Why Are Department Stores Thriving as DRAM Sales Soar? [Weekend Money]

The strong performance of department stores is expected to continue. Following robust results in the first quarter of this year, sales momentum has remained solid into April. There is analysis suggesting that the semiconductor boom has led to significant growth in department store luxury goods sales. In addition, with the strengthening of the Chinese yuan, duty-free stores are expected to see improved earnings.

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According to Korea Investment & Securities on April 25, the department store industry (based on the three major department store companies) is estimated to have seen healthy sales growth of around 15% in April. Myungjoo Kim, an analyst at Korea Investment & Securities, stated, "Department store companies are expected to record overwhelming same-store sales growth in the first quarter of this year, which ironically has raised concerns about a possible peak-out (passing the peak). Fortunately, contrary to market concerns, the solid growth trend in sales has continued through April."

One of the reasons for the positive performance of department stores in April is the price increase by the luxury jewelry brand Bulgari. Kim pointed out, "The surge in demand to purchase before the price hike is driving strong growth in department store luxury goods sales."

The background to the sustained strong growth in department store luxury sales since last year lies in the semiconductor boom. Kim analyzed, "The explosive growth in the luxury category that began last year has become even more prominent this year. This is because the soaring stock prices of semiconductor companies and their generous incentive payouts have led to increased market liquidity." Kim added, "Additionally, the ongoing strength of the Chinese yuan appears to be boosting the purchasing power of Chinese tourists visiting Korea, which is also having a positive impact."

The strengthening of the yuan is also affecting duty-free stores, leading to expectations that their performance will improve in the second quarter. Kim explained, "The strong yuan is increasing purchasing power not only among individual tourists but also among daigou (Chinese professional shoppers), who are major customers of the duty-free channel. As a result, since March of this year, the commission rates (such as referral fees) paid by duty-free companies to daigou have been trending downward. If this trend continues, the performance of duty-free companies in the second quarter could improve significantly beyond market expectations."

By stock, it is suggested that attention should be paid to the performance of Shinsegae and Lotte Shopping. Kim noted, "Given the overwhelming sales performance of department stores in the first quarter and the improved duty-free market since March, Shinsegae's first-quarter results will be a key focus in the retail sector. Among retail companies, the performance of Lotte Shopping, which is most closely tied to domestic retail conditions, should also be watched closely."

Lotte Shopping, which operates many regional stores, has previously recognized significant asset impairments due to sluggish regional economies in the aftermath of COVID-19. Kim explained, "Ironically, thanks to these asset impairments, cost savings from depreciation and amortization are expected this year, which could create a leverage effect on operating profit."

The most notable stock performance in the retail sector over the past month has been Hotel Shilla. Over the past month, Hotel Shilla has risen by more than 25%. During the same period, the KOSPI gained 11%. Kim commented, "Unlike department stores, Hotel Shilla does not have strong momentum in its first-quarter results. However, given the recent improvement in market conditions and the continued strength of China's macroeconomic indicators, the stock is likely to maintain its strong performance regardless of earnings."

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