Deteriorating cash flow at Korean retailers bodes ill for inventory and financial outlook

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[Photo by MK DB]

South Korean retail giants Lotte Shopping, Shinsegae and Hyundai Department Store have come under heavy pressure to gain investor confidence in their prospects amid rapidly deteriorating cash flow.

All three retail majors are expected to report better earnings statements this year compared to the same period a year ago. But brokerages point to deteriorating cash flow.

Lotte Shopping’s cash flow is expected to drop 27% from 1.83 trillion won ($1.3 billion) in 2021 to 1.33 trillion won this year, Shinsegae 35% and Hyundai Department Store 52% . The deterioration is expected to continue throughout next year.

Cash flow can affect stock price more than earnings because it measures future growth potential, investments, and dividends.

Shares of Lotte Shopping are down 82% from their 2011 peak, Shinsegae 55% from 2018 and Hyundai Department Store 68% from 2011. The long-awaited pent-up demand was short-lived as consumers are burdened with inflation, rising interest rates and the anticipation of an economic slowdown.

Cash flow deteriorated due to the accumulation of working capital. According to Kiwoom Securities and Hanwha Investment & Securities, Lotte Shopping’s working capital – the difference between current assets and liabilities like accounts payable and debt – could drop from 2.3 trillion won last year to 2.6 trillion won this year. In 2023, it is expected to reach 2.12 trillion won. Shinsegae and Hyundai Department Store’s working capital is expected to increase 52 percent and 17 percent respectively this year compared to last year.

Higher working capital may indicate that a business has too much inventory or is not investing its excess cash.

Retailers would have to convince shareholders that they are earning enough to alleviate concerns about cash flow.

Lotte Shopping’s four-year organizational restructuring is expected to be reflected in this year’s net profit. Losses at the Lotte Cultureworks film production and distribution unit also declined as movie theaters reopened. According to Shinhan Financial Group, Lotte Group will post a net profit of about 156 billion won this year for the first time in six years. Hi-mart and the home shopping sector, however, are expected to post sluggish profits due to lower demand for home appliances.

Major Shinsegae subsidiaries such as Shinsegae International are expected to contribute to its profits. According to Hana Securities, Shinsegae International’s profit is expected to jump 32% from a year earlier. Growth in Shinsegae’s textile business should also help boost profitability. Shinsegae’s duty-free business, however, will decline sharply due to Covid lockdowns in China.

Hyundai Department Store’s profits will be greatly helped by Hyundai Seoul achieving monthly sales of 70 billion to 80 billion won. Hyundai Department Store also acquired a majority stake in Zinus in March this year and the mattress company’s sales are expected to rise from 2 trillion won to 3 trillion won, although it is not clear if this will happen. will be reflected in the consolidated results. The high marketing costs of its department stores, however, could weigh on profit margins.

Shares of Lotte Shopping were down 2.55% at 87,800 won, Shinsegae was down 1.18% at 208,500 won and Hyundai Department Store was down 0.94% at 63,200 won as of midday Friday.

By Cha Chang-hee and Susan Lee

[ⓒ Pulse by Maeil Business News Korea & mk.co.kr, All rights reserved]

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