Lotte Shopping: Business Conditions Difficult, but Look Forward to...

The author is an analyst of NH Investment & Securities. She can be reached at jy.lee@nhqv.com. -- Ed.

[Lotte Shopping] Business conditions difficult, but look forward to restructuring and online channel launch benefits

With Covid-19 effects being inescapable, Lotte Shopping’s 1Q20 earnings are to come in sluggish. While the firm’s offline channels are to continue facing difficult operating conditions, we note: 1) a likely rebound in domestic demand in the near future; 2) anticipated store restructuring; and 3) remaining valid expectations towards benefits from the firm’s recent launch of integrated online platform Lotte ON.

Look to store restructuring and effects from launch of Lotte On

We revise down our 2020E and 2021F EPS for Lotte Shopping by 43% and 20%, respectively, reflecting likely poor earnings in 1H20 due to the Covid-19 crisis, structural decline in the offline retail industry, and reduced overall operating efficiency. Accordingly, we lower our TP by 29% from W165,000 to W117,000. Corresponding to a 2020E P/E of 18x, our new TP offers upside potential of 21% from the current share price (Apr 27: W96,600 won).

However, we stick to a Buy rating, noting: 1) a likely rebound of domestic demand upon the subsiding of the Covid-19 crisis; 2) expectations that Lotte Shopping will restructure approximately 200 poorly-performing offline stores this year; and 3) remaining valid expectations towards benefits from Lotte Group’s Apr 28 launch of integrated online platform Lotte On.

1Q20 preview: Covid-19 effects inescapable

On a consolidated basis, we expect Lotte Shopping to post 1Q20 net sales of W4.05tn (-9% y-y) and OP of W106.1bn (-48% y-y), with both figures slightly missing consensus.

For the firm’s domestic department stores, we estimate 1Q20 sales of W613.4bn (-18% y-y) and OP of W98.1bn (-37% y-y), with SSSG clocking at -20% y-y. We believe that earnings at Lotte Shopping’s Myeong-dong branch (which boasts the highest operating efficiency among the firm’s operations) have been hit hard. In particular, sales in the high-margin clothing and cosmetics categories were likely sluggish in 1Q20, leading to further OP decline.

For domestic discount stores, we estimate sales of W1.18tn (-5% y-y) and an operating loss of W5.9bn (TTL y-y). Although we estimate that SSSG declined to -5% y-y, it was likely helped by steady sales of food products during the Covid-19 outbreak. Benefiting from greater online demand amid the pandemic, Lotte Mart Mall likely enjoyed high SSSG of close to +50% y-y. That said, Lotte Mart Mall’s contribution to overall earnings remains modest, as the firm’s online channel currently accounts for only 5% of its overall sales.