Shares of South Korea’s three major department store operators have plunged in unison to roughly half their value in just over two months since the start of the second half. Investor sentiment has frozen rapidly as concerns mount that the won’s strengthening will erode foreign tourists’ purchasing power, combined with the possibility of consumption contraction amid the South Korean stock market correction.

According to the Korea Exchange on the 3rd, Hyundai Department Store (069960.KS) closed at 92,700 won (approximately $68), down 5.21% from the previous trading day. Compared with its June 30 closing price of 193,700 won (approximately $140), the stock has fallen 52.14%. Over the same period, Shinsegae (004170.KS) dropped 48.81% from 755,000 won (approximately $560) to 386,500 won (approximately $280), while Lotte Shopping (023530.KS) fell 37.95% from 169,700 won (approximately $130) to 105,300 won (approximately $78).

Hyundai Department Store and Shinsegae posted the second- and third-largest declines, respectively, among KOSPI-listed stocks in the second half.

The biggest driver behind the stock plunge is the sharp decline in the won-dollar exchange rate. The rate closed at 1,368.7 won (approximately $1) on the day, down 1.7 won from the previous session. After surging to the 1,550-won range (approximately $1.1) in early July, the exchange rate has fallen more than 10% to the 1,360-won range in just over two months. Typically, when the won appreciates, foreign tourists’ purchasing power in South Korea declines, slowing sales growth at department stores and duty-free shops.

This marks a complete reversal from the first half. In the first half of this year, Shinsegae surged 205.67%, while Lotte Shopping and Hyundai Department Store climbed 134.07% and 118.62%, respectively. Stocks that had doubled or tripled on the back of the stock market rally and increased spending by foreign tourists have now given back a substantial portion of those gains in just over two months.

Company-specific headwinds have compounded the pressure. Lotte Shopping Chairman Shin Dong-bin announced in July that he would dispose of 324,100 shares (1.15%) of his holdings, and subsequently sold 118,180 shares on the open market from the 28th of last month through the 1st of this month. Hyundai Department Store saw its consolidated operating profit decline 8.7% after subsidiary Zinus posted a second-quarter loss of 26.7 billion won (approximately $19.7 million).

Brokerages have also uniformly lowered their expectations for the department store sector. According to consensus data from financial information provider FnGuide, Lotte Shopping’s average target price was revised down 19.84% from 225,000 won (approximately $170) in the second quarter to 180,357 won (approximately $130) in the third quarter. Hyundai Department Store’s target was cut 17.70% from 223,500 won (approximately $160) to 183,944 won (approximately $140), while Shinsegae’s was lowered 14.00% from 853,333 won (approximately $630) to 733,824 won (approximately $540).

The target price revisions for the three department store operators are as follows:

CompanyQ2 Average Target PriceQ3 Average Target PriceDownward RevisionLotte Shopping225,000 won180,357 won19.84%Hyundai Department Store223,500 won183,944 won17.70%Shinsegae853,333 won733,824 won14.00%

Note: Based on FnGuide consensus

Consumption Indicators Are Key

Brokerages are now advising investors to focus on actual consumption indicators rather than stock market movements. As the wealth effect that drove first-half share price gains dissipates, a stock market rebound is unlikely to translate directly into improved department store earnings.

Park Jong-dae, an analyst at Hana Securities, warned in a recent report: “July-August consumption indicators are showing unfavorable trends. Despite strong foreign tourist numbers, retail sector share prices are likely to pass through a momentum trough for the time being.”

Elevated earnings bases are also a burden. With same-store sales at department stores having posted double-digit year-over-year growth from the fourth quarter of last year through the second quarter of this year, expectations are prevalent that growth rates will decelerate starting in the third quarter. Kim Jung-wook, a researcher at Meritz Securities, said: “The growth rate, which was 24% in July, is expected to slow to around 15% in August and 10% in September.”

However, some analysts note that the sales growth slowdown and company-specific concerns are already substantially reflected in current share prices.

There are also forecasts that if the won’s strength continues, share prices could face further correction. Kim Myung-joo, a researcher at Korea Investment & Securities, said: “If the won’s strength persists, it will be difficult to gauge the lower bound of department store valuations,” adding that this could continue to weigh negatively on share prices.

For the medium to long term, a conditional buying strategy has been suggested. Park Jong-dae said: “A strategy of gradually increasing exposure to department store operators, centered on Lotte Shopping, with a long-term view preparing for next year is also valid. However, this strategy only holds if same-store sales growth at department stores remains above 10%.” He added that if the growth rate falls to around 5%, share prices could undergo another round of correction.

From Wealth Effect to Reverse Wealth Effect

Attention is also turning to the impact the stock market correction could have on consumer sentiment. When financial asset prices such as stocks rise, a wealth effect occurs in which consumption increases due to higher asset values. Conversely, when asset prices fall rapidly, a reverse wealth effect can emerge, reducing consumption.

A securities industry official said: “If the stock market correction is prolonged, investors’ perceived asset losses could also affect consumption. In particular, investors using credit or leverage could see losses exceeding the index decline, which could relatively quickly erode their spending capacity and sentiment.”

However, some analysts say it is premature to conclude that the recent plunge in department store stocks signals an actual deterioration in consumption conditions. Demand for luxury goods and fashion, which have driven department store sales over the past year or so, continues, while the share of foreign customer sales rose to 7-8% in the first half. The impact of foreign consumption on same-store sales growth reaches approximately 2 percentage points.

Suh Jung-yeon, a researcher at Shinyoung Securities, said: “Same-store sales growth at South Korean department stores has posted double-digit figures since October last year and has exceeded 20% this year, marking a boom rarely seen in two decades. This trend had not broken as of June, and growth in core product categories appears to remain solid in the third quarter as well.”