Korean retail stocks hit new lows as consumption shrinks

[Courtesy of Lotte Shopping]

Retail stocks in South Korea have been underperforming as the sluggish economy continues to weigh on consumer sentiment. Analysts are expressing conservative opinions on retail stocks as domestic consumption shows no signs of recovery.

According to the Korea Exchange on Tuesday, the stocks of operators of the country’s three major department stores hit their 52-week lows.

Shares of Lotte Shopping Co. lost 21.32 percent this year while those of Shinsegae Department Store Co. and Hyundai Department Store Co. 18.95 percent and 16.86 percent, respectively.

Shares of discount store operator Emart Inc. also fell 20 percent this year. Convenience store stocks such as BGF Retail (-13.4 percent) and GS Retail (-16.7 percent) are also facing a downward trend this year.

The underperformance of retail stocks is attributed to rising inflation, economic slowdown, and increased borrowing costs, which have led consumers to tighten their wallets.

“The economic slowdown, following last year’s rapid inflation, has already become a reality,” said Cho Sang-hoon, an analyst at Shinhan Investment Corp. Unprecedented price hikes and increased interest rate burden have squeezed consumer purchasing power and dampened consumer sentiment.”

According to Hana Securities Co., retail sales, an indicator of consumer activity, reached 42 trillion won ($32.2 billion) as of April, showing a mere 2.6 percent growth from a year earlier.

Sales at department stores, in particular, grew only 2.5 percent on-year, slower than convenience stores (8.9 percent) and supermarket chains (3.3 percent). This is because the fashion sector, which drove department store sales growth last year, has not been as strong this year.

Analysts are taking a conservative approach to retail stocks. The outlook for second quarter earnings for the retail sector is also largely negative.

Hana Securities Analyst Suh Hyun-jung predicted that retail companies’ underperformance would continue in the second quarter, following the weak performance in the first quarter.

Earnings forecasts for retailers are turning increasingly negative. According to financial market tracker FnGuide Inc., the three major department stores are projected to post a combined annual operating profit of 1.58 trillion won this year, down 7.7 percent from the 1.7 trillion won forecast three months ago.