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 2022 fourth quarter earnings call 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 2022 fourth quarter earnings 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 2022 Fourth Quarter Earnings Conference Call. Today, we have Mr. Ho Joo Chang, Executive Vice President and CFO of Lotte Retail headquarter, and other relevant department heads of planning and strategy from major business units are all 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 3 of the presentation. Lotte Shopping's 2022 fourth quarter consolidated revenue was KRW 3.8 trillion, indicating a 0.2% year-over-year increase. Domestic Department Stores have shown fair SSSG trend in all product categories except Home Appliances and Electronics category. Domestic Hypermarket indicated favorable SSSG due to solid sales trend in HMR and liquor categories. Supermarket recorded a Y-o-Y flattish SSSG trend. And Hi-mart, our Electronic specialty unit, experienced a weak sales trend due to industry-wise weak sales environment. Cultureworks, our Cinema division have shown solid sales growth through increased number of customers. As for the overseas operation, Department Store operation in Vietnam and Indonesia indicated strong sales recovery, but revenue of China Department Stores have decreased due to respreading of COVID-19. Overseas Hypermarket has shown strong SSSG trend with the base effect of last year's store operating hour restriction regarding COVID-19. Lotte Shopping's 2022 fourth quarter operating profit was KRW 101.1 billion, indicating 7.5% Y-o-Y decline. For the Domestic operation, Department Stores operating profit was decreased due to increased SG&A regarding one-off expenses and increasing the marketing fees. Domestic Hypermarket operating profit turned into black through favorable SSSG trend. Supermarket operating loss was improved through SG&A optimization. Cultureworks operating loss improved with the rapid box-office sales recovery. Hi-mart's operating loss increased due to weak sales performance and one-off expense recognitions. As for the overseas operation, Department Stores operating profit has turned into loss due to reflection of increased rental fee regarding lease contract renewal in Vietnam and also the rapid respreading of COVID-19 situation in China. Operating profit of overseas Hypermarket was increased through a favorable sales recovery trend. Lotte Shopping recorded a net loss of KRW 317.3 billion in the fourth quarter of 2022, mainly due to impairment loss recognition amount of KRW 612.6 billion. I'll now move on to Page 4 to explain the financial summary. On Page 4, you can find the summary of consolidated financial results. In the fourth quarter of 2022, Lotte Shopping's consolidated revenue was approximately KRW 3.8 trillion, indicating 0.2% year-over-year increase. Operating profit was KRW 101.1 billion, indicating 7.5% year-over-year decline. Quarterly net loss was KRW 317.3 billion. Just as a reminder, the consolidated financials include 37 affiliate companies. Page 5 is the brief financial summary of major business units. Just as a reminder, others category includes the consolidated adjustments and other affiliate companies such as Lotte REITs and other consolidated subsidiaries. I'll now move on to divisional operations summary, starting from Department Store on Page 6 of the presentation. Page 6 is the Department Store unit. Fourth quarter Domestic Department Store same-store sales growth rate was increased by 5.8% year-over-year. Despite the favorable sales trend in major product categories, its operating profit was KRW 178.3 billion, indicating 13.7% Y-o-Y decrease due to increased SG&A, including one-off expenses and marketing promotion fees. As for the overseas Department Store, operating profit has turned into loss due to a reflection of increased rental fee regarding lease contract renewal in Vietnam together with rapid respreading situation of COVID-19 in China. In August of this year, we have a new store opening plan, Lotte Mall Westlake in Hanoi, Vietnam, which consists of not only the shopping center, but also the complexes facilities, including the hotel, office and other commercial buildings. The Westlake Mall is located in the area of wealthy neighborhood and foreign residential commercial districts, and we are aiming the store's operating profit to reach BEP within 2 years after the opening. On Page 7 is the Hypermarket unit. Domestic Hypermarket SSSG rate was up by 6% year-over-year in the fourth quarter of 2022. As the demand for home cooking has been decreasing due to the inflation and other factors, Domestic Hypermarkets revenue was increased mainly in the convenient food products such as the HMR or the processed food. Liquor category has also shown solid sales growth as well. Domestic Hypermarkets' operating profit was turned in black with favorable SSSG trend and the base effect of employee early retirement compensation recognition in the same period of last year. Domestic Hypermarket unit is striving to innovate the grocery business by generating synergy with the Supermarket unit. We plan to reduce the cost of goods sold by renegotiating with the major vendors since October 2022 last year, and also completed integrating the sourcing organization within the Hypermarket and Supermarket in January of this year. In addition, [indiscernible] integrating product barcoding among the duplicated items within Hypermarket and Supermarket, and we are expecting significant sourcing efficiency improvement through the integrated purchasing when it's completed. We also plan to provide optimal items considering each store location characteristics by utilizing integrated product operating systems. We'd like to differentiate our grocery business by reinforcing the existing private label products as well as launching of new private label brand this year. As for the overseas operation, overall SSSG rate was up by 9.3% year-over-year in the fourth quarter of 2022. SSSG of Indonesia was increased by 3.6% Y-o-Y and the SSSG Vietnam was also increased by 31.2% year-over-year with the base effect of operating our restructuring in the same period of last year. Fourth quarter 2022, overseas Hypermarket's operating profit was KRW 2.1 billion, indicating 233.8% year-over-year increase. Page 8 is the e-commerce unit. For the 2022 fourth quarter, Lotte e-commerce recorded KRW 35.9 billion of revenue, indicating 28.8% year-over-year increase. It consists of the online platform business revenue of KRW 22.5 billion, online operating service revenue of KRW 7.9 billion and the revenue of KRW 5.4 billion from other businesses. E-commerce units fourth quarter Operating loss was KRW 23.5 billion, indicating KRW 25.1 billion year-over-year improvement. Our e-commerce unit has been putting a hard effort to optimize the online grocery logistics expense as well as the IT service outsourcing cost reduction with internal IT capability enhancement. Our online platform is transforming from the general marketplace into a lifestyle vertical specialized platform, mainly focusing on cosmetics, luxury and fashion categories. In the fourth quarter of 2022, cosmetics, luxury and fashion vertical lines, all recorded a double-digit GMV growth. And this year, we plan to enhance our competitiveness in the market by expanding the vertical categories further and generating synergy between the online and offline channels. Page 9 is the Supermarket units. Supermarket unit same-store sales growth was up by 0.2% year-over-year. Its operating loss was KRW 5.3 billion, indicating KRW 4 billion year-over-year improvement through favorable sales trends in deli and HMR categories, along with SG&A reduction and increased gross profit margin. Next is the Home Shopping unit. In fourth quarter of 2022, Lotte Home Shopping transaction volume was increased by 0.4% year-over-year, but its revenue was declined by 9.2% Y-o-Y, mainly due to decreased proportion of higher-margin products, including fashion and health care products. Lotte Home Shopping's fourth quarter Operating loss was KRW 1.9 billion. The operating profit was turned into loss due to declined gross profit despite the hard effort on SG&A reduction, which is insurance management costs and logistics fees and et cetera. Page 10 is the Cultureworks, our Cinema unit. 2022 fourth quarter revenue for Lotte Cultureworks was KRW 114.9 billion, indicating 58.9% Y-o-Y increase. The number of customers visiting Domestic movie theaters have increased by -- for movie releases such as Avatar 2. And Vietnam, movie theater business also have shown increased revenue with the base effect of last year's temporary store closure impact. Cultureworks fourth quarter operating loss was KRW 1.7 billion, indicating KRW 23.3 billion improvement through the increased box-office sales in both Domestic and Vietnam movie theaters. Next is the Hi-mart, the Electronic specialty retail unit. Hi-mart's fourth quarter revenue was KRW 734.3 billion, indicating 17.1% Y-o-Y decline. And its quarterly operating loss was stretched due to weak sales trends regarding housing market depression as well as the one-off expense recognition regarding early time and compensation fee. Nonoperating financial summary is provided on Page 11 of the presentation. 2022 fourth quarter nonoperating profit include impairment loss amount of KRW 612.6 billion, and the equity method gains of KRW 0.3 billion coming in from Lotte Card, and KRW 29 billion gains coming in from the FRL Korea, which runs the UNIQLO business in Korea. I'll now finish today's presentation here, and thank you for attending today's earnings announcement. Now we can begin the Q&A session.

[Operator Instructions] [Interpreted] The first questions will be presented by Mr. Hwang Paul from Citi Securities.

[Interpreted] So I have 4 questions in total. The first one being for the e-commerce division. We do see that the product margin has been improving. I would like to get some more information into the main drivers for that. Would it be the category mix that would be the main driver? Or would it be a category possible to do a comparison apple-to-apple? Could you give us a rough contribution that's coming from each? That would be the first question. And also just a little bit to add to that. What are you expecting the profit margin to look like? Also, would that be mainly coming from the category mix or apple-to-apple comparison between the categories? The second question would be regarding the Hypermarkets. We do hear that. And as mentioned in the presentation, the efforts to automize COGS, the cost of goods sold for vendor negotiations that are currently taking place to reduce such cost of goods sold. I would like to get some insight into how things are looking at the current moment compared to your expectations and how you expect them to proceed. And in terms of the benefits for the efforts that you're carrying out for the consolidation of barcodes and such, when would be the timeline that we can expect meaningful outcomes to come out of that? And the third and fourth question is regarding the guidance and the overall, I guess, numbers to expect for this year. So with the recent trend, what are you looking at in terms of the major business units for the year guidance? If you could provide some color on that, that would be greatly appreciated. The fourth question then is also in the same line. What are you looking at in terms of the January trend for your major business units?

[Interpreted] Before we start to answer all the questions that's been asked by the analyst from Citi, we are regretfully to have to ask your understanding because Lotte Shopping do not provide the guidance for this year or the quarterly. So we will answer all other questions in orderly fashion.

[Interpreted] First, I would like to answer from the e-commerce division. The question was with regards to our profit margin. In the fourth quarter, as you mentioned, in terms of our net sales and the profit margin, we did see an increase of 1.1% Y-o-Y. And also on an annual basis, an increase of about 3%. There were some adjustment in terms of the category mix as the main drivers for the increase in numbers. So for example, the low-margin categories like Home Appliances had a decreased portion in terms of their sales proportion as a product category. Rather, we saw higher vertical integration coming from fashion and beauty categories, which are more higher margin. And the Lotte ON as a platform has been verified in terms of its stability and also the recognition that it's a platform that could handle a higher volume of GMV was spread among the sellers and the partners. So that led to increased advertisement. And as a result, we saw higher product margin coming out of it and higher gross profit margin from that as well. The second question was regards to whether this will be sustainable in the future. And I guess, as we mentioned before, we plan to transform ourselves, not just in the form of a comprehensive shopping mall. But we did have 2022 serve as our base year to transform into a lifestyle platform. So the plan that we have set forward until 2025 as a mid-term plan is to focus really on the fashion and beauty categories and achieve vertical transformation in that aspect. So we do currently have the vertical proportion accounting for 29% of our sales in the previous year. This year, we expect that, that would account for about 40% and in 2025 for it to be close to up to 70%. And we're going to continue to try to achieve that goal. And we do believe that with such efforts, the profit margin will continue to be improved moving forward as well. I would like to also answer the question from the Hypermarket division. That was great. So since the end of last year, we have been carrying out negotiations, as you mentioned, to reduce the COGS. And we have completed a lot of such negotiations throughout the year, and we do think that in terms of where we are currently standing, we are progressing as according to plan. So we do think that probably the tangible outcomes of such renegotiating results will come when the products that we have are subject to negotiation will be coming into our stores and when they are actually sold. So probably, if -- at the earliest, that would be March or at least April, which is the start of the second quarter, we believe that we will be able to materialize on the expected benefits of such renegotiations. And also in terms of our trend that we're seeing for January, we'll first answer from the Department Store unit. So we saw our performance sales for the month of January standing at KRW 1.47 trillion and achievement rate according to target is about 99%. So it is a slight decrease compared to the previous year at about a negative of 1.9%. We don't believe that though that this is a deterioration or downward trend that we're observing because in the month of January compared to last year, there are less business operation days and also less holidays. That has an impact about a negative of 6%. So all in all, considering that the overall trend that we're actually observing in terms of our sales performance is a positive of 4%. Also to answer the question for Hypermarket and Supermarket. So each -- for each division Hypermarket, we're seeing a Y-o-Y revenue decline of around 5% and for Supermarket around 7%. The main driver for that is mainly due to the timing difference in terms of the Lunar Year holiday for last year and this year. And also, as mentioned by the colleague representative firms, the Department Store and the difference in the business operation days and holidays and such. And with that into consideration, we do believe that the overall trend in terms of sales performance we're seeing is quite similar to what we saw in the previous year. I'll also answer the question from the e-commerce division. So we do have to take into account the timing difference for the Lunar Year holiday for last year and this year. And normally because of such timing difference, we do tend to look at the overall trend for 2 months together, so January and February together. We do see in the month of January, the impact from our suspension of down delivery and also the reduction in terms of the delivery and logistics capacity from the Hypermarket that led to maybe a somewhat weak performance during this period. But Overall as a result, we did see our operating profit increase Y-o-Y. And we do believe that in February, we will be able to make up a lot of the decrease that we had in the GMV in the month of February. I'll also answer the question from the Home Shopping division. So for the month of January, we did our gross sales fall by about 3% Y-o-Y, but -- and also our gross profit compared to on an yearly basis, a negative of about 5%. We do think that the overall trend that we're seeing is quite similar to what we observed last year. And this mainly seems to be coming from the part that our high-margin products, like health care products, are not performing as well as it did in the past. So the strategy for us moving forward is to focus on revitalizing the high-margin products so that we could go back to a more positive performance outlook. I'll answer from the Hi-mart division as well on our January trend. We do see that also following the fourth quarter of last year, a negative growth for the Hi-mart division is mainly seems to be coming from our decline that we see in specifically the higher-margin large Home Appliance category. We plan to focus moving forward on the ones with shorter purchase cycles like IT products, kitchenware and also smaller Home Appliances so that we could improve the lineup and achieve a turnaround, and that would be our main strategy moving forward. For Cultureworks, we see for the month of January, our revenue number that we recorded was KRW 50 billion. That was a 67% growth compared to the previous year for Domestic market. And this was mainly due to the success of movies like Avatar and [indiscernible] that were released in this period.

[Interpreted] The next question is represented by Mr. Park Sangdon from Kim Securities.