Short-term Earnings Momentum Limited     

The author is an analyst of KB Securities. She can be reached at shinay.park@kbfg.com. -- Ed.

 

Maintain BUY; cut target price 13% to KRW140,000; short-term earnings momentum limited     

We maintain BUY on E-mart but cut our TP by 13%  (KRW160,000→KRW140,000). Earnings momentum is unlikely to pick up anytime soon given (1) declining Hypermarket earnings, (2) stalling Starbucks Korea earnings growth and (3) a hazy E-commerce outlook. With such factors already priced in and the stock trading at historically low levels, additional pullback should be limited. We are keeping an eye on whether E-commerce improves.   

E-commerce strategy to shift toward profitability-driven/balanced growth         

E-mart announced that it will shift its E-commerce strategy in 2H22 from volume-based to profitability-driven/balanced growth. Its plan should:

(1) consolidate 18 small-/mid-sized P&P centers to improve logistics capacity;

(2) avoid selling low-margin products; and

(3) offer members only promotional points rather than discounts.

We expect results from the strategy shift to become visible in 3Q22. Reflecting this, we cut 2022E-2024E SSG.com gross revenue by more than 10% each year but raise OP by more than KRW20.0bn each year. 

2Q22 OP fell KRW16.2bn short of market consensus on declining Hypermarket earnings and higher E-commerce costs   

E-mart posted 2Q22 consolidated net revenue of KRW7.15tn (+22% YoY), with OP entering negative territory at -KRW12.3bn (-KRW19.9bn YoY). Net revenue was in line with the market consensus but OP fell short by KRW16.2bn. 

(1) Hypermarket (offline) gross revenue increased 4% but OP fell KRW16.8bn YoY to –KRW36.4bn. While same-store sales rose 3.8% and GPM improved 0.4pp, OPM deteriorated 0.6pp on higher SG&A (i.e., fees at P&P centers, labor costs).

(2) E-mart Traders revenue declined 0.4% on an unfavorable base effect while OP tumbled 48% on costs related to new store openings (-0.5% SSSG).

(3) SSG.com gross revenue increased 13% but operating loss widened KRW14.0bn YoY to KRW40.5bn (on KRW6.0bn cost related to membership launch). 

(4) Gmarket Global gross revenue came in at KRW4.1tn (+1% YoY) with operating loss of KRW18.2bn (on KRW3.0bn cost related to membership launch).

(5) Starbucks Korea revenue grew 15% (3% SSSG) but OP decreased 6% on higher raw material/labor costs.   

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