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

[Interpreted] Good morning, and good evening. Thank you all for joining this conference call. And now we will begin the conference of the Fiscal Year 2023 Fourth Quarter Earnings Results by Lotte Shopping. [Operator Instructions] Now we shall commence the presentation on the fiscal year 2023 fourth quarter earnings results by Lotte Shopping.

[Interpreted] Thank you for joining us in Lotte Shopping's fiscal year 2023 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 present in this call. Today's presentation will proceed in Korean by Mr. [indiscernible], who is CFO of Lotte Shopping, and I myself will provide the explanation in English. Questions will be taken after the presentation. In this quarter, starting from this quarter, we changed the earnings presentation format for investors' convenience, and it looks much prettier than the last one. Please refer to the appendix pages for the financial summary breakdown, which has been provided in the previous quarters, which indicates the major business segment performances and et cetera. Page 1 is the historical financial highlights of the Lotte Shopping performance. Lotte Shopping's 2023 annual consolidated operating profit was KRW 508 billion, indicating 31.6% year-over-year increase. Indicating surpass of the 2023 performance guidance we have provided through the CEO Investor Relations Day in -- back in the September of last year. Lotte Shopping 2023 annual consolidated net profit has turned around into profit making, mainly driven by the increased operating profit and decline in the impairment loss recognition by KRW 653 billion year-over-year. In 2024, this year, we target to achieve KRW 14.8 trillion of revenue and KRW 570 billion of operating profit based on profitability improvement coming in from grocery, Overseas operations and subsidiary companies improvement. Page 2 contains the highlights of 2023 fourth quarter earnings results. Lotte Shopping's fourth quarter consolidated revenue was KRW 3.6 trillion, indicating 4.1% Y-o-Y decline. Despite the favorable SSSG trend from major business units, the revenue has decreased due to weak sales trends from Hi-mart, as well as the store restructuring process. Lotte Shopping's 2023 fourth quarter operating profit was KRW 202 billion, indicating 117.4% Y-o-Y increase. Operating profit has increased in most of the business units, including Department Stores, Hypermarkets, Supermarket, E-Commerce, Home Shopping and Hi-mart. 2023 fourth quarter consolidated net loss was KRW 56.4 billion, indicating KRW 281 billion improvement year-over-year. As for the annual earnings, 2023 consolidated annual revenue was KRW 14.6 trillion, and its operating profit was KRW 508 billion, indicating a 31.6% increase year-over-year. Our 2023 annual net profit was KRW 186 billion, it turned into profit generation. Please note that we have attached the revenue and operating profit portion breakdown by each business segment on the right side of the Page 2. Lotte Shopping's recent dividend trend has been very steady and consistent. 2023 dividend per share amount has been set for KRW 3,800, which was the same amount prior to COVID-19 pandemic outbreak situation. Please refer to the right side of the Page 3 for the dividend details for the past 5 years by Lotte Shopping. Page 4 is the domestic department store unit. In the fiscal year 2023, domestic department stores revenue accounts for 22% of consolidated revenue, and it consists of 98% of the consolidated operating profit contribution. 2023 fourth quarter domestic department stores revenue was KRW 903 billion, indicating 3.2% Y-o-Y increase, basically induced by favorable sales trend in luxury, men's apparel, sportswear and F&B target category. Fourth quarter domestic department stores operating profit was KRW 225 billion, indicating 26.4% Y-o-Y increase through gross profit margin improvement and SG&A optimization efforts. As for the annual earnings, 2023 domestic department stores revenue was KRW 3.2 trillion, indicating 1.5% increase Y-o-Y. Its operating -- annual operating profit was KRW 498 billion, indicating a 2% increase year-over-year. Next is the grocery business status, which is the combined performance of domestic hypermarket and supermarket units. In fiscal year 2023, grocery business revenue accounts for 38% of the consolidated revenue and 14% of consolidated operating profit contribution. 2023 fourth quarter grocery business revenue was KRW 1.3 trillion, 5.6% year-over-year decline despite the increased SSSG, net revenue declined mainly due to store restructuring process. Fourth quarter domestic deployment stores -- domestic hypermarket operating loss was KRW 0.7 billion, showing signs of improvement driven by gross profit margin improvement by 1.1 percentage points resulted by integrated sourcing for hypermarket and supermarket. As for the annual earnings, 2023 grocery business revenue was KRW 5.6 trillion, indicating a 4.6% decrease year-over-year. Its operating profit was KRW 73 billion, indicating 364.6% increase year-over-year. Page 6 is the E-Commerce unit information. In fiscal year 2023, E-Commerce units revenue accounts for 1% of consolidated revenue and minus 17% contribution on the consolidated operating profit side. Fourth quarter E-Commerce revenue was KRW 38 billion, indicated 5.7% year-over-year increase through GMV growth from Lotte ON by 5%, as well as the increased GMV from vertical category specialized mall by 11.5% year-over-year. Fourth quarter E-Commerce operating loss was KRW 21 billion, indicated KRW 2.4 billion improvement through the logistics fee and IT service expense optimization efforts. As for the annual earnings, 2023 E-Commerce revenue was KRW 135 billion, indicating a 19.4% increase Y-o-Y. Its operating loss was KRW 86 billion. Next is the Overseas business operation, which is the combined performance of Overseas Department Store and Overseas Hypermarket units. In 2023, Overseas business revenue accounts for 11% of the consolidated revenue and 4% of the consolidated operating profit contribution. Fourth quarter Overseas business revenue was KRW 378 billion, 4.6% year-over-year increase, and its operating loss was KRW 9 billion. Fourth quarter Overseas Department Stores operating loss has been stretched, mainly due to increased SG&A associated with the new store opening of the Lotte Mall West Lake Hanoi, Vietnam, along with the provisions set regarding [ Chengdu ] department store restructuring plan in China. However, the Overseas Hypermarket operating profit was KRW 7 billion, indicating 205% year-over-year increase, particularly Vietnam Hypermarkets' operating profit margin has already reached 7% level in the annual base. As for the annual earnings is concerned, 2023 Overseas business revenue was KRW 1.5 trillion, indicating a 5.9% increase year-over-year. And its operating profit was KRW 19 billion, indicating 47.3% decline year-over-year. Page 8 contains the information of the 3 subsidiaries, companies under the Lotte Shopping umbrella. First one is the Hi-mart, our electronic specialty subsidiary. 2023, Hi-mart's revenue accounts for 18% of the consolidated revenue and contributed 2% on the consolidated operating profit side. Fourth quarter Hi-mart revenue declined due to slow domestic economy situation, but its operating loss has turned into profit generation through gross profit margin improvement and SG&A optimization efforts. As for the annual earnings, 2023 Hi-mart's revenue was KRW 2.6 trillion, indicating a 21.8% decrease year-over-year. And its operating profit has turned into black, recording KRW 8 billion of profit. Second one is the Home Shopping division. 2023 Home Shopping's revenue accounts for 6% of the consolidated revenue base and 2% on the consolidated operating profit. Fourth quarter, Lotte Home Shopping transaction volume and revenue were both declined, mainly due to sluggish industry-wide conditions, but its operating profit loss has turned into profit generation through business portfolio adjustment and other efforts. As for the annual earnings, 2023 Home Shopping's revenue was KRW 942 billion, indicating 12.6% decrease year-over-year. And its operating profit was KRW 8 billion, indicating 89.4% decrease Y-o-Y base. Last one is the Cultureworks, our cinema division, year of 2023, Cultureworks revenue accounts for 4% of the consolidated revenue base and it contributes minus 2% on the consolidated operating profit side. Fourth quarter, Lotte Cultureworks revenue has increased through increased the number of customers visiting to the box office, but its operating loss has been stretched, mainly due to weak performance coming in from the invested films and rise in the fixed costs. As for the annual earnings for the Lotte Cultureworks, for 2023, revenue was KRW 562 billion, indicating a 13% increase year-over-year. And its operating profit loss was KRW 8 billion turning into deficit. Page 9 is the last explanation presentation page of today's presentation, which contains the non-operating financial summary. 2023 fourth quarter non-operating loss was KRW 290 billion, indicating KRW 438 billion improvement year-over-year resulted by a reduced amount of impairment loss recognition by KRW 397 billion year-over-year. For investors convenience reasons, we have attached the financial summary breakdown by segments, balance sheet, financial stability index and store network information from Pages 12 to 19 as an appendix. I will now wrap up today's presentation here. Thank you for attending today's earnings announcement. Now, we can begin the Q&A session.

[Interpreted] [Operator Instructions] The first question will be provided by Hwang, Paul from Citi Securities.

[Interpreted] This is Paul Hwang from Citi Securities. I have 4 questions in total. The first is related to the guidance that you just released for 2024. I would appreciate if you could provide more details or a breakdown in terms of the Department Stores, Hypermarkets and Hi-marts that we would say have a significant impact on our overall earnings numbers. So please provide some more details there, if possible? The second question is also regarding the guidance as well. The goal set, as you've provided in your guidance for 2024, is to achieve KRW 570 billion. It was mentioned during CEO IR Day that the target goal in the period for the midterm is KRW 1 trillion. That would indicate that there needs to be a very high growth rate of over 32% over the course of next few years. So I think with this year's target guidance, I guess, there are concerns per se to see if that KRW 1 trillion is a realistic number. So, of course, we would have to reassess the situation in 1, 2 years period of time. But I think it would need to think about a big picture of a level up in terms of profit to be able to accomplish this number. So if there are any detailed overall outlook that you're looking at, please share that with us as well? For the third question and looking at the Q4 earnings performance, it seems that for the Department Store, there was a considerable improvement in the profit side, mainly driven by SG&A optimization. Would that be particularly only the situation we would see for Q4? Or can we expect that on this year's full year basis as well? It might be covered in the breakdown in the guidance for 2024, but if you could provide some more details there, that would be appreciated. The fourth question is with regards to the financial situation. It seems that despite the increase on the debt side, there has been an increase in the dividend paid per share, which is appreciated by the investor community. I think though then in order to keep on this commitment of an increased dividend pay share, then there needs to be management or control on the CapEx side. So if you could provide guidance on how that CapEx will be controlled, maintained in the future, that would be much appreciated. It seems that some -- we would like to get more ideas on what actual approaches that you have in terms of managing the finances other than bringing down the debt level aside from the management of free cash flow? What other approaches would you have in your pocket?

[Interpreted] Yes. For the first, second and third question, I think that I can answer that all at once. In terms of the '24 guidance, there was the request to break it down for the different business divisions. But because of the regulations regarding the disclosure, I think we are not able to provide a more detailed breakdown in terms of guidance other than what we provided. So the consolidated operating profit guidance from the whole group's perspective, as mentioned, will be KRW 570 billion. And in terms of our goal and our plans to get the KRW 1 trillion goal, you mentioned that there needs to be then a significant growth rate of 32%. We would say that currently that has been the goal set during CEO IR Day, and we're making efforts from the company side as a way to get there, and interim efforts are definitely being made on the road to that path. And for the third question, the optimization of the SG&A, these are efforts that we will continuously pursue in order to break that down also specifically into different quarters or periods, I think that's also not possible to do at the moment but -- so the information that we shared as of now is the extent that we could break down at the moment. With regards to the fourth question in terms of our CapEx plan, so we had our CapEx plan for the execution that we had set for the year 2023 and what was scheduled at KRW 1.2 trillion in total. So out of that amount, KRW 670 billion has currently been executed. We would say that the company's principle in terms of investment is to have our CapEx investment within the cash flow generated. So within the EBITDA. So we would say our investments are going to be appropriately sized to be within the limit as we said.

[Interpreted] The following question will be presented by Joo, Younghoo from NH Securities.

[Interpreted] Yes. This is Younghoo Joo from NH Securities. I would like to ask 2 questions in total. So if we look at the dividend payout this time around in terms of the overall number, definitely, there is an increase on -- in DPS. Also, the dividend yield seems to be quite high at the late 4% range. So I think, though, recently, we have seen a rise in the stock price. So if we look at the current trend, if we consider the movement, there could be a decline in the dividend yield moving forward. So if you could provide some more specific communication on your DPS-related policy, that would be appreciated. The second question is with regards to the non-operating profit side. It seems that we didn't have to take any impact from goodwill impairment, and it's very encouraging that it was able to turn a profit in terms of the numbers there. I think, though, despite the solid performance in the overall division, still on the non-operating side, there is a considerable impact coming from CGU. So in order to say that we wouldn't have such significant impact from CGU, what will the level of the company operations need to be?

[Interpreted] Regarding the first question in terms of our dividend payout ratio. So we did communicate our dividend policy, disclosed that back in 2017. And we said that we will be maintaining our dividend payout ratio to be over at least 30%. Afterwards, since even if when we had the long period of loss that we incurred for 6 years, we still consider the dividend yield as well when we made a decision on the dividend payout. So that policy in terms of our company's dividend policy moving forward will stay the same. So our policy moving forward will still be that we will try to obtain about -- over 30% in terms of the dividend payout ratio and also consider the dividend yield together when making dividend-related decisions. So for the second question, in terms of CGU impairment, if you look at the numbers on Page 9, in 2022 in Q4, it recorded KRW 389.3 billion. In the third -- fourth quarter of 2023, that actually decreased to KRW 171 billion. So the CGU is actually estimated based on the cash flow of the specific stores. So if there is an improvement in terms of store operations, this number will also naturally improve. I think, though, we are currently looking at and making efforts to try to minimize the impact from such impairment losses for occurring.

[Interpreted] The following question will be presented by [indiscernible] Securities.

[Interpreted] Yes. So I have 2 questions in total. So if you could provide an outlook in terms of the Department Store and the Hypermarkets for the domestic and Overseas business for the next 3 years in terms of, for example, additional store opening plans, investment plans, if you can share more details in terms of the item or the size, that would be appreciated. The second question is with regards to the dividend policy. It seems that, as you mentioned, the policy is to have the dividend payout ratio to be over 30%. Also that -- and you will consider the dividend yield together when making dividend-related decisions, as you said. It does seem, though, when we look at the debt-to-equity ratio, it's at a quite high level. So would we consider that the leverage ratio is quite you did mention that the CapEx investments will be within the cash generated, so within the EBITDA. So if you could provide us, I guess, some guidance or direction in terms of how the debt ratio will be maintained in the 2-, 3-year outlook moving forward, that would be appreciated, because the overall stance considering the current situation seems that it does have an impact on the cash flow. So how you plan to manage that and the debt ratio moving forward, if you could provide some more guidance there, please do?

[Interpreted] Yes. The first question will be answered by each business division, and I'll answer the second question first. So if we look at the debt equity ratio target for 2024, we're targeting it to be 182%, so about 4% improvement from the previous year. And as we mentioned, the principle of the company in terms of making investments will be to be within the EBITDA of the cash generated. So we will have to consider when we have that kind of CapEx investments in terms of EBITDA that we will try to manage that at a reasonable level. And if necessary, we will also take actions such as liquidizing or selling off of the retained real estate property or assets that we hold. We do actually have a track record of doing so. So in 2023, we did do a sell-off of 2 sites of hypermarkets and 3 for supermarkets. That was to the size of KRW 200 billion. So we will also try to take similar stances if we see and deem the situation necessary, and we'll try to manage it to an extent that our debt doesn't go up significantly. Yes. With regards to the plans for new store openings Overseas from the Department Stores. So we currently have 3 sites in operation in Vietnam and building on the successful opening launch of Hanoi West Lake, we are also considering the possibility in terms of exploring additional sites, 2, 3 currently are under observation and assessment at the moment. We also are undergoing review on whether to operate a shopping mall from the Department Stores perspective in a commercial district in Ho Chi Minh. So currently, not only Vietnam, but we're also looking at potential opportunities of feasible land and space in other countries in Southeast Asia as well. Specifically, as of now, we don't have any concrete plans for new store openings within the 3-year time frame as of now. And for the Hypermarkets, we did open a grand grocery store in [ Incheon ] last December. We plan to focus on renewal of the existing stores at the time being. So domestically rather than saying that we will have significant new renewal opportunities on the hypermarket side, we'd say we'll be more focused on the Supermarket like in the form of store renewals as grand grocery opening that we saw in December. So we will probably focus really on the Supermarket format and the new renewals for the stores, the time being for the domestic side. In terms of the Hypermarkets for Overseas, we would say that for Vietnam, we're reviewing potential opportunities for the major cities and also the cities that have high fluctuation of tourists as well.

[Interpreted] The following question will be presented by Lee, Jin-Hyeob from Hanwha Securities.

[Interpreted] Yes. This is Jin-Hyeob Lee from Hanwha Investment & Securities. I think it was asked before, but in terms of guidance breakdown per business division, I think it was mentioned that it's not possible to share the specific breakdown per division, but I would like to ask once again to the company if it would be possible to share also on the CapEx side, as well as the breakdown per guidance for business division as well. And if you look at the specific numbers on the Hypermarket side, it seems that there was a reduction in terms of profit there or any specific reasons for that? And for Home Shopping, on a Q-o-Q basis, it seems that there has been a turnaround in terms of performance. Can we expect that this kind of turnaround upward trend to continue moving forward? The last question is with regards to some comments during an interview by the group's Chairman, Dong-Bin Shin, saying that there will be consideration or a review to sell off underperforming businesses for retail and for shopping specifically. Are there any underperforming businesses that are currently being considered? If so, can you share the details?

[Interpreted] With regards to the request on the divisional breakdown, so we did provide some information on the first page of the presentation of the material that you see for -- provided to the investors. I think it was mentioned, we are trying to make efforts to make improvements in terms of the operating profit in groceries, Overseas business and also the profitability of our subsidiaries. So I think that would be a good reference to look at where we would be focusing in terms of trying to do our efforts for our operating profit improvement. Please try to understand that more detailed information or breakdown at the moment is difficult to provide. On the Hypermarket side, in Q4, during the process of integration between the Hypermarket and the Supermarket division, there was also restructuring or optimization on the resource side of the 2 business divisions. As a result of that, we also took voluntary early retirement request. And as a result, there was an increase in terms of one-off expenses related to that. In 2024, because we already made the preemptive effort of trying to optimize the labor or resource side, we believe that because of such improvements on the labor cost side, there are upside returns to be expected. And for Home Shopping, we would say that the impact that we took from the suspension of business and sales broadcast operation in 2023 no longer is effective for 2024. So definitely because of that base effect, we're seeing an increase in terms of the overall numbers. And we also made efforts to try to make adjustments to the underperforming loss-generating businesses to improve profitability. There were also continuous efforts to reduce costs and also efforts to make adjustments so that our high-performing, high-margin products are more upfront place and the offerings that we do. So for 2024, we also believe that we will be able to continue such improvement trend in terms of profit compared to the previous year. And with regards to the third question on any potential review assessment for sell-off of underperforming division. So for Shopping at the moment, we are currently making every effort to make encouragements and manage the division's performance to the utmost extent possible. As of now, there are no specific plans or discussions taking place for a sell-off of any specific division. We will be making assessments and considerations from a mid to long perspective, if necessary.

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

[Interpreted] The first question is regards to the voluntary early retirement program that you mentioned that you took for the Grocery division. Were there any of such early retirement programs for other divisions as well? And the second question is with regards to the goal for operating profit improvement in 2024. So you mentioned 3 in total, and I think one of them was improvement in terms of the earnings number for subsidiaries. I think we could then probably point to Hi-mart, Cultureworks and Home Shopping. I think for such subsidiaries, if we look at how they performed or operated in 2023, there were considerable efforts already for cost reduction. There wasn't really an increase in terms of revenue, but because of such cost reduction efforts, there has been improvement in profit. I think, though, if there are no additional improvements on the revenue side to expect, there will be, I guess, limited room for additional profit improvement for such subsidiaries. So if you could provide some more details there, that would be appreciated. The next question would be for the E-Commerce side. If you could share any mid- to long-term plans that you have, that would be great.

[Interpreted] So for other divisions that also took early retirement of registration, we did have Cultureworks also execute such program in the fourth quarter of last year. And I'll answer for Hi-mart. So as you well mentioned, there was a decline in terms of revenue last year, but in 2024, if we look at the current performance until the date to this time, we are seeing some impact in Q1 from the optimization or restructuring efforts from the stores. Though, we do expect that such impact will lessen as the time progresses. So last year, we also had the renewal of certain stores, and that impact had a 20% increase in terms of revenue. So we are going to pursue that strategy additionally this year for 73 new stores as well. So we are going to make efforts to try to turn around the revenue as well. So, of course, on our side, we are going to continue our efforts to improve profitability through efforts to optimize our operating profit side. These efforts will continue. But as mentioned during our fourth mid- to long-term plans and strategies, we're going to pursue them quite consistently as well so that we can make improvements, not only to the revenue, the top line, but to the operating profit as well. For Home Shopping, so basically, we also will pursue the strategy to increase revenue as well. We would say that, that would be the OSMC strategy to have a lot of different partnerships, not only consisting of our PB and the Lotte Malls itself, but also off-line partnerships with external partners like YouTube and off-line channels as well. So rather than focusing on external growth at the moment, we're going to try to optimize, rationalize our business operations by reducing the portion of low-margin products, increasing the ones of high-margin products to improve profitability. And we definitely see also base effect coming into the numbers and the performance moving forward to consider as well. So -- and we also took early retirement program actions in the second half of last year. So we expect that to also have an impact on our performance moving into 2024 as well. For Cultureworks, so we would say that in order to generate a lot of revenue, the performance or the turnaround of movie theaters is quite important because that accounts for a significant portion of where the revenue comes from. So the market or the industry recovery is quite critical. We would say that in countries like Vietnam, we're seeing the momentum of recovery. So we're seeing an increase in terms of revenue and profit, both in such markets. But in the case of Korea, the recovery is quite sluggish at the moment. Of course, there has been a certain level of improvements, about 10% compared to the previous year, but still overall, the performance is quite slow. So we believe that Cultureworks moving forward, our main direction will be to have tight control of our expenses, but we will also try to make improvements to try to improve our top line as well, such as focusing on customer satisfaction and experience, increasing the number of spend per customer, also dedicated specialized services like recliner type of theaters and such. And we also plan to further expand our drama series business and for future growth as well. For E-Commerce, we would say that for the Lotte ON platform, we have to target, not only external growth, but to transform the platform into an online platform that is possible to obtain sustainable growth moving forward. The top priority for that will definitely be to try to improve our profitability. And we did reduce the size of loss quite significantly last year, but there will still be ongoing efforts to continue to make improvements in that direction through further efforts like adjustments to the portfolio to increase -- despite the increase in GMV as well. So the Lotte ON platform also, we need to think about the role that it plays. So there will be some redefinition of the role that it plays within the group. In top of our efforts to improve profitability, there will be -- we will be looking at how we could try to contribute more in terms of the contribution margin by fostering developing brands that will have a significant impact on the growth of the top line. And rather than positioning ourselves just as a communication channel that sells commercial products of the Lotte subsidiaries, we will try to reestablish our positioning as an overall platform to service content and play a larger role in that context. So I think that is one of the key advantages that we can build on top of Lotte as a group. So we will work on the redefinition of the role and also the conversion of the platform moving forward as our key strategies.

[Interpreted] The following question will be presented by Lee, Jin-Hyeob from Hanwha Investment & Securities.

[Interpreted] Yes. So the question would be with regards to the Department Store division because it is definitely the main division of Lotte Shopping. So the guidance doesn't specifically carve that out. So if you could provide a more detailed, I guess, plan in terms of the Department Store operations for this year, then that would be much appreciated.

[Interpreted] For the Department Stores, we would say that if we look at the overall target or our outlook for the year, we would say that we will target 2024 to be a slight growth in comparison to the level that we saw in 2023. So in 2023, Q1, because we have to consider also the reverse base effect from COVID, there was a considerable increase during that period on a Y-o-Y basis. So we have to take that into consideration for the performance of Q1. So last year, there was -- I guess, that to consider in terms of Q1 performance. But I think that being despite in comparison quite sluggish, we expect that the revenue in terms of improvement trend will continue to show. And moving on to the quarter's second, third and fourth is throughout the year. So the target for 2024 in terms of revenue will definitely try to be a slight growth on a Y-o-Y basis. Due to time constraint, we will finish today's earnings announcement here. Thank you for joining today's conference call, and further questions will be answered by IR team through individual meetings or your calls. Thank you. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]