E-Mart, Lotte Shopping hit by US retailers' earnings shocks

Shares in E-Mart Inc., South Korea’s largest supermarket chain, have been hovering near their lowest level in almost two years, on the back of a sharp decline in its first-quarter results and after two US retail giants Walmart and Target stunned the market with a cut in their earnings outlook.

The weak earnings guidance by both Walmart and Target this week highlighted the growing risk posed by inflation for retailers, long considered inflation-hedge stocks.

Spiraling raw material and marketing costs and higher wages overshadowed the outlook for both online and offline stores, with South Korea's consumer prices spiking to 4.8% in April, the fastest pace of growth since October 2008.

On Thursday, the share price of E-Mart tumbled to as low as 130,000 won ($102), its weakest intraday level since August 3, 2020. On Friday, it crawled up 0.9% to finish at 116,500 won, versus a 1.81% rise in the broader Kospi index.

Shares in Lotte Shopping Co. slid nearly 4% on Thursday, marking its biggest percentage fall in about a month, despite swinging to a net profit in the January-March quarter. On Friday, the country’s leading department and discount store operator edged down 0.7% to end at 96,300 won, its lowest closing level in more than a week.

Following E-Mart's poorer-than-expected quarterly results, KB Securities analyst Park Shin-ae revised downward her operating profit forecast for the company by 57% to 209.1 billion won ($164 million) for all of 2022 and cut its target price by 20% to 160,000 won.

She expects the retailer's e-commerce platform SSG.COM to widen losses to 130.7 billion won this year, while Gmarket Global, the operator of online malls Gmarket and Auction, is likely to turn to an operating loss of 73.8 billion won in 16 years.

The analysts also said in a research note that Starbucks Korea, in which E-Mart holds a majority stake, would likely report a fall in operating profit, weighed by higher wages and other costs. 

Mirae Asset Securities also lowered its target price on E-Mart by 20% to 180,000 won on May 23.

But both KB and Mirae Asset maintained their buy recommendation on the stock.

Last week, Lotte Shopping said it swung to a net profit in the January-March quarter, with operating profit up 11% to 68.7 billion won. But its revenue slipped 3% to 3.8 trillion won.

Some analysts remain upbeat on domestic retail stocks, saying that the economic reopening should revive consumer spending in the coming months.

"South Korean retailers are not as much vulnerable to wages and logistic costs as Walmart and Target are," said Kiwoom Securities analyst Park Sang-joon.

"We need to take into consideration the economic reopening and subsequent recovery in consumer demand from the second quarter." 

Write to Sang-Hoon Sung at uphoon@hankyung.com
Yeonhee Kim edited this article