Shop's Stop vs. Wal-Mart: How the numbers stack up? - Views on News from Equitymaster

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  • Jul 18, 2011 - Shop's Stop vs. Wal-Mart: How the numbers stack up?

Shop's Stop vs. Wal-Mart: How the numbers stack up?

Jul 18, 2011

In our previous article, we discussed some basic parameters on which Indian retailer Shoppers Stop differs from global giant Wal-Mart . We delved into their business models, supply chain efficiencies and scalability. In this article, we will see how these companies fare in terms of financials stack up against each other.

We have made a basic comparison of the financials of the two retailers for the latest ended financial year in US dollar terms.

Parameter Units Companies
Shoppers Stop* Wal-Mart**
Operating parameters      
Sales (US$ bn) 0.50 418.95
Sales CAGR last 5 years (%) 20% 4%
Operating margin (%) 4.30% 6.10%
Net margin (%) 1.80% 3.90%
Ratios depicting efficiency      
Current ratio (x) 1.310.89
De ratio (x) 0.530.71
Working capital/sales(%)0.05-0.02
RoNW (%) 9% 23%
RoA (%) 6% 9%
Valuations      
EPS   5.41 4.18
PE (x) 86.88 12.90
* Year ended March 31
** Year ended January 31

Sales for retailing companies are a function of scale of operation and depend upon the stage of business cycle that a company is in. There is a huge difference in the sales numbers for Wal-Mart and Shoppers. This is mainly due to the fact that Wal-Mart's scale and number of years of operations far outnumber that of the Raheja group company Shoppers Stop. The same difference is also reflected in the average annual growth rate (CAGR). In all businesses, growth becomes stagnant after a few years of business.

Shoppers Stop is in a growth stage and is growing at a CAGR of 20% over last 5 years. Wal-Mart is a mature company in a developed economy and is growing at 4% CAGR.

Both the operating margin and net margins are higher for Wal-Mart indicating that its efficiency in cost management and pricing power. Due to it large scale of operations, the company has been able to bring in huge economies of scale.

A retailing company requires debt for expansion and also for day to day operations. Shoppers Stop has been able to contain its debt-equity ratio at 0.5 while Wal-Mart has relatively more debt on its books resulting in a debt-equity of 0.7 times.

A retailing company needs working capital for managing its daily operations. Thus, working capital becomes an important point to consider while evaluating. However, Wal-Mart has a negative working capital which means that the company has lesser current assets as against current liabilities. Negative working capital is actually a sign of strong bargaining power. To simplify further, the sales that a company makes can be recorded in books as either cash or receivables. Wal-Mart sells goods on cash implying immediate receipt but has to make its payments for current liabilities as per the favourable terms negotiated with its creditors.

Wal-Mart is able to generate 23% return for its investors while Shoppers Stop returns only about 10% (return on equity). Total assets have been more effectively used by Wal-Mart with (return on assets) RoA of 9% as compared to Shopper's Stop's 6%.

Valuations

As we know that retailing industry is still gaining ground in India and there is a lot of scope for companies like Shoppers Stop to grow. However, despite the stronger growth prospects, we believe that the stock of Shoppers Stop is excessively overvalued with a TTM (trailing twelve month) PE of 86 times. With proposed FDI, the company will have to spruce up its strategies and systems further to be able to compete with global giants like Wal-Mart.

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1 Responses to "Shop's Stop vs. Wal-Mart: How the numbers stack up?"

shan

Aug 11, 2011

This is real rubbish research. You need to compare Apple with Apple not with Orange. Comparing Indian MNC with Global MNC dosent add any value. Also they are not head to head Competitor Nor wither of them up for SALE so it is a Real waste of time in Publishing this article.

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