Shinsegae Reports Strong 2Q Performance Across All Sectors... But COVID Impact Unavoidable

Growth Slowdown Inevitable
But Stock Prices Still in Undervalued Range

[Asia Economy Reporter Minwoo Lee] Shinsegae showed solid performance growth across all sectors in the second quarter of this year. However, due to social distancing measures following the resurgence of COVID-19, growth rates are expected to slow down in the third quarter.

On the 16th, Kakao Pay Securities maintained a 'Buy' rating and a target price of 390,000 KRW for Shinsegae based on this background. The previous trading day's stock price was 267,500 KRW.

In the second quarter of this year, Shinsegae recorded consolidated net sales of 1.3953 trillion KRW and operating profit of 96.2 billion KRW. Compared to the same period last year, sales increased by 37.5%, and an operating loss of 43 billion KRW turned into a profit. These figures surpassed market consensus estimates. In particular, operating profit exceeded expectations by about 22%.

Performance grew evenly across all sectors. For department stores, sales reached 400 billion KRW and operating profit 47 billion KRW, increasing by 13% and 231.3% respectively compared to the same period last year. Same-store sales increased across major stores, with luxury goods up 47%, men's fashion 27%, and sportswear 20%. Duty-free store sales also rose to 561 billion KRW, up 80.4% year-on-year and 17% quarter-on-quarter. Due to continued rent reduction effects, operating losses turned into profits, recording an operating profit of 19.2 billion KRW. Daily sales were estimated at 9 billion KRW for Myeongdong store, 700 million KRW for Gangnam, and 200 million KRW for Busan store. A one-time cost of approximately 27.6 billion KRW related to the closure of the Gangnam store last month was reflected in non-operating expenses. Additionally, consolidated subsidiaries such as Shinsegae International and Central City also turned profitable.

While department store consumption remains solid due to sales events and pent-up demand, analysis suggests that growth rates will inevitably slow in the third quarter. Although luxury goods sales, which have limited potential for gross profit margin improvement, grew by 84% compared to 2019, women's and men's fashion still showed declines of 9% and 5%, respectively. Due to the Level 4 restrictions following the COVID-19 resurgence, sales growth rates have slowed by about 10 percentage points since July 12. The management target for same-store sales growth in July is approximately 13%.

However, with the closure of the Gangnam duty-free store in July, monthly cost savings of about 2 billion KRW (1.4 billion KRW in rent + 600 million KRW in interior depreciation) are expected from this month, and the increase in sales at the Myeongdong store is analyzed to sufficiently offset the decrease from Gangnam. The proportion of imported cosmetics sales is expected to rise in the third quarter, and the share of large Chinese traders (Daigou) remains steady, so the profit and loss improvement trend is expected to continue in the second half of the year.

Researcher Heo Jena of Kakao Pay Securities stated, "Not only department stores but also duty-free, Shinsegae International, Central City, Casamia, and Dongdaegu have all improved their performance. Especially, Shinsegae, which is strong in attracting luxury brands, achieved double-digit sales growth even after the fourth resurgence." She added, "Due to the higher base in the second half and concerns about slowing department store consumption, the stock price has declined, so we recommend increasing exposure."

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