The Shilla Duty Free beats Q1 expectations as offshore business climbs into the black

Korean duty free: A special report

Look out early next month for Martin Moodie’s compelling interview with The Shilla Duty Free President of Travel Retail Division In-gyu Han, part of a comprehensive on location round-up from the world’s biggest duty free market. It also includes interviews with:

• Lotte Duty Free CEO Kap Lee
• Hyundai Duty Free Managing Director Yuk Woo Seok
• Lotte Duty Free Director Main Downtown (Myeong-dong) Store Steve Park
• Shinsegae Duty Free MD Merchandising Team Director Seok-Ho Hong
• Entas Duty Free CEO David Yu
• Korean Air General Manager Inflight Sales Team Seung Joon Oh
• Incheon International Airport Corporation Executive Director/Concession Development Group Chang-Kyu Kim

SOUTH KOREA. Hotel Shilla, parent company of the country’s second-biggest travel retailer The Shilla Duty Free, has seen its previous loss-making offshore airport retail business move into profit amid record-breaking first-quarter earnings.

“We expected a good quarter but they really did outdo themselves. It seems the stars were aligned and in favour for the company this quarter.” – Equity analyst

Consolidated travel retail revenues (South Korea and offshore) rose 21% year-on-year to KW1,225.2 billion (US$1,055,534,304) for the period ended 31 March. Operating profit for the travel retail business surged by 73% to KW82.2 billion (US$70.8 million).

“We expected a good quarter but they really did outdo themselves,” one leading Seoul-based analyst told The Moodie Davitt Report. “Hard to see this continue though. It seems the stars were aligned and in favour for the company this quarter.

Korea Duty Free Association (KDFA) total market and The Shilla Duty Free sales growth comparison [Source: ©Moodie Davitt Research].
“Hotel Shilla’s earnings release was better than the highest forecast (highest operating profit forecast for 1Q19 KW70 billion) among sell side analysts and beat market consensus operating profit by 32%,” he continued.

The retailer’s overseas business (see details below) climbed into the black, posting an aggregate KW4.6 billion (just under US$4 million) operating profit.

Non-consolidated travel retail revenues (South Korea only) rose 23% year-on-year to KW950.4 billion (US$818.8 million), a particularly robust performance given widespread concerns over the impact of China’s new ecommerce law (introduced on 1 January) on daigou shopping in Korea.

Operating profit for the Korean travel retail business rose 55% to KW77.6 billion (US$66.9 million). Domestic duty free operating margin recovered to 8.2%, near the recent record-high level of 8.6% seen in 2Q18.

Industry insiders contacted by The Moodie Davitt Report speculated that large-scale daigou traders increased their scale to protect their absolute profits in 1Q19 in order to cope with China’s new e-commerce law (for example increased transportation costs, registration fees, and commissions paid to retailers). The increase in large-scale buyers resulted in lowered commissions expense for Hotel Shilla, which reported that its commission rate for the quarter was 8%, compared to 12% in 2018.

Source: ©Moodie Davitt Research
Source: ©Moodie Davitt Research

Offshore renaissance

Extrapolating the overseas performance from the two sets of results, shows that The Shilla Duty Free’s offshore airport business (Singapore Changi and Hong Kong International) posted sales of KRW274.8 billion (almost US$237 million). The overseas stores recorded an operating profit of KRW4.6 billion (US$3,962,992) – a sharp improvement on the KRW2.6 billion (US$2.2 million) loss in the same period a year earlier. [Note: The profit and loss of other overseas stores in Tokyo, Phuket and Macau, which operate in joint ventures, are accounted for in non-operation profit and loss].

Overseas airport duty free sales increased +13% year-on-year. Sales at Changi Airport grew 10% and operating profit turned positive compared to a year ago to KW1 billion (US$861,520). Sales at Hong Kong International Airport continued to grow with sales rising 19% year-on-year, driving KW3.5 billion (US$3 million) in operating profit.

Despite a record-breaking quarter, the company advised caution. China’s e-commerce law, intense competition between travel retailers both home and abroad, and other macro issues could weigh on future earnings, it said.

Hotel Shilla’s consolidated operating profit (including hotel & leisure) rose 85% to KW82 billion (US$70.6 million), up 85% and significantly ahead of expectations of KW62 billion (US$53.4 billion)

Source (all charts): Hotel Shilla
Home and away: The Shilla Duty Free’s Q1 performance in Korea (top) and overseas (below, left to right, Changi and Hong Kong airports) beat expectations.
(Above and below) Contrary to market fears, the daigou business has continued to prosper in early 2019 (Pictures: Martin Moodie).

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