[Edaily Reporter Shin Ha-yeon ] On the 11th, Shinhan Investment Securities analyzed that #F&F’s earnings recovery is being delayed due to inventory adjustments at its Chinese MLB brand and sluggish sales of its domestic Discovery brand. The assessment is that while the inventory adjustment in China appears to be entering its final stages, it remains to be seen whether this will lead to an actual rebound in sales. The firm maintained its “Buy” rating but lowered the target price by 15.2% from 99,000 won to 84,000 won.

Park Hyun-jin, a research analyst at Shinhan Investment Securities, stated in a report released today, “As efficiency improvement efforts for the Discovery brand continue, the profit contribution from the Chinese subsidiary is also declining,” adding, “While the inventory adjustment in China appears to be entering its final stages, we need to monitor market conditions to determine whether this will actually lead to a recovery in Chinese sales.”

F&F’s third-quarter consolidated revenue totaled 452.1 billion won, a 4.7% decrease year-over-year. Operating profit fell 15.3% to 108.4 billion won, falling 13.9% short of the market consensus of 125.9 billion won. This figure is 26.9% lower than Shinhan Investment & Securities’ previous operating profit estimate of 148.3 billion won. The operating profit margin also fell by 3.0 percentage points, from 27.0% in the same period last year to 24.0%.

The simultaneous slump in both domestic and Chinese operations was cited as the primary cause of the decline in earnings. By region, revenue growth rates were -3% in South Korea, -4% in China, and +5% in Hong Kong, with both South Korea and China—which account for a high proportion of revenue—posting negative growth.

In South Korea, sales for the Discovery brand fell 13% year-over-year, underperforming the market growth rate. However, the MLB brand showed a relatively strong performance, growing by 4%. MLB’s duty-free sales remained at the previous year’s level, while sales at flagship stores, company-owned stores, and franchise stores all posted consistent mid-single-digit growth rates.

Discovery continues its efforts to improve profitability by closing underperforming stores. The number of domestic stores decreased from 277 in September of last year to 260 in September of this year. Daol Investment & Securities forecasts that store rationalization efforts will continue for the time being.

A bigger problem is the slump in the China business. Sales at the Chinese subsidiary declined as inventory adjustments continued to optimize MLB’s inventory in China, and the drop in operating profit was greater than expected due to the decrease in high-margin sales to the Chinese market.

Research Fellow Park explained, “Sales at the Chinese subsidiary continue to be sluggish due to inventory adjustments aimed at optimizing MLB inventory in China,” adding, “The decline in operating profit exceeded expectations due to the decrease in high-margin sales to the Chinese market.”

The local consumer environment in China was also challenging. It was determined that weather conditions in July and August led to a decline in foot traffic at brick-and-mortar stores and a drop in retail sales. Although sales rebounded in September, analysts note that it remains to be seen whether this recovery will continue.

The pace of new store openings for the Discovery brand in China is also slower than expected. As of the end of September, there were 27 Discovery stores in China, falling short of initial expectations. Consequently, analysts assess that the earnings outlook for the China business must be revised downward.

Research Analyst Park stated, “It appears that offline traffic and retail sales declined in July and August due to weather conditions in China,” adding, “Although there was a rebound in September, it remains to be seen whether this trend will be sustainable.” He continued, “Since the pace of store openings in China is slower than expected, a downward revision of earnings assumptions for the Chinese market is inevitable.”

Shinhan Investment Securities has revised downward its earnings forecasts for F&F for this year and next, reflecting the sluggish performance of both domestic and international operations. This year’s revenue forecast was lowered by 8.3% from the previous 2.1593 trillion won to 1.9793 trillion won, while the operating profit forecast was reduced by 15.8% from 557.1 billion won to 469.1 billion won.

Next year’s revenue forecast was also lowered by 7.2% from the previous 2.3409 trillion won to 2.1722 trillion won, and the operating profit forecast was reduced by 12.5% from 612.8 billion won to 536.1 billion won. Based on the revised estimates, next year’s revenue and operating profit are expected to increase by 9.7% and 14.3%, respectively, compared to this year.

The price-to-earnings ratio (PER) used to calculate the target price was also lowered from 8x to 7x. This reflects the decline in sector-wide valuations and the trend of slowing return on equity (ROE). The target price of 84,000 won represents a 34.2% upside potential compared to the closing price of 62,600 won on the 10th.

Research Analyst Park stated, “We have lowered earnings estimates by more than 20% and adjusted the target price-to-earnings ratio to 7 times,” adding, “Both the market and earnings are currently experiencing a loss of momentum.”