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| Huh Yeon-soo, GS Retail CEO |
GS Retail is facing a bleak outlook as its flagship convenience store unit grapples with rising labor and other costs amid intensifying competition.
Its hotel unit, which operates the Grand InterContinental Hotel and other hotels, has been hit hard by the declining number of Chinese tourists; while its supermarket unit has failed to rebound amid prolonged sluggish consumer spending.
Following news of a second-quarter earnings shock Thursday, brokerage firms have been rushing to downgrade their outlook for GS Retail, advising investors to stay away.
In the second quarter, the company, headed by CEO Huh Yeon-soo, had 2.09 trillion won ($1.85 billion) in sales, up 12.8 percent. But its operating profit plunged 21.7 percent to 53.1 billion won.
Securities analysts had expected its convenience store franchise, GS25, would have generated larger profits than the same period last year, given the launch of "home meal replacements" and other products amid the growth in single-member households.
But GS25 failed to meet market consensus, with its operating profit falling 5.8 percent to 64.2 billion won, despite a 14.3 percent sales rise.
The firm's hotel unit did not live up to market expectations either, losing 800 million won during the March-June period after attracting fewer Chinese guests.
"GS Retail won't likely make a turnaround anytime soon," NH Investment & Securities analyst Lee Ji-young said. "In addition to fiercer competition, business conditions will deteriorate for GS25 and other franchises as they face more stringent antitrust rules and other regulations. A 16.4 percent hike in the minimum wage planned for 2018 will certainly chip away at the firm's profitability."
Lee also said GS Retail's hotel business will remain in the doldrums as it struggles to fill rooms. "Unless Chinese visitors return en masse, the Grand InterContinental Hotel and others will continue to face a hard time," he said.
NH Investment & Securities lowered its target price for GS Retail to 49,000 won a share from 57,000 won, saying the firm's plan to extend 75 billion won to GS25 franchisees next year to make up for the minimum wage increase will seriously hurt its bottom line.
Daishin Securities also cut the target price by 23 percent to 46,000 won from 60,000 won and Hanwha Securities by 19.6 percent to 45,000 won.
On Thursday, GS Retail shares fell 15 percent, or 7,400 won, to 41,500 won, before bouncing back 0.84 percent, or 350 won, to 41,850 won Friday.
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