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

[Interpreted] I have 2 questions in total. The first would be regarding the GPM improvement that you mentioned for the Hypermarket division. So you did say that there was a 6.3% improvement Y-o-Y. I would like to know if that's sustainable throughout the year. And if you could provide some guidance on the GPM trend, that would also be greatly appreciated. The second question is regarding the Department Stores. I understand that currently, there are more inbound foreign customers coming in, and we would like to know if there are any changes to the proportion of the foreigners contributing to your revenue. And for Q2, has there been any significant change in trend that you're seeing coming from foreign -- or shopping from foreigners? And how much has that been changed and the contribution to the SSSG as well?

[Interpreted] I'll first answer the question for the Hypermarket division. So if we look at the main drivers for the improvement in our gross profit margin, we could say the first would be due to the integration of our product sourcing between the hypermarkets and the supermarkets. So we were able to really have a reduction of our purchase-related cost that was a big factor in driving the gross profit margin towards positive trend. The second would be also the improvement and better performance that we have with our PB brands. We launched the new brand [indiscernible], which is receiving a very good response. So we do see that also playing a very positive factor. So the hypermarkets and the supermarkets in general, because of this organizational integration and also the vitalization of our PB is the -- are the main factors that we see are driving the gross profit margin improvement. We expect that this trend driven by these 2 factors will continue in the second half as well. So the gross profit margin improvement trend we see will -- of course, will be subject to maybe certain fluctuations depending on the macroeconomic conditions. But we do see that the overall trend would be able to uphold a certain level of an upward trend moving forward.

[Interpreted] I'll also answer the question for the Department Store. So if we look at the overall revenue trend that is being contributed by foreigners. So if we take a look at some numbers from the past, pre-COVID in 2019, it stood at around 2.8% of the total revenue. During COVID, it was less than 1% in the range of 0.3% to 0.9%. But during the month of January to March, we're seeing the numbers improve, up to 1.4%, and in the month of April, it rose up to 2.4%. As a result, for April, the contribution to the SSSG growth was around 2%, and we do believe that we're almost recovering back to the level of 2019, up to 85% at this point in time.

[Interpreted] Currently, there are no participants with questions. [Operator Instructions] [Interpreted] The next question will be provided by Lee Jin-Hyeob from Hanwha Investment & Securities.

[Interpreted] I would like to know if there could be some information provided on the overall trend that you're seeing for Q2 for each division? And the second question would be for the E-commerce division. It seems like we're seeing very encouraging performance from the E-commerce division in both the top line and also improvement in profitability. Would it be possible to provide some guidance on the expected performance for this year?

[Interpreted] Yes. First for the Department Store, as of April this year, the SSSG due to the impact that we're seeing from the endemic situation transition Y-o-Y, we're seeing the numbers be 0.2% improvement in terms of SSSG.

[Interpreted] I'll answer for the Hypermarket and the Supermarket. For the Domestic market for Q1, we did see, as mentioned before, improvement in our gross profit margin and optimization of our SG&A. So we do expect that, that trend will continue to a certain level in Q2 as well. In terms of revenue, we see that for the month of April, we're seeing the increase on our top line of our gross sales, and that has moved into a positive growth territory. So compared to Q1, we do think that for Q2, we will see both a stabilization in terms of the bottom line and also some improvement in the top line revenue numbers as well.

[Interpreted] So answer for the E-commerce division as well, for -- so for Q2, if we take reference of what we provided as information for Q1, you could take a little bit of a hint of how we would perform for Q2. So we are trying and making efforts to try to reduce our GMV in terms of low-margin products and categories. We're trying to strengthen our positioning as a lifestyle platform and strengthening the presence online of high-margin products in the lineup. So for Q2, such efforts will continue. So our vertical platform will really be focusing on the high-margin product categories that we expect to show a double-digit growth. We are going to continue to try to reduce our dependence and proportion coming from low-margin product categories, such as home appliances and furniture.

[Interpreted] I'll also answer for Cultureworks. So if we take a look at the number for April in terms of revenue, we did see a 2x increase compared to the previous year Y-o-Y. And for the month of May, because we did have the impact of the vacations from the Children's Day and such and we expect that there will be some big blockbuster movies that will be released and shown in the movie theaters as well, so we do hope that the operating profit will turn into a positive number from that point.

[Interpreted] For Homeshopping, if we take a look at the performance numbers for the month of April, we're definitely seeing the impact still coming from the suspension of broadcasting and the negative growth rate trend continuing as a result. We are going to continue to reduce our dependence as mentioned before in terms of the low product -- low-margin product categories on the E-commerce side for Homeshopping as well. So we do see that overall, the trend is still in a negative growth trend compared to the previous year. But we are making efforts to try to increase our direct purchases and also focusing on different good categories with margin, like kids and such. So we do expect that with the efforts also to optimize costs, we will be -- we will try to make an effort to really focus our overall management direction on securing the better level of profit to turn into a profitability front.

[Interpreted] For Hi-mart, so if we take a look at the trend for Q2, we do see that it will also continue, the slowdown of consumption of durable goods throughout the second quarter as well. So in terms of home appliance markets, we're going to a similar trend continuing. However, we do expect a slight upside because, from the month of May, there is the demand for seasonal home appliances. And from the second half, we do expect that some of the base effect of the high purchase of home appliance during COVID will be alleviated to a certain extent. So it will become more moderate in our expectation. And in terms of profit, we are going to make continuous efforts throughout the second quarter as well to have structural improvements in our cost structure. So -- and also adding to that, the impact of the nonperforming inventory clearance that we executed in Q1 will be showing some effect moving into Q2. So that's also a good sign that we would expect some improvement.

[Interpreted] I'll also answer the second question that was raised for the E-commerce division. So if we look at for our estimate for the full year, we do believe that -- taking reference to the numbers that we already released in terms of our operating profit margin, we did say that for our Q1, the operating profit was increased 60% Y-o-Y. But we did only start our transformation into a platform type of business model from Q4 of last year, and we're seeing the improvements of such results in our earnings numbers coming into effect just recently. So for the full year, we expect that the operating profit improvement rate Y-o-Y would be around 40%. And we do, as mentioned before, expect some slight decrease in the GMV. In the market, we have areas -- the categories that we have direct competition with our competitors, and we are continuously going to make efforts to reduce our dependence on home appliances and low-product category -- margin categories, as we mentioned before. And we will still need to make efforts to change and differentiate our vertical services as our positioning of a platform company. So we do expect that, overall, the profit level, the GMV will be maintained to the level that we are currently seeing now. But for Q1, while we saw 24% of the vertical market and such numbers coming into effect, on a full year basis, with the new opening of the popular market categories and such, we expect that the number will be, in effect, around 30% for the full year.

[Interpreted] The following question will be presented by Cho A-Hyung from Merrill Lynch.

[Interpreted] So I have 2 questions. The first being, is it possible to provide the absolute value for the gross profit margin that you mentioned for the Hypermarket divisions? And in terms of the gross profit margin improvement that we did mention before, Y-o-Y compared to the -- in the first quarter, do you think it's sustainable throughout this year? And what would be the normalized OPM level that you would expect and target? And for the e-commerce division, is it also possible to release the absolute value of the GMV? We do see the proportion that it accounts for in the vertical platform. But if you could provide the absolute number, that would be appreciated.

[Interpreted] First, to answer for the Hypermarket, we do see for the Domestic Hypermarket the GPM at 32%. And in terms of the operating profit margin target, so this year, it's quite difficult to forecast because of a lot of uncertainties surrounding the overall economy. So it will be difficult to give an absolute or accurate number in terms of the percentage that we're aiming for. But internally, we have set targets to make improvements compared to the previous year.

[Interpreted] For e-commerce, we did mention during the conference call for the fourth quarter earnings call that the GMV was a total of KRW 4 trillion. In the first quarter of this year, we did also achieve a number close to KRW 1 trillion. And we expect that the overall number for the full year in terms of the GMV will stay quite close to what we saw last year.

[Interpreted] The following question will be provided by Park Eun Kyung from Samsung Securities.

[Interpreted] So the question that I have is to clarify the points that are being made for the GP margin so -- for the Hypermarket division. So you mentioned in your comments before the contributable factors that we're seeing taking effect in the numbers of the GP margin. So is that something that we're seeing in the first quarter in full fledge? Or is that to be expected to come into the numbers starting from Q2? And if we take a look at the numbers that we have for our one-off expenses and one-off profit that we enjoyed, compared to that number, if we keep that in mind, the gross profit margin improvement still seems to then take quite a considerable impact from the increase in the SG&A. So would that be a correct look at the numbers that are currently provided? We would like confirmation. And in terms of the nonoperating profit and income to expect for this year, are there anything -- or is there anything that we should expect to come into with significant numbers for the full year?

[Interpreted] So yes, the impact in terms of the integrated sourcing for the Hypermarket and the Supermarket division, we would say that has been taking effect as such efforts for the integrated sourcing have already been carried out from January of this year. So with time passing, we do expect that once such products are actually sold, they would be contributing to the actual profit that we enjoy in the numbers that we see. So when I mentioned before in terms of having an effect, I was saying that when time passes and as time goes by, we'll be able to see more add up coming into the numbers as a cumulative basis. So we did start, from the month of January, such integrated sourcing. And as the months go by and as time goes by, we expect that number to come up with even more better performance that we could see. In terms of the second question for GP margin improvement, even considering the one-off profit that we did get, the SG&A increase rate is smaller than the GP margin improvement that we saw. So there are a lot of upward pressures that we have to take into account for the SG&A, such as the utility expenses for electricity and water, but we are going to continue our efforts for the optimization of the SG&A. So the GPM profit that we saw and overall seeing an improvement in the first quarter, we're going to make efforts to really put that in a sustainable mode so that could be structurally sustainable moving forward. The third question in terms of our, I guess, expectation or any kind of anticipation on the nonoperating side, it's, I guess, only the first quarter. So it would be difficult to provide, I guess, an accurate or a detailed explanation about any of such factors at this point. I ask for your understanding on that.

[Interpreted] Currently, there are no participants with questions. [Operator Instructions]

[Interpreted] Due to time constraint, we will now finish today's earnings announcement. Thank you for joining today's conference call, and further questions will be answered by our team through individual meetings. Thank you. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]