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The author is an analyst of NH Investment & Securities. He can be reached at jooyh@nhqv.com. — Ed.
We expect the retail sector’s 4Q22 sales to beat consensus, but profitability will likely be sluggish due to greater SG&A expenses and one-off costs. Rather than short-term results, individual issues such as bidding for airport DFS operators and the easing of mandatory shutdown regulations at large discount stores will be the main share price variables.
4Q22: Expect sound sales, but sluggish profitability
Major retailers recorded higher-than-expected sales in 4Q22. SSSG at department stores remained above the mid-single digits despite high-base burden, and CVS sales exceeded expectations thanks to warmer-than-average weather and World Cup specials. Large discount stores saw a significant sales rebound for the first time in a long time thanks to promotional event effects, and DFSs saw a rapid increase in free independent traveler (FIT) sales thanks to recovering travel demand.
However, sales recovery is unlikely to lead to any immediate profitability improvement. It is estimated that major companies have greatly increased their promotional expenses, and one-off expenses were likely incurred given the nature of 4Q. Earnings at CVSs and Shinsegae are expected to meet market expectations
Focus on individual issues rather than short-term performance
Retailers’ share prices are likely to greater react to individual issues rather than 4Q22 results. In particular, bids for airport DFS operators and the easing of mandatory closings for large discount stores are key issues.
Profitability at airport DFSs should be secured if there is no excessive bidding competition following the change in rent calculation method. Hotel Shilla and Shinsegae are set to benefit most. The lifting of mandatory closings for large discount stores should have the effect of adding two extra business days a month. If applied to 50% of all stores, Emart is expected to see an additional W200bn in annual sales and W50bn in OP (assuming a gross margin of 25%), which will be positive in terms of both performance and corporate value.
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