Hotel Shilla’s fourth-quarter travel retail revenues decreased by 38 percent year-on-year to KRW608.5 billion (USD454 million). However, operating profits surged 98 percent to KRW25.2 billion (USD18.8 million).
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The Shilla Duty Free’s downtown duty free revenues decreased by 63 percent year-on-year while airport sales, buoyed by the accelerating travel recovery, increased by 235 percent.
The group said it would focus on maximising business efficiency in Q1 by responding to changes in the business environment and demand in the travel retail market.
The Shilla Duty Free will begin two key ten-year concessions at Incheon International Airport on 1 July.
One (DF1) is a 17-store, 4,258-square-metre contract covering liquor & tobacco and fragrances & cosmetics. The other (DF3) involves 12 fashion and luxury stores over some 4,709 square metres of space.
“Shilla seems to becoming better off [in profit terms] thanks to lower daigou commissions,” one experienced Korean duty free observer said.
“From a brand’s point of view this might seem weak as top-line revenue decreased so significantly, yet the company did more profit (3x) than full year 2022 in just one quarter,” one longtime brand executive said.
“They are still not as strong as in 2021 profitability-wise in percentage or value but they are on track to having a newer business model to calm investors.
“The brands I talk to are scared of Korean travel retail losing too much ground but if they saw Shilla’s profitability growth they would understand their path, which confirms they are not going away.”
In a generally upbeat note, Goldman Sachs attributed The Shilla Duty Free’s profit increase to an improved payback ratio (i.e. combined daigou rebate/commissions) driven by 1) quarter-on-quarter reductions in the daigou payback rate and 2) a favourable customer mix shift.
The latter was driven by faster than expected recovery in non-daigou traffic (including Korean outbound) which has begun to boost margins in the duty free business, the note said.
Daigou differentiators
Commenting on the revenue slippage -25 percent below Goldman Sachs estimates and worse than the channel’s -27 percent year-on-year decrease in the quarter, the firm said part of the variance may be explained by the change in daigou discount terms.
This resulted in a quarter-on-quarter and year-on-year increase in the portion of the discount that is directly netted off gross sales’ proportion of discounts (as opposed to the portion that gets captured as commission in selling, general and administrative expenses), Goldman Sachs concluded.
Issuing a ‘Buy’ rating, the firm said: “The solid profit beat in 1Q23 strengthens our confidence in Hotel Shilla’s margin story driven by customer mix improvement/enhanced profitability focus.”
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Quoting management, the report said Shilla’s Incheon, Singapore, Hong Kong and Macau airport passenger numbers had recently recovered to 60 to 70 percent/80 to 90 percent/30 to 40 percent/30 to 40 percent of pre-pandemic 2019 levels, respectively.
“Management noted both domestic and overseas duty free shops are generating profit and expects to maintain above BEP [break-even ponit] going forward.”
(Source: The Moodie Davitt Report)