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Shoppers Stop – On the move - Views on News from Equitymaster
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Shoppers Stop – On the move
Jan 24, 2006

Performance summary
Shoppers Stop, one of India’s largest retail store chain owners, declared robust numbers for the first nine months of the fiscal year with the bottomline growing at a faster than the topline on a consolidated basis. Although it has been able to capitalize on the festive season, operating margins during the period have been under pressure. We take a deeper look at the numbers.

(Rs m) 3QFY05 3QFY06 Change 9mFY05 9mFY06 Change
Net sales 1,356 1,941 43.2% 3,369 4,753 41.1%
Expenditure 1,205 1,744 44.8% 3,103 4,385 41.3%
Operating profit (EBDITA) 151 197 30.1% 266 368 38.4%
EBDITA margin (%) 11.1% 10.1%   7.9% 7.7%  
Other income 1 22 3091.3% 6 49 788.9%
Interest (net) 9 7 -21.6% 32 20 -37.1%
Depreciation 35 38 10.6% 86 125 46.2%
Profit before tax 108 173 60.5% 154 272 76.5%
Extraordinary income/(expense) 9 56 553.0% 13 95 649.9%
Tax - (0) - 4 5 25.0%
Profit after tax/(loss) 99 117 17.6% 145 181 25.1%
Net profit margin (%) 7.3% 6.0%   4.3% 3.8%  
No. of shares (m) 27.4 34.4   27.4 34.4  
Diluted earnings per share (Rs)*         7.0  
Price to earnings ratio (x)         72.5  
(*annualised)            

About the Company
Shoppers Stop is one of India’s retail chain store-operator, having a chain of 20 stores spread across 10 cities in the country. It also has a wholly owned subsidiary, which is a specialty retail store i.e. ‘Crosswords’ with 31 stores spread across the country. This store specialises in books, gift articles and stationery. The company started out as a single storeowner in 1991 and before going public in 1HFY06 opened 15 more stores across the country. Post the IPO, it has opened 4 more stores and is due to open 2 more stores before the end of FY06.

What has driven performance in 3QFY06?
New store thrust: New store additions have boosted the topline growth in 9mFY06 with sales per store having gone up by 15% YoY (sales per store was around Rs. 285 m in FY05). This growth rate is expected to continue during the last quarter of the financial year. According to the management, there has been an increase in margins of its private labels by around 5% YoY. Private labels constitute around 18% of its total sales (FY05). Going forward, the company does expect its private labels to contribute significantly, as they generate more value for the company. The non-apparel business, led by the home décor business (furniture, kitchen equipment and furnishings), which it operates from its store in Bangalore, has been well received. Figures are not comparable as it was recently setup.

Other income during the quarter witnessed a spurt largely due to the insurance claim of Rs 13 m, which it received for the loss of goods it incurred during the July monsoon.

as a % of net sales 3QFY05 3QFY06 9mFY05 9mFY06
Cost of goods sold 60.3% 62.4% 61.8% 62.9%
Staff cost 6.2% 5.6% 7.1% 6.5%
Selling and Distribution 5.2% 6.0% 4.0% 4.6%
Operating & Administration 17.1% 15.9% 19.1% 18.3%
Total expenditure 88.9% 89.9% 92.1% 92.3%

Margin blues: Operating margins in 9mFY06 have remained under pressure, largely due to the new store additions. Margins are likely to remain under pressure till the fag end of FY07, as the company is expected to add new stores during this period. Another reason for the 100 basis point fall in operating margins during 3QFY06 was due to the increase in the cost of goods sold. Sale of branded products accounted for nearly 80% of its net sales and the company does not have the bargaining power.

Net margin under pressure: Net profits for the quarter have increased by 18% YoY, largely aided by the insurance claim. Growth could have higher had it not been for the increase in the tax burden. The increase in the tax burden has directly affected net margin, which has gone down by 130 basis points. For the nine month period also it has gone down, albeit marginally.

What to expect?
At Rs 509, the stock is trading at a price to earnings multiple of 72.5 times 9mFY06 annualised consolidated earnings, which is significantly higher. On the company’s front, it continues to add new stores (2 to be added before the end of FY06 and 7 more before the end of FY07). The management has indicated that would continue to look for locales in the 2nd and 3rd tier cities for expansion. In our view, retailing is a highly capital-intensive business and the benefits from these expansions are likely to accrue over the next few years. To that extent, margins of the company will be affected. Nevertheless, valuations are high and to that extent, the risk profile of the stock is also significantly higher.

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