Korean retailers' deteriorating cash flow bodes badly for stock and financial outlook

[Photo by MK DB]

South Korea’s retail giants Lotte Shopping, Shinsegae, and Hyundai Department Store have come under great pressure to earn investors’ confidence in their outlook amid their rapidly deteriorating cash flow.

The three retail majors are expected to deliver better income statements this year against a year-ago period. But brokerages point to their worsening cash flow.

Lotte Shopping’s cash flow is projected to fall 27 percent from 1.83 trillion won ($1.3 billion) in 2021 to 1.33 trillion won this year, Shinsegae 35 percent, and Hyundai Department Store 52 percent. The deterioration is expected to continue throughout next year.

Cash flow can affect the stock price more than earnings as it measures future growth potential, investments, and dividend.

Lotte Shopping shares are 82 percent down from their peak in 2011, Shinsegae 55 percent from 2018, and Hyundai Department Store 68 percent from 2011. The much-awaited pent-up demand has been short-lived as consumers are burdened by inflation, higher interest rates, and anticipation of an economic slowdown.

Cash flows have been worsening due to buildup in working capital. According to Kiwoom Securities and Hanwha Investment & Securities, Lotte Shopping’s working capital – the difference between current assets and liabilities like accounts payable and debt - could surge from 2.3 trillion won last year to 2.6 trillion won this year. In 2023, it is expected to hit 2.12 trillion won. The working capital of Shinsegae and Hyundai Department Store is expected to climb by 52 percent and 17 percent, respectively, this year from last year.

Higher working capital can indicate that a business has too much inventory or that it is not investing its excess cash.

Retailers would have to convince shareholders that they are earning enough to mitigate the worries over cash flow.

Lotte Shopping’s four-year organizational restructuring is expected to be reflected in this year’s net profits. The losses of the film production and distribution unit Lotte Cultureworks have also shrunk thanks to the reopening of movie theatres. According to Shinhan Financial Group, Lotte Group will record a net profit of around 156 billion won this year for the first time in six years. Hi-mart and the home shopping sector, however, are likely to post sluggish earnings due to the decreased demand for household appliances.

Shinsegae’s key affiliates such as Shinsegae International are expected to contribute to its earnings. According to Hana Securities, Shinsegae International’s profit is expected to jump 32 percent compared to the previous year. The growth of Shinsegae’s clothing business is also expected to help boost profitability. Shinsegae’s duty-free business, however, will decline sharply due to China’s Covid lockdowns.

Hyundai Department Store’s earnings will be greatly helped by The Hyundai Seoul achieving monthly sales of 70 billion to 80 billion won. Hyundai Department Store also acquired a controlling stake in Zinus in March this year and the mattress company’s sales are expected to rise from 2 trillion won to 3 trillion won, although it is unclear whether it will be reflected in consolidated earnings. The high marketing costs of its department stores, however, may put a damper on profit margins.

Shares of Lotte Shopping were 2.55 percent lower at 87,800 won, Shinsegae 1.18 percent down at 208,500 won, and Hyundai Department Store 0.94 percent at 63,200 won by midday Friday.

[ⓒ Maeil Business Newspaper & mk.co.kr, All rights reserved]