Operating Loss Expected to Drop in 2Q
The author is an analyst of Shinhan Investment Corp. She can be reached at hpark@shinhan.com. -- Ed.
1Q20 consolidated OP misses consensus at KRW48.4bn (-34.8% YoY)
E-Mart posted consolidated operating profit of KRW48.4bn (-34.8%YoY) for 1Q20, missing the market consensus (KRW64.3bn). Results were below expectations as a whole. Rather than the retail business, poor performance by consolidated subsidiaries Shinsegae Food (turned to loss) and Shinsegae Chosun Hotel (widening loss) pulled down profit. Discount stores and E-Mart Traders reported KRW84.6bn and KRW17.5bn in profits, respectively. The online division suffered a loss of KRW19.7bn. Operating loss from specialty stores declined by KRW3.1bn YoY and KRW5.8bn QoQ, despite inventory disposal loss of about KRW5bn from store closures that will continue throughout 1H20. The online division saw over 40% growth in transactions, but an operating loss similar to the previous quarter (4Q19 loss of KRW36.2bn, or KRW18bn excluding goodwill impairment loss and promotional spend for SSG Day event).
2Q20F operating loss of KRW15.1bn (-KRW14.8bn YoY), positive on directionality
In the slow 2Q season, consolidated operating loss is expected to drop KRW14.8bn YoY to KRW15.1bn. With the disposal of Magok property, there is no concern about additional property tax payment. Gross margin is improving with continuing growth of food product sales. Discount stores are projected to turn to profit, given April same-store sales growth of 4.4% YoY (or 0% YoY without the effect of two more store opening days) which is a clear improvement from an average annual growth of -3.0% YoY in 2019. The online division should continue on an uptrend in 2Q, with operating loss likely to remain flat QoQ at KRW18.3bn. Specialty store earnings should pick up from 2H20. Operating loss is estimated to drop KRW30bn YoY to KRW57bn for the full year. We are positive on the directionality of earnings of discount store, specialty store, and online operations.
Retain BUY for a target price of KRW145,000
E-Mart shares are trading at a PER of 14.5x when excluding one-off gains that are expected in 2Q. We recommend focusing on the positive directionality for 2H20, such as improving specialty store earnings, stabilization of discount store operations, and online business growth, instead of attractive valuations based on 1Q results. We retain our BUY rating on E-Mart for a target price of KRW145,000.