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

[Interpreted] The first question is from Jin-Hyeob Lee from Yuanta Securities. There are 2 questions that I would like to ask, the first being -- it would be appreciated if you could provide an update on the sales trends that you currently see for the month of July. The second question is with regards to e-commerce. If you can share the numbers on the GMV growth, also the MAU, and the number of subscribers that have also come on to Lotte -- at Lotte [ Honors ]. We would like to have an update also what the trend you're seeing for e-commerce for the month of July as well. And if possible, please share the overall strategic direction for e-commerce.

[Interpreted] I have to ask for your excuse because due to the corona situation, all of the participants from the company side, we are all connected through the conference call system. So it's going to take a moment for us to coordinate who's going to answer which question in which order, so there may be a little bit of delay. So please excuse for the little delay.

[Interpreted] So first off, we would answer the trend that we see for the department store. This is the Head of the Department Store Planning division. And if we look at the overall performance that we reported for the department store between the period of January to June, it did -- as we just shared in our earnings results show a moderate growth of year-over-year of 13%. But as we all know, the current situation with COVID-19 has exacerbated. So the month of July and August has definitely seen a harder hit on the impact of the overall performance compared to the first half of this year. Although we do believe that if the COVID-19 situation is contained, after the month of September we will see a turnaround. So in the quarter of -- the third quarter and the fourth quarter, we do expect that the growth range would be in the -- at about 8% range. And then we would -- on an annual basis, be able to achieve a growth rate around 10% year-over-year, which would be quite favorable compared to the year 2020.

[Interpreted] We would like to also give you an update for our overseas department stores. So we do have a suspended sales operations. Stores have been closed down in Hanoi from July 19. And also, the store has been closed down in Jakarta from July 3, and there are also stores that are currently continuing its operation. But as of the month of July, separately, we do see that the overall trend is down by a negative of 30%. But assuming that we would be stabilized again by the month of August, then we do believe that we would return back to the trend that we saw between the month of January to June to return back to a growth pace of around 20%.

[Interpreted] Next, we would like to give you an update on the domestic Hypermarket, and this is the lead for the strategic management division of domestic Hypermarkets. So if we look at the trend for July and August for our division, we do have to take into consideration the recent situation that the social distancing level in Korea due to the COVID-19 pandemic resurgence has now been changed again to Level 4. As a result, we do see that in the households, there are a lot of people who are consuming more food, and the food consumption as a result has gone soft. So for the Hypermarkets for the month of July, we see that just in terms of the same-store sales growth, it has achieved quite a favorable growth rate of around 8%. And we have -- as we mentioned before, in the first quarter earnings conference, pursued internal efforts to improve the overall profitability of our products. And such efforts have also taken quite an effect. And we will continue to take such efforts moving forward. So in the month of July, considering all aspects, we do believe that the overall improvement in the operating profit will continue on and to show in the -- as we displayed in the second quarter. And this would also be in our favor in the coming month of August as well.

[Interpreted] Next, we would like to give an update on the overseas Hypermarket. So if we look at our overseas main operation in terms of the regions, that would be Indonesia and Vietnam, and if we look at the COVID-19 situation of each country, right now, the daily confirmed patients, the number in Indonesia is 40,000 a day, and in Vietnam, 4,200 a day. So still quite a dire situation. And that definitely has had an impact on our overall revenue. In Indonesia, we did have the impact of the stores operation hours being reduced to shorter hours. And so we are pursuing many efforts to improve our overall operating profit level. In Vietnam, we do see that the overall margin that we see in our stores has increased from a level of 3.5% up to 5%. So we have taken efforts to close down some of the stores that were showing sluggish performance. And we will continue to pursue such efforts in the future so that we see better performance moving forward.

[Interpreted] Next, we would like to give an update on our Supermarket division. The update was given by the executive in charge of planning and strategic development for the Supermarket division. So for the month of July, the same-store sales growth of our supermarket recorded a positive 3.1%. And we do believe that the month of July is quite likely that we will turn into a profit generation. And we do believe that also, in terms of our performance in August as well, it would be positive year-over-year. And also, we expect that there will be a profit generation as well. So if we look at the overall strategic direction that we have for the second half of this year, we're going to really focus on the fresh food categories and also the delicatessen, so that we will also pursue efforts in the reformatting of the previous stores and improvement in R&D. And in terms of new store openings, we already did open a new store, the Olympics branch in the first half of this year, and there are plans to open 9 more stores in the second half of this year as well. So we will continue efforts to maximize our revenue and also improve our operating profit moving forward as well.

[Interpreted] Next, we will give an update for our Cultureworks division. So in the month of July, despite the social distancing level being elevated to Level 4 in Korea, we do see that the number of moviegoers compared to the previous year has shown an increase of 25%. That was due to the main movie releases of blockbusters like Black Widow and also Boss Baby 2. And with such movie releases, naturally, the number of movie customers have gone up. In the month of August, we also have some big movie releases from Korean movies coming up with Mogadishu and also Sinkhole, [ Hostage ]. So with such additional movie releases, we believe that we are on a good path to continue on for a good performance in the movie going forward.

[Interpreted] We'd like to give an update now for our e-commerce division. First, if we share our earnings performance that we have -- saw for the second quarter. First, if we look at the GMV year-over-year, we -- it deflates at a 13% growth. And compared to the number of GMV year-over-year growth of the first quarter being at 4.3%, it is a considerable jump. And we do have a very even growth displayed in various categories of fashion, home appliances and food. Even despite the COVID-19 effect, we did see that the overall numbers we have for our Hypermarket has shown an improvement of 10.8%, displaying that we have seen an overall growth trend in the various categories that we have in our business. So for -- in addition to the GMV, we also can point to different types of indicators, like the web traffic that has increased of about 36.9% year-over-year. And also compared to the number of the first quarter that we have at 0.9%, this is a considerable jump. And if we also look at the number of sellers on the platform, compared to the first -- end of first quarter, at the end of second -- at the end of the second quarter, we saw an increase of the number of sellers by 26.7%.

[Interpreted] And also, if we give an update on the overall trend that we see for the month of July, we have pursued a lot of -- we are planning a lot of different campaigns and promotions like the old Lotte ON Zero and also ON Sale. And we have a lot of such events in collaboration with big name brands. So we're expecting that the year-over-year growth would be around 20%, and we expect that the high growth trend of -- in the late 10% range will continue on as our trend. And in the month of August and September as well, we are expecting that we will have some new sales opening that we could also point to for some favorable conditions, like the new one opening in [ Hime ] and Dongtan. So with such store openings, we will pursue online events so that we could increase the overall web traffic, and that's resulting in better increase in sales performance will be our main target moving forward.

[Interpreted] And we would also like to provide some insights into our overall business strategies. So we've received a lot of questions with regards to our eBay participation in the eBay acquisition. And what we can say officially is that, internally, we reviewed the situation very carefully. And compared to what we initially expected, the level of synergy that we can expect as of the group as a whole was not up to our expectation. So we took a more conservative approach. But if we look at the overall strategic direction for Lotte ON, we are going to really focus on providing differentiated experience to the users from a user's perspective and also try to provide a new type of logistics and distribution for the distributors who are also going to engage in our platform. Through such efforts, we're trying to emerge and position ourselves as a new type of logistics platform and try to differentiate ourselves by also accelerating investment into digital transformation, so that we are focusing really on the 2 major areas of groceries and also fashion and beauty. And this will be our main basis for creating a virtuous cycle in terms of growth and development in the future. So building on that, we are going to really accelerate a lot of investment and expand our efforts in creating and setting up a logistics infrastructure and also pursuing digital transformation. And as we are accelerating our efforts for digital transformation, we have internally also reorganized our e-commerce division. So previously, a lot of the teams for online were scattered around in different shopping affiliates. We have all merged them together in e-commerce division so that the capacity and the level of collaboration is now centered, so that we can make fast decisions in a timely manner. And then also, the main area that we have to focus on for e-commerce is really in terms of the delivery time, the expectations from the customers and how we could fulfill them. So rather than just focusing on the speed of the delivery itself, we're trying to focus on how we could differentiate a better customer experience. For the Hypermarkets, trying to maintain that at a level of 2-hour delivery and also for the supermarket at a 1-hour delivery time frame. So the quality and delivery time are all properly fulfilled according to the customers' expectations. So based on such business efforts, and we do believe that we are going to try to further make a solidified position in our standing.

[Interpreted] Next, we would give an update for home shopping. So traditionally, for the home shopping sector, normally, the month of July and August is a down season because of vacation. But this year has been quite different because of the social distancing policy of the government. A lot of people are staying at home for their vacation, and we also believe that the Tokyo Olympics currently going on will have a positive impact on our performance in home shopping. And it will definitely have a positive impact on our overall PB. So if we look at our gross sales, we do see that in the month of July, we're expecting our year-over-year growth of around 2%, and in the month of August, around 6%. And in the second half of the year, we're also going to focus on acquiring a lot more customers rapidly through mobile channels. And also on the TV side, we're going to increase the number of direct purchases, so that the overall product competitiveness of our offerings are improved.

[Foreign Language]

[Operator Instructions] The following question is by Hyeeun Kim from Morgan Stanley.

[Interpreted] The question is regarding Lotte Mart. You shared the daily capacity plan. And we are curious in terms of the daily capacity on the online side. How much does online account for in your overall sales amount? And what is the trend that you currently see in terms of the performance for the second quarter? And the second question is regarding LOHB's because it's also a part of Lotte Mart. How are things progressing in the second quarter? And I think a lot of the mention for LOHB's was really focused on the profit. So if you could share the overall strategic direction for also LOHB's, that would be great.

[Interpreted] Thank you for your question with regards to the Hypermarket. So if we look at the overall of -- the ratio that online transactions account for in our sales, it's around 8%, so 7.9% to be exact. And in the second quarter, we do see that the overall growth in terms of our performance is at 10%, an early 10% range. So it's growing quite well. And in our e-commerce division, as mentioned before, we -- in the -- from the month of August, we are really going to focus on the overall trend that we have to strengthen the online categories for groceries. And the overall -- the organization structure for our online has also been focused and centered into the e-commerce division so that they have central governance. So for us at Lotte Hypermarket, we're focusing on the grocery category to strengthen our services online and really focus on fostering such strengths that we have. And in order to improve our competitiveness and delivery, we are going to utilize for our fresh food a cold chain system. And we are also going to offer a differentiated services compared to our market currently and such online-only type of shopping malls by utilizing the resources that we have in store. So for example, if people requested, it could be that certain sizes or portions are split up when delivered, and there will also be focus on more high-value and high-quality products so that we could really strengthen our positioning in the online space. For LOHB's, with regards to that question. In the month of -- from the month of January to June, we did see that our operating loss was improved considerably compared to the previous year, which was KRW 15.8 billion, and it improved about KRW 2.4 billion to around KRW 13.4 billion. And with LOHB's now coming under Lotte Hypermarket, we are going to pursue differentiated strategies and mainly it's twofold. So first, we're really going to focus on the H&B competitiveness and competitiveness enhancement on the Hypermarket side. Because previously, in the H&B category, the Hypermarkets did not see a very good level of competitiveness. And so in our Hypermarket, we are trying to position ourselves so that we are now having a specific capacity in the range of specialized H&B. So we have some prime examples that we could account for, for that. So in the city of Yeosu in month of May, we launched something called LOHB's Plus, which is really focusing our efforts in beauty and health costs. And compared to the previous H&B section that we had just in our Hypermarket, it grew nearly 2 digits, so showing that such efforts do pay off. And in the month of July, we also had a new drug store concept that we opened for the first time in Korea, in Namyangju. And it's also trying to take our strategic direction to have our Hypermarkets have such kind of a drug store concept that is focusing on health-related products and also bringing in the benefit of LOHB's with health and beauty categories. So such drug store concept will be a prime strategic focus for us in moving into these categories.

[Foreign Language] Because we are out of time, we'll take the last question very shortly.

The last question is by [ Sang Jun Park ] from [ Keun ] Securities.

[Interpreted] So this is a question from [ Keun ] Securities of [ Sang Jun Park ]. So in the market now, there's definitely -- the big buzz is around quick commerce. And the distribution logistics of food category online is of prime interest. So our question is, of course, you shared the numbers and the overall growth trend for the Hypermarket. But even with such growth trend that we see, considering the market's expectations, it might not be up to the expectation of the market as much as it could be. So in order to improve or increase market share, are there any strategic consideration of partnering up with mobile type of online platform so that there could be a turnaround?

[Interpreted] So yes, we'll take that question from the Hypermarket Planning division. So if we look at our overall strategic direction for our grocery, we did mention that we are going to focus a lot on the grocery category as our main growth focus. And compared to the competitors, how we're trying to differentiate ourselves is really with the quality of the fresh food. And we do believe that, that is something that we should definitely focus on to provide the level of high-quality food as expected by the customer. And as we are looking at overall the product service area, we are trying to utilize a lot of the resources that we have in store and also trying to utilize the infrastructure that we have available in the stores. So for example, as we mentioned, we're providing differentiated services, like making or preparing the food to be easier to handle or consume when delivered, and also looking at various ways that we can continuously improve our competitiveness. In terms of our consideration for partnering up with external platforms, we are already pursuing such efforts with general malls like Gmarket or also [ Market Mover ]. And such an important focus for us is for Lotte Hypermarket to focus on expanding external channels for our grocery category. And even within the grocery category, focusing on fresh foods and HMR because there are a lot of very competent e-commerce start-ups that are specializing in such areas. So we are going to take a close look at such startups. And because they have avid fans, we are going to look very closely at the potential synergy and the opportunities that are available in the market. And if everything is right, then there definitely will be considerations to make the move for an acquisition. So overall, in the long term to improve our market share for the grocery category, a lot of such efforts will be pursued and considered.

[Interpreted] 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 the IR team through individual meetings. Thank you. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]