Korea's major department store companies, which all posted strong results in the first quarter, are expected to continue a sharp improvement in the second quarter. Sales are rising quickly on the back of inbound foreign tourists and a recovery in high-income consumer spending, and as sales of high-margin categories such as luxury goods and fashion expand, higher sales are translating into profit gains through the "operating leverage" effect. The securities industry expects same-store sales (sales at existing locations excluding the effects of openings and closures) at major players including Lotte Department Store, Shinsegae Department Store, and Hyundai Department Store to log double-digit growth rates in the second quarter.
According to the Ministry of Trade, Industry and Resources on the 1st, the average sales of the three department store groups (Lotte, Shinsegae, Hyundai Department Store) in April rose 21.7% from a year earlier. That is more than triple the overall retail industry's average sales growth rate (7.2%) over the same period. It also surpassed the department stores' average growth rate (17.4%) in the first quarter.
By category, sales of overseas luxury brands jumped 38.1%, leading the increase. Fashion-related categories also posted double-digit growth rates, including women's suits (14.7%), women's casual (21.1%), men's apparel (12.8%), and children's and sports (12.4%). Food category sales rose 8.6%, showing a broad-based improvement across all categories.
Overall purchasing indicators also improved. In April, the number of department store purchases increased 11.4% from a year earlier, and the purchase unit price rose 9.3%. The average spend per customer was 142,796 won, up 9.3% from a year earlier. The per-store sales growth rate also reached 26.1%.
In general, department stores have large floor areas for each store and are strongly characterized as offline, capital-intensive businesses that must maintain tenant brands and traffic-drawing facilities. They are also considered businesses with heavy fixed costs, such as labor, rent, and depreciation, required to operate large stores. Therefore, when sales are weak, fixed costs weigh on profitability.
However, in periods like now when sales rise above a certain level, costs do not increase as much as sales, so the magnitude of profit growth becomes larger. An industry official said, "Because department stores consistently incur fixed costs, in periods when sales recover, a higher portion of incremental sales is retained as profit," adding, "In particular, if high-margin categories such as luxury goods and fashion grow together, the profit improvement effect can be even greater."
This virtuous cycle is also evident in the companies' recent results. In the first quarter, Lotte Shopping's department store segment net sales were 872.3 billion won, up 8.2% from a year earlier, and operating profit rose 47.1% to 191.2 billion won. Shinsegae Department Store's net sales were 741 billion won, up 13.0%, and operating profit increased 30.7% to 141 billion won.
Hyundai Department Store's first-quarter department store net sales were 632.5 billion won, up 7.4%, and operating profit rose 39.7% to 135.8 billion won. All three companies saw operating profit growth rates outpace sales growth rates.
The securities industry expects the improvement in department store earnings to continue through the second quarter and into the second half. Park Sang-jun, an analyst at Kiwoom Securities, said, "In the second quarter, department stores will show steady profit growth on operating leverage from strong domestic consumption and high growth in foreign customer sales," adding, "Same-store growth rates in the second quarter are projected at 13% for Lotte Department Store and Hyundai Department Store, and around 20% for Shinsegae Department Store."
In particular, analysts say the expansion of sales to foreign customers is serving as a key variable lifting the growth rate. The average share of foreign customer sales at the three department store groups rose from around 4% in the first quarter of last year to about 6% in the first quarter of this year, and expanded to about 8% in April. Lee Jin-hyeop, an analyst at Hanwha Investment & Securities, said, "At the current pace, the share of foreign customer sales is likely to exceed 10% as early as the second quarter, or by the third quarter at the latest."