Shinsegae International: Earnings Will Prove Higher Than Past Performance

The author is an analyst at NH Investment & Securities. She can be contacted at [email protected] — Ed.

We believe good earnings momentum continued at Shinsegae International in 2Q22, supported by both solid demand for imported brands and rapid growth for in-house fashion brands (Vov, G-cut and Tomboy). OPM has probably extended to all divisions of the company.

The “three peaks” environment (interest rate, inflation and exchange rate) is a reason to smile

We are revising our 2022E/2023F EPS figures for Shinsegae International upwards by 7% and 5%, respectively, reflecting upward adjustments to our revenue and margin projections for its internal domestic fashion brands (per example, Vov, G-cut and Tomboy). However, we stick to our TP of 42,000W for now, noting a decrease in our target multiple from 14x to 13x (in light of both the likely reduction in profit contributions for the company’s cosmetics area and downgrades in cosmetic peer group valuations).

Going forward, the triple combination of higher interest rates, inflation and more favorable exchange rates should work to the company’s advantage. In detail, Shinsegae International currently owns about 50 imported brands, boasting the highest sales share in the apparel industry. In 2021, the company’s share of imported brand sales was 55% for apparel and 72% for cosmetics. As most of its licenses are for brands in Europe and North America, the associated margins are expected to improve in the future thanks to the spreads between purchase costs and ASPs amid a depreciating won.

2Q22 Snapshot: To View Uniform OPM Growth Across Companies

On a consolidated basis, we expect Shinsegae International to post 2Q22 sales of 380 billion W (+12% YoY) and OP of 34.1 billion W (+29% YoY), both figures meeting market expectations.

On a non-consolidated basis, we estimate 2Q22 fashion sales at 199.6 billion W (+16% yy), with an OP at 24.1 billion W (+51% yy). Driven by a trend in domestic consumption towards small luxury goods, sales growth (year-on-year) for imported brands likely reached around 23%. In particular, sales of national brands have probably been strong thanks to the growing popularity of the Vov and G-cut brands.

We estimate domestic cosmetics sales at 83.8 billion W (+3% yy) and POs at 6.9 billion W (-11% yy). The growth rate of imported brands probably held steady at around 20% year-on-year. And, despite negative base effects (yy) for VIDIVICI, we believe that private label sales have increased, in turn allowing cosmetic OPM to reach around 8%.

For the Tomboy subsidiary, we see 2Q22 sales of W24.5 billion (+7% yy) and an OP of W2 billion (+125% yy). Aided both by a recent upgrade to the SIVillage online mall and the effects of marketing targeting millennials and gen Z, there has been a likely increase in online sales for Tomboy, leading to improved margins . The lifestyle brand JAJU should post a turnover of 68.4 MdW (+10% yy), with an operating result reaching the BEP.

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