Lotte Shopping Co., Ltd. (023530.KS) Earnings Call Transcript & Summary

[Interpreted] Second Quarter Earnings Conference Call. Today, we have Mr. Won-Jae Kim, CFO of Lotte Retail headquarter. We also have other business representatives joining the call. [Operator Instructions] Let's now begin the Lotte Shopping Q2 earnings presentation. Page 1 is the overall review of Q2 2025 consolidated financial performance. Lotte Shopping's second quarter revenue and operating profit declined mainly due to worsening consumption slowdown and weak demand from domestic grocery and culture divisions. However, for the first half of 2025, the OP increased by 11% year-over-year by solid performance from the department store and overseas operations. For the department store unit, large-format core stores continue to indicate strong sales trend and foreign customers sales also grew. In particular, our flagship Myeongdong stores foreign customer sales contribution was 70%, up by 2 percentage points Y-o-Y. Our overseas department store continued their favorable performance trend, including Lotte Mall Westlake Hanoi posting second consecutive quarter of OP. In grocery business, OP was declined due to initial costs from launching our new grocery application, Lotte Mart Zetta. However, our newly opened hypermarket Guri branch delivered a strong performance, ranking second in sales across all Lotte hypermarkets since the first opening of the store. Among our overseas hypermarket businesses, Vietnam operations revenue was increased by 5% and its operating profit was up by 2.8%. For the first half, revenue rose by 7% and OP was increased by 25%. As for the e-commerce division, Lotte ON GMV indicated 50% growth Y-o-Y and the hard efforts to streamline costs led to 5 straight quarters of OP improvement Y-o-Y. Hi-mart also continued its recovery for a second consecutive quarter, indicating both sales and OP increase. However, Cultureworks business posted weak results due to the lack of blockbuster movie releases in domestic box office. Page 2 is the summary of 2025 Q2 consolidated financial performance. Revenue was KRW 3.3 trillion, indicating 2.3% Y-o-Y decline, resulted by delayed recovery in consumer sentiment and the impact of holiday time difference in Indonesia. Operating profit was KRW 41 billion, down by 27.1%. It was mainly due to fixed cost pressures amid revenue decline. Just as a reference, the property tax expense stayed relatively flat Y-o-Y at KRW 152 billion. Net loss was narrowed to KRW 10 billion by a reverse base effect of last year's one-off losses regarding impairment loss from Shenyang and the disposal loss of Chengdu Department Store in China. Please note that we have attached the first half revenue breakdown by each segment on the right side of Page 3. Page 4 is the domestic department store unit. Revenue was KRW 786 billion, indicating 2.7% Y-o-Y decline. Same-store sales increased by 0.5%, thanks to solid sales trend by our top-tier VIP customers, but the net revenue was decreased due to lower exposure of high-margin fashion category sales. OP was KRW 63 billion, increased by 14.7% Y-o-Y, induced by SG&A optimization effort. Next is the domestic grocery business. Revenue was KRW 1.3 trillion, down by 3.3% Y-o-Y. OP was minus KRW 45 billion. Lotte has been stretched due to initial promotional costs from launching the new grocery application, Lotte Mart Zetta in April of this year and the reverse base effect from supermarket one-off profit regarding Hangzhou Chan real estate sales last year. Also, taking over online grocery business from e-commerce unit has caused a further margin decline. Next is the e-commerce unit. E-commerce reported KRW 27 billion of revenue, indicating 46% Y-o-Y decrease. Lotte e-commerce sales was increased by strong GMV growth, product margin enhancement and increased advertisement sales. However, the revenue was decreased due to business strategic shift, including scale down of Lotte affiliated company's website maintenance service. Operating loss was KRW 8 billion, which has been reduced dramatically driven by gross profit margin enhancement and cost reduction through business portfolio transformation and the transfer. Next is the overseas department store. Revenue was KRW 30 billion, indicating 5.2% Y-o-Y increase. And its operating loss has turned into profit recording KRW 2 billion. Especially Lotte Mall Westlake Hanoi has recorded 25.1% increase in revenue and sustained its momentum with the second straight quarter to achieve OP intact. As for the overseas hypermarket, the revenue was KRW 350 billion, indicating 0.6% decrease and its OP was KRW 9 billion, indicating 6.3% decline. Vietnam operation continued to show strong performance, recording 8.8% in SSSG and 27.6% increase in OP, but Indonesia indicated weak performance due to time period difference in national holiday Y-o-Y. But Indonesia unit still recorded solid sales trends from recently renovated stores. Next is the Hi-mart. Revenue was KRW 594 billion, up by 0.8% Y-o-Y, indicating sales growth in both online and offline channels despite the slow recovery in domestic electronic market. OP was KRW 11 billion, increased by 27.4%, thanks to strong sales trend in private label, lifestyle and kitchenware categories as well as steady demand for our home care services. As for the home shopping, revenue was slightly decreased, recording KRW 231 billion. OP was KRW 12 billion, down by 24.8% Y-o-Y. Despite the efforts on improving product mix such as low-margin intangible goods reduction, lower TV viewership has caused a decline in both top and bottom lines. Next is the Cultureworks. Our cinema division revenue was KRW 92 billion, weakened by 19.5% Y-o-Y due to the absence of major box office hits, resulting decline in theater attendance and sales. In terms of OP, despite the SG&A reduction, a loss of KRW 6 billion was recorded mainly due to weak sales trend in domestic box office sales. Next page is nonoperating profit summary. Loss was KRW 65 billion. Q2 gains on foreign currency and derivative asset was turning bad due to derivative trading valuation loss and FX loss on foreign borrowings. The equity method profit was decreased due to weak performance from Hanssem, Lotte Card and KDB Open Innovation despite increased profit from FRL Korea. Other non-OP in Q2 '25 includes dividend income of KRW 13 billion. In Q2 '24, profit includes impairment loss from Shenyang GPT and disposal loss of Chengdu Department Store. I'll now finish today's presentation here. Thank you for attending today's presentation. We will begin the Q&A session. For your reference, the Q&A session, Korea English interpretation will be sequential.

[Interpreted] [Operator Instructions] The first question will be provided by Jin-Hyeob Lee from Hanwha Investment & Securities.

[Interpreted] My name is Lee, Jin-Hyeob from Hanwha Securities. I have 3 questions. I would like to know the third quarter outlook. And can you tell me briefly by division? And second question is regarding the loss that has been stretched for the Grocery division. Can you tell me the outlook for that? And the third question is regarding Home Shopping, the commission. Can you also give -- add some color to it?

[Interpreted] So I will start with the department store outlook. So, looking at the second half of the year, including third quarter and fourth quarter, we expect the situation is going to be similar to last year. So, the renovated department stores are doing very well. And also, we are seeing increase in the foreign customer contribution. First half of the year, it was 20%. We believe that this trend will continue. So overall, we are expecting about 1% growth.

[Interpreted] And on Grocery division, so there are 2 issues that I would like to point out for the third quarter. First of all, the negative conditions is due to the government subsidy that's provided as a coupon, and it was given last -- end of last month. But as you know, the large hypermarkets and supermarkets were excluded. So there are some short-term impact -- negative impact on our business. However, when this impact wears off, after Chuseok, which is Korean Thanksgiving, we expect the domestic consumption to resume compared to even more than last year. So after Chuseok holiday, we expect the condition to be more favorable for us. And second, for -- when we look at our performance for second quarter, it was impacted heavily by the changes in the labor cost law, which has impacted our labor costs. And this is one-off and short term, it would have a temporary impact on our numbers. So to address this, we have adjusted our headcount, we adjusted our workload. So, we optimize basically our labor costs. So, we are seeing the effect of this after June, end of after June. So, with these efforts, as the domestic condition turn around and as our optimization impact realizes, we believe we are expecting the third quarter and fourth quarter performance to improve.

[Interpreted] So, on e-commerce, when we look at the overall outlook for e-commerce in Korea, the growth is stagnated compared to last year. NAVER and Coupang, the major dominant players are expected to continue their leading position. But still, there are ongoing adjustment in the landscape, including 11th Street going through restructuring. And the expectation is that for overall e-commerce, the industry is expecting o1ne-digit growth in the second half of the year. However, there are areas that are supported by the consumers and seeing 2-digit growth, which is vertical players. So, coming back to Lotte Shopping, we are strengthening our vertical aspect, and we are seeing solid growth. We expect to achieve another 2-digit growth in the second half of the year.

[Interpreted] And on Home Shopping, as you can see, the commission has been on the declining trend because we have been improving the commission system. And we saw a decline in the first half of the year, and we will continue this effort in the second half of the year. So, looking at the outlook for Home Shopping, we are continuously improving our portfolio, including the high-margin products and also working on optimizing our cost.

[Interpreted] And we expect to -- so we'd like to add some more information about the department store. So, adding on to what I've shared about the second half of the year outlook. As you can see, the foreign fashion category and the food category show solid growth. And as you can see, the foreign fashion has recorded 3.7% growth, and the food category recorded 6% growth. And we believe this trend will continue in the second half of the year. The entire fashion category was negative 1.8% growth, but we will be adding new model and new stores such as connected ground in the second half of the year, and we believe that this will improve our results in the second half of the year. The first half of the year, the growth was 0.7%, and we expect this revenue growth to grow to 1 percentage point. And we will continue our restructuring efforts, labor cost optimization efforts and SG&A optimization effort in the second half of the year. And we are expecting to close our operating profit at KRW 480 billion-ish.

[Interpreted] The following question will be presented by John [indiscernible] Park from [indiscernible] Securities.

[Interpreted] So I have 3 questions. So, hypermarket showed struggling growth. And you have explained it's due to the initial cost that incurred in the first half of the year due to the Zetta app. So, do you think this trend will continue in the second half of the year as well? And also, you mentioned that the e-grocery business transferred to the e-commerce business has also impacted negatively. How contribution did it impact on the operating loss? And the second question, I think it is positive that the amount of operation loss has been narrowed. When do you expect the e-commerce business to turn to profit? And what are your plans to address this -- achieve that goal? And my third question is regarding the financial health. So as you can see, the net borrowing is pretty high. So compared to the money that you're earning, the interest expense is pretty high. So what are your plans to address this problem as well?

[Interpreted] I'm answering from the Grocery division. So regarding the first question on online Zetta app, we have collaborated with Ocado from U.K. And last May, we have launched Zetta app, which is our new online commerce business. And the CapEx is within our plan. And we believe that through optimization and the efficiency that we will achieve through this activities and also the robotics that we are adopting, we believe that the benefit will outweigh the cost. And there was a growth in the initial cost. It was because we had to migrate the customers and the users from the existing Lotte Mart app and other apps to Zetta app, and that's why the cost has incurred. And the migration has been pretty smooth. So, in the second half of the year, the cost that is incurred due to migration will not be as large as first half of the year. And moving on to the second part of your question, we have transferred the online grocery online service from e-commerce to Mart last year, October 2024. And last year, that's why the P&L of e-commerce business did not reflect on our numbers, but -- and we believe the contribution for this year due to this transition is KRW 16 billion.

[Interpreted] And answering your third question regarding the financial health, we -- our goal is to turn to profit by 2026 to continue the solid growth going forward, we will strengthen our vertical business. In the past, the sellers were selling products to the users, but we are transitioning this to a system where brands sell their products to the users. And this will -- we are expecting that this will improve our competitiveness. And also, we have launched our Lotte gateway service, which is -- which cuts across our entire group. And the Lotte Giant shop, in particular, is doing very well. And overall, our revenue have grown double fold. And we will continue strengthening this business as well. And third, we are advancing our advertisement service. So, in the first half of this year, it has recorded 40% growth, and we are continuously upgrading our advertisement system and the way we operate the business, although the sheer amount of the revenue is not large. However, we expect that there is room to grow. And lastly, we are working on new businesses targeting new groups of specific customers. So next year, in order to achieve our goal, we will continuously restructure our organization. So, we are hoping to achieve this goal by the end of next year.

[Interpreted] Thank you very much. I'm the CFO of Lotte Retail headquarter. I'd like to share information on the financial health. So since last year, we've been working on improving our financial health. So, end of last year, we have conducted asset revaluation. As a result, we have reduced our debt-to-equity ratio to 129% and our debt-to-net ratio to 37.9%, which is an improvement. We are continuously working on improving our financial health. And this year, in particular, we are doing various activities to lower the volume of borrowing. We are investing within the EBITDA volume. And also, in terms of CapEx, we have reduced to 50% compared to last year. We will continuously review our assets and the appropriate ones that are identified, we will work on selling them. And if any of the plans are finalized, we will disclose the information. And also, we are reviewing and identifying low-performing leased stores, and we are -- we will restructure these. So as -- due to the various efforts that we have conducted early this year, we have reduced our interest expense by KRW 20 billion this year -- early this year. So we will continue our efforts.

Next question, please.

[Interpreted] The following question will be presented by Younghoo Joo from NH Investment & Securities.