E-Mart, Lotte Shopping credit rating downgraded
Workers disinfect Lotte Mart in Yuseong-gu, Daejeon, Sunday, after it was confirmed that a married couple diagnosed with the new coronavirus had visited the hypermarket. / Yonhap
By Kim Jae-heun
By Kim Jae-heun
The credit ratings of two South Korean retailers have been downgraded as the outbreak of the coronavirus here has resulted in local customers stopping outdoor activities which has hit the giants' core hypermarket businesses.
Moody's Investors Service (Moody's) and Standard & Poor's Financial Service (S&P) cut their outlook on the two local retailers to negative after the companies' profitability and financial leverage weakened significantly in 2019.
Moody's withdrew E-Mart's Baa3 issuer rating and assigned a Ba1 corporate family rating (CFR).
“Our expectation is that these factors will not improve meaningfully over the next one to two years,” Moody's Vice President and Senior Credit Officer Yoo Wan-hee said in a statement. “The company faces ongoing challenges in its core hypermarket business and its capital spending remains elevated.”
The global credit rating firm estimated E-Mart's earnings before interest, taxes, currency depreciation and amortization (EBITDA), increased around 6.1 times last year from 4.2 times in 2018 due to significant weakening in earnings and higher adjusted debt. EBIDTA is commonly used as a measurement to gauge cash-flow.
Moody's said the move was due to changing consumer preferences and spending patterns that have brought about a structural shift in Korea's retail sector towards e-commerce.
“Although the company is implementing countermeasures, such as investing in online platforms and restructuring certain offline stores, this structural shift should strain its profitability, at least over the next one to two years,” Moody's said in the statement.
S&P expected the same outlook for E-Mart, revising its rating from stable to negative Wednesday.
The agency pointed out that difficult operating conditions for traditional retail businesses and the slower-than-expected stabilization of new businesses will keep E-Mart's profitability low.
The retail giant has recently closed down a number of its profitless businesses including its men's fashion brand Show & Tell and discount store Pierrot Shopping. The decision came as the new businesses failed to settle in the market and showed poor performances.
E-Mart's consolidated operating profit was 150.7 billion won in 2019, down 67.4 percent compared to the previous year. The hypermarket operator said it will focus on its new businesses such as online retail through SSG.com, overseas retail and hotels.
S&P forecasted that the company's ongoing restructuring efforts for new channels won't make a big difference to E-Mart's profitability.
The situation wasn't different for Lotte Shopping as Moody's changed its prospects for the company from stable to negative while affirming its Baa3 issuer rating.
“Lotte Shopping financial leverage will remain elevated over the next one to two years after weakening significantly in 2019,” Yoo said. “While the company's potential restructuring measures may lead to better profitability over the next two to three years, there are uncertainties and execution risks over such plans.”
Lotte Shopping recently announced it would shut down 30 percent of its stores, mostly its big supermarkets and some department stores, to cut losses. The retail giant said not all 200 stores will close at once and it will take some years to do so. Lotte Shopping earlier said it will provide “customized service to individual customers” by utilizing the offline stores where people can come and experience their products and food items.