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 Fourth Quarter Earning 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 Fourth Quarter Earning Results by Lotte Shopping.

[Interpreted] 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 Fourth Quarter Earnings Conference Call. Today, we have Mr. Ho Joo Chang, Executive Vice President and CFO of Lotte Shopping, and other relevant department heads of planning and strategy from major business units present in this conference call. I'll proceed today's presentation in Korean, first, followed by English. Questions will be taken after the presentation. I'll now start with highlights on Page 2 of the presentation. Page 2 is the highlights of the 2021 fourth quarter earnings results. Lotte Shopping's fourth quarter consolidated revenue was KRW 3.8 trillion, indicating 4.1% year-over-year decline. Domestic department stores have shown strong SSSG trend with a base effect of COVID-19 in the same period of last year. Hypermarket and supermarket units have shown weak SSSG due to decreased demand in home cooking meal products, Hi-mart, our electronic specialty unit also have shown weak sales growth due to mainly weak sales trends in white electronics, and for Cultureworks, our cinema division, performed favorable sales growth through increased number of customers relative to same period of last year. As for the overseas operation, department store and hypermarket both have shown weak SSSG trend due to ongoing COVID-19 situation. Lotte Shopping's 2021 fourth quarter operating profit was KRW 117.4 billion, indicating 35.3% of Y-o-Y decrease. In this quarter, in the fourth quarter, we recognized a one-off expense of KRW 10.6 billion regarding early retirement compensation cost in hypermarket units. When excluding this one-off expense, fourth quarter 2021 operating profit would have been KRW 128 billion. Domestic Department Stores' operating profit has increased through strong SSSG, but domestic hypermarkets' operating profit turned into loss due to weak SSSG and increased SG&A regarding early retirement compensation cost reflection. Supermarket division's operating loss has been stretched due to weak SSSG and Hi-mart's operating profit was also decreased due to weak sales growth trend. Cultureworks' operating loss has been eased through SG&A optimization and favorable ticket sales trends. As for the overseas operation, department stores' operating profit has decreased due to weak SSSG, but hypermarket units' operating loss has turned into profit generation through SG&A reduction. Lotte Shopping has recorded a net loss of KRW 517.4 billion in the fourth quarter of 2021 due to impairment loss recognition amount of KRW 559.5 billion, which include asset impairment loss and goodwill impairment loss. I'll now move on to Page 3 to explain the financial summary. On Page 3, you can find the summary of the consolidated financial results. In the fourth quarter of 2021 Lotte Shopping's consolidated revenue was approximately KRW 3.8 trillion, indicating a 4% year-over-year decline. Operating profit was KRW 117.4 billion, indicating 35.3% year-over-year decrease. Quarterly net loss was KRW 517.4 billion. Just as a reminder, the consolidated financials include 40 affiliate companies within Lotte Shopping. Page 4 is the brief financial summary of the major business units. Just as a reminder, others category includes consolidated adjustments and other affiliate businesses such as Lotte REIT and other consolidated subsidiaries and et cetera. I will now move on to divisional operational summary, starting from the department store on Page 5 of the presentation. Page 5 is the department store unit. Fourth quarter domestic department store same-store sales growth rate was increased by 11.1% year-over-year. Its operating profit was KRW 204.8 billion indicating 60% Y-o-Y increase through favorable sales growth in all categories despite the increased SG&A. In 2022, this year, domestic department store unit plans to renovate the main flagship stores focusing on luxury fashion and premium F&B merchandising enhancement to improve the off-line competitiveness in the market. We also plan to improve customer experience by developing the large-scale next-generation off-line stores, such as Dongtan department store and Uiwang premium outlet. Department store unit has optimized its labor costs in 2021 through employees' early retirement program. The reduced labor cost will be utilized to hire experts in the field of luxury fashion, marketing, design and et cetera. We plan to further improve its profitability through diversifying exit strategy of underperforming stores such as disposal subleased to outside third party and change of uses and et cetera. As for the overseas business, operating profit has declined due to ongoing COVID-19 pandemic situation in the country. Page 6 is the Hypermarket division. Domestic Hypermarket SSSG rate was down by 3.8% year-over-year in the first -- fourth quarter of 2021. Sales revenue has decreased due to decreased demand in home cooking meals resulted by eased government regulation regarding social distancing in November of 2021. Fourth quarter operating profit turned into operational loss mainly due to temporary cost reduction effect during the fourth quarter of 2020, including on pay the leave of absence program for the employees as well as the change in the employee welfare program. And also this year's one-off expense reflection on the fourth quarter 2021 regarding employee early retirement compensation. In 2022, this year, domestic hypermarket plans to enhance off-line competitiveness in the market through continued store renovation focusing on F&B investment and specialty store expansion for nonfood items. For instance, Zettaplex, the newly renovated store has reinforced wine, living, health, pet and F&B categories. Main floor of the Zettaplex store is composed with the largest wine MD in the country that occupies 70% of the entire first floor space. This store has performed outstanding results with a sales increase of 42% year-over-year for the first 5 weeks of operations since the reopening. We plan to develop the warehouse type deep discount store called Lotte Mart Maxx, mainly in the medium-sized cities outside capital region. On January of this year Gwangju's hometown store has reopened as the warehouse type format converted from the traditional hypermarket, and its sales were increased by 250% Y-o-Y for the first 2 weeks since the reopening. As for the overseas hypermarket operation, SSSG rate was down by 1.3% Y-o-Y in the fourth quarter of 2021. Sales revenue has increased by 2.3% in Indonesia, but Vietnam's SSSG rate was down by 13% due to COVID-19 situation. Fourth quarter overseas hypermarket's operating loss has turned into profit generation through SG&A effort. Page 7 is the e-commerce division information. For the fourth quarter, Lotte e-commerce recorded KRW 27.9 billion of revenue indicated 8.2% Y-o-Y decline. As of August 1 of last year, 2020, the online business function of department store, hypermarket and health and beauty units has been transferred and integrated into the e-commerce division to promote maximum synergy. As a result, e-commerce units' 3P sales volume has increased by KRW 8.6 billion. E-commerce units's fourth quarter operating loss has been stretched mainly due to reflection of hypermarkets online operating loss amounting KRW 17 billion. When applying the same standard as the fourth quarter of 2020, the 2021 fourth quarter operating loss would have been KRW 31.7 billion instead of larger number. E-commerce division plans to improve the competitiveness in the online market by focusing on Lotte ON platform enhancement. In terms of the GMV, Lotte ON, when excluding the external affiliate channel sales, fourth quarter 2021 Lotte ON's GMV was KRW 764.6 billion, indicating a 53% year-over-year increase and KRW 2.4 trillion annually, indicating 48% Y-o-Y increase. This rate is significantly higher than the average domestic online market growth rate, which is also driving the increase in total GMV volume for all 7 retail divisions under Lotte Shopping's banner. In addition, key indices of Lotte ON's performance has been improved such as increased number of traffic, sellers and buyers and cross-buying rate among the Lotte retail business units. For your reference, we have attached the key indices of Lotte ON's performance during 2021 on Page 8 or the next page of the presentation. Page 9 contains the Supermarket division. Supermarket's 2021 fourth quarter same-store sales growth rate was down by 9.1% over -- year-over-year. However, its revenue was up by 16.5% year-over-year induced by a change in revenue recognition of accounting in fourth quarter 2020. From gross sales to net sales regarding group supplies to the CH distribution, which is one of the subsidiaries of Lotte Shopping. Despite increased revenue, Supermarket's fourth quarter operating loss has stretched by KRW 2.2 billion due to weak SSSG trend. In 2022, supermarket plans to improve the customer traffic, mainly targeting working moms. For the last 2 years, supermarkets has been putting the hard efforts on restructuring process closing down 146 stores. As a result, its operating loss has improved by KRW 15 billion compared to the same period of last year, and we'll make every effort to reach the BEP within this year. Also, supermarket has completed the renovation process of 87 stores up until now, and we plan to further renovate 70 more stores by end of this year, focusing on organic fresh food, delicate food and processed food in reinforcement. And next is the Home Shopping division. 2021 fourth quarter Lotte Home shopping recorded KRW 302 billion of revenue, indicating 4.4% year-over-year increase. Its transaction volume was also up by 4.7% through increased sales in all channels, including TV, e-commerce and OneTV. Lotte Home Shopping's fourth quarter operating profit was KRW 13.2 billion, indicating a 38% decline year-over-year due to decreased gross profit resulted by declined high-margin product proportion as well as increased SG&A regarding new platform business investment. Page 10 is the Cultureworks, our Cinema division 2021 fourth quarter revenue for Lotte Cultureworks was KRW 72.2 billion, indicating a 9.5% Y-o-Y increase. Number of customers visiting domestic movie theaters is on the recovery trend by tactical movie releases, but its overseas revenue has decreased due to temporarily closure of movie theaters in Vietnam regarding COVID-19 situation. Cultureworks' 2021 fourth quarter operating loss was KRW 25 billion, indicating KRW 6.5 billion improvement year-over-year. Next is the Hi-mart, the electronics specialty retail division. Hi-mart's fourth quarter revenue was approximately KRW 893 billion, indicating 7% Y-o-Y decline. Sales revenue has decreased mainly due to high-basing effect in the same period of last year regarding the pent-up demand resulted by stay-at-home trend. Hi-mart's fourth quarter operating profit was KRW 3.7 billion indicating 77.5% decline year-over-year. Nonoperating financial summary is provided on Page 11. 2021 nonoperating profit includes the impairment loss of KRW 559.9 billion, which contains the asset impairment as well as the real impairment losses and et cetera. I'll now finish today's presentation here. Thank you for attending this earnings announcement. We can now proceed the Q&A.

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

[Foreign Language]

Okay, Mr. Jin-Hyeob Lee, since we hear nothing from your speaker. So since we don't hear the questions from the first questioner, we'll move on to the next person. The next question will be given by Younghoo Joo from NH Investment Securities.

[Interpreted] This was a question by Mr. Younghoo Joo from NH Investment Securities. Thank you for the earnings announcement today. I do have a question with regards to the nonoperating financial summary portion. So we would like to get confirmation if indeed the goodwill impairment loss is pertaining to Hi-mart. And also, there has been quite some goodwill impairment loss that has been recorded for the past years. Could you explain a little bit more into the background of why additionally, it has incurred and moving forward how the trend would be?

[Interpreted] We will take a question from the corporate accounting team of Lotte Shopping. With regards to the goodwill impairment loss that has been recorded for this fiscal year as the total was KRW 120.9 trillion. Out of that, KRW 82.3 billion was pertaining to Hi-mart, the remaining KRW 38.6 billion was due to the GS Square acquisition back in 2010. With regards to the amount that was reported for the impairment loss, it was KRW 442.6 trillion in this year, if that overall trend for the impairment loss reported is on a decreasing trend, if we give an outlook for next year, assuming that the overall performance of Lotte Shopping will improve in the future. Then we expect that the overall amount that we are recording in impairment losses will be on a declining trend.

[Operator Instructions] The following question is by Seung Lee from Morgan Stanley.

[Foreign Language]

[Operator Instructions] We move on to the next person to ask question. The following question will be given by Jin-Hyeob Lee from Yuanta Securities.

[Foreign Language]

Jin-Hyeob Lee from Yuanta Securities. Next question is Younghoo Joo from NH Investment Securities.

[Interpreted] Okay. The additional follow-up question is also by NH Investment Securities, Mr. Younghoo Joo. So thank you for the opportunity to ask the additional questions. So it is a follow-up question to the previous question that was asked. So after the recognition of the impairment loss, I would like to get a better idea on how much that would have an impact on the reduction of depreciation expenses. And also how the third and fourth quarter early retirement expenses would have an impact on the reduction or improvement in SG&A?

[Interpreted] So yes, I would like to provide some additional information with regards to the answer provided. With regards to how much the loss impairment would have an impact on the depreciation expenses. If we break it down in 2019, it was KRW 1 trillion. In 2020, it was KRW 630 billion, in 2021 of KRW 400 million. So roughly, it was KRW 2 trillion for the past years as explained. And if we take a look at the coming years of operation, where considering that normally that is 10 to 15 years, then on an annual basis, how much the loss impairment would have an impact on the depreciation expenses would be a simple calculation of dividing the KRW 2 trillion into 10, and that would be then in the range of KRW 160 billion to KRW 200 billion.

[Interpreted] With regards to the question, and we would like to take for the SG&A impact of its early retirement, we will answer it first from the department and then move on to the other departments. First, the answer will be provided by Mr. [indiscernible] from the task force of the Department division. In 2020 of September, there was a recognition of the early retirement expense of KRW 60 billion and a total of that was resulted as the early retirement of employees have been recognized in process. Since then in 2022, the hiring of new employees has also started. We expect that the impact or improvement that this would have to the SG&A as a result of early retirements will also be taking effect from year. For the SG&A improvement in 2022, on an annual basis, we do expect that there will be an upside of KRW 10 billion to KRW 15 billion, and then the additional impact of -- in addition to that would be provided at a later point in time if any further details are necessary.

[Interpreted] Also, we would like to provide the same answer for the hypermarket division, the answer by the business planning ahead of the hypermarket division. So last year in May and November, there were 2 rounds of early retirements that was the process by the hypermarket division totaling up to 200 employees. There was a recognition as a result of -- as a one-off expense of KRW 15 billion. And afterwards, as a result of such early retirements, we do expect that in terms of reduction in overall labor costs, it would be on an annual basis of approximately KRW 5 billion or so. Additionally, also when we have more information, pertaining to this that we can share, we will later provide.

[Interpreted] The following question is from [ Jeong Eun from IBK Investment Securities ].

[Interpreted] The next question is from [ Jeong Eun from IBK Investment Securities ]. I have a question separately for the department store and the hypermarket unit. So first for the department store. Last year, there was the opening of the large-scale department store in Dongtan. And there were -- it was, of course, an overall trend. There has been increase of the expansion of stores, not many, but it was a very -- also quite some -- it has been some time since there has been an opening of a large-scale store, and it has been in operation then. And moving forward, I'm quite curious about the overall direction that has been set forward. So compared to the competition, if we take a look at the main stores that are in the more subregional areas, and also in additional to the planning of new stores to be expanded, I am curious about the overall direction and the future plans that you have accordingly for both. Moving forward, would it be that the main focus would be on improving the performance of the main flagship stores and the stores that are existing? And how would the plan be for the turnaround for the existing store so that so that -- or would it be additional opening of new stores and how that process or the direction has been set for would be of curiosity. And also the next question for the hypermarket. There has been the recent remodeling of the Gwangju flagship store as mentioned. I also have the experience recently visited myself. I could tell that the overall model is quite different from what has been there in the past, the naming Zettaplex, would it be also the concept as such as we see in Gwangju apply to other stores as well? So if we take a look at the hypermarket also in terms of the restructuring efforts for the past 2 years, it seems to be coming to a conclusion. So in terms of the concept, will there be a turnaround like the new store opening that we witnessed? What are the plans moving forward for improvement the existing stores for the hypermarket side as well?

[Interpreted] So first, we would like to take the question from the business planning of the department stores. So as mentioned, in 2021, there was a successful opening of the Tongkeun department store and also that we won time villas. And in 2022, we will continue on the path of focus selected -- selection and focus and also try to pursue that strategy in the same course of direction. In 2023, I think we will also continue to have continued efforts to renew the existing. In 2023, there will be the renewal completed for the -- main department store in Lotte main department store in Dongtan and also there will be renewals planned for Gwangju and Gongyeong, especially because the Gongyeong overall business main focus target area for us. And we will continue to try to look at renewal opportunities and also strengthening of merchandising in these store. And also for the mid to the small scale stores in the suburban regions, we will continue to carry out renewal efforts as required and also work on efforts to try to more foot traffic, so focusing on F&B, and also improved merchandising. Depending on the performance and the trends that we see in the existing stores as such, we will also plan to carry out additional restructuring efforts if necessary for sure.

[Interpreted] And we would also like to answer the question from the Hypermarket division. For Lotte hypermarket, there were renewal efforts carried out for 8 stores last year. The main direction that we have set forward for the real effort are threefold in total. The first being that we are for the existing stores, we are looking at expanding groceries and also more specialized efforts there. And there is also an improvement efforts to try to improve fashion and F&B fashion and fashion accessories in the non-F&B category. So things such as living, health and beauty, wine, but specialty stores are focused for the non-F&B category. So for the model that was mentioned for Zettaplex, of course, it is going to be reviewed continuously. But there are a lot of factors to consider for the Zettaplex model. We have to have prerequisite of a large-scale business district area and also a large store structure to be able to support this structure. So we are going to review this continuously, but we are not going to consider that all of the existing stores could be converted to such as Zettaplex type of model. We would consider the overall size of the business district and also the condition of the stores to strategically make that selection moving forward. So -- and as mentioned before, for the existing stores, the renewal efforts will be focusing on the expansion of the grocery category and also the improvement into specialty stores for the non-F&B categories. Lastly, for the third peg of the strategy, is that there is going to be an increased portion of our opening of the warehouse type Lotte Maxx. So previously, when we look at the overall results initially, we are seeing that the performance is actually performing very well above our expectations and the initial phases of the store open. So we are going to focus also in the suburban regions where the other competition currently does not have any store operations to convert the existing stores into warehouse type of models, and this will be continuously looked into as a viable option.

The following question is by [ Lina Ho from Abest Investment Securities ]. We'll move on to the next person. So the following question is by [ Jian Li from CIMB ].

[Interpreted] The next question is from [ Mr. Jian Li from CIMB]. There are 2 questions in total. The first 1 being a follow-up to the existing comments just made. So with regards to the hypermarkets for the domestic hypermarkets and also for Lotte, are there any additional cash for stores closing in 2022? Second question is regarding e-commerce. I think overall, still in terms of the revenue and operating profit, the performance is quite sluggish. Of course, it is understandable considering that it is in its initial stages of integration of the organization. But specifically, when I guess, overall, the plan of how the top line and the operating profit overall profitability will increase. Is there any plan in terms of how you see moving forward? And do you have also an estimate timing on do you think that there will be a meaningful turnaround in terms of the growth rate of the top line and also the margin?

[Interpreted] So yes, first we would take the question from the Business Planning Division of hypermarket. So in 2020, we do believe that the first round of restructuring efforts have been completed for the hypermarket. Last year, we are going to continue on the trend or the strategic direction that was set continuing into this year. So the Zettaplex, as mentioned before, and also the expansion of the grocery category for the existing store and the warehouse type of Maxx stores would be a focus moving forward as a new proposition to the customers. And as we mentioned before in the previous IR for Lotte, there will be additional restructuring for the off-line road shops this year. So in 2022, there will be additional store closings that will be carried out. And as a result, moving forward for Lotte, there will only be operation type as shop-in-shops as Lotte Plus within the hypermarket store space itself. So yes, we'll also take a question from the e-commerce division as well. As mentioned before in the presentation of the material. In fourth quarter, there was a significant, I guess, performance recorded in terms of the revenue and the operating profit numbers being quite disappointing. I think that was mainly due to the impact of the R&R of the relevant affiliates of under Lotte Shopping, and the adjustments that have been taking an impact as a result. If we take a look at the main indices for Lotte ON, such as being the main core marketplace, we see that in terms of the overall revenue, it has increased more by some 80% compared to the previous year. And also for the operating profit loss, it was on a deteriorating trend until the third quarter. But if we take into account and of the impact from the governance effort and also the onetime expense that has to be considered in the short term for the fourth quarter 2020 amount that has to be reflected. And if we take that out and exclude that, the overall operating profit is quite at a similar level compared to the year-over-year, and if we take a look at the GMV of Lotte ON for the fourth quarter, it has increased by 15% year-over-year. And also in the third quarter, it was an increase by 14.6%. So we are continuing to see a high growth trend in the GMV. In addition to the GMV, the main indicators such as the traffic, which is also quite important, has increased by 29.7% and the number of active sellers compared to the previous quarter also by 52.2% showing promising results.

[Operator Instructions] The last question will be given by [ Jeong Eun from IBK Investment Securities ]. .

So the last question is from [ IBK Investment Securities, Ms. Jeong Eun ]. So lastly, can we just ask the overall trend that you see for January, the performance for the department stores and the hypermarket?

[Interpreted] So yes, first part of the department store. If we take a look on the revenue trend in January of 2022, of course, we have to take into account the impact of the Lunar New year and also the big sales events that have been going on. Overall, all in all, taking into effect, there has been a very high growth trend observed of 25%. And despite also factoring in the impact from COVID, we do believe that it is quite a strong trend. Also, we'll take the question from the business planning from the hypermarket as well. For the same-store sales growth for January, we do see that overall, there is a growth about 12% and we are seeing that mainly around the foods category and fresh food in general. And you think they're also taking into consideration the impact of the weather conditions, there also has been very strong performance in the non-F&B category as well. We would have to take a look to see how things trend out. But overall, we believe that the revenue performance that we're observing is not bad.

[Interpreted] We would just like to add to your reference as a correction to the previous statement. Of course, if we take a look at the revenue performance in January, we have to man year on having a quite strong push. So that could be temporary that we observed in that particular month. So considering that, that would have to be taken into consideration that it would be not a continuing trend in terms of the revenue performance that we see moving forward.

[Interpreted] For actual trend you should wait and see what's going to happen in the February and take a look at the accumulative trend to give you better ideas. [Foreign Language] Due to time constraint, we will now finish today's earnings announcement here, and thank you for joining today's earnings conference call. And further questions will be answered by the IR team through individual meetings, so thank you for support. Thank you.

This concludes the fiscal year 2021 fourth quarter earnings results for Lotte Shopping. Thank you for your participation. [Statements in English on this transcript were spoken by an interpreter present on the live call.]