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Shopper's Stop: Research meet excerpts
Jun 11, 2008

Though the retailing sector does not enjoy an industry status or the government’s support, it is growing on its own tapping the renewed aspiration levels of a burgeoning middle class, trying to cash in on the consumers’ wallet and gain a considerable share of their consumption basket. Retailers are not just expanding their scale of operation but are venturing into new geographies and formats in a bid to sustain their margins in the competitive environment. In times of high inflation and global economic slowdown, one may argue that discretionary spending may take a hit, in turn impacting the margins of retailing businesses. In such times, Shopper Stop has undergone a re-branding exercise and will be going for a rights issue to fund its expansion plans. In order to understand the prospects of the lifestyle retailing, specialty retailing and departmental stores in specific and the strategies adopted by the company to stay ahead of the competition, we met the management of the Shopper's Stop. Following are the key excerpts of the meet.

  • Read Shopper's Stop FY08 result analysis

    The logic for re-branding
    Though the company is largely present in lifestyle and luxury retailing segment, through Hypercity it caters to value retailing business like food and grocery. However, the target customer is the same. The foray made by the company into specialty retailing is a move to stay ahead of competition. Thus, the current repositioning and launch of new logo is directed towards increasing visibility and generate brand recall. The cost of re-branding works out to Rs 200 m, which will be amortised over a period of time. As part of the brand-repositioning move, it has also tied up with music content providers to keep customers updated on new arrivals.

    The strategies adopted to survive…

    • Raising capital: Shopper’s Stop has filed documents with the SEBI for a rights issue (approximately Rs 5 bn) to expand its retail footprint. While the company has joined hands with other players in segments like airport retailing and catalogue retailing, it is still concentrating on the organic growth route to expand its lifestyle and luxury segments. The company has outlined Rs 15 bn as capex (Rs 10 bn to be funded through debt and internal accruals) to expand its retail footprint from 1.5 m sq ft to 3.5 m sq ft and also plans to double the number of outlets from 24 to 48 stores in the next two to three years.

    • New formats: The current per store area of Shopper's Stop is about 40,000 to 45,000 sq feet, which it plans to increase to around 75,000-85,000 sq feet with new formats. The company does not find it feasible to operate in smaller formats, as that does not enable it to achieve economies of scale. The cost of operation is not only rising on account of expansion plans that leads to rise in personnel cost, merchandise sourcing, electricity and other costs but also on account of rising rentals. As the company has contracted properties at approximately Rs 75 per sq feet, which is much lower than the current market rates that are hovering around Rs 120 per sq feet, it has capped rising cost of operation. However, it is still higher when compared to other retailers such as Pantaloon Retail, which has been able to lock properties at an average rate of Rs 50 to 60 per sq feet.

      In a move to cater to tomorrow’s demands of the customers and diversify revenues it has ventured into specialty retailing concept. Mothercare formats have witnessed good response, while the concept stores such as Arcelia are yet to pick up. Further, airport retailing and gaming businesses are new concepts in India and would take some time to attract Indian consumers.

  • Read how important gross margins are for a retailer.

    The company has strategically maintained a judicious mix of owned labels and branded labels in a ratio of 20:80, to maximize footfalls and cater to different customers by providing varied options. However, this restricts margin expansion as owned labels enjoy better margins. The company has also tied up with high end brands Espirit, Mac, Tommy Hilfiger and Lancome that enjoy better margins and would help company to sustain gross margins at current levels.

    Our view…
    The company holds 19% stake in Hypercity and can increase it to 51% by the end of 2008. Post the stake acquisition, Shopper's Stop and Hypercity would make up for 90% of the consolidated revenues and the remaining would be contributed by the initiatives taken by the company such as airport retailing (Nuance group) and Time Zone entertainment (interactive entertainment, games).

    Even though 8% EBITDA margins are feasible over a three year period, huge expansion plans will pressurise net margins in terms of increased financial costs and maintenance cost. Further, the delays in upcoming properties from the developers’ side on account of increased cost of construction and timely availability of raw materials owing to infrastructural issues can impact sales growth. Though the company is targeting 20% return on capital, considering slim margins, huge expansion plans and slower growth of the retailing sector in the medium term, such high returns on capital is difficult to achieve.

    At the current price of Rs 390, the stock is trading at an expensive valuation of 195 times its trailing twelve month earnings. From an on going business point of view, the company’s moves are positive and will help it stay head of the competition. However, from the shareholder’s point of view, in the medium term after factoring the dilution owing to the rights issue, there are hardly any upside potential left. We shall soon update our research report on the stock.

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