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

[Interpreted] 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 2024 Second Quarter Earnings Results by Lotte Shopping. This conference will start with a presentation followed by a divisional Q&A session. Now, we shall commence the presentation on the fiscal year 2024 second quarter earnings results by Lotte Shopping.

[Interpreted] Good afternoon, everyone. This is [indiscernible], IR Associate of Lotte Shopping. Welcome to the Lotte Shopping's Fiscal Year 2024 Second Quarter Earnings Conference Call. Today, we have Mr. Ho Joo Chang, Executive Vice President and CFO of Lotte Retail Headquarter; and Mr. [ Won Jae Kim ], CFO of Lotte Shopping. We also have other representatives joining the call to answer any questions for the Q&A sessions later. Mr. [ Won Jae Kim ] will proceed today's presentation in Korean, and I'll provide explanation in English. Questions will be taken after the presentation. [Foreign Language] [Interpreted] Page 1 is the highlight of the 2024 second quarter consolidated financial performance. Lotte Shopping second quarter revenue was KRW 3.4 trillion, indicating 5.4% Y-o-Y decline, mainly due to weak sales trends from grocery business and Hi-mart division. Lotte Shopping second quarter operating profit was KRW 56 billion, indicating 8.9% Y-o-Y increase, thanks to profitability improvement in core subsidiaries, mainly in Home Shopping and Cultureworks. Second quarter net profit was minus KRW 80 billion, turning into loss-making due to asset impairment loss of KRW 59 billion from Shenyang Glory Properties China and KRW 11 billion loss from disposal of Chengdu Department Store. I would like to emphasize our business in Vietnam, which has sustained its high growth rate in the second quarter, including Department Store, hypermarket and cinema units. [Foreign Language] [Interpreted] Page 2 is the financial summary of 2024 second quarter consolidated earnings results. Lotte Shopping second quarter revenue was KRW 3.4 trillion, indicating 5.4% Y-o-Y decline, and the first half revenue was KRW 6.9 trillion, down by 3.4%. Second quarter operating profit was KRW 56 billion, up by 8.9% Y-o-Y and our first half operating profit was KRW 171 billion, indicating a 4.2% increase. Second quarter net profit was minus KRW 80 billion, and the first half net profit was minus KRW 7 billion. Please note that we have attached the revenue and operating profit portion breakdown by each segment on the right side of Page 2. [Foreign Language] [Interpreted] Page 3 is the Domestic Department Store unit. 2024 second quarter Domestic Department Stores revenue was KRW 808 billion, indicating 0.8% Y-o-Y decline. Despite the increase in same-store sales, the net revenue has declined mainly due to a bigger portion of low-margin products such as F&B and living categories compared to the same period of last year. Second quarter Domestic Department Stores operating profit was KRW 60 billion, 9.7% Y-o-Y decline due to one-off expense recognition of KRW 4 billion regarding underperforming store closure and rising fixed costs caused by inflation. [Foreign Language] [Interpreted] Next is the grocery business, which is the combined performance of domestic hypermarket and supermarkets. 2024 second quarter grocery businesses revenue was KRW 1.3 trillion, down by 5.1%. Despite the moderate sales trend in supermarkets, our hypermarket same-store sales was decreased due to intensified online competition triggered by expanded presence of Chinese e-commerce players in Korea. Second quarter grocery business' operating loss was KRW 13 billion. Despite the increase in gross profit margin, our operating loss has stretched due to weak top line trend. [Foreign Language] [Interpreted] Next is the e-commerce unit. 2024 second quarter e-commerce revenue was KRW 28 billion, indicating 23.3% Y-o-Y decline. Second quarter Lotte ON app traffic was increased by 15.7%, but the platform GMV was decreased by 9.8%. Second quarter e-commerce operating loss was KRW 20 billion, showing signs of improvement driven by product profit margin enhancement along with the IT cost optimization. [Foreign Language] [Interpreted] Next is the international business. 2024 second quarter overseas department stores revenue was KRW 28 billion, indicating 83.8% Y-o-Y increase and the operating loss was reduced despite the rise in SG&A regarding new store opening of Lotte Mall West Lake Hanoi, Vietnam in second half of last year. Lotte Mall West Lake Hanoi store is continuing to improve its operating loss every quarter since its opening. And in the case of overseas hypermarket, the revenue was KRW 352 billion, indicating 7.3% Y-o-Y decline, and the operating profit was KRW 10 billion, indicating 15.9% Y-o-Y decrease. In particular, Vietnam hypermarket has sustained its solid growth trend, but the difference in Indonesian national holiday compared to the same period of last year has caused a weak sales trend, as well as operating profit decline. Nevertheless, when looking at the overseas hypermarkets first half earnings, its revenue and operating profit are still on the right track, both indicating solid growth rate. [Foreign Language] [Interpreted] Next is the Hi-mart, our electronic specialty subsidiary. 2024 second quarter Hi-mart's revenue was KRW 589 billion, down by 13.3% Y-o-Y due to sluggish home appliance market situation, and the operating profit was KRW 3 billion, declined by 64.4% Y-o-Y due to weak sales trend. As for the Home Shopping operation, 2024 second quarter Home Shopping transaction volume was decreased, but the revenue was increased by 0.7% induced by high-margin product categories expansion. Home Shopping's second quarter operating profit was KRW 16 billion, increased by 711.2% Y-o-Y through efficiency improvement efforts. Next is the Cultureworks, our cinema division. 2024 second quarter Cultureworks revenue was weakened by 10%. And in detail, Vietnam businesses revenue was increased by 31.7%, but domestic businesses revenue was declined by 14.5% due to weak box office sales in Korea. Second quarter Cultureworks' operating profit was KRW 6 billion, indicating 188% increase Y-o-Y. [Foreign Language] [Interpreted] Nonoperating financial summary is provided on Page 8. 2024 second quarter nonoperating loss was KRW 129 billion. Last year's second quarter gain and loss on derivative asset includes the gain of KRW 22 billion from Home Shopping put option execution. 2024 second quarter equity method profit contains KRW 30 billion from FRL Korea, which runs the Uniqlo brand, but the total equity method profit has decreased due to reverse base effect of gain from sale of Lotte Card subsidiary, Loca Mobility, in the same period of last year. 2024 second quarter nonoperating profit includes asset impairment loss of KRW 59 billion from Shenyang Glory Properties China and KRW 11 billion loss on disposal of Chengdu Department Store in China. I'll now finish today's presentation here. Thank you for attending today's conference call. We will begin the Q&A session.

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

[Interpreted] So I have 2 questions. First question is regarding the guidance that you have shared earlier. The operating profit guidance was KRW 570 billion for the -- for this year. But when we look at the result of the -- accumulated result for the first half of this year, is it still achievable? Is there any risk in not being able to achieve this? And can you tell us what is the discrepancy? And second question is regarding the hypermarket operating profit. You've been seeing the improvement in the profitability over the past few quarters after the integration of hypermarket and supermarket. However, the second quarter trend seems to be reversed. So can you help us understand what -- and whether this trend will be continued in the second half of this year? You did mention about the Chinese players. And do you have any strategies to tackle this?

[Interpreted] So for the first question, yes, we have shared our guidance of KRW 570 billion for operating profit in this year January, in this year, February. Now we're at the end of the first half of this year, but the trend could change towards the end of this year regarding the different mixes in the Department Store. So at the moment, we assess that this guidance is something that we can achieve. [Interpreted] And regarding your second question, yes, since the integration of hypermarket and supermarket that began last year, our gross profit margin has been improving, and that is actually still holds for the second quarter as well. Second quarter gross profit margin was 1% as well. The direct result of why the overall result is not good for the second quarter is because of the non-grocery categories like fashion that have been struggling. And we believe that this trend is going to stand for a long time. So as you saw our transition or conversion of [indiscernible] store outlet into a grocery-focused store outlet, we will apply such concept in other outlets as well. And considering the economic climate of this time of the year, we will expand our PB product and focus on the expansion of PB product as well.

[Interpreted] The following question will be provided by Joo Young-hoon from NH Investment & Securities.

[Interpreted] First question is regarding the nonoperating profit. You saw the loss in this category due to the Chinese business. Is there any other losses that you expect in the second half of the year? I'm asking this because so far the second quarter, we -- you have seen net loss. But last year, you have turned into a profit. So I would like to understand how the rest of the year is going to be like. And second question is that, you have recorded 8% operating profit, which is a very impressive result. Is this sustainable in the long run? And do you have any other strategies regarding that?

[Interpreted] So regarding the first question, we had 3 businesses in China, but the Shenyang GPT and the Chengdu Department Store business is now fully closed. So there will be no extra additional losses that will be incurring from these 2 businesses. We are currently working on selling our Chengdu HK business, but it's still ongoing, so we cannot give you the concrete number on that. So far, the issue regarding the Chinese business was always an impairment of assets. And still, we are working on the assessment. So currently, we cannot give you the current concrete figures just yet. The first half net loss was KRW 6.8 billion, and we will do our best to turn that around. [Interpreted] Regarding the hypermarket in Vietnam, the locals love [ key ] food. And since last year, we've been working on accelerating the transitioning our focus through groceries. So we -- when we look at the product profiles, we have value products and high-margin products. So I can confidently say that we are on our way to sustainably generate sustainable operating profit. And we will be able to continue and sustain this operating margin in the near future. And also, I would like to mention that in terms of managing SG&A, we are adopting the IT technologies of Korea, which is advanced preemptively in Vietnamese operation. So we are optimizing the HR management and various management and dealing with SG&A in that sense. So there is still room to improve in that category as well. And in regarding expanding the business in Vietnam, we are looking into new lots. Currently, we have businesses in Hanoi and Ho Chi Minh, but we're also looking into first tier and second tier cities as well as a possible potential locations.

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

[Interpreted] I have 2 questions. First question is regarding nonoperating profit item. When you look into that section the list gain and loss seems to be varying a lot. So can you shed some light into it? And second question is regarding e-commerce. The traffic has increased by 16%, but unfortunately, the GMV has declined. Can you help us understand why that's the case?

[Interpreted] So I'd like to answer the first question first. So the biggest or largest item in the list, gain and loss was KRW 41.6 billion that incurred last year and its associated the differences in the accounting principles or accounting recognition of property tax. So this is something that I need to share in detail. So please contact us through the IR team, and we will get back to you. [Interpreted] Okay. So regarding the e-commerce, when you look at the overall traffic, it was minus 13%. But when you look at the traffic, it was positive. So we'll focus on the traffic that is more efficient, and we will focus on converting the loyal customers. So overall, we'll be able to improve the traffic as well. And regarding the GMV that was lower, it's because of the margin profile, we had low margin and even the reverse margin products, something like home appliances and these are the reason behind why GMV was low as a result.

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

[Interpreted] So I'll translate the first question first. There was some crisis regarding Ticket Monster and we make price. And I wonder if it has impacted your business as well? We'll translate the second question consecutively. So regarding the Lotte ON and Ocado, there are expenses that are related to it. Would the expense remain at KRW 15 billion, which is the current level? Will it continue?

[Interpreted] So regarding the Department Store, the loss for the second quarter was KRW 5.6 billion. That was the math that was recognized. And with the collaboration with the affiliated channels that we are working with, we will be able to improve this loss. [Interpreted] So regarding Ocado, KRW 34.2 billion was invested, and the composition was building, construction and also for the lot. For the second half of the year, we are expecting about KRW 105.2 billion that will be incurred -- occurred regarding this Ocado business. And when we look at the breakup, KRW 14.2 billion is for the lot and KRW 80.2 billion is for the construction. And there will be some other added additional expenses that will be added to this as well. So in total, we are looking at KRW 136 billion. And also, please reach out to us, we will be able to give you the additional breakdown of the correct concrete figure.

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

[Interpreted] So first question is regarding the -- when you look at the overall climate of second quarter overall other -- when we look at other retail companies, they were also struggling, I think, because of the shrinkage in the consumption. And I want to understand how would this would look like in July and onwards for department store mart and supermarket? And regarding the second question, the yen price has been varying a lot. And some are saying that this might have some positive impact or have upside for the department store. So is there any room to make up the loss because of the low end?

[Interpreted] So for the second half of this year, I would like to share some outlook that we assess. So first half of this year, the consumption was suppressed. And as a result, the revenue struggled. However, when we look at the second half of this year, we have a lot of new products that are in line that we'll be launching. And also we have some cosmetics and also fashion fairs and we have events that the focus is on fashion. And we believe that this -- and also the low performance of last year, which works as a base effect positively for the second half of this year. So I think there is a room to turn around in the second half of this year. And for July, the business climate was not favorable. And as a result, the revenue recorded minus 5% year-over-year. However, we expected the business climate to be unfavorable. So as a result, we have met the internal goal that we have set out. [Interpreted] So regarding the hypermarket, the second quarter revenue struggled due to the suppressed consumption. And in July, we had more rain and heavy rainfalls compared to previous years, so that weak revenue trend has been sustained. However, in August, we had many warm days. So the seasonal products, especially the grocery products were doing very well. So this trend has been recovering compared to second quarter. As for supermarket, the second quarter was positive, and this trend has been sustained throughout July and August. So we expect this revenue trend will sustain for supermarket.

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

[Interpreted] So there was a question about the low yen earlier, and we will prepare the answer and share that to you later on.

[Interpreted] The following question will be provided by [indiscernible].

[Interpreted] So my question is regarding the overseas department store. They've been growing at positive rate. However, when we look at how fast the loss is shrinking, it seems a bit slow. So can you help us understand how it's going to be like towards the end of this year? Can you share us the outlook on this?

[Interpreted] So on overseas department, we are seeing the operating loss due to the opening of new locations, which is in West Lake Hanoi. And that that's causing the loss. So if you look at the revenue numbers, it's on a growing trend. So -- and also, if you look at the operating loss, the size has been improved. We are looking at October this year. We expect the total revenue to be around KRW 300 billion, and we expect the operating loss to be -- to turn to profit by October. Of course, after October, we may not be able to sustain operating profit every month. However, we expect to maintain positive improved performance.

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

[Interpreted] Since there are no more questions, we will now finish today's earnings announcement. Thank you for joining us on today's conference call, and further questions will be answered by Investor Relations. Thank you. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]