Lotte Shopping Co., Ltd. (A023530) Earnings Call Transcript & Summary

[Interpreted] So to provide some details for the hypermarket, the SG&A was reduced by 9% for the hypermarket division year-over-year. If we look at the detailed areas of the reduction, about 8% was in the area of labor cost, about 30% in the area of advertisement. And this also -- overall, we did have additional efforts in having the impact considered for the depreciation reflected into the SG&A, resulting in an overall, I guess, efficiency and reduction of the SG&A expenses as a total.

[Interpreted] In the area of the supermarket, if we look at the current restructuring efforts in the third quarter of 2020, we have also completed restructuring for 26 stores. So overall, 60 stores are in target for progress of the restructuring efforts on the supermarket side. With regards to the restructuring expenses, as of the third quarter of 2020, we did see, overall, that having an impact in the SG&A reduction, about 10%. Mainly the areas that we saw the decrease was labor costs down by 12% and also advertising expenses down by 15%, resulting in overall reduction of SG&A. As a result, we did also see a turnaround in the operating profit as well.

The following question is by Park HeeJin from Financial Investment securities.

[Interpreted] So also, again, Mr. HeeJin Park from Shinhan Financial Investment. I would like to ask one additional question. So we did hear from your recent comment that 88 stores have been completed in terms of restructuring. According to the previous plan that we heard, there was a plan to restructure up to 200 stores. So if you could share with us the plans that you have for the restructuring efforts in the fourth quarter of this year. And it would be appreciated if you could give the breakdown of the numbers for the hypermarket and supermarket separately. And we would like to know in detail of exactly when in terms of the timing you believe that the restructuring will be completed as of next year and the related provisions that you estimate from that. So we understood, just based on your answer that in the third quarter, there were no provisions accounted for. How about in the future, is that also the case? And we would also like to know some details on the operating process for the online business.

[Interpreted] So first, to answer the question with regards to the restructuring, we did mention before that we have the plan to carry out restructuring for over 200 stores in the course of the next coming 3 years. So the plan to restructure the 244 stores were -- in the course of 3 years is indeed a plan as of now, and it would be subject to a lot of additional factors to consider at the moment its actually carried out. So as of now, please consider this as a plan. So to give you the numbers on the actual ones carried out, as mentioned before, from the month of January to September, there were 88 stores that were carried out for restructuring. In the fourth quarter, we expect to carry out restructuring for 34 stores. But in terms of the provisions that are recognized as an effort of such restructuring, it would first have to be confirmed in terms of the plan and also approved by the Board of Directors for us to accurately estimate and recognize the provision amount. Before that, it's difficult to comment on exactly how that much would be because that would be the time that we know for sure. So the KRW 21.2 billion that we mentioned before that we are recognizing currently as provision and expenses as an effort of restructuring is, as of now, the amount that we could share, that we have in that relevant account. And there is no additional amount coming into that account as of now. So with regards to the numbers in the fourth quarter, please understand, at this point in time, we can't provide accurate details because in the process of restructuring, it's not only one-sided by a Lotte, but there's also the counterparts, the stores that are involved in the deal negotiations that could be quite sensitive to such information being shared, and it could play in a negative manner for the parties involved in the deal itself. So once we know more details, we'll share. But at this point in time, please understand that we can't share details beyond this point.

[Interpreted] And with regards to the profit and loss in our online sector. So as you well know, the launch of the Lotte ON service was as of end of April of this year. And there were a lot of investments to get the service up and running. So as of now, it is recording a loss. But as this is a new business that we have recently launched, please understand that at this point in time, it's actually difficult to have official numbers to report on the profit and loss as -- of that separately because it has a lot of relevance with the current divisions that are operating in the business. So we can't share any specific numbers on the profit and loss specifically for this division now at this point in time.

The following question is by Lee Jin-Hyeob from Yuanta Securities.

[Interpreted] So this is a question by Jin-Hyeob Lee of Yuanta Securities. I have a question with regards to the overall improvement or the performance we see in the financial statement. We do see that the EBITDA as currently told is KRW 1.5 trillion. But despite that, there is a significant increase on the loans on Lotte Shopping side of the balance sheet. And still because of that -- despite having the operating profit or reporting of KRW 100 billion, you are still seeing some losses in the financial statement. So the question is, with regards to the plans overall in the future to have further efforts to have an improvement in the financial balance sheet, is there one? If so, please share. And with regards to the current restructuring efforts, by next year when the restructuring takes more progress, how do you impact -- see the impact that it would have on each division? If you could provide us the answer for each division, that would be appreciated.

[Interpreted] So we would like to first answer the second question that was raised in terms of the restructuring impact that we would see on the Lotte Shopping overall for all divisions. Please understand that it's difficult to provide a breakdown for each division at this point in time. But as we mentioned before, we have the plan to carry out 244 stores for restructuring in the course of 3 years. So the operating loss that we estimate for these stores is KRW 600 billion. And annual, that would be KRW 200 billion. So we do see that the restructuring would have an impact to turn this around. So as of now, it's difficult to actually estimate accurately what the closing related -- closing of operation expense would entail. We do have estimates, but not an accurate number. So please take this into consideration. So we do see that the current overall accumulated loss recorded would have a turnaround into recording profit, but we cannot provide detailed numbers of such impact at this point in time.

[Interpreted] So we would first also like to answer the second question that was raised. So on a separate basis for Lotte Shopping, we did see an increase of the loan amount in our financial statements. So if we compare it to the end of December of 2019, if we look at the net loan on the balance sheet, it recorded about KRW 3.5 trillion and a year-on-year increase of about KRW 90 billion. And in the month of January to September of 2020, we do see that currently, the net loan stayed at KRW 4.05 trillion and a year-on-year impact of 46 -- KRW 460 billion in our balance sheet. So that is due to some of the retained -- the numbers that were reflected into the balance sheet of KRW 200 billion and also the -- with despite the internal EBITDA and the effect that we see in the statements as of now. So in terms of the expenses and investments, you did see we did have a flow of the money in terms of the investment, about KRW 500 billion and also a payout of dividend recording to KRW 100 billion as well. So as of now, it does seem that it has a net loan amount in our balance sheet, recording about KRW 460 billion as total. But we do plan in the future to have that reflected and turnaround in the balance sheet to improve. So we do have some plans to have a sell-off of some of our home shopping-related assets to secure more funding in our balance sheet. So in the year of 2021, we would make efforts to not actually see any net increase in the loan amount, but to actually have a decrease in the amount reflected into our balance sheet as an effort on our side.

Just a small additional information is that the sale of the stocks regarding the home shopping, it's not the Korean Lotte Homeshopping that we're talking about. We have investment stocks for the Momo Homeshopping, which is based in Taiwan. We're talking about their particular stock, not the local Lotte Homeshopping.

The following question is by Park Eun Kyung from Samsung Securities.

[Interpreted] So this is a question by Eun Kyung Park from Samsung Securities. We would like to ask some more details on the performance for the department stores and the hypermarkets in the month of October. So our understanding is that currently, you have plans to carry out restructuring for about 10 of the department stores. We would like to know the current process. It seems to be a little slow in terms of the progress. So if you could comment on that, that would be appreciated. And if we exclude actually the stores, the department stores that are planned or subject to restructuring, how would that have an impact on the business performance? We're curious about that. But if that's difficult to actually isolate and provide numbers on, we would still like to know the performance of what you would classify as a great stores and the numbers that you see, not only for the third quarter, but as a trend from the first to third quarter. And so in consideration of the stores that you actually want to keep, then how was the performance trend that you witnessed overall?

[Interpreted] So first, we would like to offer our thoughts on the performance for the department store in the month of October. We did see that in the third quarter, the overall trend was a decline of 15%. But in the month of October, specifically, we did see a turnaround of a positive of 2%, and the operating profit year-over-year also improved by 20%. So with the lessened impact of the COVID-19, we have pursued continuously efforts to promote and carry out a lot of promotions to help trigger and generate more sales, which we will continue to do. And with regards to our core stores and such operations, we do have the plan to carry out MD updates and also hardware renewal for not only the headquarter, the flagship store, but also the large department stores. Once the renewal of the flagship store, the headquarter store, is completed after the year 2022, we do expect that from the years moving forward that we would gain an advantage in this position compared to our competitors once all efforts are realized.

[Interpreted] So for the hypermarket, if we look at the overall sales trend, as we did also see an increase in the month of September, we also did see a turnaround of our sales in the month of October as well, mostly in the area of fresh fruit and processed foods with the need of the customers driving mainly such performance. So overall, in the month, we do see that there is a slight improvement compared to year-over-year.

[Interpreted] So for the supermarket, if we compare the month of September and October, the key differentiator is actually the Korean Thanksgiving holiday. So if we compare the 2 months, actually, the sales that we recorded in October is significantly less, so about 7%. But we do see that the overall profit margin has improved by about 1.2% with our additional efforts to optimize costs, reducing cost by 23%. So with such efforts, we do see that and expect that the operating profit will have a slight improvement compared to the previous year.

[Interpreted] So with regards to our restructuring plan for the department stores, as we mentioned before, we have completed restructuring for 1 department store in the month of September. And until the year-end, there is a plan to do restructuring for 4 additional stores and 5 in the coming year. As you can well assume, for the department stores, the size and the scale that we're talking about is significantly larger compared to LOHB's, or supermarkets. So we have to very carefully and cautiously approach this. And it cannot be done in a short period of time. So please understand that we can't disclose any further details at this point in time. But currently, what we do have is an estimate of -- as a result of restructuring 244 stores in our plan is over the course of 3 years, we do expect to see a turnaround of profit to about KRW 400 billion as a result of the restructuring efforts. So that's the current plan, but there's definitely a lot of external factors and variables that we have to consider in the process, like the cost of negotiation and such that could have a -- that this number is subject to changes.

Last question is by Ha Jun Young from IBK Investment Securities.

[Interpreted] This is Jun Young Ha from IDK. One question as the last question. So with regards to the hypermarket, as you mentioned, there was a transition of the store in Chongqing and Guangzhou to a smart store every opening. And you mentioned that you did see a significant turnaround based on such results. So we do hear also that you have plans to actually increase such number of smart stores. So how are they different from the semi dark stores? As mentioned, what are the differentiators between the 2, that would be appreciated if you could provide some more details. And for these stores that have undergone such transition, do you have a separate target margin or profitability compared to the operating profit or the performance that you see in your existing stores as of now?

[Interpreted] So with regards to the smart store and the semi dark store transition in our hypermarket. As you well mentioned, we did open the smart store in Chongqing and Guangzhou. And if we compare the number of the delivery compared to the normal store, it did increase four or fivefold. And we do have the plan to actually increase the number of smart store rollout to 2 more stores until the end of this year. And for the semi dark store, we also have the plan to open 2 additional semi dark stores as well, and this will be tested. And a semi dark store is actually -- the key point is that the back part of the store is kind of turned into like a warehouse so that you have a higher efficiency and the picking and packing process to increase the number of deliveries that can be made. So the semi dark store also compared to the normal stores, the target is to improve the delivery numbers by up to fourfold, as our plan.

[Interpreted] And a little more details that we would like to add to the smart store and the semi dark store. So the smart store, if we explain it in more detail, is actually the picking from the store floor itself and when it's sent over to the warehouse part in the back part of the store for packing is all automated from end-to-end. So that would be how the smart stores operate. And the semi dark stores, the picking from the store floor actually is done manually by a person. And once it's sent over to the warehouse part in the back of the store, the packing process would be automated. That would be the main key difference between the 2. So the smart store, the picking and the packing is fully automated end-to-end. And the main focus is to actually enable fast delivery, so within 2 hours, for example. And for the semi dark stores, the more focus is placed on increasing the capacity overall that can be processed. So for smart stores, definitely, we do believe that we would be enable to process more deliveries than -- compared to before. So as of now, we do see a small loss, but I have confidence that we could turn this around into a profit.

[Foreign Language]

Due to time constraint, we will now finish today's earnings announcement. Thank you for joining us on today's conference call, and further questions will be answered by our IR team through individual meetings. Thank you.