Hong Kong, February 21, 2020 -- Moody's Investors Service has changed the outlook on Lotte Shopping
Co., Ltd. to negative from stable.
At the same time, Moody's has affirmed the company's
Baa3 issuer rating.
RATINGS RATIONALE
"The change in outlook to negative reflects our expectation that Lotte
Shopping's financial leverage will remain elevated over the next
1-2 years, after weakening significantly in 2019,"
says Wan Hee Yoo, a Moody's Vice President and Senior Credit Officer.
"While the company's potential restructuring measures may lead to
better profitability over the next 2-3 years, there are uncertainties
and execution risks over such plans," adds Yoo.
Moody's estimates that Lotte Shopping's adjusted net debt/EBITDA
increased to 6.1x in 2019 (5.8x excluding one-off
expenses in H2 2019) from 4.6x in 2018 because of weakened earnings,
increased net debt and the implementation of new accounting standards;
with the change in standards having the effect of increasing the company's
adjusted net debt/EBITDA by around 0.5x-0.7x.
According to Lotte Shopping, the company's consolidated operating
income fell by 28% to KRW428 billion in 2019 from KRW597 billion
in 2018. Net losses for 2019 totaled KRW854 billion because of
significant impairment charges.
The fall in operating income was mainly caused by weaker performance in
its domestic hypermarket, supermarket and electronics retail businesses,
as well as one-off tax payments and depreciation charges in the
second half of 2019.
Same-store sales growth for Lotte Shopping's domestic department
store shrank by 1.4% during 2019. For the domestic
hypermarket, the fall was 6.0% during the same period,
driven by intensifying competition with e-commerce.
The company's reported net debt - excluding lease liabilities
- grew to KRW6.3 trillion at the end of 2019 from KRW5.1
trillion at the end of 2018, mainly because of its acquisition of
majority stakes in three Lotte group affiliates, which had sizable
debt.
Moody's expects Lotte Shopping's adjusted net debt/EBITDA
to remain largely stable in 2020 from 6.1x in 2019, but to
improve to 5.5x in 2021, because of a moderate increase in
earnings in 2021 and a modest decrease in net debt levels. This
level of financial leverage is weak for the company's Baa3 rating
category.
Moody's expects Lotte Shopping's adjusted EBITDA to remain
largely stable in 2020 compared with 2019, before improving moderately
in 2021. This expectation reflects (1) the continued weak performance
in its key domestic retail businesses; (2) the temporary negative
impact from the coronavirus outbreak during 1Q 2020 that would partly
offset the absence of one-off expenses in 2019; and (3) higher
earnings for 2021, mainly through the lack of disruption from the
coronavirus outbreak.
Moody's also notes that Lotte Shopping's department store
business should be better placed to fend off increased competition from
the e-commerce industry relative to its hypermarket business,
but that it would be more vulnerable to the effects of the coronavirus
outbreak.
The assumption of a modest decrease in reported net debt reflects an expectation
that the company will take a conservative approach to capital spending.
In response to the challenging operating conditions, Lotte Shopping
said that it plans to restructure 30% of its domestic offline stores
of around 700. While the degree of restructuring and the specific
timing are not disclosed, Moody's notes that this measure
will help restore profitability over the next 2-3 years,
although Lotte Shopping could incur related restructuring costs over the
next 12-18 months. Moody's projections do not incorporate
the effect of such measures, given the uncertainty over the timing
and magnitude of the restructuring.
Lotte Shopping's Baa3 rating continues to reflect the company's leadership
position in the domestic department store industry, its diversification
into other retail businesses, such as hypermarkets and supermarkets,
and the likelihood of support from its parent, Lotte Corporation,
if and when needed.
These strengths are counterbalanced by the challenging operating environment
for its domestic hypermarket and electronics retail businesses,
the company's moderate profitability, and weak financial leverage.
Lotte Shopping's rating also takes into account the following environmental,
social and governance factors.
Lotte Shopping is exposed to a structural shift of consumer preferences
toward e-commerce, which has increased the pressure on domestic
offline retailers, particularly in its hypermarket, supermarket
and electronics retail businesses. Although the company is implementing
counter measures, such as ongoing investments in the online business
and restructuring of offline stores, this structural shift should
strain its profitability at least over the next 1-2 years.
Moody's also takes into account Lotte Shopping's aggressive
financial policy, which is reflected in its high financial leverage.
This risk is mitigated by its reasonably prudent shareholder return policy
and intention to restructure loss-making offline stores.
The outlook on Lotte Shopping could return to stable, if the company
improves its financial profile by enhancing profitability or reducing
net debt, such that adjusted net debt/EBITDA remains below 5.0x-5.5x
on a sustained basis.
Moody's could downgrade Lotte Shopping's rating if the company's
profitability remains weak, or it undertakes large-scale
investments, such that adjusted net debt/EBITDA exceeds 5.0x-5.5x
on a sustained basis.
The principal methodology used in this rating was Retail Industry published
in May 2018. Please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
Lotte Shopping Co., Ltd. is the leading retailer in
Korea by revenue. It owns the country's largest department store
by revenue, and third largest hypermarket network by the same measure.
The company also engages in other businesses, such as supermarkets,
internet/TV home shopping, cinemas, premium outlet malls and
electronics retail.
REGULATORY DISCLOSURES
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security or pursuant
to a program for which the ratings are derived exclusively from existing
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be assigned subsequent to the final issuance of the debt, in each
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The first name below is the lead rating analyst for this Credit Rating
and the last name below is the person primarily responsible for approving
this Credit Rating.
Wan Hee Yoo
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Chris Park
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
