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

Good morning, and good evening. First of all, thank you all for joining this conference call. And now we will begin the conference of the fiscal year 2020 Fourth Quarter Earnings resulted by Lotte Shopping. This conference will start with a presentation, followed by a divisional Q&A session. [Operator Instructions] Now we shall commence the presentation on the fiscal year 2020 fourth quarter earnings resulted by Lotte Shopping.

[Foreign Language] Good afternoon, ladies and gentlemen. This is Ji Hwan Seol, Head of Investor Relations of Lotte Shopping. Thank you for joining us in Lotte Shopping's Fiscal Year 2020 Fourth Quarter Earnings Conference Call. Today, we have Mr. Ho Joo Chang, CFO of Lotte Shopping, and relevant department heads of planning and strategy for major business divisions present in this room. Today, we -- today, Mr. Kyong Seo Park, our Senior Manager of IR team, will proceed today's presentation in Korean, and I'll provide the explanation in English. Questions will be taken after the presentation. I'll now start with the highlights on Page 2 of the presentation.

[Foreign Language]

[Interpreted] Page 2 is the highlights of 2020 fourth quarter earnings results. Lotte Shopping's fourth quarter consolidated revenue was KRW 3.8 trillion, indicating 10.8% year-over-year decline. Domestic business revenue declined, mainly caused by weak sales trend in department store and Cultureworks, which is our Cinema division, severely affected by respreading of COVID-19 situation in November, triggering the elevated social distancing regulations. Domestic hypermarket divisions have shown moderate same-store sales growth with increasing demand in grocery category. Home shopping and Hi-Mart, our Electronics Specialty division, have also shown favorable sales growth. As for the overseas operation, department store and hypermarket both have shown weak SSSG trend due to ongoing COVID-19 pandemic situation. Lotte Shopping's 2020 fourth quarter operating profit was KRW 181.5 billion, indicating 317% year-over-year increase. Domestic department store and Cultureworks operating profit declined due to weak sales trend. But previously, hypermarkets' operating loss turned into profit generation, driven by increased SSSG and SG&A reduction. Supermarket's operating losses improved through ongoing restructuring process and cost optimization efforts. Hi-Mart's operating profit was increased by 159% year-over-year with a favorable sales growth trend. As for the overseas operation, department store's operating losses turned into profit generation through closure of underperforming store in China, SG&A reduction efforts in Indonesia and strong SSSG trend in Vietnam. Overseas hypermarket unit's operating loss improved through SG&A reduction despite the weak SSSG trend. Lotte Shopping has recorded a net loss of KRW 431.6 billion in the fourth quarter of 2020, mainly due to impairment loss recognition amount of KRW 550 billion, which includes the asset impairment loss and goodwill impairment losses. I will now move on to Page 3 to explain about the financial summary.

[Foreign Language]

[Interpreted] Page 3, you can find a summary of consolidated financial results. In the fourth quarter of 2020, Lotte Shopping's consolidated revenue was approximately KRW 3.8 trillion, indicating 10.8% Y-o-Y decline. Operating profit was KRW 181.5 billion, indicating 317% year-over-year increase. Quarterly net loss was KRW 431.6 billion. Just as a reminder, the consolidated financials include 41 affiliate companies.

[Foreign Language]

[Interpreted] Page 4 is the brief financial summary of major business divisions. Just as a reminder, Others category includes the consolidated adjustments and other business divisions, such as the Cultureworks, e-commerce and Health & Beauty divisions and et cetera. I'll now move on explain divisional operations summary, starting from department store on Page 5.

[Foreign Language]

[Interpreted] Page 5 is the Department Store division. Fourth quarter domestic department store same-store sales growth rate was decreased by 9.9% year-over-year. Luxury fashion, high-end electronics and home appliances categories have shown strong sales growth, but domestic department store's operating profit declined, mainly due to weak sales trend in fashion, food and accessories category. Domestic department store division plans to open next-generation complex shopping mall at Dongtan in June and Suwon in September this year. As for the overseas department store operation, sales revenue has declined due to ongoing COVID-19 pandemic situation, but its operating loss has turned into profit generation through closure of underperforming store in China, SG&A reduction in Indonesia and strong SSSG trend in Vietnam.

[Foreign Language]

[Interpreted] Page 6 is the Hypermarket division. Domestic Hypermarket's SSSG rate was up by 1% year-over-year in the fourth quarter, and its operating loss has turned into profit generation, mainly driven by SG&A reduction as well as the SSSG improvement led by strong sales growth in online shopping. As end of 2020, domestic hypermarket is operating 6 store-based logistics hub centers, including 4 smart stores where fully automated picking and packing system is implemented and 2 semi dark stores where automated packing facilities are fitted up. We plan to further expand daily delivery capacity by opening 8 more smart stores and 27 additional semi dark stores until the end of this year. As for the overseas operation, SSSG rate was down by 18.9% year-over-year in the fourth quarter of 2020. Despite the weak SSSG trend, operating loss has improved through SG&A reduction.

[Foreign Language]

[Interpreted] Page 7 is the Hi-Mart, our Electronics Specialty retail division. Hi-Mart's fourth quarter revenue was approximately KRW 1 trillion, indicating 3% Y-o-Y increase. Sales revenue has increased mainly in premium home appliances by recent stay-at-home trend and COVID-19 pandemic situation. Hi-Mart's fourth quarter operating profit was KRW 16.4 billion, indicating 159% increase year-over-year. Hi-Mart's operating profit margin also increased by 1 percentage point year-over-year, driven by SG&A reduction and favorable sales trends. Next is the Supermarket division. Supermarket's 2020 fourth quarter revenue was KRW 280.5 billion, indicating 35.9% decline Y-o-Y. Sales revenue decreased mainly due to change in revenue recognition in accounting from gross sales to net sales regarding goods supplied to CS distribution, which is one of the subsidiaries of Lotte Shopping. Despite the weak sales trend, supermarket's fourth quarter operating losses improved by KRW 35.7 billion, driven by SG&A reduction and closure of underperforming stores.

[Foreign Language]

[Interpreted] Page 8 is the Home Shopping division. In 2020 fourth quarter, Lotte Home Shopping recorded KRW 289.1 billion of revenue, indicating 3.1% Y-o-Y increase. Aggressive promotions and change in IPTV channel placement were the main drivers of this strong sales trend. Lotte Home Shopping's fourth quarter operating profit was KRW 21.3 billion, which was down by 26% year-over-year due to the rise in SG&A costs such as the broadcast commission fee and labor cost and et cetera. Next is the Cultureworks, our Cinema division. Fourth quarter revenue for Lotte Cultureworks' was KRW 66 billion, indicating 65.6% year-over-year decline. The number of customers visiting movie theaters nationwide was on a recovery trend until October, but drastically decreased due to the respreading of COVID-19 in November as well as the delay of tentpole movie releases. Lotte Cultureworks' 2020 fourth quarter operating loss was KRW 31.5 billion, mainly due to weak sales trend. The COVID-19 pandemic had a substantial impact on film industry globally and domestically, causing a paradigm shift as global OTT market is growing rapidly. Following these changes in the environment, we plan to streamline our offline movie theater operation and focus on high-quality film contents production and distribution going forward.

[Foreign Language]

[Interpreted] Lastly, Page 9 has the fourth quarter nonoperating financial summary. Nonoperating profit of fourth quarter includes the impairment loss of KRW 550.2 billion, which consists of asset impairment and goodwill impairment losses and et cetera. I'll now finish today's presentation here. Thank you for attending today's earnings announcement. For investors' convenience, we have attached 2 materials regarding integrated operation plan of hypermarket and H&B business unit and another is the shopping mall business acquisition from Lotte asset development on Page 13 and 14 of today's presentation material. We can now proceed to the Q&A session.

[Operator Instructions] The first question will be given by Lee Jin-Hyeob from Yuanta Securities.

[Foreign Language]

[Interpreted] The first question is from Mr. Jin-Hyeob Lee from Yuanta Securities. So we do see that for the major divisions, there have been a significant reduction in SG&A and we do see that, that's probably due to the impact of restructuring. We would like to know exactly how much has been reduced from the annual fixed costs? And with regards to the asset impairment loss, so as mentioned, there is the number that we have to take into consideration for the goodwill impairment loss and also the right-of-use assets. So in terms of the right-of-use assets in next year, can we also get a number on the company as a whole how much we would have to account for in overall depreciation? And in terms of the specifics of the goodwill impairment loss, the details of that if could be elaborated would be appreciated as well. And the next question would be with regards to the overall growth of Lotte ON for the fourth quarter. If you could share the numbers on the major divisions and the overall details on the progress there would be appreciated.

[Foreign Language] Due to the corona situation, some of our participants internally are connected with the conference call machine. So it's going to take a minute for us to who's going to answer which question. So please stand by for a minute.

[Foreign Language]

[Interpreted] So first, we would answer the second question with regards to the impact of the depreciation coming from the asset impairment loss. On an annual basis, that was roughly KRW 165 billion. And in terms of the breakdown details of the goodwill impairment loss, as a total, it was KRW 245 billion. And if we look at the details of that, there was some from the department stores coming from ES retail due to some arrangements that were made in August 2012 of KRW 136 billion. And from Indonesia there was a goodwill impairment loss recognized was KRW 43 billion. For Hi-Mart, it was KRW 28.5 billion. And there was also the merger in 2018 that took place for the e-commerce that was recognized to be KRW 28 billion.

[Foreign Language]

[Interpreted] And with regards to the first question. So in 2020, there was a restructuring of total 162 stores that were taken out, and there was a reduction in terms of the fixed expenses, including labor costs and also the associated expenses that we have to account for, for such restructuring activities. Overall, we look at the restructuring impact to have been a plus of KRW 33 billion on our operating profit. This year also, there is the plan to carry out restructuring for 70 stores in total. And looking at the aspect of the fixed cost reduction and associated expenses, we expect that also there would be an impact on the overall profitability this year as well.

[Foreign Language]

[Interpreted] And with regards to the third question, for the growth overall on Lotte ON. In terms of the GMV in the fourth quarter, we did see an increase of 9.8%. So compared to the 3.5% increase that we had as of the third quarter, we are seeing kind of like a fair shaped increase pattern in the overall growth pattern as well. And if we look at the overall main growth drivers that we're attributing to such a strong trend, we had the launch of Lotte ON and a lot of promotion events that took place in the month of October. Also the Black Festa and the commemoration event for the founding of the company in November and also the Christmas-related events that took place in December that brought in very strong sales. And in terms of the traffic also, which is the main indicator that we look to, we did see an increase of 26.9% in the fourth quarter. So that number was also up compared to the 15.6% that we saw in the third quarter. And also the number of sellers compared to the end of 2019, it has increased 130%, showing a 5% increase every month. So we are in the process of solidifying a very good foundation for our operations.

[Foreign Language]

The following question is by Park HeeJin from Shinhan Investment -- Financial Investment.

[Foreign Language]

[Interpreted] So the question is from Shinhan Financial Investment for HeeJin Park. There are 3 questions in total. First with regards to the operating profit improvement overall for the department stores. It seems to be quite good in comparison to the numbers that we see in the third quarter, which actually in terms of the SSSG and the SG&A reduction seems quite stable. So we would like to know a little bit more about the big improvement that we see in the profit this quarter around because if we have the negative growth overall for the same-store sales growth, then did you see an overall improvement in the DP margin? What were the main contributors that you see a big improvement in the fourth quarter compared to the third? And in terms of the SG&A reduction and improvement, we would like to know the details of how much exactly that was for the part of domestic department stores. And for the Others, also the improvement that we see overall for the related subsidiaries, if you could give us a detailed breakdown on the number of how we could trace them individually, that would be appreciated. And it is quite early in the year, but the number for the first quarter, the trend that you see for 2021, if you could share.

[Foreign Language]

[Interpreted] So first for the department store. In the fourth quarter, we did have a very effective execution in terms of the advertising and a lot of the SG&A related expenses. Mainly a lot of the advertisement that was normally done offline through paper and mobile was transformed into digital, being much more effectively executed. And also in terms of a lot of the promotional-related expenses, there were -- was a significant drawback in terms of the events that were carried out. So compared to the previous year, there was a 50% reduction in the overall expenses for advertisement and promotion contributing to the significant increase that we see in the operating profit.

[Foreign Language]

[Interpreted] So with regards to the second question, in terms of the Others, in the fourth quarter number that we see and the improvement of about KRW 60 billion, we could point that out to 3 main reasons. So first, if we look at what makes up the KRW 60 billion, we have a negative of KRW 12 billion that we have to recognize from Cultureworks and a negative of KRW 9 million from e-commerce. But the big difference is in the second half of 2019, there was an asset transfer over to Lotte REIT. And Lotte REIT, of course, they have to pay up for the acquisition-related tax of acquiring the Lotte assets. But in terms of accounting, it's not a listed in terms of the asset-related ones. So based on the consolidated adjustments, there was a recognition of KRW 79 billion in SG&A that was not accounted for this year. So that was the main reason that we did see overall a KRW 60 billion improvement in the operating profit for Others.

[Foreign Language]

[Interpreted] We'll first start off with the trend that we see in the fourth quarter for the hypermarket so -- in terms of the estimates that we see there for our domestic hypermarket. So in the -- compared to the fourth quarter of 2020, we do see that overall in the first quarter of this year compared to the previous year, there is an increase in overall demand in mainly the sales and revenue for grocery-related categories. And as -- with that as a result compared to the previous year, year-over-year, we expect that there will be a slight increase in terms of revenue and also profit.

[Foreign Language]

[Interpreted] And the trend that we see for the department stores, we do see that there will be the lingering impact of COVID-19 still taking effect until the month of January. But -- so that's triggering a sluggish overall performance in terms of the fashion brands. But we do see overall slight improvement in the Lunar Korean New Year sets and gift packages. So we expect that overall, the trend that we see in the month of January to February in terms of sales and operating profit compared to the previous year will hold quite steady.

[Foreign Language]