The author is an analyst for NH Investment & Securities. She can be reached at jiyoony@nhqv.com — Ed.
Shinsegae International’s 1Q23 OP arrived well wide of consensus on both the exit of some imported fashion brands and heftier one-off labor costs. Annual earnings estimate cuts are unavoidable, but we view the bulk of negatives as already being reflected in current share price. We maintain a Buy rating on a likely eased base burden in 2H23 and still-valid expectations for a cosmetics industry recovery.
Worst quarter of the year now past
We lower our TP on Shinsegae International by 8% to W24,000, reflecting an 8% cut in our 2023 OP estimate due to both a vacuum of high-margin imported fashion brands in 1H23 and a consequent decline in profitability.
But, imported cosmetics continue to grow rapidly, and sales volume for in-house cosmetics also looks to be rising, supported by both entry into the Olive Young channel (LOiViE +66% y-y) and hit color products (YUNJAC+118% y-y). We see room to push up earnings expectations upon the appearance of a duty-free channel rebound and the planned launches of seven new imported brands (four fashion/three beauty). We consider a Buy rating as remaining valid, especially upon share price dips, when approaching from a mid/long-term perspective.
1Q23 review: Margins deteriorate at fashion division
Shinsegae International posted consolidated 1Q23 sales of W312.2bn (-11% y-y) and OP of W10.3bn (-69% y-y), with OP arriving far below the market forecast.
Company-wide OPM was held to 3.3% (-6.1%p y-y) due to: 1) a sharp drop in overseas fashion sales following the termination of contracts with high-margin imported brands (-34% y-y); 2) the cleanup of inefficient businesses (1Q22 sales of W15bn); and 3) one-off labor costs (W5bn in employee incentives).
We estimate 1Q23 fashion (non-consolidated) sales of W134.4bn (-29% y-y), with growth (y-y) clocking at -34% for import brands and -20% for in-house brands. On the bright side, in-house domestic brand women’s wear (VoV/g-cut, etc) upped 7% y-y (if excluding Dayz base effects). Tomboy sales rose to W30.1bn (+8% y-y), with OPM of 9.3%. Meanwhile, cosmetics (non-consolidated) sales climbed to W90.1bn (+19% y-y)—we size growth (y-y) at +20% for import brands and +15% for in-house brands. Lifestyle (JAJU) sales amounted to W56.9bn (remaining flat y-y), incurring operating losses of W3bn due to common cost sharing (RR y-y).