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

[Interpreted] Page 7 has the summaries containing our major subsidiaries. First subsidiary, the Hi-mart, our electronic specialty subsidiary. In the first quarter of this year, Hi-mart's revenue accounted for 15% of Lotte Shopping's consolidated revenue and it had minus 14% effect on the consolidated operating profit side. Our first quarter Hi-mart's revenue was KRW 525 billion, indicating a 16.1% Y-o-Y decline due to sluggish home appliance market situation but its operating loss has improved through efficiency improvement efforts as well as the ongoing restructuring process. As for the TV Home Shopping operations, in the first quarter of this year, Home Shopping's revenue accounted for 6% of the Lotte Shopping's consolidated revenue and 9% of the consolidated operating profit. Our first quarter TV Home Shopping's revenue and the transaction volume were both declined by 1.6% and 5.4%, respectively, due to product portfolio adjustment in the e-commerce channel but its operating profit was increased by 156.1% year-over-year through restructuring efforts. Next is the Cultureworks, our cinema division, which in the first quarter of this year, Cultureworks revenue accounted for 3% of the consolidated revenue and 1% of the consolidated operating profit. First quarter of this year Cultureworks revenue was increased by 2.8% Y-o-Y. Domestic business revenue has maintained in terms of the year-over-year at a flat level but its -- also its overseas business revenue was increased by 21.3%. First quarter Cultureworks' operating loss has turned into profit generation mainly driven by the SG&A optimization efforts.

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[Interpreted] Page 8 contains the nonoperating financial summary. First quarter of 2024 nonoperating loss was KRW 32 billion. Last year's first -- last year first quarter nonoperating profit included gains and losses on foreign currency financial assets amount majorly came from the Home Shopping and West Lake Hanoi, Vietnam operations. First quarter of this year nonoperating profit included gains on disposal of assets held for sale amount of KRW 16 billion and the equity method gain of KRW 9 billion came from the FRL Korea, which runs the UNIQLO brand in Korea. I'll 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 Lee Jin-Hyeob from Hanwha Securities.

[Interpreted] Yes, I have 3 questions in total. So first for the Domestic Department Store. Even if we eliminate the one-off expense impact that you mentioned, it seems that there was still a considerable decline. Could you point out anything noticeable in terms of expense related issue or other factors that undermine the margin? Secondly, in terms of Ocado, you mentioned that there will be expenses that are reflected from this quarter. Moving forward, on a quarterly basis, on an annual basis, how much impact should we estimate? Number three, the third question would be, it seems that the overall portion of the Overseas business is increasing. If you could provide some color on the outlook for the Overseas business, that would be much appreciated.

[Interpreted] First on the performance or earnings of the Department Stores. If we look at Q1 of 2024, the SSSG stood at a growth rate of 3.5% Y-o-Y. If we look at the previous year's Q1 results, the SSSG increase was 6.2%. So it actually grew more last year. The reason for that was because the high-margin categories like fashion increased quite considerably back then at 13% Y-o-Y. This year, if we take into comparison the overall results for fashion, there was only about a 1% increase, and there was more increase in terms of the low-margin product categories of luxury living and F&B. So there was a decline in the overall margin structure slightly. But from Q2, we do expect that because we don't have the base effect to account for from the fashion category, we will continue -- or turn around to be more on back on track on the growth trend. And the next question for E-Commerce. You asked about the expense that we will have to account on a quarterly basis for Ocado and on an annual basis as well. So if we look at the numbers in total for Q1, as we mentioned, the impact will be KRW 1.1 billion that we recognize as expense. In Q2, the amount will be KRW 2 billion. In Q3, the amount would be KRW 5 billion. Q4 will be KRW 7 billion. So on an annual basis, the total would be about KRW 15 billion. For the Overseas Department Stores, let me provide some updates on our plans moving forward. Last year, as you well know, we opened the West Lake Hanoi store. We have the top priority at the moment to be stable operations of the West Lake Hanoi and also future growth drivers as well. So for Vietnam, we have Hanoi and Ho Chi Minh that we plan to further strengthen in terms of the existing stores operations. And we're also reviewing the possibility of other major, I guess, cities on the outskirts of Hanoi for additional store openings. So we do believe that in a few years, moving into the future, we will be able to have, I guess, more reviews and plan to elaborate it for new store openings. And for the Overseas Hypermarket, as you saw in the presentation materials, for the Overseas Hypermarket, we have the operations in Vietnam and Indonesia. And you can see that compared to the previous year, we have had double-digit growth in both revenue and operating profit. The main drivers, we would say, are definitely K-culture and also considerably K-food. We have had a lot of appreciation from the local consumers from those categories. I think we also had a very good response with the new type of grocery specialized store opening in [ Incheon ] and domestically, and we plan to bring that and expand that model format to Vietnam and Indonesia moving forward. So in the future, such advanced grocery shopping type of format will be exported so that we could have this as a best reference for the Overseas operations as well.

[Interpreted] The following question will be presented by Lee Seung-eun from Yuanta Securities.

[Interpreted] According to the information that you disclosed as of February 8, you said the annual guidance for this year in terms of revenue would be KRW 14 trillion and operating profit KRW 570 billion. I think if we look at the numbers or the performance of Q1, it is a little bit disappointing. So if you could provide for each business division, the strategies moving forward to achieve the guidance for the remaining quarters of the second, third and fourth.

[Interpreted] So first to give an overall response. So the guidance that we provided as of February in terms of revenue KRW 14.7 trillion and KRW 470 billion in operating profit still holds. If you look at the overall structure or trend in terms of our revenue and our operating profit throughout the year, we tend to have an increase of both numbers as we move on to Q4. So Q1, we do acknowledge that we have underperformed compared against market expectations. But please also consider that we had to reflect one-off expenses and if we do account for that also, that is an important point to consider. The details of each strategy for each business unit will be elaborated by each representative. First, for the Department Store. As we mentioned before, we do believe that moving forward from Q2, we will have a solid growth trend in other categories such as fashion. So we do believe that we are on a solid base to achieve a considerable profit moving forward. And this year, we are carrying out the 8 major renewal projects. We have already started for stores in Incheon. The renewal has been ongoing. And we are in the process of renewal for the main flagship store and also the Suwon Department Store. We had a soft open for the Suwon Department Store as of April 25 this year. And in August, there will be a grand opening with the new brand, Time Villas, as a complex shopping mall. And we plan on top of that to carry out restructuring efforts for our low underperforming stores. So as of June, the [ Nonsan ] Department Store will be closed. And after that, we plan and expect that there will be increase of our profit moving forward. And in addition, if we look at the portion or contribution coming from foreign tourists, it's also on an increasing trend as well. If we look at the numbers for our flagship store and also the Chuncheon Department Store, the contribution coming from the foreigners have increased 73% on a Y-o-Y basis in terms of the numbers. So after Q1, we believe that this will continuously increase to put us on a solid path for growth. Next, for the Hypermarket and Supermarkets. We have 3 main pillars to talk about. So the first one would be on heels of last year, we have carried out a lot of consolidation and merging efforts to reduce cost and improve the margin, which we believe have an impact continuing onto this year. Secondly, we have the private brands that we have launched since last year. And in the situation of an economic recession, we believe that this will have more of a competitive edge in terms of our product group that will contribute to a solid performance on our side. Thirdly, we have, as mentioned, the new grocery shopping format that we opened in the Incheon store that differentiates in terms of food and deli. And we plan to expand this type of model, and we believe that this will also be quite an improvement for us in the near future for the expansion of this new business format. So if we have this favorable trend continue on from Q1 till the end of the year, we do believe that we have a very solid basis for achieving the plan that -- or guidance as we set out. Next, for E-Commerce. We plan to leverage the Lotte membership data as much as possible to use that to expand our customer base and we plan to further leverage the strong points of Lotte, the diverse offering of product and services of the Lotte Group. We plan to leverage the Lotte membership to the full potential so that we can increase the number of purchases from each member. We also plan to increase the monetization items by expanding online ads and also carry out continuous efforts for SG&A optimization. With such efforts, we believe that it will be possible for us to achieve the plan as we set out in our annual guidance. Next, for Home Shopping. We plan to carry out continuous renewal of our product portfolio to focus on generating profit. So those would be the main categories of fashion, beauty that are more beneficial in terms of profit generation. We plan to also try continuous efforts to increase the margin and also expand the offering of our products through the broadcast. And on top of that, we will make a lot of efforts to try to secure exclusive products and also global brands so that we can secure competitiveness in terms of our product offerings. We will also continue cost optimization efforts so that we could reduce the portion of our low-margin product categories and we also carry out continuous efforts to reduce and optimize our variable expenses such as credit card commissions and logistics costs. On top of that, we plan to strengthen targeted marketing to our main customer groups for -- who are people in their 40s to 50s. We will carry out more targeted marketing for them to provide the appropriate products that they desire like health care so that we have more efficiency in terms of marketing efforts. And last year, from the month of February to July, we had to account for the broadcast suspension, the business suspension that we had to comply with. And there is the base effect from that, that we have to consider. So all in all, we believe that compared to last year, we are going to be able to turn around the performance to a positive to achieve the plan that has been set out. Next, for Cultureworks. So we believe that what's directly related to our performance is definitely the recovery that we see in the overall movie market or industry. If we look at Vietnam compared to the domestic performance in terms of the recovery pace and also the numbers, it's quite solid, it's performing well. But if we look at the domestic side, despite growth on a Y-o-Y basis for Q1, it is not still as much recovered before the pre-COVID levels. So we have carried out preemptive cost optimization efforts from last year which we do believe will continue to have an impact continuing on to this quarter and this year altogether. And we believe that, that cost optimization efforts will continue to have an impact. We do believe, though, with the recovery of the overall industry, we do expect that we will be able to achieve the growth target as we set out to achieve. For Hi-mart, since the second half of 2023, we are operating based on 4 major pillars in terms of our strategy. The first is store renewal. Second is strengthening of service. The third is rebranding of PB and fourth is immersive experience of on and off-line experience. So if we look at the first part, the store renewal, we're carrying out continuous efforts for store renewal efforts. In Q1, the number of stores subject to renewal is set at 56 and throughout the year, we expect that the number will, on a cumulative basis for the full year, be 108. For strengthening of services, we plan to expand our service from the existing home appliance and home care to other areas such as disaster management and also surveillance protection for family care. In the second half, we also plan to strengthen our efforts for PB rebranding that we will have on the second half to have an increased portion coming from the revenue from PB brands. And fourth, in terms of the immersive experience of online and off-line, we are going to provide more tailored content for an immersive experience with specialized curators, which we have special category shops opening in the month of May, July and September moving forward.

[Interpreted] The following question will be presented by Cho Sanghoon from Shinhan Investment Securities.

[Interpreted] I have 2 questions in total. So the first, if you could provide some more color per business division in terms of the overall business atmosphere that you saw for the month of April, that will be much appreciated. Secondly, for the E-Commerce business results. If we look at Lotte ON, despite some positive numbers, like the 12% increase overall, still in terms of the breakdown of revenue, if we look at the GMV growth at the vertical mall level, it seems that it's performing at a slightly sluggish pace. Do you see some impact from the, I guess, competition from Chinese e-commerce companies?

[Interpreted] So if we look at the Department Store performance for the month of April, we would say that there were some seasonal factors to consider in terms of the overall environment. But internally, we have achieved 100% of the target that we have set out. So considering such seasonal factors, we had a growth rate of 0.9%. So we believe that it was a positive month for us, and we do see a similar trend for the month of May as well. For the Hypermarkets and Supermarkets, we do see in the month of April, as you saw probably in the press, there was rapid increase in terms of the inflation pressures. So that had an impact of reducing the number of purchase quantities of the general customers. On a Y-o-Y basis, we also saw that in terms of the seasonal impact, there were less days of rain, and it was more warmer than usual. So as a result, there were a lot of increase of outdoor activities, which in turn, had, I guess, more of a disappointing result in terms of our overall revenue for the weekend for the Hypermarkets. So compared to our expectations, the performance on the Hypermarket side was not as up to our previous initial expectations. However, for the Supermarket channel, we did continue to see the solid growth trend that we have observed before. If we look at the month of May, we do see, though, a turnaround of such momentum in terms of the revenue, it is back on a positive track as we saw for the overall momentum for Q1. For E-Commerce, if we look at the performance for April, we would say that we have about a 10% to 15% impact to account for from the competition of Chinese e-commerce companies like Ali and Tmall. So we do believe that though we have continued on with our also profit improvement activities to carry a restructuring of our low-margin products, from Ali and Tmall, mostly the impact was from home appliance and also the volume products. But moving forward, we do believe that, that is not going to have an impact on our strategic product focus, which is beauty, fashion and kids luxury. So we will continue to be able to achieve the positive momentum that we have been seeing.

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

[Interpreted] So just a short question on my side. So in terms of the nonoperating profit side, you have achieved quite good results, solid results in Q1. Are there any upsides from the nonoperating side that we should consider for the month of May?

[Interpreted] So in terms of the nonoperating profit, we do have an increase in terms of our interest income and expenses in Q1 to a considerable number of KRW 111.8 billion. But at this moment, we can't accurately estimate for the other parts of the nonoperating that will have a considerable impact like impairment losses and such. Probably as we move on to the next quarters, we will be able to see probably a more concrete numbers. And the interest income and expense related factors are definitely taking impact from the high interest rate environment, which we believe will be continued to mitigate as we move forward.

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