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Shopper's Stop: Ends the year in black - Views on News from Equitymaster

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Shopper's Stop: Ends the year in black

Feb 10, 2010

Performance summary
  • Standalone topline grows by 14% YoY. The growth has come in on account of increase in customer entry, higher average selling price and transaction size.
  • Operating margins expand by 5.1% as costs continue to grow at a slower pace compared to growth in topline.
  • Nearly two/fold growth in operating income, lower interest and depreciation charges lead to seven-fold growth in profit before tax.
  • The company reports net profit of Rs 192 m as against a loss of Rs 205 m during the same period last year.
  • On a consolidated basis, topline grows by 11.2% YoY. At the net level, the company reports a profit of Rs 136 m as against a miniscule profit of Rs 4.6 m during the same period last year.

Financial performance snapshot
Rs (m) 3QFY09 3QFY10 Change 9mFY09 9mFY10 Change
Net sales 3,354 3,826 14.1% 9,503 10,298 8.4%
Expenditure 3,124 3,371 7.9% 9,204 9,433 2.5%
Operating profit (EBDITA) 229 455 98.8% 299 865 189.5%
EBDITA margin (%) 6.8% 11.9%   3.1% 8.4%  
Interest 52 44 -15.3% 138 154 11.3%
Depreciation 137 122 -11.0% 414 245 -40.8%
Profit before tax 40 289 625.6% (253) 466  
Tax (4) 107   (34) 146  
Exceptional Items 249 (10)   249 (19)  
Net profit (205) 192   (468) 338  
Net profit margin (%) -6.1% 5.0%   -4.9% 3.3%  
No. of shares (m)       34.9 34.9  
Diluted earnings per share (Rs)*         4.8  
Price to earnings ratio (x)   -     66.8  
* 12 month trailing earnings

What has driven performance in 3QFY10?
  • Shopper’s Stop’s revenues grew by 14% during 3QFY10 backed by growth across its formats. The departmental stores reported 11.1% YoY growth in sales during the period under consideration, while all formats grew at the rate of 11.5%YoY. The growth came in on account of increase in customer entry, increase in transaction size (up nearly 12% YoY) and increase in average selling price (up by 4.5% YoY). Otherwise, revenue per sq ft has declined by 5.4% YoY. The same could be the result of de-growth reported (1.3% YoY) by stores that were operational during both the quarters and are older than five years, while stores less than five years reported growth of 9.9% YoY. The like to like stores volumes were down by 2.4% YoY. The same could be on account of de-growth in customer entry, 10.6%. Thus, the growth has come in on account of new store openings, higher average selling price and transaction size.

  • Apart from rebound in consumption, the company’s increased focus on consignment merchandise (lower bought out merchandise means lower mark downs) enabled to report higher margins. The revenue contribution of consignment merchandise improved to 41% from 30% in 3QFY09. The share of private labels decreased from 19% to 16.9% in 3QFY10. The company consciously changed its merchandise mix to lower the cost of inventory, which in turn led to higher profitability.

  • As regards revenue mix, the share of non-apparel segment is increasing. The apparel segment share declined from 59.7% in 3QFY09 to 58.2% in 3QFY10. As regards divisional sales in the apparel category, the contribution of men’s apparel to total apparels declined to 31.5% in 3QFY10 from 2.6% in 3QFY09, while contribution of women’s apparel improved marginally by 0.2% to 18%. The kid’s apparel contribution declined by 0.6% to 8.6%.

  • The company reported nearly two-fold growth in operating profits as costs continued to grow at a slower pace as compared to growth in revenues. Apart from pickup in sales, led by festive season and signs of economic revival, the cost control measures undertaken by the company enabled it to report superior growth in profitability.

  • At the net level the company was back to reporting profits on account of the whopping growth reported at the operating level and lower interest and depreciation charges. The company had re-estimated useful life of assets and accordingly revised depreciation rates from 1 April, 2009. This resulted in lower depreciation cost to the tune of Rs 75 m which further cushioned margins.

What to expect?
The company holds 19% stake in Hypercity and can increase it to 51% by the end of June 2010 (period extended from December 2008). Post the acquisition of this stake, Shopper’s Stop and Hypercity would make up for majority of the consolidated revenues and the remaining would be contributed by the other initiatives taken by the company such as airport retailing (Nuance group) and Time Zone entertainment (interactive entertainment, games).

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. The company's focus lies on high end and luxury retail markets. Considering India's demographic profile, there is lot of scope for modern retail to flourish in India. The company is comfortable with a debt to equity ratio of 1 and is targeting a return on capital employed of above 20% going forward. It remains to be seen whether the same is achievable and sustainable considering the growth phase of the Indian retail sector, the company's focus on high end customers, slim margins, huge expansion plans and slower growth of the retailing sector in the medium term.

At the current price of Rs 323, the stock is trading at a price to earnings multiple of 66.8 times its trailing twelve months earnings.

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