Lotte Shopping Co. has faced a prolonged financial strain, unable to cover its financial expenses with its earnings for six consecutive years, according to recent data. The company is now planning to enhance liquidity by selling assets and reevaluating real estate holdings. However, industry observers caution that selling assets at fair value could prove challenging.
Data from the Financial Supervisory Service’s electronic disclosure system, reviewed on Dec. 4, showed that Lotte Shopping’s interest coverage ratio has remained below 1.0 for six years. This ratio, calculated by dividing operating profit by financial expenses, measures a company’s ability to meet its financial obligations. A ratio below 1.0 indicates that operating profits are insufficient to cover financial costs.
Between 2019 and the third quarter of 2023, Lotte Shopping’s interest coverage ratio ranged from 0.4 to 0.9. It stood at 0.9 in 2019, dipped to 0.7 in 2020, and dropped to 0.4 in 2021 amid aggressive mergers and acquisitions. The ratio modestly improved to 0.8 in 2022 and 0.9 in 2023 but has yet to surpass the critical 1.0 mark.
The persistently low ratio has raised concerns, particularly when Lotte Shopping issues corporate bonds. Historically, however, the company had strong support systems to alleviate investor worries. A key backer was Lotte Chemical, a core affiliate of the Lotte Group, while the company’s prime real estate assets served as a safety net. These factors previously ensured smooth bond issuances despite financial concerns.
“During the April corporate bond issuance, Lotte Shopping aimed to raise 250 billion won (approximately $176 million). However, bids reached 1.9 trillion won ($1.3 billion). At the time, the market deemed Lotte’s bonds relatively safe, even if its stock was underperforming, due to Lotte Chemical’s perceived stability and the assumption that asset sales would proceed smoothly,” a bond analyst at a securities firm noted.
The situation has since shifted. Lotte Chemical is now grappling with difficulties stemming from large-scale expansions by Chinese petrochemical firms, leaving it unable to provide the same level of support. While Lotte Shopping is exploring asset sales, market analysts believe achieving fair value will be difficult, particularly for less lucrative properties. Department stores, in particular, face structural challenges, often selling for little more than land value due to limited remodeling potential.
A real estate sales advisor elaborated, “Department store buildings typically feature open areas with escalators and elevators positioned at the periphery, making structural modifications costly and impractical. Buyers often prefer to pay only for the land, sometimes requiring sellers to bear demolition costs. Simply put, securing fair prices is tough.”
Most of the stores slated for sale are located in underperforming regional markets, further complicating sales. Properties reportedly under review include branches in Busan Centum City, Gyeonggi-do’s Ilsan, Daegu Sangin, and Pohang, Gyeongsangbuk-do. Analysts warn that these locations may struggle to attract strong bids, especially as regional depopulation trends weigh on demand.
Additional complications arise from potential political and employment concerns tied to store closures. Midsized department stores typically employ around 4,000 people, including contractors and outsourced workers. Such job losses could trigger pushback from local governments.
Retail industry experts argue that while asset sales and real estate reevaluations are necessary for immediate financial relief, fundamental growth will require significant profit improvements. Without this, the company may face continued difficulties in stabilizing its financial position.
