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Shopper’s Stop: Sinking into losses - Views on News from Equitymaster

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Shopper’s Stop: Sinking into losses
Aug 1, 2008

Performance summary
  • Standalone revenues grow by 29% YoY in 1QFY09, while on a consolidated basis topline growth stands at 28.7% YoY during the same period under consideration.
  • Shopper’s Stop reports operating losses in 1QFY09 as costs grow at a faster rate as compared to topline growth.
  • Increased selling and distribution expenses (marketing) on account of competitive environment, brand campaign and logo change and higher rentals exert pressure on profitability.
  • Apart from the operating losses, bottomline takes a hit on account of the company’s ambitious capex plans in the form of high depreciation charges and interest costs.


Financial performance snapshot
  Standalone Consolidated
Rs (m) 1QFY08 1QFY09 Change 1QFY08 1QFY09 Change
Net sales 2,123 2,747 29.4% 2,188 2,817 28.7%
Expenditure 1,988 2,753 38.5% 2,050 2,888 40.9%
Operating profit (EBDITA) 135 (6) -104.3% 138 (71) -151.2%
EBDITA margin (%) 6.4% -0.2% 6.3% -2.5%
Other income 3 11 251.8% 5 18 259.7%
Interest 4 36 695.1% 12 53 354.7%
Depreciation 85 136 59.0% 93 150 60.6%
Profit before tax 49 (166) -441.1% 38 (256) -767.3%
Tax 18 (13) -171.0% 19 (12) -165.3%
Minority Interest** - - - 30
Net profit 30 (153) -604.5% 20 (214) -1183.8%
Net profit margin (%) 1.4% -5.6% 0.9% -7.6%
No. of shares (m) 35 35
Diluted earnings per share (Rs)* (3.3)
Price to earnings ratio (x) -
* 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 1QFY09?
  • The retail major posted a decent 29% YoY growth in topline backed by growth across its offerings. The company’s departmental stores (Shopper’s Stop) witnessed 23% YoY growth, of which like to like sales grew by 7% YoY (largely supported by stores less than 5 years of operation). In case of all formats, like to like sales grew by 9% YoY. The growth in the topline was also backed by 8% YoY growth in sales per sq ft for all formats (from Rs 1,702 in 1QFY08 to Rs 1,840 in 1QFY09) coupled with increased customer entry (up 5% YoY).

  • While the private labels that fetch high margins witnessed 20% YoY growth during 1QFY09, the contribution of the same to total revenues declined marginally. The company continues to maintain the revenue mix of apparels to non-apparels in the ratio of approximately 60:40. As regards divisional sales in the apparel category, the contribution of men’s apparel to total apparels was maintained at 33.2% in 1QFY09, while that of the kids apparel, divisional sales decreased from 8.0% to 7.8% during the same period. The contribution of women’s apparel increased to 19.2% in 1QFY09 from 18.1% in 1QFY08.

    Cost break-up
      Standalone Consolidated
    (% of net sales) 1QFY08 1QFY09 1QFY08 1QFY09
    Total Cost of goods 61.1% 62.0% 60.4% 60.8%
    Staff Cost 8.7% 8.4% 8.6% 8.6%
    Selling & distribution expenses 3.5% 5.1% 3.4% 5.7%
    Lease rent and hire charges 9.6% 11.3% 9.4% 11.3%
    Other Expenditure 10.7% 13.5% 12.0% 16.1%

  • In 1QFY09, the company witnessed 0.9% contraction in gross margins, which indicates that the cost of sourcing increased during the quarter as compared to the same period last year. The increase in the cost of sourcing might be a result of increased competition or change in revenue mix. While the exact reason for the same is not known, we believe that as the company primarily caters to lifestyle retailing and the new initiatives do fall in the same category, the shrinking margins could be attributed to the fact that competition is increasing.

  • At the operating level, the substantial increase in the cost of operations resulted into the company reporting losses. The increased selling and distribution expenses and sky rocketing lease rentals were the main culprits hampering profitability. The operating expenses also included amounts spent on brand campaign and logo change.

  • Besides reporting losses at the operating level, higher depreciation and interest expenses further aggravated losses at the net level. The company has leveraged its balance sheet and has also re-estimated the useful life of its assets, which led to the increase in interest expenses and depreciation charges.

  • The new stores and new initiatives have also dented margins and would continue to do so till the time they 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. Further, the management has indicated that the real estate prices will witness correction in the coming years and with that the rentals will come down from the current levels, thereby bolstering margins of the company. The scenario is expected to reverse FY10 onwards if everything works out as planned.

What to expect?
The company holds 19% stake in Hypercity and can increase it to 51% by the end of 2008. Post the acquisition of this stake, 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).

The company has filed for a rights issue 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 Shopper’s 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. While these moves are a positive in the long term, in the medium term after factoring the dilution owing to the rights issue, there is hardly any upside potential left.

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