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The author is an analyst of KB Securities. She can be reached at — Ed.

Maintain BUY, target price of KRW220,000     

We maintain BUY and TP of KRW220,000 on BGF Retail. With business conditions continuing to improve since the reopening of the economy. BGF Retail has consistently outperformed its competition. We expect double-digit OP growth to continue in 2H22 on rebounding SSSG, high-margin products’ growing market share and efficient cost controls. With the stock currently trading at 17.7x 12m fwd P/E, however, valuations are somewhat demanding, as we believe levels above 20.0x are unlikely. 

2H22 outlook: CVS business to be less affected by inflation, less sensitive to economic conditions   

For 2H22, we expect the CVS business to maintain solid earnings growth, as cost pass-through has become easier and the impact of the economic slowdown has been reduced. We expect earnings at subsidiaries, which had a negative impact on 2Q22 performance, to gradually rise as oil price increases slow, FF prices increase and manufacturing processes improve. 

2Q22 review: SSSG jumped 5.5% YoY but OPM improved only 0.2pp YoY on various cost increases 

2Q22 consolidated revenue came in at KRW1.919tn (+13% YoY), which is in line with the market consensus, but OP reached KRW70.8bn (+21% YoY), falling short by 6%:

(1) SSSG jumped to 5.5% (+6.5% for products excl. tobacco; +4.0% for tobacco), with no. of customers up 3.7% and avg. spending per customer up 1.5%. With sales growth for beverage/liquor (+18%) and HMR (+16%) remaining solid, price hikes contributed to strong SSSG. Unfavorable weather, however, pushed SSSG down to the 3% level in June from a high 6-7% in April-May.

(2) OPM stood at 3.7% (+0.2pp YoY). Although GPM improved 0.6pp thanks to brisk product sales (excl. tobacco), SG&A ratio rose 0.4pp on one-offs incurred from CU’s 10th anniversary event, bonus payments to franchises and earnings decline at subsidiaries (increased fuel costs for BGF Logis; diminished production efficiency, surge in raw material costs for BGF Food). Meanwhile, BFG Retail saved KRW1.4bn YoY in leasing costs.

(3) Although BGF Retail did not disclose 2Q22 net increase in no. of stores, we estimate 210 QoQ (+5% YoY). 

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