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Shoppers’ Stop: Mixed results

May 9, 2007

Performance summary
Shoppers’ Stop announced mixed results for the fourth quarter and full year ended March 2007. The company achieved 31% YoY growth in topline for both the periods under review on the back of growth in volumes and higher sales per sq ft. However, net margins dropped by 90 basis points during FY07 as the company re-estimated the useful life of certain classes of assets, resulting in higher depreciation charges. For 4QFY07, the company reported a net loss on account of the revised depreciation rates.

Consolidated performance
Rs(m) 4QFY06 4QFY07 Change FY06 FY07 Change
Net sales 1,630 2,149 31.8% 6,345 8,280 30.5%
Expenditure 1,510 1,997 32.3% 5,856 7,599 29.8%
Operating profit (EBDITA) 121 152 25.5% 489 681 39.3%
EBDITA margin (%) 7.4% 7.1%   7.7% 8.6%  
Other income 10 11 17.4% 18 36 96.7%
Interest (9) (4) -57.3% (30) (41) 39.4%
Depreciation 41 151 271.6% 166 290 74.9%
Profit before tax 99 16 -84.2% 371 468 26.2%
Minority interest - -   5 -  
Tax 37 49 32.0% 133 226 70.5%
Net profit 61 (34) -155.2% 243 242 -0.4%
Net profit margin (%) 3.8% -1.6%   3.8% 2.9%  
No. of shares (m) 34 35   34 35  
Diluted earnings per share (Rs)*         15.1  
Price to earnings ratio (x)*         40.1  
* 12 month trailing earnings

What is the company’s business?
Shoppers’ Stop is the pioneer of pan-nation one-stop retail outlets. Starting in 1991 with a single store in Mumbai, it has now developed more than 20 stores (total retail space crossed the 1 m mark in the second quarter of FY07). The contribution of private labels to sales was 21% in FY07 as against 19% in FY06 and the management is confident of increasing the same to 25% by FY08. The company has a wholly owned subsidiary – Crossword – a specialty retail chain with 32 stores spread across the country. This store specialises in books, gift articles and stationery.

In 4QFY07, the company added a new store in Lucknow taking the total tally to 20 stores with a presence in 11 cities. It acquired 19% shareholding of M/s. HyperCity Retail (India) Ltd., out of the total 51% of the option available to it. During the quarter, Crossword opened its first store and 2 Stop & Go stores at the Mumbai domestic airport. Further, it forayed into airport retailing through a joint venture with The Nuance Group AG of Switzerland. Shoppers Stop has opened 4 stores in the F&B segment and 2 new Crossword franchise stores during the quarter. The company has also made an entry into the entertainment sector by acquiring 45% stake in Timezone Entertainment Pvt. Ltd. The company has added 1,568,479 sq ft of area during the year taking its total store area to 1,170,548 as on March 2007.

What has driven performance in 4QFY07?
Robust topline growth: Shoppers Stop’s own merchandise offerings rose by 32% YoY, while the consignment merchandise sales rose by merely 0.3% YoY for 4QFY07. Customer entry increased by 10% YoY. In 4QFY07, the non-apparel revenue share increased to 42% as compared to 41% during the same period last year. Over the past few quarters the share of non-apparel sales is increasing as a percentage of total sales. Going forward too, the company expects the topline growth to be driven by the growth in revenues from the non-apparel segment. Further, sales from the existing stores on a like to like basis registered an 18% YoY growth in sales on account of 9% YoY growth in volumes and 16% YoY growth in sales per sq ft. For the quarter, the sales per sq ft increased from Rs 1,834 in 4QFY06 to Rs 2,120 in 4QFY07.
Segment Revenue
(Rs m) 4QFY06 4QFY07 Change FY06 FY07 Change
Own merchandise 1,627 2,141 31.6% 6,295 8,256 31.2%
% of total revenue 87.1% 88.8%   86.9% 88.9%  
Consignment merchandise 222 223 0.3% 832 870 4.6%
% of total revenue 11.9% 9.2%   11.5% 9.4%  
Other retail income 18 46 152.8% 116 156 34.2%
% of total revenue 1.0% 1.9%   1.6% 1.7%  
Total 1,867 2,411 29.1% 7,243 9,283 28.2%

Costs heading north: The company’s operating costs continued to grow at almost the same rate as its sales growth on a YoY basis during the quarter. Staff costs (as percentage of sales) have increased by 20 basis points on account of expansion of outlets, provision for bonus and the like. Except for the cost of goods sold, which reduced considerably during the quarter, all other cost heads have exerted downward pressure on margins. In order to maintain market share and ensure proper supply chain, the company had to incur huge selling and distribution costs. Thus, the rising costs have contracted operating margins for 4QFY07 by 30 basis points.

Consolidated cost break-up
As a % of net sales 4QFY06 4QFY07 FY06 FY07
Total Cost of goods 67.8% 60.5% 64.5% 63.2%
Staff Cost 7.7% 7.9% 6.9% 7.2%
Selling & distribution expenses 1.6% 2.5% 3.2% 3.4%
Other Expenditure 15.5% 22.0% 17.7% 18.0%

Net margins under pressure: The company re-estimated the useful life of certain classes of assets, which resulted in higher depreciation charges during both the periods under review consequently impacting net margins. This also led the company to report a net loss of Rs 34 m during 4QFY07. Though the company has booked profits in FY07, net margins did shrink by 90 basis points (0.9%).

What to expect?
At the current price of Rs 604, the stock is trading at a price to earnings multiple of 25.3 times our estimated FY09 consolidated earnings. The management continues to pursue new initiatives like setting up standalone stores apart from expanding its consolidated retail space. It acquired 19% shareholding of M/s. HyperCity Retail (India) Ltd., out of the total 51% of the option available to it. The promoters of ‘Hypercity’ are expected to open 4 to 5 stores in FY08. The setting up of new formats like Hypercity, F&B (cafeterias), Mothercare, duty free shops at airports and the acquisition of a 45% stake in Time Zone (a kids-related initiative) will widen the offering and de-risk its dependence on the flagship Shoppers’ Stop stores. Taking into account these factors, we maintain our positive view on the stock from a long-term prospective.

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