By Ian Chung
The department store market and Hyundai Department Store's earnings and stock price all appear to be bottoming out. We see consumer spending and the market passing through a cyclical trough between late 2011 and early 2012. The company’s first quarter and full-year earnings are forecast to beat our expectations.
Hyundai Department Store will likely outshine its retail peers as its newly opened stores are normalizing quickly and an earnings forecast upgrade will follow. The share price looks primed for a breakout out from the current boxed range.
Double-digit profit growth continues
Earnings concerns grew in the first quarter this year due to the slowdown in the department store market, but Hyundai Department Store is forecast to register double-digit earnings growth in the quarter with sales and operating profit expanding 16.7 percent and 14.4 percent year-on-year, respectively, driven by positive contributions from stores in Ulsan (merged in the second half of 2011), Ilsan Kintex (opened in 2010) and Daegu (opened in 2011).
Though the market consensus looks a bit high, investors’ expectations have been lowered due to poor same store sales growth at nearly zero percent for the past two months. Pre-tax and net profits are expected to edge down in the first quarter from a year ago due to the high comparison base of the first quarter in 2011 which was boosted by one-off gains from the Hyundai Merchant Marine stake sale.
Amid challenging market conditions in the first quarter, Hyundai Department Store is expected to register solid numbers. Going into the second quarter, earnings will strengthen on the back of improving conditions and investor sentiment.
Consumer spending and the department store business cycle are passing through the bottom. Same store growth stalled in the past couple of months, the worst showing ever except for the credit card debt crisis in 2003 and the global financial crisis in 2008. Inflation is moderating, fueling rebound expectations.
Hyundai Department Store shows superior earnings momentum and a stronger long-term growth potential with support from newly opened stores. Sales at the Ilsan Kintex and the Daegu stores are picking up rapidly. The Ilsan Kintex store is estimated to have made approximately 7 to 10 billion won in operating profits last year, less than a year after its opening. That is an impressive feat because it typically takes two to three years for a new department store to turn a profit. The Daegu store is also seen churning out a quarterly profit.
The combined department store sales floor space is projected to expand more than 80 percent by 2016 with continued store openings and renewals. With inflation and consumer preferences for department store shopping taken into account, we forecast sales and operating profit will double by 2016 from 2010 levels.
The Chungcheong store, to be opened in August 2012, will add another chapter to Hyundai Department Store’s growth history, and the completion of the Korea World Trade Center (KWTC) store renewal in October this year is another reason why the company deserves a growth premium. The KWTC store is the most efficient money maker for Hyundai Department Store.
2012 forecast upgrades
We are revising up our 2012 earnings forecast to reflect a market recovery and faster-than-expected sales normalization at new stores. Sales estimates are little changed, but operating profit and earnings per share forecasts are revised up by 2.8 percent and 2.7 percent, respectively. Much of the increase comes from new stores. Previously, we had forecast the Daegu store would just about break even in 2012, but we now see it making 20 billion won in operating profit.
Profit growth at the Ilsan store, KWTC store renewal effects and a further Hyundai Merchant Marine stake sale could provide an added boost to earnings. Following Hyundai Department Store's first quarter earnings release, forecast upgrades by more analysts will follow.
Ian Chung is a retail analyst at Daishin Securities.