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'll begin the conference of the fiscal year 2021 First Quarter Earnings results 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 2021 first quarter earnings result 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 2021 First Quarter Earnings Conference Call. Today, we have Mr. Ho Joo Chang, CFO of Lotte Shopping and Relevant Department Heads of Planning and Strategy from major business divisions. Mr. Kyong Seo Park, our Senior Manager of IR team, will proceed today's presentation in Korean, and I will provide 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 of the presentation contains the highlights of 2021 first quarter financial results. For the first quarter 2021, Lotte Shopping's consolidated revenue was KRW 3.9 trillion, indicating 4.8% year-over-year decline. Domestic department stores have shown strong SSSG, along with the consumer sentiment improvement. Domestic Hypermarket SSSG remained flat despite the favorable sales trends in F&B categories. However, supermarket units indicated weak SSSG due to high base effects of COVID-19 in the first quarter of last year. Cultureworks, which is our Cinema division have shown weak sales due to declined number of customers. For the overseas operation, hypermarkets have shown weak SSSG due to ongoing COVID-19 pandemic situation. Whereas department stores have shown significant SSSG trend due to temporary store closure effect in the same period of last year. Lotte Shopping's 2021 first quarter operating profit was KRW 62 billion, indicating 18.5% year-over-year increase. Domestic Department Store's operating profit has increased dramatically, driven by solid SSSG trends. However, Domestic Hypermarket operating profit has turned into loss resulted by merging with HMB units, earnings reflection and other one-off expenses. Supermarket's operating loss has turned into profit generation, induced by restructuring efforts as well as the recognition of one-off profit. And Cultureworks' operating loss has been stretched due to weak sales trend. For the overseas operations, department store operating losses turned into operating profit, driven by strong SSSG trends and SG&A reduction. Overseas Hypermarket unit's operating profit has decreased due to weak sales trend in terms of the same-store sales growth. Lotte Shopping has recorded a net loss of KRW 41 billion in the first quarter of 2021. I'll now move on to Page 3 to explain the financial summaries.

[Foreign Language]

[Interpreted] On Page 3, you can find the summary of consolidated financial results. In the first quarter of 2021, Lotte Shopping's consolidated revenue was KRW 3.9 trillion, indicating 4.8% year-over-year decline. Operating profit was KRW 62 billion, indicating 18.5% year-over-year increase. Quarterly net loss was KRW 41 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 and consolidated adjustment category includes the other business divisions such as the Lotte Reach and consolidated adjustments. I'll now move on explaining divisional operations summary, starting from department store on Page 5 of the presentation.

[Foreign Language]

[Interpreted] Page 5 is the Department Store division operations summary. First quarter Domestic Department store same-store sales growth rate was increased by 18.1% year-over-year, and its operating profit has also increased through SG&A reduction and solid SSSG trend in high-end electronics, luxury fashion categories, along with the favorable sales trend in national brand categories. Domestic Department store division plans to open next-generation complex shopping mall at Dongtan in August and Suwon in the third quarter of this year. As for the overseas department store operation, SSSG has increased significantly through high-base effect over the same period last year, and its operating loss has turned into profit generation through base effect of store closure expense in the first quarter of last year in China; and as for the same period, rent fee reduction in Indonesia.

[Foreign Language]

[Interpreted] On Page 6, we have an explanation on the Hypermarket division. Domestic Hypermarket SSSG rate was 0.3% year-over-year in the first quarter of 2021. Its operating profit has turned into operating loss due to H&B units operating loss recognition following the integration into Hypermarket division and the one-off expense amounting KRW 8.5 billion regarding employee voluntary retirement compensation, change in welfare system impact and provisions for store closures and et cetera. When excluding the one-off expenses and H&B units operating loss, our Domestic Hypermarket's operating profit would have been KRW 9.5 billion, which indicates year-over-year flat level. As of end of first quarter of 2021, Domestic Hypermarket is operating 10 store-based logistics hub centers, including 4 smart stores, where fully automated picking and packing system is implemented and 6 semi dark stores where automated packing systems are fitted out. We plan to further expand daily delivery capacity by operating [ 12 ] smart stores and 29 semi dark stores until the end of this year. For the offline stores, we plan to improve its profitability through store renovation effort and private labor brand merchandising expansion. As for the overseas operation, SSSG rate was down by 11.3% year-over-year in the first quarter of this year. Its operating profit was decreased mainly due to weak sales growth in regards to ongoing COVID-19 pandemic situation.

[Foreign Language]

[Interpreted] Page 7 has the information on Hi-Mart, the Electronics Specialty Retail division and Supermarket division. Hi-Mart's first quarter revenue was KRW 956 billion, indicating 3.3% Y-o-Y increase. Sales revenue has increased mainly in premium home appliances by pent-up demand affecting COVID-19 pandemic situation. And IT products also have shown meaningful sales growth through launching of the new mobile products and rapid sales recovery trend in personal computer goods. Hi-Mart's first quarter operating profit was KRW 26 billion, indicating 31.8% increase Y-o-Y through cost optimization and moderate revenue growth. Next is the Supermarket division. Supermarket's first quarter revenue was KRW 388 billion, indicating 21% decline year-over-year. Sales revenue decline was severe, mainly due to change in revenue recognition in accounting from gross sales to net sales recognition regarding goods supplied to CS distribution company, which is one of the subsidiaries under Lotte Shopping. Despite the weak sales trend, Supermarket's previously operating loss has turned into profit generation, driven by closure of underperforming stores and one-off profit regarding property sales of -- property presales of Gwangju residential development. Supermarket's operating profit would have been KRW 0.5 billion when excluding the one-off profits. Supermarket division will improve its profitability through ongoing restructuring efforts as well as the merchandise renovation, focusing on deli food and franchise store expansions.

[Foreign Language]

[Interpreted] Page 8 has the information on Lotte Home Shopping as well as the Cultureworks. In the first quarter, Lotte Home Shopping recorded a KRW 258 billion of revenue, indicating 4.3% Y-o-Y decrease. Home Shopping's first quarter gross sales increased by 6.6% year-over-year. However, its revenue has declined mainly due to decline in high-margin product proportion such as health-related goods and beauty products. Lotte Home Shopping's first quarter operating profit was KRW 34 billion, indicating 6.3% Y-o-Y decline due to decreased revenue and increased SG&A. Next it the Cultureworks, our cinema division. First quarter revenue for Lotte Cultureworks was KRW 40 billion, indicating 60.5% Y-o-Y decline. And its operating loss has stretched due to declined number of customers in box office sales.

[Foreign Language]

[Interpreted] Page 9 has information on our e-commerce division. For the first quarter, Lotte E-commerce recorded a KRW 27.6 billion of revenue indicating 41.9% Y-o-Y decrease. Since the launching of our Lotte ON application in April of last year, which is the integrated online platform for 7 different channels, our e-commerce unit sales commission has decreased, as the business model has been changed from a general mall to open market format. In addition, revenue regarding other business unit app operating service has also decreased, mainly due to change in accounting standard. Our e-commerce division's first quarter operating loss was KRW 28.7 billion, which was stretched by KRW 13.7 billion compared to the same period of last year due to revenue decline and increased SG&A, mainly in advertising costs.

[Foreign Language]

[Interpreted] Non-operating financial summary is provided on page 10 of the presentation. Non-operating profit of 2021 first quarter include KRW 19.8 billion of -- gained on bargain purchase regarding Shopping mall business acquisition from Lotte Asset Development. Also KRW 11.1 billion worth of gains are reflected regarding expected sales in the future. I'll now finish today's presentation here. Thank you for attending today's earnings announcement, and now we'll begin the Q&A session. Before the Q&A session, I have to ask the -- today's participants for excuse because a lot of our members are also connecting through the conference call. So before we answer the questions, it's going to take a minute or so to discuss who's going to answer which question, so please keep that in mind. [Foreign Language]

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

[Foreign Language]

[Interpreted] The first question would be from Mr. Jin-Hyeob Lee from Yuanta Securities. I would like to ask 3 questions in total. The first question with regards to the department store. We do believe that some of the loss would have to incorporate the effect that was caused by the acquisition of Lotte Mall. We would like to know in detail how much indeed that impact was? Secondly, we have questions with regards to the Hypermarket. The first one being, we do see that information that in terms of the plan for store closing this year, it's mentioned as one. We would like to just confirm if that is indeed correct, if there's only 1 store to be planned to be closed this year or if that would be subject to change? The third question also regarding the Hypermarket. There has been restructuring efforts going on since last year. And as a result, there was a decline in the fixed cost, and that has led to some improvements in performance overall in your earnings. But this year, we do think that overall, the SSSG was quite okay, and there's already the reduced portion of the fixed expenses to take into account that was realized last year. So we do did expect that the earnings performance of this year would have been a little bit improved or better than what was announced. Even if we consider that there was one-time expenses to be incorporated, then it's still at a flat level year-over-year. So it might be a little bit less than expected. So if there are any updates or reasonings to given -- to be as why this is, that would be appreciated.

[Foreign Language]

[Interpreted] So first, we would like to answer the question regarding the Hypermarket. So as mentioned before, the restructuring efforts for the 12 stores have been completed as of last year. And internally, the assessment is that already the stores that have high impact in terms of store closing have been completed. So initially, the first round of closing, indeed, it did include all the stores that we deem to have high-impact due to store closure. We do have to consider the ongoing situation with the COVID-19 with regards to the economic development as well. But the focus of this year is mainly going to be on revitalizing investment into the existing stores. But of course, we do have to consider the economic development and also the cycle that we have in our real estate market. So depending on such circumstances, we are going to be quite flexible in our position with regards to how we approach the number of stores to be subject to restructuring. So when we say that there is plan for 1 store only, that would not be indeed definite because there are a lot of other circumstances to consider, and we would be flexible in our approach for such decisions in the future. But we, as mentioned, already have concluded the restructuring of the stores that have huge impact of store closure. So this year, more of the focus would really be in terms of our management to improve the competitiveness of the existing stores.

[Foreign Language]

[Interpreted] And with regards to the third question, we do realize, as pointed out, that maybe the earnings as released today would not be entirely meeting your expectation. And we do believe that moving forward, we are looking forward to such more improved performance in the near future. As stated in the IR report, there has been the increase of one-off expenses. But even excluding that, there was the point made that we should have done better. And we would like to shed a little bit more light into the details and the background for the situation that we are encountering. In the food category, we did perform as good as expected. But in comparison for the categories that have relatively higher margins such as interior, H&B and also clothing and fashion, the overall performance was not good. And in comparison to last year, as a result, the overall profitability that we saw in such goods decreased as a result. In the second quarter, we do believe that we will be able to achieve a turnaround because we are going to increase our private brands and also exclusively offered products and improve our margin structure also by making improvements to our overall logistics structure that we have in place. So we are already seeing that a lot of the impact for improving the margin has been kicking in since the month of April. And so we believe that from the second quarter, due to such impact, as already mentioned, with regards to the decrease of the fixed cost by restructuring last year and also efforts to improve margin, and our investments to vitalize the existing stores will be able to realize the expected outcome as expected by many.

[Foreign Language]

[Interpreted] And with regards to the specific portion of the loss recorded for the department store coming from the Lotte Shopping Mall. So in the first quarter, the impact of the shopping malls that came into the division as a result, including all the respective affiliates in the shopping mall, did have an impact of negative of KRW 3 billion, but that was considering only the case indeed on face when the numbers are existing exactly of how that was incorporated into the business itself. But we do believe that moving forward, in the remaining period, due to the synergy effect that could be caused by such acquisition, there will be able to be more positive performance moving forward.

The following question is by Ju Yeong Hun from Eugene Investment Securities.

[Foreign Language]

[Interpreted] The second question is from Mr. Yeong Hun Ju of Eugene Investment Securities. We have 2 questions overall. The first being with the numbers that were released for the e-commerce. We do see that in the first quarter of 2021, the numbers did deteriorate quite a bit. Could we get any kind of prospects or future projections for this year? And in terms of also the retention-related taxes, the second question for assets, how that would have an impact?

[Foreign Language]

[Interpreted] Yes, this is the lead of the strategy team for e-commerce, Mr. [indiscernible]. So we would like to give some updates with regards to the question asked in terms of the performance for GMV. So in the first quarter, we did record a 4.3% increase compared to the previous year and in comparison to the full year number that we have for last year of 9.3%. Some might consider that, that was not as optimistic as could be. But we do believe that, though, we have to take into consideration that overall COVID-19 impact has been quite prolonged and progressing since February of last year, and that had quite an impact in increasing exponentially the number of revenue at that point in time. But in the first quarter, we do see that in terms of the increased portion, we are a bit -- at a bit of a stalemate because we do have some sluggish performance, mainly in the Hypermarket and Supermarket in the Foods category overall. But we do believe that still, overall, we have room to improve. And in consideration to Lotte ON, which was launched in April 28, the operating profit also is to be considered, and the decline of operating profit for this is really due to the transition of the business model and changes to the accounting standard. There was also the revenue decrease of 41% year-over-year. But we do believe that from the second quarter, the GMV is expected to turn around. And we also do believe that the overall revenue and the operating profit will take a positive turn as well. So overall, for the full year, our expectation is that the annual GMV will be recording a 2-digit growth and also the operating profit will be able to catch up to the level that we recorded last year.

[Foreign Language] As far as the tax is concerned, we will look into it and get back to the interest of the party individually. [Foreign Language]

Currently, there are no participants questions. [Operator Instructions] The following question will be given by Jin-Hyeob Lee from Yuanta Securities.

[Foreign Language]

[Interpreted] So yes, I think if there are nobody else with questions, then we would like to take the opportunity to ask 1 more question by Mr. Jin-Hyeob Lee from Yuanta Securities. So in the second quarter, of course, we're not talking about for the month of April and May, it's only been 10 days. But if we could get an update of the trend that you're seeing per division?

Please stand by. We have to contact our connected party.

[Foreign Language]

[Interpreted] Yes, we would give the update in the respective order. First, starting with the department store. For the department store, the number that we saw in the month of April was a 20% increase compared to the year of 2020. And in terms of the overall size of the revenue, we did also catch up to what we achieved back in 2019. So overall, we did see, definitely, growth compared to the year 2020 and also catching up with the level that we achieved in 2019. Of course, we don't have the profitability yet for the month of May in full. But looking at the current trend, we do also see that the number of revenue is increasing over 10% year-over-year. And we are expecting after the full month of May does close that we will also catch up to the level of 2019 for the month of May as well. And mainly the increase in revenue is being driven by the categories of global fashion and also groceries and living overall.

[Foreign Language]

[Interpreted] Also, we would like to give an update on the performance of the department stores overseas. In the 3 stores that we're talking about in total for our overseas department stores, the number of growth that we have saw for the month of April was 108% year over year. Of course, we do have to consider the base effect of for 2 of those stores being subject to closed down due to COVID-19 in the same period last year. So that's why we are seeing the very significantly big number in the year-over-year growth for the month of April. In the month of May, we see currently that the year-over-year growth rate is at around 18%. And when the month of May is fully closed, we are currently estimating that the growth rate would be approximately 25%.

[Foreign Language]

[Interpreted] And next, we would like to give an update on the Domestic Hypermarket. So for the second quarter that we have currently have information on for the month of April and May, we do believe that we don't have any more the issue of the Hypermarkets being excluded from the disaster relief fund as was regulated as of May last year. So with that out of the way, we do believe that overall in the Hypermarket, in terms of the earnings and performance, we are going to achieve a growth about a mid-10% range for the month of May in terms of our revenue. And as mentioned, we do have to take into consideration also the restructuring impact and efforts that were taken out last year in terms of the SG&A reduction and also internal profitability improvement efforts that are being taken out. And the issue of the emergency disaster relief fund also not being in the way anymore kicking in as a base effect. So these 3 factors overall are contributing quite positively in our situation. So based on such factors, we do believe that in the second quarter, we will achieve significant improvement and -- compared to the first quarter.

[Foreign Language]

[Interpreted] We would like to give an update on the overseas hypermarket. So the base effect of COVID-19, assuming that ends in the second quarter, we do believe that in the second quarter, we will achieve improvement growth overall in our revenue and also operating profit. So in the month of April, when we look at the overall growth in revenue, it recorded 8.8% Y-o-Y, and there was an improvement in terms of operating profit of about KRW 3 billion. In the second quarter for that period as a whole, we expect that the revenue growth would record about 5.4%, and our operating profit improvement would be KRW 44.4 billion.

[Foreign Language]

[Interpreted] And also, we would like to give an update for our supermarkets. In terms of the revenue, the trends we are seeing for our Supermarkets is quite similar to what was just mentioned for our Hypermarkets. So if we consider the impact of COVID-19 for last year, and obviously, that's taking an impact as of the month of April, we did definitely realize a negative growth for that particular time period. And also, we have to consider, as the same as mentioned, the exclusion of the emergency disaster relief fund usage in the Supermarket of large chains from the month of May and June. So we do believe that, considering that, the overall impact that we expect in growth would be around 10%. And in the second quarter, we would see quite similar trend as we're seeing in the first quarter. And we do believe that we have entered into quite a stable base of profit generation, and we will also see that our operating profit will achieve a good turnaround in the market.

[Foreign Language]

[Interpreted] And we would like to give an update on Cultureworks. So for the Cultureworks division, we did also record a growth of 58% year-over-year for the month of April compared to the previous year. But that was not maybe, in terms of direct comparison, not the right reference because the month of April of last year was indeed the lowest point for our box office sales. But we do see that, overall, for Cultureworks, we are seeing a little bit of a different trend in our retail business because it depends highly on the distribution of movies and that is giving a very big impact on the overall revenue that is recorded as a result. But fortunately, we do see very positive signals coming out of the movie industry, mainly that the Hollywood-released movies are now coming to theaters, and that is acting as a very positive signal on our side. So in the month of May, there was the release of the Hollywood movie, Cruise Family, and that was a very positive factor in recording the best sales that we have -- or revenue that we have seen for the recent periods. And we do have the upcoming releases for the movies like Fast and Furious as well. So we expect that the overall trend will continue to be quite positive.

[Foreign Language]

[Interpreted] I would like to also give an update for our Home Shopping. We did definitely record also a negative growth and overall very sluggish performance in the first quarter due to the base effect of COVID-19 continuing on from last year. But we do believe that we are taking very active efforts to turn the situation around with a lot of promotion-related efforts massively in the second quarter. We did already carry out the signature kind of Click festival to vitalize the overall sales that we have through the period of April 23 to May 2. And as a result, the overall revenue increase estimated 60% and also profit by 30%. So it's for the month of April as a whole, we are expecting that the revenue growth year-over-year is around 10% and the profit to be increased by 3% range. And we are continuing on such promotion activities in the memoration of the 20th anniversary of the Lotte company establishment, until the period of 24th of May. And we do believe that continuing on such massive promotion efforts will lead to positive sales growth in the future period as well.

[Foreign Language]

Currently, there are no participants in question. [Operator Instructions]

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

This completes the fiscal year 2021 first quarter earning results by Lotte Shopping. Thank you for your participation. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]