Hot Autumn and Yen Weakness... 3rd Quarter Department Store Performance Hampered

Q3 Operating Profit Expected to Fall by Up to 30%
FW Apparel Sales Slump Due to Mild Weather
Yen Weakness Expands Japanese Tourists... Consumption Dispersion Continues
Strengthening Differentiated Content... Changes Including Generational Shift in Personnel

There is a forecast that the performance of major domestic department stores in the third quarter of this year will fall short of market expectations. The prolonged heat even after entering autumn significantly impacted the sluggish sales of fall and winter (FW) clothing, which had been the key driver of third-quarter results. Additionally, the ongoing overseas travel trend due to the endemic phase of the pandemic during the peak summer vacation period led more people to travel to countries like Japan, benefiting from the weak yen. This trend relatively reduced the proportion of shoppers opening their wallets, negatively affecting department store performance.

Visitors are waiting to enter the K-fashion brand 'Mardi Mercredi,' which opened on the B1 floor of Lotte World Mall in Jamsil, Songpa-gu, Seoul.
[Photo by Lotte Department Store].

According to financial information firm FnGuide on the 12th, the consensus estimates for the third-quarter earnings of listed companies, including the three major domestic department stores?Lotte, Shinsegae, and Hyundai Department Store?are similar to or below the results of the same period last year.

Lotte Shopping’s estimated consolidated operating profit for the third quarter this year is 148.4 billion KRW, down 1.13% from 150.1 billion KRW in the same period last year. Estimated sales for this period also decreased by 3.62% to 3.8679 trillion KRW from 4.0133 trillion KRW in the previous year. The sluggish performance of the department store segment, which accounts for the largest portion of Lotte Shopping’s results, is analyzed to have had an impact. Lotte Department Store’s existing stores are expected to have contracted by 1-2% in the third quarter. This is attributed to the high base from the previous year and warmer-than-average weather in September, which negatively affected fall clothing sales.

Shinsegae’s estimated consolidated operating profit for the third quarter is 160.1 billion KRW, slightly higher than 153 billion KRW in the third quarter of last year, but the forecast expectations are gradually lowering. Estimated sales are 1.6641 trillion KRW, down 14.88% from 1.9551 trillion KRW in the same period last year. Department store sales are expected to be similar to last year. However, sales in the high-margin clothing category fell short of expectations, and increased utility-related costs such as electricity bills are expected to cause operating profit to decline by around 30% compared to the previous year.

Hyundai Department Store’s estimated operating profit and sales for the third quarter are 95.3 billion KRW and 1.1456 trillion KRW, respectively, similar to or slightly lower than 92.2 billion KRW and 1.3721 trillion KRW in the same period last year. The existing store growth rate in the department store segment is relatively high at 3-4% among the three companies, but operating profit is expected to decrease by over 10% compared to the same period last year due to rising labor and utility costs continuing since the first half of the year. Lee Jin-hyeop, a researcher at Hanwha Investment & Securities, said, "The combined operating profit of the department store segments of the three major department stores is estimated to have decreased by 22% year-on-year to 246 billion KRW."

The poor performance of major domestic department stores is largely due to the base effect. When social distancing measures related to COVID-19 were lifted in April last year, consumption for outdoor activities surged, leading major department stores to consecutively record record-high performances. Although concerns about an economic downturn gradually emerged in the second half of last year, the base of strong performance sustained for several years due to revenge consumption and reopening-driven expansion in categories such as fashion remained a burden on third-quarter results this year.

While department store performance was soaring, the long-feared "performance peak-out" occurred this year. With high inflation and interest rates reducing disposable income, demand for luxury goods as a "flex" at department stores declined, and demand for well-dressed men’s and women’s fashion also slowed as commuting and outdoor activities resumed in earnest. Instead, sales increased mainly in sports and golf-related categories as the number of golf and tennis participants generally rose. Since the beginning of this year, overseas travel demand has continued to surge, and during the peak summer vacation period in the third quarter, consumption dispersion due to people traveling abroad to countries like Japan remained unchanged. The long Chuseok holiday starting at the end of the third quarter and expectations for foreign consumer effects entering the country due to the endemic phase were present, but these did not bring about a turnaround.

To overcome this situation, major department stores, including Shinsegae, which made early personnel changes last month by extensively replacing executives including the CEO, are busy preparing business plans for next year ahead of regular executive appointments. In particular, Shinsegae has not only transitioned to a veteran CEO, Park Joo-hyung, an expert in development and strategy, but also signaled major changes by appointing Jang Su-jin, the head of the merchandise division?often called the "flower" of department stores?to managing director in this personnel reshuffle. A department store industry insider said, "Following several years of special circumstances due to the external variable of COVID-19 and this year’s struggles, the essential task going forward is securing fundamental content competitiveness with a future outlook," adding, "The plan is to accelerate the transformation into future-oriented department stores through strengthening differentiated content such as K-fashion and renewing major stores."

Visitors are exploring the SEVENTEEN pop-up store held at The Stage in Shinsegae Department Store Gangnam Branch.
[Photo by Shinsegae Department Store].

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