Ample Upside to Earnings
The author is an analyst of Shinhan Investment Corp. She can be reached at hpark@shinhan.com. -- Ed.
2Q22 review: Even growth reported across the board
Shinsegae International registered consolidated sales of KRW383.9bn (+12.7% YoY) and operating profit of KRW38.7bn (+46.1% YoY) for 2Q22, exceeding both our estimate of KRW33.5bn and market consensus of KRW33.8bn by roughly 15%. The company saw double-digit growth in sales across the board, including imported apparel brands, domestic apparel brands, cosmetics and lifestyle. After reporting weak earnings through 1Q22, domestic apparel brands posted 12.4% YoY growth in sales thanks to efforts to raise store efficiency and streamline product categories at VOV and G-CUT brands. Meanwhile, the company's 40-plus imported luxury brands reported even growth in sales for 2Q22.
Cosmetics sales expanded by 12% YoY to KRW91.2bn, out of which KRW68bn came from imported brands that contribute to higher margins. Cosmetics sales reach a total of KRW94.3bn when including sales from subsidiary Swiss Perfection. At the current pace, the luxury cosmetics brand is expected to secure sales in the KRW20bn range for full-year 2022. Adding to the positives, earnings from the lifestyle brand JAJU swung into positive territory as sales recovered in 2Q22.
3Q22 outlook: Solid earnings and sustainable margin gains
We believe strong earnings continued in July-August, despite concerns over a slowdown in global consumption. Backed by its focus on the luxury category, Shinsegae International stands to see solid growth momentum continue even in times of polarization in consumer spending.
The cosmetics business, in particular, is seeing clear growth in earnings, led by imported brands and Swiss Perfection. As imported cosmetics carry high margins, changes in the sales mix should drive profitability improvement going forward. Subsidiary Swiss Perfection is poised to expand its presence in US and European markets, and gradually increase earnings contribution from domestic and Chinese operations. Domestic apparel brands and the lifestyle business should continue to report margin gains through 2H22 on further improvement in fundamentals.
Retain BUY and target price of KRW45,000
Shinsegae International's apparel business is expected to maintain a strategic focus on the luxury category to secure further growth. The cosmetics business is likely to benefit from an upturn in demand following Korea and China's economic reopening. Seeing ample upside to earnings from cosmetics and domestic apparel brands, we retain our BUY rating on Shinsegae International. We also find it positive that an increase in earnings contribution from cosmetics could lead to a re-rating of share valuations.