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Shopper's Stop: 'Extraordinary' effect - Views on News from Equitymaster
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Shopper's Stop: 'Extraordinary' effect
Feb 12, 2009

Performance summary
  • Standalone topline grows by 9% YoY. The growth slows down on account of lower footfalls and lower sales per sq. feet.
  • Operating costs grow at a tad lower rate as compared to the topline. This coupled with the company’s ability to increase conversion ratio, transaction size and average selling price leads to the 51% YoY growth in operating profits.
  • The company reports loss at the net level on account of extraordinary expenses during the quarter. Excluding the extraordinary item, the net profits clock an impressive 183% YoY growth despite higher interest costs and depreciation charges.
  • For 9mFY09, the topline grows by 19% YoY, while at the net level the company reports loss of Rs 468 m.
  • On a consolidated basis, despite the 14% YoY growth in topline, net profits decline by 45% YoY mainly on account of higher corporate costs.

Financial performance snapshot
Rs (m) 3QFY08 3QFY09 Change 9mFY08 9mFY09 Change
Net sales 3,083 3,354 8.8% 7,983 9,502 19.0%
Expenditure 2,932 3,125 6.6% 7,560 9,204 21.7%
Operating profit (EBDITA) 151 229 51.4% 423 299 -29.5%
EBDITA margin (%) 4.9% 6.8%   5.3% 3.1%  
Interest 13 52 311.1% 29 138 372.3%
Depreciation 102 137 34.4% 287 414 44.5%
Profit before tax 37 40 8.6% 108 (253)  
Tax 21 (4)   57 (34)  
Exceptional Items - 249   - 249  
Net profit 16 (205)   50 (468)  
Net profit margin (%) 0.5% -6.1%   0.6% -4.9%  
No. of shares (m)       35 35  
Diluted earnings per share (Rs)*         (14.1)  
Price to earnings ratio (x)   -     -  
* 12 month trailing earnings

What has driven performance in 3QFY09?
  • Shopper’s Stop reported nearly 9% YoY growth in revenues during 3QFY09. Shopper’s Stop departmental stores reported 6% YoY growth, while all formats grew by 9% YoY. While the company continues to witness growth across its offerings, the same is at a slower pace. Lower footfalls and lower sales per sq. feet (Shopper’s Stop witnessed a decline of 11% YoY, while all formats fell by 1.4% YoY) arrested revenue growth. Moreover, like to like sales had been lower mostly on account of cannibalization of stores in major cities. Sales from departmental stores declined by 4%YoY as stores which are more than 5 years old have de-grown by 11% YoY during the period under consideration.

  • The increasing share of private label mix (19% in 3QFY09 from 18.4% in 3QFY08) and decreasing share of bought out merchandise (56% in 3QFY09 from 58% in 3QFY08) has helped the company expand operating margins from 4.8% in 3QFY08 to 6% in 3QFY09. This is apart from improved conversion ratio, ticket size and average selling price. Private labels fetch higher margins, while lower bought out merchandise means lower mark downs, which has resulted in increased cash flow.

  • The improved revenue mix has also helped shore up operating profits by 51% YoY in 3QFY09. The contribution of high margin businesses such as women’s apparel and non-apparel is increasing. The company’s apparels to non-apparels ratio stood at 58:42. As regards divisional sales in the apparel category, the contribution of men’s apparel to total apparels declined to 31.2% in 3QFY09 from 33% in 3QFY08, while in case of kids apparel, divisional sales improved by 1% to 9.2% during the same period. The contribution of women’s apparel increased by 0.3% to 17.5% in 3QFY09.

  • Despite robust growth at the operating level, the company reported a loss at the net level to the tune of Rs 205 m on account of extraordinary expenses. Excluding the same, growth stood at an impressive 183% YoY despite higher depreciation charges and more than four-fold growth in interest cost. The high depreciation charges can be attributed to expansion plans and renovation write off. Renovated stores are depreciated over five to seven years.

What to expect?
The company holds 19% stake in Hypercity and can increase it to 51% by the end of June 2009 (period extended from December 2008). Post the acquisition of this stake, Shoppers' Stop and Hypercity would make up for 90% 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).

On account of liquidity issues, the company has deferred its plans to raise funds through equity markets. The company is cautiously moving ahead with its expansion plans and for the same has leveraged its balance sheet. 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 Shopper’s Stop stores. The company’s presence across retail formats, which account for a lion’s share of the consumption basket and its positioning in the retail sector, is expected to help it capitalise on future opportunities. However, the over Rs 10 bn ambitious expansion plans will continue to exert pressure on the already strained margins. We had earlier opined that while the company’s expansion moves are a positive in the long term, in the medium term, there is hardly any upside potential left. We maintain this view.

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