Lotte Hi-Mart, Slump Coming to an End... 'Buy'

[Asia Economy Reporter Song Hwajeong] Lotte Hi-Mart is showing signs of escaping the prolonged slump in performance. It is expected to show a recovery trend in the second half of the year.

DB Financial Investment has upgraded its investment opinion on Lotte Hi-Mart from 'Hold' to 'Buy,' seeing that the performance slump is coming to an end. The target stock price was maintained at 33,500 KRW. Jaehun Cha, a researcher at DB Financial Investment, said, "The stock price, which had plummeted due to poor performance and the adverse effects of the novel coronavirus (COVID-19), is recently recovering rapidly," and added, "Since the market's downward revision of earnings estimates has stopped, fears of additional asset impairments will also ease." Cha also noted, "With the potential for upside compared to the target price, we have upgraded the investment opinion."

Although the first-quarter performance this year was weak, the quarterly decline in profits is believed to be in its final phase. DB Financial Investment estimated Lotte Hi-Mart's first-quarter results at 935 billion KRW in sales and 17.6 billion KRW in operating profit, representing decreases of 9.8% and 27.6%, respectively, compared to the same period last year. Researcher Cha said, "Due to high sales in the same period last year and a decrease in customer visits caused by COVID-19 in March, first-quarter sales are expected to be weak across categories," but added, "However, the first-quarter GP margin (gross profit margin relative to sales) is estimated to improve by 0.8 percentage points year-on-year to 23.8%." In the first quarter of last year, Lotte Hi-Mart's aggressive promotions and expansion of online sales share caused the quarterly gross profit margin to fall to around 23%. As this phenomenon ends, quarterly GP margins are expected to gradually improve this year. Although fixed selling and administrative expenses such as labor costs increased significantly last year, the absolute amount of selling and administrative expenses is expected not to increase quarterly this year.

Since April, the rate of sales decline has rapidly narrowed, with particularly strong growth in sales of PCs, TVs, and dishwashers. Researcher Cha predicted, "As the adverse effects of COVID-19 ease, sales recovery compared to the previous year will be possible from the third quarter," and added, "With the recovery of air conditioner sales during the summer peak season and a lighter cost structure, operating profit improvement compared to the previous year will be possible."

This content was produced with the assistance of AI translation services.