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Shopper’s Stop: Margins under pressure - Views on News from Equitymaster

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Shopper’s Stop: Margins under pressure
Apr 30, 2008

Performance summary
  • Consolidated topline grows by 38% YoY and 33% YoY during 4QFY08 and FY08 respectively, backed by new initiatives and growth across offerings.
  • While the company was able to expand gross margins by 0.8% in FY08, skyrocketing rentals and the business revamping and expansion plans dragged down operating margins by 3.2% in FY08.

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

  • The company has started to utilise idle funds towards expansion plans, resulting in lower other income and lower interest income.

  • Net profits decline considerably by 89% YoY.

  • On a standalone basis, the topline grows by 36% YoY in FY08, while bottomline continues to feel the heat of rising cost of operation and on account of the company’s ambitious plans (high depreciation charges and finance charges).

  • During the year, the company added 431,382 sq ft of area across various formats taking its total retail area to 1.6 m sq ft.

Financial snapshot
Consolidated Standalone basis
Rs (m) 4QFY07 4QFY08 Change FY07 FY08 Change FY07 FY08 Change
Net sales 2,149 2,975 38.4% 8,280 11,037 33.3% 7,996 10,900 36.3%
Expenditure 1,997 2,837 42.1% 7,599 10,487 38.0% 7,341 10,338 40.8%
Operating profit (EBDITA) 152 137 -9.3% 681 550 -19.3% 655 562 -14.2%
EBDITA margin (%) 7.1% 4.6%   8.2% 5.0%   8.2% 5.2%  
Other income 11 5 -54.2% 36 32 -12.5% 42 25 -40.5%
Interest (4) 32 -909.5% (41) 74 -280.3% (47) 49 -205.0%
Depreciation 151 117 -22.6% 289 435 50.5% 256 393 53.3%
Profit before tax 16 (6) -138.2% 469 72 -84.6% 487 145 -70.2%
Tax 49 20 -60.2% 226 79 -65.1% 225 76 -66.5%
Share of loss of associate - -   (2)     - -  
Minority Interest** - 22   - 33   - -  
Net profit (34) (4) -88.5% 241 26 -89.0% 262 70  
Net profit margin (%) -1.6% -0.1%   2.9% 0.2%   3.3% 0.6%  
No. of shares (m)       32 35   35 35  
Diluted earnings per share (Rs)*         0.8     2.0  
Price to earnings ratio (x)         526.1     200.4  
* 12 month trailing earnings
** In Hypercity Retail (India) Ltd, Gateway Multichannel Retail (Inida) Ltd , Timezone Entertainment Pvt Ltd & Nuance Group (India) Pvt. Ltd

What has driven performance in FY08?
  • The retail major posted robust 34% YoY growth in topline backed by growth across its offerings. The company’s departmental stores (Shoppers Stop) witnessed 28% YoY growth, of which like to like sales grew by 14% YoY (largely supported by stores less than 5 years of operation). In case of all formats, like to like sales grew by 20% YoY.

  • Further, what have supported the topline growth are the increased sales per sq ft for all formats from Rs 7,973 in FY07 to Rs 8,671 in FY08 coupled with increased customer entry (up 28% YoY).

  • While the contribution of revenue private labels that fetch high margins witnessed margin fall in terms of contribution to total revenues. However, the same grew by 28% YoY. The company continues to maintain the revenue mix of apparels to non-apparels in the ratio of approximately 59:41. Talking about the divisional sales in the apparel category, the contribution of men’s apparel to total apparels has come down from 33.5% in FY07 to 31.7% in FY08, while that of kids apparel divisional sales increased from 8.0% to 9.5% during the same period. The contribution of women’s apparel was steady at 17.4%.

    Segmental revenue break-up
    Consolidated Standalone
    (Rs m) 4QFY07 4QFY08 Change FY07 FY08 Change FY07 FY08 Change
    Own merchandise 2,141 2,976 39.0% 8,256 11,111 34.6% 7,980 11,044 38.4%
    % of total revenue 89.2% 90.7%   89.0% 91.4%   88.7% 91.5%  
    Consignment merchandise 223 233 4.7% 870 857 -1.5% 870 857 -1.5%
    % of total revenue 9.3% 7.1%   9.4% 7.0%   9.7% 7.1%  
    Other retail income 36 73 103.5% 146 192 31.9% 145 168 16.0%
    % of total revenue 1.5% 2.2%   1.6% 1.6%   1.6% 1.4%  

  • While the company was able to expand gross margins by 0.8% in FY08, skyrocketing rentals and the business revamping and expansion plans dragged down operating margins by 3.2% in FY08. The gross margin may have improved on account of better inventory management or due to economies of scale.

    Cost break-up
    Consolidated Standalone
    (% of net sales) 4QFY07 4QFY08 FY07 FY08 FY07 FY08
    Total Cost of goods 60.5% 64.2% 63.2% 62.4% 63.5% 63.5%
    Staff Cost 7.9% 6.3% 7.3% 7.3% 7.3% 7.2%
    Selling & distribution expenses 2.5% 3.1% 3.5% 4.0% 3.6% 4.0%
    Lease rent and hire charges 8.1% 10.3% 7.5% 9.2% 8.0% 9.3%
    Other Expenditure 13.9% 11.4% 10.3% 12.0% 9.5% 10.8%

  • Apart from the subdued performance at the operating level, higher depreciation and finance expenses have pulled down net margins that contracted by 2.7% in FY08. 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 which has also led to increased depreciation. Thus, the net profits declined by 89% YoY in FY08.

  • The new stores and new initiatives have also dented margins and would continue to do so till the time they break even. The new initiative Arcelia (luxury outlets) and F&B (food and beverage) segment of the company are yet to 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. Further, the management has indicated that the real estate prices will witness correction in coming years and with that the rentals will come down from the current levels, resulting into savings and in turn boosting margins of the company.

What to expect?
At the current price of Rs 400, the stock is trading at multiple of 526 times its consolidated trailing twelve-month earnings. The company has filed rights issue for to raise funds for its ambitious expansion plans in the luxury segment. 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’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. We shall soon update our research report on the company.

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