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Department store earnings to grow in 2H25

2Q25 review: Weak results from department stores and Shinsegae International

For 2Q25, Shinsegae reported below-consensus results, with net revenue of W1.69tr (+6% YoY) and operating profit of W75.3bn (-36% YoY). The company was negatively affected by its high cyclical exposure, with unstable domestic demand weighing on both the core department store business and macro-sensitive subsidiaries such as Shinsegae International (fashion) and Casamia (furniture).

Department stores posted gross revenue of W1.75tr (flat YoY) and operating profit of W70.9bn (-13% YoY; OP margin of 4.1%). Sales began to recover in May, allowing overall revenue to remain stable, but operating profit declined slightly due to continued depreciation expense pressures related to major store renovations. Depreciation expenses were approximately W6.4bn (vs. W5bn in 1Q25). With further renovations scheduled through 1H26―including the renewal of the deli section at the Gangnam branch and the reorganization of the main wing (“The Reserve”) at the flagship branch―depreciation expenses are likely to continue rising.

The duty-free unit reported net revenue of W605.1bn (+23% YoY) and an operating loss of W1.5bn (turning to a loss YoY; narrower loss QoQ). Earnings continued to recover from the 4Q24 bottom, with losses narrowing QoQ for the second straight quarter. Downtown stores remained profitable (mid-single-digit OP margin) amid easing daigou competition and a higher revenue mix of independent travelers (42%). In addition, airport store losses slightly narrowed, partly due to the adoption of a sales-linked rent calculation system for some Terminal 2 operations (to be in place through year-end).

Among subsidiaries, Shinsegae International and Casamia were hit especially hard by weak demand, with both experiencing revenue declines and operating losses. In particular, Shinsegae International’s domestic fashion sales fell 18% YoY, and increased marketing expenses for cosmetics further squeezed profits.

In 2H25, higher department store revenue to help offset rising costs

While the increase in fixed costs is disappointing, we still see potential for profit growth if revenue expands sufficiently. Based on our current depreciation expense assumptions, we estimate that same-store sales (SSS) would need to grow by around 5% to ensure profit growth. Consumer sentiment is rebounding, with department store revenue in July-August estimated to have risen more than 5%. For 2H25, management is guiding a 7% YoY increase in revenue and a W10bn YoY increase in operating profit; we think these targets are achievable, given current sales trends. Furthermore, with the consumption environment continuing to turn more favorable for cyclicals, we expect Shinsegae International and Casamia to stage recoveries in 2H25. All in all, we believe earnings visibility has improved. Reflecting sector-wide multiple expansion, we raise our target price to W210,000 (from W200,000).