In urgent need of new brands

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The author is an analyst of NH Investment & Securities. She can be reached at jiyoony@nhqv.com — Ed.

Shinsegae International’s 1Q23 earnings are likely to fall far short of consensus due to the exit of major imported fashion brands. Although a slide in annual earnings at the imported fashion business looks inevitable this year, q-q earnings recovery is expected to continue at the cosmetics division.

Now is time to focus on launch of new brands

Although maintaining a Buy rating, we lower our TP on Shinsegae International from W33,000 to W26,000 on a downward adjustment to our consolidated sales estimate by 10% due to the departure of luxury brands for which contracts ended last year. In particular, as margins are high for imported fashion, OP at the (non-consolidated) fashion arm is likely to fall 48% y-y in 2023.

Although potential risks remain for the firm, which has a high portion of imported brands, due to the rush of luxury brands directly into Korea, we note that the company plans to launch new imported brands (contemporary fashion/perfume) in 2H23. Moving ahead, we anticipate a nurturing of its own fashion brands and gradually improving OP for Tomboy. For imported cosmetics, double-digit sales growth was witnessed in 1Q23, and when the DFS channel recovers, there should be additional room for earnings increase for in-house cosmetics. Against this backdrop, we advise investors to view share price corrections as dip-buying opportunities from a mid/long-term perspective.

1Q23 preview: To reflect breakaway of directly-advancing brands

Shinsegae International is to record consolidated 1Q23 sales of W319.5bn (-9% y-y) and OP of W18.7bn (-43% y-y), with both figures to significantly miss consensus due to brand departures and one-off labor costs.

Fashion (non-consolidated) sales are estimated at W145.7bn (-23% y-y) and OP at W10bn (-58% y-y). Import/domestic brand sales growth (y-y) is gauged at -30% and -9%, respectively. The import arm was strongly impacted by the departure of major brands, and double-digit sales growth for in-house brands (VoV/g-cut) was offset by the removal of DAIZ. Tomboy should post sales of W29.7bn (+7% y-y) and OP of W3.4bn (+4% y-y). Backed by brand efficiency improvements, profitability should continue to climb for Tomboy for some time.

Cosmetics (non-consolidated) sales are forecast at W85.9bn (+13% y-y) and OP at W5.9bn (-8% y-y). Overseas brand sales growth is estimated at +18% y-y. Considering actual demand, VIDIVICI should report quarterly sales of around W10bn, with sales of Others likely upping 9% y-y. Lifestyle (JAJU) should post sales of W57bn (+1% y-y) and an operating loss of W0.6bn. With the restructuring of inefficient stores completed and the high-margin fashion sales portion steadily rising (approximately 40%), a solid foundation for profitability growth is emerging.

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