[Click eStock] "Lotte Shopping Aims for Fixed Cost Reduction and Sales Recovery Simultaneously"

Shinyoung Securities Report

[Asia Economy Reporter Gong Byung-sun] Shin Young Securities raised the target price for Lotte Shopping from 120,000 KRW to 150,000 KRW on the 9th, anticipating that the improvement in earnings could be stronger than expected due to fixed cost reductions and sales recovery. The investment opinion was maintained as 'Buy.'

In the fourth quarter of last year, Lotte Shopping recorded total sales of 5.377 trillion KRW, a 10.4% decrease compared to the same period the previous year, but operating profit increased by 317% to 181.5 billion KRW, showing solid performance. By segment, the discount stores achieved an operating profit of 21 billion KRW, turning profitable. Department store operating profit decreased by 3.3% year-on-year to 2.055 trillion KRW, while the supermarket segment posted an operating loss of 7 billion KRW.

Notably, the company succeeded in reducing fixed costs. Analyst Seo stated, "It is understood that more than 250 billion KRW in annual fixed costs were cut last year through restructuring and efficiency improvements," adding, "Efficiency efforts will continue this year, allowing for additional fixed cost reductions, but costs related to restructuring should also be considered." He further noted, "However, with the easing of the COVID-19 situation compared to the previous year and sales recovery, the operating leverage effect could be greater than expected, which is a positive factor."

Sales recovery is expected due to improvements in the COVID-19 situation and the easing of quarantine measures. Offline operations in major business areas had been sluggish due to strengthened social distancing following the resurgence of COVID-19. Analyst Seo predicted, "From March, the recovery driven by the base effect will accelerate," and added, "With fixed cost reductions and sales recovery occurring simultaneously, the improvement in earnings could exceed initial expectations." Shin Young Securities forecasts Lotte Shopping's total sales this year to rise 4.7% year-on-year to 22.4387 trillion KRW, and operating profit to increase by 91.1% to 661.4 billion KRW.

However, risk factors that could affect the strength of the earnings recovery should be taken into account. Analyst Seo said, "The additional fixed cost reductions possible compared to the previous year are limited, while restructuring costs may continue to occur," and "Despite improvements in the COVID-19 situation, offline recovery could be slow." Additionally, although the online business is improving, it has not yet fully reached the industry average trajectory, and the impact on profits and losses from the shopping mall business of the affiliate Lotte Asset Development, acquired at the end of last year, remains unclear. These points should be considered as risk factors.

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