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Shoppers’ Stop: No major hiccups! - Views on News from Equitymaster
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Shoppers’ Stop: No major hiccups!
Jan 29, 2007

Performance summary
Shoppers’ Stop announced robust results for the third quarter and nine months ended December 2006 on Saturday. For the quarter, the impressive growth in topline, on a consolidated basis, has been driven by strong growth across its core categories. The margins remained stable for 3QFY07. The bottomline grew by 19.6% YoY for the quarter.

Consolidated performance
Rs(m) 3QFY06 3QFY07 (%) Change 9mFY06 9mFY07 (%) Change
Net sales 1,925 2,398 24.6% 4,715 6,131 30.0%
Expenditure 1,728 2,151 24.4% 4,347 5,602 28.9%
Operating profit (EBDITA) 197 247 25.7% 368 528 43.6%
EBDITA margin (%) 10.2% 10.3%   7.8% 8.6% 1.50
Other income 22 37 72.0% 49 93 90.0%
Interest 7 11 69.5% 20 30 50.1%
Depreciation 38 43 11.1% 125 139 11.0%
Profit before tax 173 231 33.0% 272 453 66.5%
Minority interest - -   5 -  
Share in profit/loss in associate   (0)     (0)  
Tax 56 90 60.7% 95 176 85.6%
Profit after tax/(loss) 118 141 19.6% 181 276 52.1%
Net profit margin (%) 6.1% 5.9%   3.8% 4.5%  
No. of shares (m) 34.5 34.5   34.5 34.5  
Diluted earnings per share (Rs)*         9.8  
Price to earnings ratio (x)*         72.8  
* 12 month trailing earnings            
             

What is the company’s business?
Shopper’s Stop is the pioneer of pan-nation one-stop retail outlets. Starting in 1991 with a single store in Mumbai, it has now developed more than 20 stores (total retail space crossed the 1 m mark in the second quarter of FY07). The contribution of private labels to sales in FY06 was 19% in FY06 as against 18% in FY05 and the management is confident of increasing the same to 25% by FY08. The company has a wholly owned subsidiary – Crossword – that is a specialty retail chain with 32 stores spread across the country. This store specialises in books, gift articles and stationery.

What has driven performance in 3QFY07?
No stopping: The company witnessed a 24.6% YoY growth in the topline performance led by decent growth across its offerings. While the sales of its own merchandise offerings rose by 25% YoY, the consignment merchandise sales rose by 21% YoY for 3QFY07. Customer entry increased by 8% YoY. The share of the apparels in the total sales fell from 61% in 3QFY06 to 58% in this quarter, while that of non-apparels grew to 42% in 3QFY07. For the quarter, the sales per sq ft increased from Rs 2,170 in 3QFY06 to Rs 2,508 in this quarter. The company also opened its 20th store in Lucknow. Crossword in the form of franchise operations opened 4 stores while Crossword Bookstore as a chain reached 41 stores. F&B and Mother Care opened 5 and 4 stores respectively during the quarter. The company added 201, 889 sq ft of area in the nine-month period ending December 2006. By FY09, this is expected to touch 3.2 m, even after accounting for around six months delay in the delivery of already agreed retail space. While this pertains to Shopper’s Stop alone, Crossword is expected to more than double its retail space over the next three years from 115,000 sq feet in FY06.

Segment Revenue
(Rs m) 3QFY06 3QFY07 (%) Change 9mFY06 9mFY07 (%) Change
Own merchandise 1,912 2,388 24.9% 4,668 6,115 31.0%
% of total revenue 88.7% 89.0%   86.8% 89.0%  
Consignment merchandise 202 245 21.2% 610 648 6.2%
% of total revenue 9.4% 9.1%   11.3% 9.4%  
Other retail income 41 49 19.0% 98 110 11.9%
% of total revenue 1.9% 1.8%   1.8% 1.6%  
Total 2,155 2,682   5,376 6,872  

Steady margins: Shoppers’ Stop’s operating costs grew at almost the same rate as its sales growth on a YoY basis. Staff costs, as a percentage of sales, have increased from 5.7% in 3QFY06 to 6.5% in 3QFY07. The increase in staff costs is not only due to the expansion of outlets, but also on account of pay hikes and high attrition rates. In order to curtail the high attrition rate, the company has had to review salaries/wages on a time-to-time basis. This has now become an industry practice. Even the cost of goods sold witnessed an increase as a % of sale. The margins would have witnessed a decline but for the lower advertising and administrative costs.

Consolidated cost break-up
As a % of net sales 3QFY06 3QFY07 9mFY06 9mFY07
Total Cost of goods 62.9% 64.0% 63.4% 64.1%
Staff Cost 5.7% 6.5% 6.6% 7.0%
Advertising 5.2% 3.8% 3.8% 3.7%
Other Expenditure 16.1% 15.4% 18.5% 16.6%

Pressure on net margins: Net margins continue to remain under pressure. We expect this to sustain in the medium term, as the company has ambitious expansion plans. It normally takes the larger format stores 15 to 24 months to yield desired profitability. Though the other income was higher by 72% YoY, due to higher interest cost and tax outgo, the bottomline grew at a slower pace than the topline.

What to expect?
At the current price of Rs 711, the stock is trading at 72.8 times its trailing 12-months trailing earnings. The company’s expansion plans are running well on schedule. Also, the company has an option to acquire 51% stake (till December 2008 starting from 1QFY07) in the recently opened ‘Hypercity’ at an attractive price. The promoters of ‘Hypercity’ are expected to open 4 stores in FY07 and another 4 stores in FY08. Taking into account these factors and the current level of reasonable valuations, we are positive on the long-term prospects of the company.

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