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The authors are analysts of Shinhan Investment Corp. They can be reached at and, respectively. — Ed.

Department stores offer downside support amid recession fears

Shinsegae continues to generate solid earnings from department stores despite rising fears of a recession and slowdown in consumption. Gross sales growth at department stores came in at 16% for June and 22% for July, squashing consumption slowdown concerns thanks to strong demand for luxury goods and apparel products, and reached up to 28% in August with the boost from the earlier-than-usual Chuseok holiday stronger than the feared impact of historic rainfalls. We believe decent growth in department store sales is continuing in September.

Consumer spending on apparel has sharply increased this year, but we still see further upside given the relatively low weight in total consumption vs. levels seen in 2019. In addition, the portion of VIP consumption, which is inelastic to economic conditions, is remaining at high levels (roughly 40%) and an added boost is expected from newly-opened stores in Daejeon and Gwangju. As a result, we expect department store sales growth to continue at current levels through 2H22 and 2023.

Duty-free operations adding upside potential

Shinsegae, the country’s biggest airport duty-free shop operator in terms of gross area, stands to benefit the most in periods of duty-free market recovery led by demand from outbound travelers as seen today. An increasing number of countries outside of China are now relaxing overseas travel restrictions and Japan has been actively reviewing the easing of tourism regulations, raising expectations for a sharp increase in the number of high-margin free independent travelers (FIT)going forward.

At Incheon International Airport, Shinsegae currently operates duty-free stores in Section 3 of Terminal 2 (contract expires in January 2023) and Section 1 and 5 of Terminal 1 (expires in July 2023). Rent policies for airport duty-free shops will likely be switched from the flexible-rent system tied to monthly sales, which was adopted in September 2020 amid the pandemic, back to the original fixed-rent system in 2023. However, we believe cost-related worries are overblown with companies in general likely to avoid cutthroat bidding wars and Shinsegae expected to hold the upper hand in negotiations at the expiration of its airport duty-free license in 2023.

Retain BUY and target price of KRW350,000 for sector top pick

We maintain our BUY rating on Shinsegae. Despite upward revision of earnings forecasts, we keep our target price unchanged at KRW350,000 in reflection of the recent decline in peer valuations and drop in value of equity stake in subsidiaries. Slowing consumption and the high YoY base remain a burden, but the outlook for department store sales remains bright, with profitability improvement expected from strong demand in the high-margin fashion/accessory category. Duty-free earnings have remained decent amid extremely challenging conditions, and signs of a market recovery are starting to emerge. We believe now is the time to shift focus from peak-out concerns to recovery expectations and attractive share valuations (2023F PER 5.4x).




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