Shinsegae: Solid Department Store Sales and Duty Free Benefits

The authors are analysts from Shinhan Investment Corp. They can be contacted at [email protected] and [email protected] respectively. — Ed.

Department stores offer lower support amid recession fears

Shinsegae continues to generate strong revenue at department stores despite growing fears of a recession and slowing consumption. Department store gross sales growth was 16% in June and 22% in July, dashing fears of a slowdown in consumption on the back of strong demand for luxury goods and apparel, and reached as high as to 28% in August thanks to the impetus of the previous one. -the usual Chuseok holiday is stronger than the dreaded impact of historic rainfall. We believe the decent growth in department store sales continues in September.

Consumer spending on apparel has risen sharply this year, but we see even more upside given the relatively low weight of total consumption compared to levels seen in 2019. Additionally, the share of VIP consumption, which is inelastic to economic conditions, remains at high levels (around 40%) and further increase is expected from newly opened stores in Daejeon and Gwangju. Accordingly, we expect department store sales growth to continue at current levels through 2H22 and 2023.

Duty-free transactions add upside potential

Shinsegae, the nation’s largest airport duty-free operator by gross square footage, stands to benefit the most from periods of duty-free market recovery, driven by demand from outbound travelers, as seen today. A growing number of countries outside of China are now easing restrictions on outbound travel and Japan is actively considering easing tourism regulations, suggesting a surge in the number of high-margin independent travelers (FIT) in the future.

At Incheon International Airport, Shinsegae currently operates duty-free shops in Section 3 of Terminal 2 (contract expires in January 2023) and Sections 1 and 5 of Terminal 1 (expires in July 2023). Rent policies for airport duty-free shops will likely change from the flexible rent system linked to monthly sales, which was adopted in September 2020 amid the pandemic, to the original fixed rent system in 2023. However, we believe that cost-related concerns are overblown, with businesses in general likely to avoid fierce bidding wars and Shinsegae set to gain the upper hand in negotiations when its airport duty-free license expires in 2023.

Retain the BUY and target price of 350,000 KRW for the industry’s first choice

We maintain our BUY rating on Shinsegae. Despite the upward revision to the earnings forecast, we are keeping our target price unchanged at KRW 350,000 due to the recent drop in peer valuations and the decline in the value of the stake in subsidiaries. Slowing consumption and a high annual base remain a burden, but department store sales prospects remain bright, with improved profitability expected on the back of strong demand in the high-margin fashion/accessories category. Pre-tax earnings remained decent in extremely difficult conditions, and signs of a market recovery are beginning to appear. We believe now is the time to focus on recovery expectations and attractive equity valuations (2023F PER 5.4x).