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Shopper’s Stop: New stores dent margins - Views on News from Equitymaster
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Shopper’s Stop: New stores dent margins
Jan 29, 2008

Performance summary
  • Consolidated topline grows by 29% YoY owing to festive season momentum.

  • Cost of goods sold (as percentage of sales) reduces to 61.9% in 3QFY08 from 64% in 3QFY07 leading to 2.1% expansion in gross margins.

  • Operating profits decline by 41% YoY owing to increase in cost of operations besides opening of new stores.

  • In addition to this, higher depreciation (re-estimation of useful life of its assets) and finance charges further pressurise net margins.

  • Net profits decline considerably by 94% YoY.

  • On a standalone basis, the topline grows by 31% YoY in 3QFY08, while bottomline continues to feel the heat of rising cost of operation, high depreciation charges and finance charges.

  • During the quarter, the company added 142,271 sq ft of area across various formats taking its total retail area to 1.51 m sq ft.

  • It also launched catalogue retailing business, Hypercity Argos.

Financial snapshot
Consolidated Standalone basis
Rs (m) 3QFY07 3QFY08 Change 9mFY07 9mFY08 Change 3QFY07 3QFY08 Change
Net sales 2,398 3,100 29.3% 6,131 8,062 31.5% 2,344 3,081 31.4%
Expenditure 2,150 2,954 37.4% 5,602 7,649 36.5% 2,105 2,931 39.2%
Operating profit (EBDITA) 247 146 -41.0% 529 413 -22.0% 239 150 -37.2%
EBDITA margin (%) 10.3% 4.7%   8.6% 5.1%   10.2% 4.9%  
Other income 15 3 -81.5% 25 26 6.5% 11 1 -88.5%
Interest (12) 13 -215.9% (37) 43 -214.3% (12) 13 -209.1%
Depreciation 43 113 164.9% 139 318 129.1% 31 102 227.5%
Profit before tax 231 22 -90.3% 452 78 -82.7% 230 37 -84.1%
Tax 90 21 -76.1% 176 59 -66.5% 90 21 -76.5%
Minority Interest** - 7   - 11   - -  
Net profit 141 8 -94.1% 275 30 -89.0% 141 16 -88.9%
Net profit margin (%) 5.9% 0.3%   4.5% 0.4%   6.0% 0.5%  
No. of shares (m)       35 35   35 35  
Diluted earnings per share (Rs)*         -     0.8  
Price to earnings ratio (x)         -     496.7  
* 12 month trailing earnings
** In Gateway Multichannel Retail (India) Ltd.

What has driven performance in 3QFY08?
  • The retail major continues to clock robust topline growth with its own merchandising seen growing at the rate of 32% YoY during 3QFY08. While merchandise sold on consignment basis has witnessed a decline of almost 7% YoY, other retail income grew by 5% YoY. Similar trend has been witnessed on a standalone basis too. The healthy show at topline has been backed by festive season, new store momentum and new initiatives in the non- apparel space, which accounts for almost 50% of the consumption basket. Going forward too, the company expects the topline growth to be driven by the non-apparel segment.

    Consolidated Standalone
    Consolidated Standalone
    (Rs m) 3QFY07 3QFY08 Change 9mFY07 9mFY08 Change 3QFY07 3QFY08 Change
    Own merchandise 2,388 3,150 31.9% 6,115 8,135 33.0% 2,334 3,149 34.9%
    % of total revenue 89.0% 91.9%   89.0% 91.3%   88.8% 92.4%  
    Consignment merchandise 245 228 -6.9% 648 624 -3.7% 245 228 -6.9%
    % of total revenue 9.1% 6.6%   9.4% 7.0%   9.3% 6.7%  
    Other retail income 49 52 4.8% 110 154 40.6% 49 33 -33.7%
    % of total revenue 1.8% 1.5%   1.6% 1.7%   1.9% 1.0%  

  • Cost of goods sold (as percentage of sales) reduced to 61.9% in 3QFY08 from 64% in 3QFY07 leading to 2.1% expansion in gross margins. This indicates that the company may have started witnessing economies of scale at the trading level on account of expansion plans and new initiatives. However, at the operating level costs still continue to take its toll on EBITDA margins. Apart from higher rentals and employee costs, which has been an industry wide issue, what has further pressurised operating margins are the matters related to the provision for service tax (Rs 16.4 m) pending in court. The company has its own four distribution centres, whose capacity has been doubled (considering the expansion plans for the next 2 years) to cater to future needs.

  • In 3QFY08, net profits witnessed a sizeable decline of 94% YoY. The company has leveraged its balance sheet and has started utilising the surplus cash towards expansion, which has resulted in a decline in interest income and increased interest expenses leading to strained net margins. Further, the company has re-estimated useful life of its assets, leading to a three fold growth in asset replacement cost.

    Cost break-up
    Consolidated Standalone
    (% of net sales) 3QFY07 3QFY08 9mFY07 9mFY08 3QFY07 3QFY08
    Total Cost of goods 64.0% 61.9% 64.1% 61.8% 63.3% 63.2%
    Staff Cost 6.5% 6.9% 7.0% 7.7% 6.7% 6.9%
    Selling & distribution expenses 3.8% 5.5% 3.7% 4.3% 4.1% 5.8%
    Lease rent and hire charges 6.9% 8.6% 7.3% 8.8% 7.0% 8.6%
    Other Expenditure 8.5% 12.3% 9.3% 12.3% 8.8% 10.6%

  • The new stores and new initiatives have also dented margins and would continue to do so till the time they break even. The management has indicated that once the new store openings growth reaches 20%, the margins would not be under pressure. To put things into perspective, if a company opens 8 stores on a base of 40, the EBIDTA margins would not be strained. However, Shopper’s Stop is feeling the heat currently on account of a lower base. The scenario is expected to reverse FY10 onwards if everything works out as planned.

What to expect?
At the current price of Rs 390, the stock on a standalone basis is trading at a price to earnings multiple of 21 times our estimated FY10 earnings. The company has planned to partly fund its expansion plans through rights issue, which probably will take place in FY09. The management’s focus on setting up new stores and looking at other related retail initiatives are expected to augur well from a long-term perspective as these moves will broaden its offerings and de-risk its dependence on the flagship Shoppers’ Stop stores. The company has a distinctive business model. It has presence across retail formats, which account for a lion’s share of the consumption basket. The retail sector in India is on a growth trajectory and considering Shoppers’ Stop position within the industry, the company is all set to capitalise on the opportunity.

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