Korean retail stocks struggle due to worsening profitability

[Courtesy of Walmart Inc.]

South Korean retail stocks remain weak, unlike their U.S. peers that have recently hit their all-time highs, as profitability worsens amid intensifying industry competition.

Shares of Emart Inc. finished 0.85 percent lower at 70,400 won ($52.99) on Thursday while those of Lotte Himart Co. fell 0.2 percent to 9,870 won.

Since the beginning of 2024, shares of Emart and Lotte Himart lost 8.09 percent and 3.8 percent, respectively.

The sluggish stock performance is in contrast to U.S. retail stocks that have been thriving recently.

Shares of Walmart Inc. rose 16.36 percent this year, hitting an all-time high in February. Costco Wholesale Corp.‘s stock has also surged by 17.14 percent this year.

The contrasting trends are due to differences in growth performance. Korean retail stocks are facing deteriorating profitability amid intensifying industry competition.

Emart posted its first-ever losses of 46.9 billion won since its inception in 2023. Its sales growth rate, which had been above 10 percent for the past three years, fell to 0.48 percent last year.

Although the company is expected to swing back to profit this year, its operating profit outlook falls short of its 2020 and 2021 levels.

Emart’s underperformance is believed to be largely due to the 97.5 billion won operating loss of its subsidiary Shinsegae Engineering & Construction Co. The market, however, notes a 2.1 percent decline in sales from its primary business of retail stores.

Lotte Himart‘s sales also fell 21.8 percent year-on-year to 2.61 trillion won last year. Although the company swung to an operating profit of 8.2 billion won, it fell 50 percent short of market consensus estimates.

The weak performance led to downward revisions in earnings consensus.

KB Securities Co. significantly lowered Emart’s estimated operating profit for 2024 and 2025 by 50 percent and 30 percent, respectively, from previous figures.

Stock prices track 12-month forward earnings estimates based on analyst forecasts, and a deterioration in profitability could reduce valuation attractiveness, which could reduce the stock‘s upside momentum.

Emart and Lotte Himart have price-to-book ratios (PBR) of 0.18, well below book value, making them the most undervalued stocks in the domestic stock market.

Although the recent government value-up programs have led to a rise in the share prices of undervalued stocks, Emart and Lotte Himart have not benefited from this trend.

In contrast, Walmart and Costco’s stock prices are booming on the U.S. stock market, primarily due to their continued earnings growth and robust shareholder return policies.

Walmart‘s estimated operating profit for this year is expected to rise 32.4 percent to $27 billion from $20.4 billion last year.

Costco’s operating profit is also expected to increase 9.6 percent to $9.1 billion from $8.3 billion during the same period.

Walmart‘s fourth-quarter sales and operating profit increased by 5.7 percent and 30.4 percent year-on-year, respectively. The growth rate of its primary business in North American stores also reached 4 percent.

Walmart recently announced a 9.2 percent increase in dividends, the highest growth rate in the past decade. Since 2023, it has also bought back a total of $40 billion worth of its own shares. During the same period, Costco bought back $700 million of its own shares.

Walmart’s recent acquisition of a smart TV company, Vizio, has also had a positive impact on its stock performance, as the acquisition is expected to help the big box store operator secure a new channel for reaching customers.