Recession and Consumption Contraction Hit Hard... Department Stores Show 'Cloudy' Q2 Performance

Base burden amid sluggish business conditions
Only offline channel with decreasing purchase price
Recovery expected toward year-end

Although this year marks the beginning of the full-fledged no-mask era, the second-quarter performance of major department stores is expected to be sluggish. This is because consumers are tightening their wallets due to factors such as economic recession, rising prices, and interest rate hikes. The baseline burden on this year's performance is also significant, as department stores enjoyed a boom last year thanks to the revenge consumption trend.

Lotte Department Store, Shinsegae Department Store, Hyundai Department Store exteriors. (From top, clockwise) [Photo by Lotte, Shinsegae, Hyundai Department Store]

According to financial information company FnGuide on the 5th, Lotte Shopping's consolidated sales for the second quarter of this year, including Lotte Department Store's performance, are forecasted to be 3.8501 trillion KRW, a 1.33% decrease compared to the same period last year, while operating profit is expected to increase by 17.34% to 87.3 billion KRW. Shinsegae's sales are projected to decline by 4.18% to 1.7986 trillion KRW, and operating profit is expected to fall by 17.29% to 155 billion KRW. Hyundai Department Store's sales are analyzed to increase by 8.22% to 1.2177 trillion KRW, while operating profit is expected to decrease by 2.39% to 69.5 billion KRW.

Market observers believe that while Lotte Shopping's large marts, supermarkets, and e-commerce sectors will see improved profitability, department stores and other subsidiaries will experience poor performance. Due to the elevated baseline effect, department stores' operating profit is expected to decrease by about 11% compared to the same period last year. Although Shinsegae anticipates a structural turnaround in its duty-free business, the decline in profits from department stores, which have driven performance so far, is expected to impact overall results negatively. Considering the slowdown in sales growth and increased selling and administrative expenses, the performance is seen as relatively resilient, but profit growth is expected to be difficult in the near term.

Hyundai Department Store faces a high baseline burden due to a surge in clothing sales following the lifting of social distancing last year, along with increased costs such as utilities and heating expenses, leading to an expected decline in operating profit margin. However, the reopening of the Daejeon branch, which was closed due to a fire in September last year, and improved profitability in the duty-free business are expected to reflect positive factors such as a reduction in the deficit.

According to the Ministry of Trade, Industry and Energy, department store sales in April increased by 2.5% compared to the same month last year, but this was lower than convenience stores (8.9%), semi-large stores (3.7%), and large marts (3.3%). At department stores, sales increased in food (10.2%), women's casual wear (6.2%), and overseas famous brands (4.5%) due to large discount events, but decreased in household goods (8.4%) and men's clothing (2.2%). The purchase unit price increased in semi-large stores (3.3%), convenience stores (1%), and large marts (0.6%), but decreased by 0.3% only in department stores. This indicates that department stores among offline retail sectors were hit hardest by the contraction in consumer sentiment.

The overall department store business is expected to bottom out in the second quarter and recover toward the end of the year. The consumer sentiment index, which had been rebounding since bottoming out in November last year, recorded 100.7 in June, surpassing the baseline of 100. The rebound in real estate prices, which greatly influences consumer sentiment, is also materializing, and prices and interest rates, which had negatively affected consumption outlooks, are declining from their peaks.

Lee Jin-hyeop, a researcher at Hanwha Investment & Securities, said, "With domestic consumption being maintained and the proportion of foreign sales increasing, it is highly likely that department stores' sales growth rate will rebound from the second quarter as the bottom. Investment sentiment toward department stores, which had been a major concern, is expected to improve in the second half of the year."

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