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Significantly undervalued

3Q25 review: Narrowing the gap with department store peers

For 3Q25, Shinsegae reported net revenue of W1.64tr (+6% YoY) and operating profit of W99.8bn (+7% YoY), in line with expectations. In department stores, the company is gradually narrowing the performance gap with competitors, supported by the reopening of key locations following renovations (YoY growth in gross revenue in 3Q25: +1.4% at Shinsegae, flat at Hyundai Department Store, and +2.8% at Lotte Department Store). With the flagship store in Myeongdong scheduled to reopen completely in November, we expect same-store sales (SSS) growth to rebound further.

Department stores posted gross revenue of W1.71tr (+1% YoY) and operating profit of W84bn (-5% YoY; OP margin of 4.9%). Gross revenue growth has been recovering vs. 1H25 levels (-1% YoY in 1Q25 and flat YoY in 2Q25), aided by: 1) the opening of the Gangnam branch’s renovated food court/deli in August; and 2) the phased reopening of the flagship store in 2H25. The rebound has been especially pronounced at renovated stores; gross merchandise sales (GMS) growth (YoY) at the Gangnam branch reached +8% in July, +9% in August, +13% in September, and +17% in October, with the flagship store seeing gains of +2%, +3%, +4%, and +6% over the same months. For department stores as a whole, GMS rose 16% YoY in October, signaling a clear recovery.

Sales to foreign shoppers increased 56% YoY, accounting for 5.1% (+1.1%p YoY) of total sales. At the flagship store, foreign shoppers accounted for 16% of sales, rapidly approaching the pre-renovation level (20%). The Gangnam branch, which historically has not been a major draw for foreign shoppers, has seen a sharp rise in foreign visitors following the food court/deli renewal, with their sales mix reaching 7% in 3Q25.

The duty-free unit posted net revenue of W538.8bn (+14% YoY) and a narrower operating loss of W5.6bn. While rent expenses at Incheon International Airport (IIA) rose, profits from downtown locations helped limit the overall loss. Of note, Shinsegae has decided to exit IIA’s DF2 zone; with quarterly losses at the airport amounting to W10-20bn, we expect the duty-free business to turn profitable after the withdrawal.

End of renovations, likely duty-free turnaround, and attractive valuation

Visibility on an earnings turnaround in 2026 is improving. The department store business should see full-year contributions from the renovated Gangnam and flagship stores, while the duty-free unit is likely to turn profitable from Apr. 2026, following the DF2 exit. Earnings momentum from department stores has lagged peers due to renovations, while the duty-free unit has faced structural headwinds, resulting in a weaker share performance for Shinsegae (vs. peers). However, these negatives should soon dissipate. We raise our target price to W280,000 (from W240,000), as we lifted our earnings estimates. Valuation is highly attractive (12-month forward P/E of 6x), and earnings visibility is solid. We maintain our Buy rating on Shinsegae.