[KH Explains] Lotte goes all

South Korean retail giant and the nation's fifth-largest conglomerate Lotte Group is reportedly resorting to liquidating billions of won in assets as it grapples with flagging performance posted across its major subsidiaries.

According to the Financial Supervisory Service's electronic disclosure board, Lotte Holdings reported 211.7 billion won ($157 million) in operating profits in the January-June period this year, down 19 percent from the same period last year (261.2 billion won). Lotte Holdings, which holds stakes in more than 20 affiliates and subsidiaries, obtains profits that stem from subordinate companies' dividends, trademark rights and management support.

During the first half of the year, the holding unit’s dividend income – its biggest revenue source – also suffered an almost 30 percent on-year decline to 104.2 billion won.

The sharp dive in Lotte Holdings' profits, which function as a metric for the group's general financial status, is largely attributed to the spluttering performance of its two major subsidiaries, Lotte Shopping and Lotte Chemical.

Lotte Shopping, which oversees the operation of Lotte Group's major retail affiliates such as Lotte Department Store, Lotte Mart and Lotte Super, logged 3.6 trillion won in sales and 51 billion won in operating profits during the second quarter, seeing a 7.2 percent and 30.8 percent on-year decrease, respectively.

Major reasons for its sluggish performance include a slowdown in consumer sentiment for its department store business during the second quarter. Lotte Homeshopping, Lotte Shopping’s television channel, also posted poor results, with the Ministry of Science and ICT suspending its broadcast for six hours every day from February to August 2023. During the suspension period, Lotte Homeshopping experienced an average on-year decrease in profits of some 89.9 percent.

In addition, the lackluster performance of Hanssem -- a clothing brand Lotte Shopping jointly acquired with IMM Private Equity in 2021 in a 259 billion won buyout -- is largely seen as a sign of Lotte Shopping's crumbling financial health.

Hanssem recorded an annual operating loss of 21.7 billion won on a consolidated basis last year, turning to a deficit for the first time since its listing in 2022. During the second quarter, it returned to the black, but the company still reported a 43 percent on-year decrease in operating profits.

Lotte Chemical, one of the retail giant’s two business pillars, also posted operating deficits worth 26.2 billion won and 77 billion won in the first and second quarters, respectively, negatively affecting Lotte Group’s overall financial health.

The chemical unit, having already spent 2.7 trillion won to acquire Lotte Materials, offered about 580 billion won to Lotte Engineering & Construction in November last year to ease the financial burden caused by a default in project financing for the construction of the Legoland Korea Resort.

Due to the flagging performance of Lotte Group's major affiliates, the credit ratings of a slew of affiliates across Lotte Group such as Lotte Capital, Korea Seven and Lotte Holdings have been downgraded. A decline in credit ratings leads to a high possibility of further worsening a company's financial health, as it can mean higher loan interest rates.

In a possible bid to fortify its declining financial health with cash, Lotte Shopping reportedly sent a teaser letter to prospective buyers through its underwriter NAI Korea for the sale of Lotte Department Store's properties.

Through the bid, Lotte Shopping reportedly aims to sell nine Lotte Department Store assets, along with 10 Lotte Mart assets across the nation. The assets are estimated to be worth a total of some 400 to 500 billion won. Regarding the sales' current status, Lotte Shopping could not be reached for questions as of press time.

An analyst said that Lotte Group could be rushing to sell its assets because it currently does not possess proper management strategies to prevent the deterioration of its financial soundness.

As for whether Lotte Shopping’s asset sales will be successful, another industry official working in a real estate consulting firm said it is unclear whether the sale will reap successful results for Lotte Group.

“Currently, consumption is slow, due to a slowdown in economy. But most of the assets put out for sale are real estate of department stores and marts. Except for the premium of the name ‘Lotte’, it is questionable whether the (asset) sales (bid) will go smoothly,” he said.

Meanwhile, Lotte Shopping unveiled a vision last week to raise 17 trillion won in sales and one trillion won by 2026, via a rare investor relations event it held for the first time in 13 years.

During the event, Lotte Shopping announced that it will aggressively ramp up its sales and profits by focusing on six core strategies, which include establishing market leadership in core commercial areas; optimizing its e-commerce business; and expanding its Southeast Asian business.