Lotte Shopping Co., Ltd. (A023530) Q4 FY2025 Earnings Call Transcript & Summary

Good morning, everyone. This is [ Ji-eun Lee ], an Associate of Investor Relations. Welcome to the Lotte Shopping 2025 Fourth Quarter Earnings Conference Call. Today, we have Mr. Won-Jae Kim, CFO of Lotte Shopping. We also have other business representatives joining the call. Questions will be taken after the presentation. Page 1 is the overall review of Q4 2025 consolidated financial performance. Lotte Shopping's fourth quarter consolidated revenue increased by 1.3% Y-o-Y to KRW 3.5 trillion. This growth was driven by strong Department Store sales from higher traffic at large format stores and increased foreign customer spending, along with continued growth in the Vietnam business. Operating profit increased 54.7% Y-o-Y to KRW 228 billion, driven by improved Department Store performance, solid growth in Vietnam and a base effect from Q4 2024 one-off expenses such as ordinary wage change impact and Cultureworks bad debt. Net profit turned positive, reaching KRW 115 billion, supported by operating profit improvement, increased equity method gains and reduced asset impairment losses. Page 2 covers key highlights of 2025 annual performance. Foreign sales in Department Store recorded an all-time high of KRW 735 billion, exceeding the previous peak of 2016. It indicates a 29% Y-o-Y increase, showing significant growth across major branches, including Myeongdong, Jamsil, Busan, and Dongbusan outlet. To cater to rising foreign demand, the Myeongdong main branch as to drive sales growth this year by reinforcing marketing efforts, including launching foreigner-exclusive membership cards and installing instant tax refund kiosks. Vietnam business performance is accelerating. Vietnam Department Store unit is sustaining high growth rate, driven by a premium strategy that incorporates Lotte's proven capabilities and know-how from the domestic market, led by Lotte Mall West Lake Hanoi, which opened in September 2023. As a result, quarterly operating profit has continued to reach new record highs. And on an annual basis, operating profit amounted to KRW 10.1 billion, marking a return to profitability. For Vietnam Hypermarket units, both revenue and operating profit have increased for 5 consecutive years, induced by strong demand for K-food and Lotte's premium branding. Operating profit margin was 9.5%, demonstrating high efficiency. Please note that we have attached the Q4 2025 income statement and annual revenue and OP breakdown by each segment on the right side of Page 3. Page 4 is the Domestic Department Store units. Revenue was KRW 917 billion, indicating 4.2% increase Y-o-Y. This growth was driven by solid same-store sales growth in our major branches and increased sales to foreign customers. Notably, foreign sales at the Myeongdong main branch surged 43%. As a result, the share of foreign sales rose by 4 percentage points to 19%. Despite one-off expenses regarding the early closure of the Bundang branch, OP increased by 22% to KRW 220 billion. This profitability was supported by strong sales of high-margin fashion products. Next is the Domestic Grocery business. Revenue was KRW 1.3 trillion, increased by 0.4% and operating loss was KRW 20 billion, narrowing the deficit. Despite the decline in hypermarket SSSG, revenue grew driven by efficient promotions and increased foreign traffic at the Seoul station branch. Profit-oriented operations helped narrow the operating loss. Next is the E-Commerce unit. E-Commerce recorded KRW 32 billion of revenue, indicating 10.9% decrease. While Lotte ON commerce revenue grew by KRW 3 billion, E-Commerce's total revenue declined due to business portfolio adjustment and ending of the support contract. Operating profit recorded a loss of KRW 2.8 billion. However, the gross profit margin improved driven by an increased mix of high-margin products such as women's fashion and sports categories, along with higher advertising revenue. In addition, losses were significantly reduced through SG&A savings achieved via cost optimization. Next is the Overseas Department Store. Revenue was KRW 36 billion, indicating a 10% increase, and its operating loss has turned into profit, recording KRW 5.6 billion, increased by KRW 6.4 billion. Revenue grew across all branches, including Vietnam and Indonesia. Notably, Lotte Mall West Lake Hanoi's OP was KRW 4 billion, hitting a record high since its opening. As a result, annual OP turned into profit with a 10.7% margin, showing strong performance. As for the Overseas Hypermarket, the revenue was KRW 383 billion, indicating a 3.7% increase and its OP was KRW 10 billion, indicating 5.8% decline. Vietnam operation continued to achieve record high performance recording 15% increase in SSSG and 24% increase in OP, but Indonesia indicated declined performance due to weak customer sentiment. Next is the Hi-mart. Revenue was KRW 524 billion, decreased by 5.7%. This was due to sluggish domestic home appliance demand and fewer business days from holiday timing difference. However, OP improved by KRW 8 billion to minus KRW 9 billion, driven by key strategic initiatives such as expansion of home care service, private label and store format innovation. As for the Home Shopping, revenue was decreased by 9.6%, recording KRW 232 billion. OP was KRW 10 billion, down by 24% while underlying profitability improved, the OP decrease was due to a high base impact from a one-off relating to secure profitability. While underlying profitability improved, the OP decrease was due to a high base effect from a one-off VAT refund of KRW 6 billion last year. Next is the Cultureworks, or Cinema division. Revenue was KRW 128 billion, driven by global hits by Zootopia 2 and increased content business sales. Operating loss was KRW 2 billion, an improvement of KRW 14 billion. This was driven by strong box office performance and a base effect from last year's one-off bad debt expenses. Next page is nonoperating profit summary. Nonoperating loss was KRW 150 billion, an improvement of KRW 1,079 billion. Net profit turned positive, driven by increased equity method gains from the strong performance of major affiliates, including FRL Korea, Hanssem and Stonebridge Investment Fund. Asset impairment loss for Q4 2025 was KRW 127 billion, which includes impairments on CGUs in invest stocks. Next page is the dividend. The year-end dividend for FY '25 is KRW 2,800 per share. The total annual dividend, which includes the interim dividend is KRW 4,000, an increase of KRW 200 Y-o-Y. This payout qualifies for separate taxation on dividend income, reflecting our commitment to shareholder returns. Going forward, we'll maintain a sustainable and predictable dividend policy while balancing financial stability and investment needs. Please refer to the table on the right for the 5-year trends. Finally, we would like to discuss our financial guidance for 2026. Regarding revenue of KRW 14.3 trillion, up by 4% Y-o-Y and operating profit of KRW 650 billion, representing 19% increase. While Department Stores remained strong due to polarized consumption trends and increase in major tourists. This adjustment reflects expected stagnation in hypermarket units in other subsidiaries. Compared to the mid-to-long-term target announced in October 2024, revenue of KRW 15.2 trillion and operating profit of KRW 800 billion, the guidance has been revised to reflect changes in the market environment and our cost structure, resulting in a more realistic and achievable target. We'll continue to make every effort to deliver on our 2026 guidance. This concludes our presentation. We'll now move on to Q&A. Please note that the Q&A session will be conducted with consecutive translation.

[Interpreted] [Operator Instructions] The first question will be provided by Younghoo Joo from NH Investment & Securities.

[Interpreted] My name is Younghoo Joo from NH Investment Securities. And today, I have 3 questions. First is about your guidance. So you shared your guidance for 2026. Can you break that down by each business division? And second, the Q4 performance was quite strong, and I think the market largely sees it as a positive. So in the 2026 guidance, if 2026 guidance is largely adhered to throughout the year, would there be any one-offs that we need to be worried about like the impairments of goodwill and different types of assets that occurred in 2025? And last question is about the one-off costs in Q4. Are there any one-off expenses that we need to be aware of in the Q4 business performance?

[Interpreted] Yes, I will take your first and second question first. So regarding the 2026 guidance, I think at this point, we can say that we developed it based on the market consensus and the internal targets that we have. But as to the details in terms of the breakdown of each business division, I think we can communicate with the market at a later period. Regarding your second question on any one-offs we need to be aware of for the 2026 operating profit, I do not believe that there will be any significant one-offs that can occur throughout the year. Having said that, we are monitoring the situation of Hi-mart, given that the home appliance market has been quite slow, and it does not seem to show signs of strong recovery in the near future. Against that backdrop, we will be making every effort to maintain a positive operating profit for Hi-mart. We do not foresee, however, any large one-off impairments like we did in the past. So we are hoping that we will be able to maintain the positive operating profit trend for Hi-mart.

[Interpreted] First, I will talk about the Department Store one-off expense to answer your third question. Largely, the one-off was around KRW 30 billion, and this includes the ERP costs, the costs associated with closure of the Bundang store and costs associated with the land usage payments in Gimhae area.

[Interpreted] Next, for the Supermarket and Grocery business, there were some one-offs related to the fact that the holiday timing was different from last year. So to the Korean Thanksgiving holiday dates were different and the associated advertising cost will be booked as one-off. And there were also some costs associated with ERP programs similar to the Department Store as well.

[Interpreted] The following question will be presented by Sang-Jun Park from Kiwoom Securities.

[Interpreted] I am Park Sang-Jun from Kiwoom Securities. And I have 3 questions. Question one is regarding the same-store sales growth of the stores in Q1. What are the trends in -- what were the trends in January and early February? And what is your outlook on the revenue trends for this quarter? Second question is regarding the Department Stores. We have seen visible growth of inbound foreign customer revenue. Do you think this trend will continue throughout the year? What do you foresee as the growth of the foreign customer revenue? And also, how much would be the contribution to revenue coming from the foreign customers? Third question is regarding e-commerce. The loss in this business is reducing significantly. There was, of course, the coupon incident in Q4 last year. And overall consumption seems to be quite robust. So overall, I think I can understand this reduction of the losses. Do you think this trend will continue throughout 2026? And do you think that loss will continue to narrow throughout the remainder of the year?

[Interpreted] First, I will go over the Department Store recent revenue trends. So in January, we have been seeing double-digit growth, mainly driven by the large-format stores and the overseas luxury brands and high jewelry brands and also the foreign inbound customers. And we believe that these trends will largely continue for the time being in this quarter, yes. And so we believe that the strong trend should be visible for some time.

[Interpreted] Next is the Grocery and Supermarket business. So given that the Lunar New Year holiday falls on different dates this year and last year, I think it is important to look at January and February together. So like the Department Stores, the gift sets during the Lunar New Year holidays should be one driver of growth this quarter. Also, there are some competitor stores that are closing down. And I believe that some of our stores will benefit from that. Another aspect is that the temperature is lower than last year. And therefore, fashion and related categories have also been showing growth. Along with the growth of the food and beverage category, I think these factors will continue to drive strong growth in the first quarter of this year.

[Interpreted] Next is the E-Commerce business. If you look at the growth of our GMV in 2025, it has outperformed the market average. And we are hoping that these strong trends will continue in 2026. We have also been focusing on high-margin, high profitability products. And with these efforts combined, we believe that we will be able to achieve in this year.

[Interpreted] The following question will be presented by Lina Oh from LS Securities.

[Interpreted] I am Lina Oh from LS Investment Securities (sic) [ LS Securities ], and I have 2 questions. One is related to Ocado. In Q4 2025, how much cost associated with Ocado has been reflected in the Grocery business numbers? I believe you are targeting opening for July and August period. And also what would be the cost that you would book related to Ocado this year as well? So Ocado cost in Q4 2025 and this year? And related to that, overall Grocery business, what would be other areas or other factors of improvement that we can look forward to other than the Ocado associated cost for 2026? My second question is regarded to your Overseas business. I understand that you are not able to share more specific division guidance for 2026 yet, but your Overseas business, including Vietnam, has been doing quite well. So can you share a little bit more detail on the outlook you have for the Overseas business?

[Interpreted] Regarding Ocado associated cost, we are still building one of the key assets of Ocado, which is the CFC. And given the constant construction needs at the moment, the size of the loss may increase in 2026, and we will be probably recording a loss in 2026 for Ocado. However, once the CFC opens and reaches the business as usual status, these costs, I think, will quickly be offset. And then over -- the overall, the Grocery business last year in Q3, when the government distributed the subsidies, the coupon subsidies, the large marts were excluded from this program. And so there will be a base effect coming from this in 2026. So overall, we believe that once business starts in earnest, the Ocado-related costs can be offset quite speedy manner.

[Interpreted] Next, regarding the Overseas business of the Department Stores, we have largely 2 strategies that we are implementing at the moment. One, we have 4 stores at the moment. And by implementing the renewals and strengthening our marketing activities, we are working to boost the profitability of the existing stores. Second, the West Lake Hanoi has been very successful. So we are working to replicate this success in some other cities as well. And we will be working together with the group affiliates to develop large shopping mall complexes in second-tier cities, near Hanoi and Ho Chi Minh. These cities will largely be developed by government. And therefore, we believe that we -- these cities will show very strong growth in the future. And so we are planning to expand our presence into these second-tier cities.

[Interpreted] Yes. And now I will go over the Grocery business. So we have the grand grocery models in Korea. And these have specialized food corners and a quite large eat-in area as well. And we believe that this model can be very successful in Vietnam. We have tried it in Vietnam West Lake. And based on the success, we are planning to expand this model when renewing the existing stores. As of last year, I think we are already seeing positive results, especially in areas that are tourist -- near tourist attractions, I think we will be accelerating the renewals so that the existing stores can become the grown grocery models and attract more inbound customers. Vietnam market overall is developing and changing very quickly. And so we will be renewing our existing models and also launching online businesses. The online business, I think, is an area where we can look out for new business opportunities. So given the economic development of Vietnam, that is another area that we are highly interested in. If you look at the Indonesian market, we are coming up with hybrid formats that combine wholesale and retail segments. So it's basically a retail store that is also having features of a warehouse store. These hybrid type models we launched a couple of months ago, and we're already seeing positive results. And so in the future, we will be renewing the existing stores to the hybrid format stores to attract more customers and show strong business growth.

[Interpreted] And regarding the previous question made by the analyst from Kiwoom Investment Securities, I think we can make some -- give you some more color on the inbound foreign customer contribution to revenue. So the Department Store business will add some more color to that.

[Interpreted] Yes. So we have been seeing continuous growth of revenue coming from the foreign inbound tourists and customers. If we look at January and February numbers, I think we are seeing already double-digit growth around KRW 800 billion revenue contribution. There are largely 3 strategies we are implementing to continue this trend. So a very high portion of this foreign revenue is coming from our HQ Jung-gu stores, I think more than 70%. So we will be cooperating with group affiliates in terms of marketing and promotional activities to generate strong growth. We will also be working with the RSAs to enhance the convenience regarding payments, and we will be installing kiosks so that the foreign customers can easily do their tax returns when they are shopping in our stores.

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

[Interpreted] I am Jin-Hyeob Lee from Hanwha Investment Securities, and I have 2 questions today. You mentioned today that some of the stores of Homeplus is closing and that you are benefiting from this change in the market. So what is the contribution? So how much can you benefit from this closure of the competitor stores? And what is your outlook on that for the remainder of the year? Second question is regarding debt levels. So when I look at your statement of financial position, the debt levels have come down. What would be your expectation for this year regarding debt levels? And also, how much reduction can you experience in terms of the interest expense this year?

[Interpreted] Regarding the first question, so our stores that are near Homeplus stores that have closed or have officially announced its closure have been receiving -- have been experiencing around double-digit revenue growth. And so it is -- we are observing that these stores are benefiting from the situation of the competitor. And so as if more Homeplus stores close or officially announced the closure, I think this type of benefit can become stronger in the coming months.

[Interpreted] And regarding the question regarding debt and interest expense. So we will be investing in CapEx continuously in 2026 and also, at the same time, make effort to accelerate the disposal of some of our noncore assets. Debt as of 2025 was around KRW 13.8 trillion. In 2026, we believe we can bring that down to around or below mid KRW 13 trillion levels. As a result, given that the debt size is expected to decrease, interest expense should decrease as well. Another aspect to consider regarding interest expense is that we are paying down the high interest borrowings first. And so as those borrowings are paid down, overall interest expense should show further decrease.

[Interpreted] The following question will be presented by Sang-Jun Park from Kiwoom Securities.

[Interpreted] I am Park Sang-Jun from Kiwoom Securities. I have 2 questions. In 2025, there was reduction -- significant reduction in fixed cost given that there was recognition of impairment losses. And as a result of that, the depreciation expense declined. Would there be any similar further decline of fixed cost in 2026? What is your outlook in that category? And second question is regarding CapEx. What is your CapEx plan for 2026, given that it also impacts your overall cash flow? Can you share overall details and where you will be investing?

[Interpreted] Regarding your first question on the fixed cost levels. So in 2024, we did large-scale revaluation of our assets that led to some impairment losses and also the decline of depreciation expense. So there was overall reduction of fixed costs. However, in 2025, as you can see from our financials, we did not experience any unusual impairments. And I think this trend will be similar in 2026. We do not foresee any unusual one-off impairments that can have direct impact on our fixed cost. Regarding CapEx, I think maybe I can give you more color on the direction that we have for 2026. As for the Department Store, we will be focusing on the renewal of large-format stores, especially our HQ Jung-gu store. And then as for the Grocery business, I think we will be focusing on efficiency. So the renewals will be smaller in scale, and we may decide to open new stores that require small amounts of investment, but the stores that we can believe will generate high efficiency.

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

[Interpreted] I have 2 questions. One is regarding the Supermarkets, the Grocery business overseas. What are your plans for new store openings? And second, I heard that you will be closing your Bundang store this year. Do you have additional plans to close more stores this year? So overseas store opening plans and domestic store closing plans would be helpful.

[Interpreted] I will first discuss the overseas new store opening plans. So we have been making effort to open new stores in Vietnam, especially in the regions near Hanoi. We have already secured land that we need to open new stores. It's a little bit too early to share exact numbers, but we will be focusing new store opening efforts in Vietnam and especially in Hanoi. Regarding your second question on the closure of stores in the domestic market. So I think you specifically referred to small and medium-format stores. So for the small and medium-format stores, we are taking a diverse approach. So we may look at temporary closure of the stores that we lease or rent. We may look to dispose some of the stores that we own. We may look to change the main businesses or make some business changes and improvements in the existing stores. So we are looking at it with diverse options. And I think when we have more concrete plans, we can share that with the market.

[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. Further questions will be answered by IR team. Thank you for joining today's conference call.