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Shoppers’ Stop: No stopping
May 3, 2006

Performance summary
Shoppers’ Stop, one of the country’s pioneer in retailing, declared its FY06 results. Although the topline for FY06 has outperformed our estimates, at the bottomline level, it was lower than our expectations. This was on account of higher effective tax rate. Although this was a dampener, the overall performance is commendable.

Consolidated financials…
(Rs m) 4QFY05 4QFY06 Change FY05 FY06 Change
Net sales 1,140 1,635 43.3% 4,487 6,345 41.4%
Expenditure 1,063 1,516 42.7% 4,143 5,858 41.4%
Operating profit (EBDITA) 78 119 52.6% 344 487 41.6%
EBDITA margin (%) 6.8% 7.3%   7.7% 7.7%  
Other income 6 29 365.1% 12 78 565.0%
Interest (net) 8 8 2.1% 40 28 -29.2%
Depreciation 26 41 55.0% 112 166 48.2%
Profit before tax 50 99 98.0% 204 371 81.8%
Tax 5 37 727.7% 17 133 670.4%
Profit after tax 45 61 35.2% 187 238 27.6%
Minority Interest - - - 3 5 71.8%
Net profit 45 61 35.2% 184 234 27.0%
Net profit margin (%) 4.0% 3.8%   4.2% 3.8%  
No. of shares (m) 27.4 34.4   27.4 34.4  
Diluted earnings per share (Rs)         6.8  
Price to earnings ratio (x)         83.9  

About the Company
Shoppers Stop is one of India’s retail chain store-operator, having a chain of 20 stores spread across 10 cities in the country. During the last quarter of FY06, the company opened its first ‘Home Stop’ shop in Bangalore by converting its retail store. It also has presence in books retailing through its wholly-owned subsidiary, Crosswords (31 stores). This store specialises in books, gift articles and stationery. The company started out as a single storeowner in 1991. Before going public in 1HFY06, it had opened 15 more stores across the country. Post the IPO, it has opened 6 more stores.

What has driven performance in FY06?
Expansion led topline growth: The topline growth of retailing companies is a function of the number of stores and the average sales per store (or average sales per square feet at the broader level). On the stores front, Shopper’s Stop added 6 stores (of which 2 were added in the last quarter). With square feet available increasing, topline growth was augmented. Secondly, Shopper’s Stop generates over 60% of revenues from apparel sales. Led by increased sales, the apparels’ contribution to the topline increased by 1% in FY06. This was due to the 46% YoY growth in private label sales (contribution to the total apparel sales increased from 17% in FY05 to 19% in FY06). The company aims to increase this to 25% by FY08. There has also been higher contribution from women’s’ apparels (around 49% of the total apparel revenues). The company expects this to touch 55%, which is a global standard. Since the new stores generally have a gestation period of 12 to 15 months (depending on the location), we expect the topline growth to remain robust going forward.

Staff cost leaps: Although the company has been able curtail its operating and administrative expenses during 4QFY06 (% of sales), there has been a 150 basis points (1.5%) increase in staff costs to sales. The management has opined concern with respect to the same, as the industry is going through a high attrition phase and in order to retain talent, it will have to revise staff costs upwards on a time-to-time basis. In 4QFY06, there was a revision in salaries. However, for FY06 as a whole, this has not impacted significantly (as is apparent from the table below).

Cost break-up
(% net sales) 4QFY05 4QFY06 FY05 FY06
Cost of goods sold 64.0% 63.8% 62.9% 63.6%
Staff cost 6.3% 7.7% 6.9% 6.9%
Selling and Distribution -1.9% 2.2% 1.9% 3.2%
Operating & Administration 24.7% 19.1% 20.7% 18.6%
Total expenditure 93.2% 92.7% 92.3% 92.3%

Since the fourth quarter is typically is ‘the discount’ period’, operating margins tend to be lower. However, the company has not only managed to grow its topline but also expand its operating margins by 50 basis points in 4QFY06. When one is analyzing a retail company, it is pertinent to note that major costs are front-ended, whereas new stores typically take time to gain in scale (in terms of per square feet sales). In the long-term, we believe that Shoppers’ Stop will be in a position to maintain operating margins at the current level, if not marginally higher.

Performance over the Quarters
(% change) 1QFY06 2QFY06 3QFY06 4QFY06
Sales growth 37.2% 41.1% 43.2% 43.3%
EBDITA margin 6.9% 5.9% 10.1% 7.3%
Net profit growth 18.9% 98.3% 60.1% 35.2%
Net margins 3.0% 2.1% 8.9% 3.8%

Net margin under pressure: Net margin continues 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. The growth in the bottomline was aided by higher other income. This was due to the interest earned on surplus cash to the extent of Rs 56 m (including the IPO proceeds). The interest income will decline going forward, as the company starts utilizing the surplus cash towards expansion (6 in FY07 and 13 in FY08).

What to expect?
At Rs 580, the stock is trading at a price to earnings multiple of 83.9 times FY06 consolidated earnings. The management continues to pursue new initiatives like setting up standalone stores for ‘Mothercare’ (Childcare), ‘Café Brio’ (Food and Beverages) and ’Maks’ (personal care products). Apart from that, the company has an option to acquire 51% stake (till December 2008 starting from 1QFY07) in the recently opened ‘Hypercity’. The promoters of ‘Hypercity’ are expected to open 4 stores in FY07 and another 4 stores in FY08. We are positive on the company from a long-term perspective.

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