Morning everyone, this is Chi-Hyun Kim, Head of IR. Welcome to the Lotte Shopping 2025 first quarter earnings conference call. Today we have Mr. Won-Jae Kim, CFO of Lotte Retail Headquarter. We also have other business representatives joining the call. Questions will be taken after the presentation. Before we get started, I would like to highlight the image on front cover of today's IR material, the Singapore premium coffee brand, Bacha Coffee. Lotte Department Store has secured the exclusive distribution rights of Bacha Coffee in Korea. The first store was introduced in August 2024 at Cheongdam District, and opened its second location at Lotte Department Store at main flagship. Its sales have consistently growing and OP turned into black in Q1 2025. Now, I will move to page one to explain first quarter review. Page one is the overall review of Q1 2025 consolidated financial performance.
Lotte Shopping first quarter revenue remained relatively stable YoY, by strong sales trend in overseas business, despite the challenging domestic business environment, such as domestic political crisis and slow economy. Operating profit was increased by 29% YoY, driven by profitability of oriented management and favorable performance in overseas business. As for the department store division, large size core stores have shown favorable sales growth, and more importantly, Lotte Mall West Lake Hanoi's operating loss turned into black for the first time in six quarters since the opening of the store. As for the domestic grocery unit, we have seen solid performances from renovated stores. Additionally, overseas hypermarket's revenue was increased by 10% and its OP was also up by 21%, thanks to the increased foot traffic both in Vietnam and in Indonesia. Other business divisions are showing improvements as well.
Lotte Hi-Mart has seen revenue turnaround for the first time in three years and seven months, and all three subsidiaries sustained improvement trend in operating profit. Page two is the highlight of 2025 Q1 consolidated financial performance. Revenue was KRW 3.5 trillion, indicating 1.6% YoY decline, resulted by domestic political crisis and unfavorable weather condition, despite continuous growth in overseas business and Lotte Hi-Mart's revenue turnaround. Operating profit was KRW 148 billion, indicating 29% increase, driven by increased profit in overseas business, strong performance from renovated stores and efficiency improvement effort. Net profit recorded KRW 18 billion, indicating 75.1% decline due to high comp base of the same period of last year.
Please note that we have attached the revenue and OP exposure breakdown by each segment on the right side of page three. Page four is the domestic department store unit. Revenue was KRW 775 billion, indicating 1.4% YoY decline.
Same store sales was increased by 1% with core stores renovation and hosting popular pop-up events. But the net revenue was slightly decreased due to lower exposure of high-margin fashion category sales. OP was KRW 128 billion, increased by 39% YoY, thanks to the SG&A optimization effort. Next is the domestic grocery business. Revenue was KRW 1.3 trillion, down by 4.3% YoY. OP was KRW 10 billion, indicating 73.4% decline, mainly due to aggressive promotions in response to major competitors' discount events, increase in labor costs regarding the ordinary wage standard change impact, and the transfer of the online grocery business from e-commerce to hypermarket as of October 2024. Next is e-commerce. E-commerce recorded KRW 28 billion of revenue, indicating 5% YoY decrease. Lotte On commerce sales was increased by strong GMV growth, product margin enhancement, and increased advertisement sales.
However, the revenue was decreased due to business portfolio transformation, including scale down of Lotte-affiliated company's website maintenance service. Operating loss was KRW 9 billion. Loss has been reduced dramatically, driven by gross profit margin enhancement and cost reduction through business portfolio transformation and the transfer impact of the online grocery business to hypermarket. Next is the overseas department store. Overseas department store's revenue was KRW 31 billion, indicating 6.2% YoY increase, and its operating loss has turned into profit recording KRW 2 billion. Both Vietnam and Indonesia businesses have seen increases in sales and OP. Especially Lotte Mall West Lake Hanoi has recorded 21.9% increase in revenue and sustained profitability improvements. As for the overseas hypermarket, the revenue was KRW 469 billion, indicating 9.5% increase, and its OP was KRW 21 billion, indicating 20.6% increase.
Both Vietnam and Indonesia units have shown solid SSSG trend through increased foot traffic and their OP were also increased. In particular, Vietnam hypermarket's OP margin has reached double-digit figures, recording 10.8%. Next is the Lotte Hi-Mart. Revenue was KRW 529 billion, up by 0.7% YoY. Despite the slow economic situation in Korea, Lotte Hi-Mart's both online and offline sales were increased, resulting the revenue turnaround. As for the home shopping, revenue was relatively stable, recording KRW 228 billion. The transaction volume was declined by 3%, but the net revenue indicated flattish induced by product margin enhancement, thanks to the high-margin category expansion, mainly in tangible goods. OP was KRW 12 billion, indicating 22.9% increase by SG&A optimization effort.
Next is the Lotte Cultureworks, our cinema division. Revenue was KRW 86 billion, weakened by 24.9% YoY due to the absence of blockbusters, resulting decline in theater attendance and box office sales.
In terms of OP, despite the SG&A reduction, a loss of KRW 10 billion was recorded, mainly due to weak sales trend in domestic box office sales. Next page is non-operating profit summary. Loss was KRW 104 billion. 2025 Q1 gains on foreign currency and derivative asset was KRW 0.7 billion, including foreign exchange gain of KRW 2.2 billion. But its YoY amount has decreased due to high comp base of home shopping's foreign currency deposit gain of KRW 6.4 billion in the same period of last year. The equity method profit was decreased due to weak performance from Hanssem, Lotte Card, and KDB Open Innovation Fund's strong profit last year. 2025 Q1 profit includes dividend income of KRW 6 billion, but 2024 Q1 profit includes lease accounting termination profit of KRW 29.3 billion regarding Cheongdam Department store closure and supermarket asset disposal gain of KRW 15.7 billion.
I'll now finish today's presentation here. Thank you for attending today's presentation. We'll begin the Q&A session. For your reference, the Q&A session's Korean-English interpretation will be sequential.
Now Q&A session will begin. Please press star one, that is star and one, if you have any questions. Questions will be taken according to the order you have pressed the number star one. For cancellation, please press star two, that is star and two on your phone. The first question will be provided by Jin-Hyeob Lee from Hanwha Investment & Securities. Please go ahead with your question.
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Good morning. I am Lee Jin-Hyeob from Hanwha Investment & Securities, and thank you for the opportunity to ask questions today. I have largely three questions. First, I read on the media yesterday that Megabox and Lotte Cultureworks are considering a merger. However, the details have not been provided yet, so it will be very helpful if you can elaborate on that strategy. Second question is regarding the equity method gains. I believe that the number has shown decline in recent financials. Also, the FRL Korea, the UNIQLO part of the equity method gains have not been explicitly presented. So please elaborate on the equity method gains. And third, we are into April and May now, so it will be great if you can share some of the revenue trends for Q2 for each business unit.
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Regarding your first question on the merger between Megabox and Lotte Cultureworks. We are, I think, in the same position in trying to turn around the business amid a challenging environment for cinema in Korea. It will be a great opportunity for the two countries to share the knowhow that they have accumulated over the years and strengthen business competitiveness. However, as to the details, it is a little too early to disclose. Once we mutually agree on the exact details of the business, we will be communicating that to the market. However, the main goal is that we are trying to create business synergy between the two companies and find ways to boost efficiency, attract new investment and also cooperation between the two major shareholders of those two film distributors. We believe that it will significantly help the theater business to turn around.
We will be disclosing more details once we have some more confirmed information.
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Regarding your second question regarding equity method. KRW 28 billion decline was recorded for Q1, and the main reasons for that have already been mentioned in the presentation. It would be Hanssem, Lotte Card, and KDB Innovation factors. As for UNIQLO, the operating performance did improve and increase on a QoQ basis. However, as to the closing dates, there are some differences. We believe that because of this kind of closing standard difference in Q1, the equity method gain went down by KRW 6 billion against the previous quarter. But these are non-ordinary items and should not be observed from next quarter onwards.
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Next, I will go over the business trends of the department stores. The political environment is improving in Korea. We believe that this will have positive impact on overall consumer sentiment, and this should lead to stronger revenue growth from the retail segments. The fashion category was quite weak in the first quarter due to unfavorable weather conditions. However, the category has turned to positive growth since May, and so we believe that there will be overall recovery of revenue in the fashion category. In Q2, the flagship store will be completing its renovations and will be opening with renewed facilities. This should also have a strong positive impact to overall revenue growth. The overseas stores are also doing well. The same-store sales growth has always been around 20% or even higher.
Overall for the department stores in Q2, we believe that the performance in earnings will be better than Q1.
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Next, I will go over the hypermarket and supermarket business. The recent consumer consumption pattern is typical to that of economic downturn. There has been strong demand for food category and value for money items within our stores. That means that the non-food category has been experiencing a decline in consumption. However, based on the trends that I just mentioned, in April and all the way up to May, we believe there will be a slight growth of revenue. At the same time as the Homeplus issue becomes more long term, I believe that our store's revenue have also benefited from that issue. Overall, we believe that Q2 revenue should show improvement compared to Q1.
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Next, I will go over the e-commerce business. Following Q1, we believe that in Q2, e-commerce business should also be able to generate double-digit growth. Of course, there is the negative impact from the business transfer. However, if we exclude that business transfer impact, the e-commerce should continue to show very strong growth. I would like to highlight that our e-commerce business is serving the role of an online gateway for the non-distribution subsidiaries of the group. For example, Lotte Group has Lotte Giants, which is a baseball team, and we are exclusively selling the goods of Lotte Giants. We opened an exclusive store within our platform, and that has generated around 20,000 in terms of traffic. We believe that we will be strengthening our role as the online gateway for the Lotte Group, and this should continue to generate higher traffic for our platform.
Based on this role, we believe that the e-commerce business should continue to show strong growth in Q2.
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We will receive the next question.
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The following question will be presented by Young-h oon Joo from NH Investment & Securities. Please go ahead with your question.
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Good morning. I am Joo Young-hoon from NH Investment & Securities, and thank you for the opportunity today. I have two questions. One would be regarding the impairment losses that were booked in previous quarter. It was mentioned before that this would lead to a reduction of depreciation expense. Do you have that positive impact for Q1 for each business unit? Second question is regarding the property taxes for Q2. What would be the ballpark number for the property taxes for Q2?
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Regarding your first question on depreciation expense. On a consolidated basis in Q1, the depreciation expense declined by KRW 23 billion YoY. However, the details still need to be analyzed because there is the impact of the impairment losses that we booked. At the same time, we have disposed some of our assets as well. In order to segregate those impacts, we believe we need a little bit more time to analyze the details.
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Regarding your question on the property taxes for Q2, we are currently conducting a survey of the official value of the assets that we hold. We have disposed some of our properties and assets last year as well. We are currently aggregating the impact of all of these exercises that we conducted last year. As for the detailed numbers, our IR team will be communicating with the market very soon as soon as we finish those studies. [Non-English content]
Next question, please.
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The following question will be presented by Hyeeun Kim from Morgan Stanley. Please go ahead with your question.
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Good morning. My name is Kim Hyeeun from Morgan Stanley. I have two questions. First question is regarding your overseas business. The margins that we are seeing from the department stores and the hypermarkets in overseas business segments have been improving very significantly, especially regarding the business in Vietnam. I would like to know if you believe that this improvement is sustainable. I would also like to have an idea on what you believe is the normalized margin for your overseas business. Second question is regarding Ocado. I think you mentioned in your presentation that you expect around KRW 900 million in terms of cost for this quarter. Would that be the average cost that you expect for the quarters in the future?
In terms of the growth, do you believe that the total revenue, the gross revenue and the overall revenue growth, what would be your idea for the appropriate level of growth for the future?
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For the department stores overseas, our main stores are Hanoi, Ho Chi Minh, Jakarta, and Lotte Mall West Lake Hanoi. For Hanoi, Ho Chi Minh, and Jakarta, the operating margin has been around 5%. Over mid long term, given that these stores are largely stabilized, the expected margin will be around 5%. However, for the Lotte Mall West Lake Hanoi, we believe that it can generate higher margins. Currently, Lotte Mall West Lake Hanoi is still booking its depreciation expense, and that will be one of the main reasons why it is still recording on a loss. We believe towards the end of this year, the Lotte Mall West Lake Hanoi store may also turn to profit.
As for the growth of Lotte Mall West Lake Hanoi, we believe that it can continue to show very strong growth, and this would imply that the operating margin for Lotte Mall West Lake Hanoi can be higher than 5%.
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Second, regarding the hypermarkets in Indonesia and Vietnam, we believe that this business should continue to show strong growth. K-culture and K-food are quite popular in this area, and we are also replicating the more advanced distribution model of Korea in these countries. We find that our customer base in Indonesia and Vietnam are strongly welcoming the efforts that we are making there. As for the formats, currently it is mainly focused on hypermarkets, but we are also planning to diversify the formats. We will be taking a flexible approach to ensure that we can achieve further growth. As for the future expectations, we believe that this business will continue to show robust growth. In terms of margins, I believe that there is additional room for improvements given that we can introduce more private brands and also implement automation to decrease the SG&A item.
Based on these efforts, we believe that operating margin should show better numbers in the future. Then regarding your question on the cost associated with Ocado. In Q1, we booked a cost associated to that, as mentioned in the presentation. But we believe that as we actually implement the business, we will be able to boost efficiency and strengthen integration, and this should help reduce the cost associated with Ocado. In future quarters, we believe that we will be able to present more improved numbers.
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I would just like to highlight regarding the performance of Lotte Mall West Lake Hanoi. In 2024, it recorded a loss due to depreciation expense. But as mentioned in the presentation today in Q1, it recorded a profit and we believe that for the full year, Lotte Mall West Lake Hanoi will be able to record a profit as well.
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Next question, please.
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The following question will be presented by Sang-j un Park from Kiwoom Securities. Please go ahead with your question.
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Good morning. I am Park Sang-j un from Kiwoom Securities, and I have largely three questions. First question is regarding your overseas business. It has been quite successful, your expansion into overseas businesses in the department store and the grocery business. I would like to have a better understanding of your expansion plans. Based on this success, are you planning to expand your branch network in these markets? If so, what would be the schedule or pipeline? Second question is regarding Lotte Cultureworks. The numbers that were reported for Q1 I think are quite weak. What are your plans to improve the business, and what is your expectation for Q2, Q3, and Q4? My last question is regarding Homeplus.
There has been a lot of media reports, and I think there has been many issues that were arising from the Homeplus incident on a monthly basis. I would like to know the performance of the stores that are in direct competition with Homeplus. For example, in commercial areas that has overlap between Homeplus and yourself. I would believe that the revenue fluctuation would have been quite dynamic, and so it would be helpful if you can share some of the revenue trends that you have observed for your stores that are in direct competition with Homeplus stores nearby. I believe that the inventory and the receivable and payable situation of Homeplus would have largely changed over the last couple of months. How is this impacting your business, and how do you plan to respond to this issue?
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I will take your first question. On the CEO IR Day, we mentioned that we expect overseas business revenue contribution to grow to around KRW 3 trillion, and to that end, that we would establish an IHQ. That has been progressing according to plans. So by end of Q2 or Q3, we would have fully established international headquarters. Also on page three, you can see that from this quarter, we have been also sharing the breakdown between the domestic and international business, where revenue and operating profit and so forth. In the broader sense, we are working to expand and grow our overseas business.
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As for the department store business in overseas, especially Vietnam. Based on the success of Lotte Mall West Lake Hanoi, we are planning to expand our presence there. We will be working together with other group affiliates to launch large-scale malls. We are reviewing some geographies in Hanoi, Ho Chi Minh, and some second-tier cities in Vietnam. Once we have more concrete plans, we will be sharing that with the investor community.
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As for the hypermarket business in Vietnam and Indonesia, we are planning to continuously add more stores and expand our store network. To that end, we are reviewing and securing land in major cities and developing our network expansion plan. Once we have more confirmed details, we will be communicating that to the market. I would like to highlight that in the process, we will not only be focusing on large hypermarkets. Like mentioned earlier today, we are planning to diversify the format in terms of the size and the key features of those stores, and I think that can help accelerate our efforts. Again, once we have more concrete details, we will be sharing that with the market.
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Next, I will go over Lotte Cultureworks. Like mentioned in Q1 2025, the earnings and the numbers weakened mainly because there was a lack of blockbuster films, and that led to a reduction in visitation and revenue. Also, there is the high base effect because in February last year, Exhuma, a Korean film, was released which attracted 10 million moviegoers. That also had an impact on our financials this quarter. To offset some of the foreign film last year, the lack of foreign films last year, in 2025, Mission: Impossible – The Final Reckoning and Avatar: Fire and Ash, which have very strong fandom, are expected to be released, and this should help restore some of the visitation to the box offices. There are some Korean films of large scale that are expected to target the summer season, and this should also help recover the performance.
As a company, we are making conservative assumptions and we are making utmost effort to boost the efficiency of cost and manpower to be able to present better results in the coming quarters. Thank you.
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Next, I will address your question regarding the stores in direct competition with Homeplus. Since the issue occurred in the market, for the first month, we did not really see a lot of volatility. I think the impact has become more visible as we get into April, and especially the latter half of April. I think in that sense, in recent weeks, we have seen more concrete benefits from this incident. For example, the stores that are in direct competition, the revenue trends in April have shown very strong performance compared to previous quarters. Against this backdrop, we are largely implementing two strategies to try to make the most of what is happening in the market at the moment. First, we are trying to attract customers that were more captive of Homeplus.
In that sense, we are implementing special programs for those particular stores so that they can attract new customers and also care for those customers so that we can take this opportunity to capture and expand the new customer base. Second is regarding the suppliers. This was largely a three-player market, now is turning into a two-player market. Given that one of the three players would be reducing the procurement and sourcing of goods, we have been in separate meetings with some of the main suppliers to try to secure volume of popular items and also to sign on more special offers and favorable terms with those manufacturers and suppliers. We will be focusing and concentrating those resources to the stores that are currently in competition with the competitor.
Based on these efforts, we believe that we will be able to enjoy stronger benefits from what is happening in the market at the moment.
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Next question, please.
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The following question will be presented by Lina Oh from LS Securities. Please go ahead with your question.
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Good morning. I am Lina Oh from LS Securities, and I have two questions today. First is regarding your strategy of Zeta, and you are also opening a new CFC. How would those apps and new fulfillment centers add to the competitiveness of your business? Naver recently had their earnings call, and they mentioned they will be partnering up with Market Kurly. This will mean that they will be strengthening their fresh foods and F&B business. Also, as you know, they have been quite strong in this area with their Plus Store app and so forth. What would be our competitive strengths, and how do you plan to further grow and develop this business? Second is regarding the e-commerce. It was already mentioned today that the overall numbers and financials and growth have all been showing positive trends.
What would be, aside from the costs, your overall business and operating strategies? Also, during the presentation, it was briefly mentioned that advertising revenue is on growth trend as well. Can you be a little bit more detailed in terms of the growth rate and the numbers? Thank you.
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Yes. Regarding the Zeta app, it was launched in April this year. With the launch of the new app, there are largely three aspects that we need to monitor. First is the migration of existing customers and users. Second is system stabilization. Third is customer experience. Ensuring that there is customer convenience throughout the entire process from order to payment. Currently in all of these three aspects, the app is ongoing as planned. The next step is to ensure that we can further penetrate the market, and these efforts will be concentrated in the second half of this year. As to your question regarding the competitiveness of our platform. First of all, we have long history of dealing and handling fresh foods and goods.
We have both a hypermarket and supermarket business, which are quite sizable, and we have already established a strong value chain that is based on long-standing relationship with a lot of the producers. I think that direct relationship is one upper hand. Another aspect is that we have experience in terms of storing and developing products in the fresh food category. We have the APCs and processing centers that can cater to the demands of the current customers. Based on this very strong system, we can ensure that we offer high-quality goods and that we also provide a diverse array of products to ensure customer satisfaction. On top of that, we are adding Ocado, and its automated system should significantly contribute to the diversity, the quality and the established relationships that we already have with long-standing suppliers.
I think that is one key strength that we have over some of the competitors in the market. As mentioned today, we are also building a fulfillment system. Once the CFC is completed, it should also give us more strength in terms of the delivery aspect as well. All of these factors combined, I think we are in a good position in the market.
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Regarding the e-commerce business, you asked about the strategy excluding the business transfer. I would like to go over the strategy of our commerce platform. I think we are in a transforming process. Initially, I think we were more focused on open market platform based on price competitiveness. In more recent times, we are focusing on establishing a vertical platform based and mainly driven by fashion and beauty categories. It also means that we are seeing the higher contribution from trendy brands rather than legacy brands. This is what we mean when we say we want to become a vertical platform. That vertical platform will also be concentrating on fashion and beauty categories. At the same time, we already mentioned today that we are playing the role as a online gateway for Lotte Group.
This means that we are becoming a online entry point for the Lotte members. These two strategies would be our main strategies going forward. You also asked about the advertising revenue. Advertising revenue is, of course, closely linked to platform traffic. As our platform grows and attracts more traffic, the advertising revenue should grow accordingly. In terms of the growth trends, I think we have been seeing strong growth momentum since second half last year. In Q1 and Q2 this year, I think we will be seeing similar trends in terms of growth. However, as we go into the second half, due to the high base effect, the growth numbers can slow down, but I believe in overall fundamentally, the e-commerce should continue to show robust growth.
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[Foreign language] There are no questions in the queue right now.
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Since there are no more questions, we'll now finish today's earnings announcement. Further questions will be answered by IR team. Thank you for joining today's conference.