Earnings Momentum at Fashion division to Sustain in 2Q22
The author is an analyst of NH Investment & Securities. She can be reached at jiyoony@nhqv.com. -- Ed.
Shinsegae International recorded a 1Q22 earnings surprise, with OP jumping 56% y-y. Earnings momentum at the fashion division should sustain in 2Q22. We expect diversification of sports and men’s wear categories in 2H22.
Preference for imported brands lasts longer than expected
As a resumption of overseas travel continues to be delayed, the consumption trend in favor of imported brands is set to last longer than expected at the beginning of the year. Accordingly, we increase our 2022E EPS estimate by 8% by raising the profitability outlook for the fashion division, and raise our TP by 11% from W38,000 (W190,000 before the stock split) to W42,000.
As domestic apparel consumption is booming in line with re-opening from April, the growth rate of fashion/miscellaneous goods is higher than that of luxury goods. The stock currently trades at a 2022E P/E of 11x, which is near the low level seen in the early stages of the Covid-19 outbreak. The declining competitiveness of the company’s cosmetics in China has already been reflected in its share price, and the related sales portion is insignificant at 5%. We believe that now is the time for the firm to fully enjoy growth and profitability improvement stemming from the recovery of domestic demand.
1Q22E review: Earnings to quell concerns over peak out
Shinsegae International recorded 1Q22 consolidated sales of W352.2bn (+3% y-y) and OP of W33.1bn (+56% y-y), beating OP consensus by 37%.
By division, y-y sales growth came in at +15% for fashion (separate), -18% for cosmetics (domestic), and +5% for lifestyle (JAJU). The fashion division’s OPM stood out at 13% (+5%p y-y) thanks to robust department store sales and the closure of inefficient stores. In the case of cosmetics, imported brands with high margins recorded double-digit sales growth, but in-house brands were inevitably hit by a downturn in China and DFS channels. However, since the negative base burden should fade from 3Q22, the cosmetics division is likely to achieve an annual OPM of 6~7%.
The performance of subsidiaries was outstanding. Tomboy’s sales declined 11% y-y, but excluding the one-off exit of Komodo, SSSG was at a high-single digit pace, with an OPM of 10%. We believe that S.I.Village marketing targeting the MZ generation was effective. Meanwhile, Swiss Perfection’s sales grew sharply to W3bn (+77% y-y) and its margins remained robust at 53% (following on from 42% in 2021). Profit growth is expected in 2H22 when new stores are opened in Korea and the company enters Europe.