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

Good morning, everyone. This is [indiscernible], the Manager of Investor Relations. Welcome to the Lotte Shopping 2025 Third 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. Questions will be taken after the presentation. Page 1 is the overall review of Q3 2025 consolidated financial performance. Lotte Shopping's third quarter revenue and operating profit declined mainly due to grocery businesses unfavorable business environment despite the strong performance in Department Store division. Department Store unit indicated moderate sales trend led by high-margin fashion categories as well as dramatic increase from foreign inbound customer sales, which was up by 34%. Our overseas department store continued their solid performance. In particular, Lotte Mall Westlake Hanoi in Vietnam posted record high quarterly performance with revenue increased by 29% and operating profit increased by KRW 5.7 billion. Domestic grocery business has shown weak performance, mainly due to the restriction from government issued consumption vouchers program and Korean Thanksgiving holiday timing difference year-over-year and cost burdens from e-grocery operation. Overseas hypermarket unit also indicated slow performance resulted by anti-government protests in Indonesia. However, Vietnam operation has sustained its promising performance with revenue increased by 5% and operating profit increased by 24%. As for the e-commerce division, Lotte ON GMV indicated 3% growth rate and the efforts to streamline costs led to 6 straight quarters of OP improvements in Y-o-Y basis. Hi-mart also maintained its OP improvement trend when excluding one-off profit of KRW 22 billion in the same period of last year. And Cultureworks achieved the first quarterly operating profit in 2025 through specialized data reinforcement and a record-breaking box office performance from local movie in Vietnam. Page 2 is the summary of 2025 Q3 consolidated financial performance. Despite the moderate sales trend in department store, our consolidated revenue was KRW 3.4 trillion, indicating 4.4% Y-o-Y decline, resulted by weak performance from grocery unit regarding the impact of differences in national holiday timing year-over-year and exclusion from the government issued consumption coupon program. Operating profit was KRW 131 billion, down by 15.8%. It was mainly due to one-off expense regarding property tax in department store and reverse base effect of Hi-mart's one-off profit in the same period of last year. Net profit was turned into net loss of minus KRW 49 billion due to impairment loss from invested property despite the dramatic increase in equity method profitability. Please note that we have attached Q3 2025 year-to-date revenue and OP breakdown by each segment on the right side of Page 3. Page 4 is the domestic department store unit. Revenue was KRW 734 billion, indicating 0.7% increase. Same-store sales growth rate was 2.8%, thanks to solid sales trend by our core large format stores and foreign inbound tourists. OP was KRW 80 billion, increased by 9% despite the one-off expense regarding property tax of KRW 8 billion. Next is the domestic grocery business. Revenue was KRW 1.3 trillion, down by 8.8% and OP was KRW 7 billion, down by 85.1%. Unfavorable business environment factors such as Korean Thanksgiving timing difference, exclusion from the government issued consumption coupon usage list and the revenue base -- and the reverse base effect from supermarkets one-off profit regarding [ Guangzhou Chanda ] real estate sales last year has caused a weak performance in domestic grocery unit. Next is the e-commerce unit. E-commerce recorded KRW 23 billion of revenue, indicating 16% decline. Our online platform Lotte ON GMV was increased by 2.8%, but the revenue was decreased due to business strategic shift such as scale down of Lotte affiliates online website maintenance service. Operating loss was KRW 10 billion, which has been reduced dramatically, driven by gross profit margin enhancement and cost reduction initiatives. Next is the overseas department store. Overseas department stores revenue was KRW 31 billion, indicating 17.2% increase. And its operating loss has turned into profit generation, recording KRW 4 billion, increased by KRW 6 billion. And especially Lotte Mall Westlake Hanoi has recorded 28.6% increase in revenue and all-time high quarterly operating profit of KRW 2 billion since the first opening of the store. As for the overseas hypermarket, the revenue was KRW 344 billion, indicating 0.9% decrease and its OP was KRW 9 billion, indicating 7.1% decline. Vietnam operation continued to achieve record high performance, recording 11.6% increase in SSSG and 23.5% increase in OP. But Indonesia unit indicated decline performance due to weak consumer sentiment regarding anti-government protest. But Indonesia still recorded a solid sales trend from recently renovated stores. Next is the Hi-mart. Revenue was KRW 653 billion, decreased by 4.9%. Sales declined due to sluggish domestic home appliance demand and reverse base effect from one-off VAT refund gains in the same period of last year. Excluding the one-off impact last year, our Q3 sales would have been decreased by 0.9%. OP was KRW 19 billion, decreased by 39.3%. But again, excluding the one-off impact, our OP increase rate was 111.7%. Key strategic initiatives such as expansion of home care service, private label and store format innovation delivered meaningful results, sustaining the performance improvement trend. As for the Home Shopping, our revenue was increased by 1.6%, recording KRW 211 billion. OP was KRW 10 billion, up by 4.8%. Our gross sales was declined due to product mix adjustment focusing on fashion, luxury and beauty products, but our improved sales margin and declined SG&A ratio has led to improvement in both top and bottom lines. Next is the Cultureworks, our cinema division. While revenue was KRW 128 billion, weakened by 2.1% due to reverse base effect of major box office hits from last year's invested film, resulting decline in theater attendance and sales. While our Vietnam operations have shown dramatic increase in OP through record-breaking box office success from local movie, weak performance from domestic content business has caused the 8.4% decline in operating profit recording KRW 8 billion. Next page is the nonoperating profit summary. Nonoperating loss was KRW 145 billion. Net interest income improved on the back of reduced borrowings and equity method loss has turned into profit generation driven by strong performance from FRL Korea. However, overall nonoperating profit decreased due to higher foreign exchange losses on foreign currency borrowings from the weaker Korean won and the recognition of an impairment loss on invested property related to the withdrawal from the Ulsan development project. Next page is the balance sheet improvements. As of the third quarter of 2025, total debt stood at KRW 14.3 trillion, down by KRW 0.4 trillion from the end of 2024. Debt-to-asset ratio was 37.6%, remaining below 38% since the asset revaluation at the end of last year. However, the net debt-to-EBITDA ratio was 7.4x, reflecting one-off costs such as ordinary wage standard change in the fourth quarter of last year. With the expected earnings improvement and a further reduction in total debt level in the upcoming fourth quarter, our net debt-to-EBITDA ratio is projected to improve by the year-end. I'll now finish today's presentation here. Thank you for attending today's presentation. We'll begin the Q&A session. For your reference, the Q&A session is in Korean English and the presentation will be sequential.

[Interpreted] [Operator Instructions] The first question will be provided by Younghoo Joo from NH Investment & Securities.

[Interpreted] My name is [ Joo Younghoo ] from NH Investment Securities. I have 3 questions. Question number one, can you please give us an overview about your business trends since October this year for all of the different business divisions? Second, you mentioned about the contribution of foreign inbound customers to the department store business. Can you please elaborate that and discuss the foreign inbound customer trend for the overall department store business, not just the HQ and the flagship stores? And third, there was mentioning of one-off expense for the department store business in your presentation. And please give us more color on that.

[Interpreted] I will first go over the department store business trends that we expect from October on for the remainder of this year. We have seen around double-digit growth in revenue in October, and I believe that we will be able to maintain this type of trend in November as well. The outlet malls have been doing exceptionally well. And if this trend continues, we believe we will be able to generate stable revenue growth for the entire 2025 year. I would like to highlight that we are seeing a significant improvement in the fashion category. Last year, this time the weather was warmer than usual. And given that base effect, we believe that we will be able to generate higher revenues in the fashion category in Q4 this year. We are also observing the visible growth in the sports and outdoor categories. And so for the October to December Q4 period, we believe that the high-margin fashion category will be driving operating profit as well. And therefore, we will be seeing better performance in Q4 compared to previous quarters of this year.

Next, I will go over the grocery business. In Q3, our businesses and stores were excluded from the government's consumption coupon program. So this weighed on our business in Q3. However, we are seeing recovery as we get into the mid and latter half of October. And as we get into November, we are seeing positive growth. In particular, we have launched a large-scale promotion campaign towards the end of October. And we believe that this will have positive contribution to the overall top line growth of the grocery business in Q4.

I will move on to the e-commerce business. Online GMV overall, I think, was only around of last year. However, as we get into Q3, we are seeing double-digit growth. So overall recovery trend is becoming quite visible. As part of our vertical strategy, we have been focusing on the fashion and beauty categories. And especially in the fashion category, I think we will be seeing the strong growth for the remainder of the year. The weather conditions were already mentioned in the previous answers. And so we believe we will also be benefiting from that base effect in Q4 compared to Q4 of last year. So I think we will be continuing to see visible growth of the fashion category, and that should have positive contribution to our overall business.

Next, I will go over the trends of foreign inbound customer contribution to the department store business. So we are seeing very strong growth. In Q1 this year, the foreigner contribution grew by 28%. In Q2, it grew by 15%. And in Q3, it grew by 34%. Of course, this growth is mainly driven by our flagship HQ store. However, our [indiscernible] store is doing very well as well. In Q1, the growth was 27%. In Q3, the growth was 13%. And we believe that this trend will be continuing. I think there -- we can also compare this to pre-COVID levels. So pre-COVID, back in 2019, for the department store business, the foreigner contribution was around 2.9%. And this has grown to 4.3% in recent times. The HQ 2019 figure was 18% and Q3 this year was 19%. So you can see that those numbers have recovered to pre-COVID levels.

I would like to highlight that we are seeing similar trend at our [indiscernible] store as well. So 2019, it was 2.5%. Q3, it jumped to 4.5%. And so we are now trying to launch integrated marketing campaigns that can attract more customers to the [ Chengdu ] stores that we have that puts together the attractions in the Lotte Tower, the Observatory and the department store business. So the more foreigners can be attracted to come to our [ Chengdu ] stores.

So I would like to give more color on the hypermarket, supermarket grocery business. So there is some difference depending on the store. But overall, the foreigner contribution is also showing growth. Especially our Seoul station is highly visited by the foreign tourists. The foreign inbound customer contribution to our Seoul Station store is over 30% now. And this trend has become especially evident since the Visa waiver program for Chinese tourists has been implemented by the government. So for this business as well, the Seoul Station and [indiscernible] store are also benefiting from higher visitation of foreigners.

[Interpreted] Lastly, I will address your third question on the one-off expense. I am Kim Won-Jae, CFO. For the department store one-off expense, there was some additional property taxes that we paid for our regional store, which was around KRW 8.1 billion. And we have some different thoughts on this tax issue. So we paid the tax, and we reflected all of that on our balance sheet and income statements, but we are also currently exploring other options on how to address this issue.

[Interpreted] The following question will be presented by Hyeeun Kim from Morgan Stanley.

[Interpreted] I have largely 2 questions today regarding the grocery business. Your e-commerce business has been incurring some expenses, which have been leading to lower profitability. But I believe that as the e-commerce business ramps up, there is a possibility that the size of the loss will decrease. So compared to Q2, I think in Q3, the expense situation of the e-commerce business has improved. So I would like to get some further color on your outlook for the expense and profitability of the e-commerce business. My second question is also regarding the profitability, but for the entire grocery business. So in Q3, I think the same-store sales growth was quite weak, and this is what weighed on overall performance. So you already mentioned today that you are seeing recovery as you get into later half of October and November. So it would be great if you can further elaborate on that. And also, do you think that the Home Plus incident is something that can benefit your business in Q4 and early next year as well. So some thoughts on these overall issues and profitability outlook will be appreciated.

[Interpreted] Thank you for the question. As you mentioned, at the initial stage of the launch of the e-commerce business, there were some costs that we need to incur. But as time passes, we see those cost elements stabilizing very quickly, especially regarding the packaging and delivery, we are seeing higher efficiency. And so this should bring down the cost overall. Also, at the initial stage, we have invested in marketing to raise awareness of our application among our customers. That upfront marketing cost was also something that weighing on the business early -- in the early stages. However, as more customers now are aware of our applications, we are able to rationalize the advertising cost as well. So overall, the cost is downward stabilizing. As for the profitability of our hypermarket business, as you already know, the overall market environment was not the most favorable for the offline business. But Home Plus incident is something that we believe can have positive impact on our business, especially for the stores that are closely situated to Home Plus stores. And I think we will have clear idea on what will happen to Home Plus as we get into the end of this year. And so once that becomes more clear, I think the size or the type of benefits that we can enjoy will also become clear as well. Having said that internally, the stores that have been renovated to really focus on the food and beverage section, such as the Grand groceries have been doing very well, both in terms of revenue and profitability. So I think going forward, we will be driving the renovation to turn more of our stores to Grand groceries and also to strengthen the overall product mix in these Grand grocery stores as we have already seen that it can have positive impact on both revenue and profitability.

[Interpreted] Next question, please.

[Interpreted] The following question will be presented by Jin-Hyeob Lee from Hanwha Investment & Securities.

[Interpreted] I largely have 3 questions. First, regarding your Vietnam businesses, it is doing quite exceptionally. So do you think this strong performance can be sustained? Second, in Indonesia, I understand there were some challenges and issues. Do you think that has largely wrapped up in Q3? Or do you think it will have a lingering impact for the remainder of the year? And lastly, regarding the data and [ RMM ] businesses, this has been quite strongly emphasized by the Vice President. And so what are some of the businesses you are pursuing in this area?