Seoul, Oct 25 - Lotte Shopping Co. beat forecasts with a 57 percent rise in quarterly profit on Wednesday on gains from its credit card unit, but fragile consumer demand and a slow turnaround in its discount stores cloud the outlook.
Lotte, South Korea's top retailer, is feeling the pinch of slowing growth in Asia's third-largest economy and stagnant margin improvement in its "Lotte Mart" discount stores, the fastest-growing segment of the retail market.
Analysts say Lotte's higher exposure to department store operations than rival Shinsegae means a more vulnerable earnings structure because consumers tend to switch to low-priced outlets during an economic slowdown.
Lotte, which runs the country's biggest department store and No. 3 discount store chain, expects its 2006 net profit to rise 21 percent to 661.6 billion won ($692.3 million) from a year earlier, boosted by gains from its 92.5 percent stake in card affiliate Lotte Card Co.
But the retailer sees its operating profit growing just 7 percent to 737.5 billion won this year.
Lotte, which in January raised $3.54 billion via the world's largest retail IPO, earned a 167 billion won ($174.7 million) net profit in the quarter to Sept. 30, up from 106.2 billion won a year earlier and topping an average forecast of 139.8 billion won profit compiled by Reuters Estimates.
Lotte booked profit of about 50 billion won in the third quarter from its holdings in Lotte Card, which claims one out of every seven South Koreans as a customer, a spokesman said.
But the operating profit rose just 4.3 percent to 148.8 billion won, while sales rose 1.9 percent to 2.12 trillion won.
Despite hopes Lotte Mart's operating margins will improve as a result of aggressive expansion following the IPO, margins remain stuck in a 3 percent range -- way below 8 percent at rival Shinsegae Co. Ltd.
Shinsegae, the biggest discount store and No. 3 department store chain, is expected to increase third-quarter net profit by 24 percent to 121.1 billion won, according to Reuters Estimates.
With Lotte holding billions of dollars after failing to buy local outlets of Wal-Mart Stores Inc. or Carrefour , investors also worry Lotte may be tempted to make yet another unprofitable investment to bulk up.
In August, it bought Woori Home Shopping for $487 million -- valuing Woori at 18 times earnings compared to 8.5 times for bigger rival GS Home Shopping.
Shares in Lotte fell 9.2 percent in the third quarter, bucking the wider market's 5.9 percent gain.
The stock closed 2.29 percent higher at 358,000 won on Wednesday, outperforming the wider market's 0.36 percent gain.