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Shoppers' Stop: Mixed signals

Aug 6, 2007

Performance summary
  • Topline grows by 27% YoY led by growth across its offerings.

  • The company's operating costs grew at a faster pace than the topline growth, driving down the EBITDA margins, which contracted by 30 basis points (0.3%).

  • The net margins contacted by almost 220 basis points (2.2%).

  • However, the fall in net margins is severe as compared to EBITDA margins on account of higher interest out go costs and depreciation charges (the company re-estimated the useful life of certain classes of assets during the last quarter of FY07).

  • The company is planning to come up with a rights issue during 3QFY08.

Consolidated financial snapshot
Rs(m) 1QFY07 1QFY08 Change
Net sales 1,720 2,188 27.2%
Expenditure 1,600 2,050 28.1%
Operating profit (EBDITA) 119 138 15.8%
EBDITA margin (%) 6.9% 6.3%  
Other income 4 5 34.2%
Interest (13) 12 -193.4%
Depreciation 41 93 126.7%
Profit before tax 95 38 -59.5%
Tax 41 19 -54.1%
Net profit 54 20 -63.5%
Net profit margin (%) 3.1% 0.9%  
No. of shares (m) 35 35  
Diluted earnings per share (Rs)*   5.9  
Price to earnings ratio (x)   93.3  
* 12 month trailing earnings      
* 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 23 stores spread across the country. This store specialises in books, gift articles and stationery.

In 1QFY08, the company added two new lifestyle stores at Noida and Rajouri Gardens, Delhi taking the total tally to 22 stores with a presence in 11 cities. It also opened 2 MotherCare shop-in-shops, 2 outlets of Desi Café and currently has 2 stores of M.A.C (cosmetics). During the quarter the company subscribed to 51% stake in Gateway Multichannel Retail (India) Ltd, a company engaged in retailing of home and merchandise and has the franchise for operating under the Hypercity Agros brand. In FY07, it acquired 19% shareholding of M/s. HyperCity Retail (India) Ltd., out of the total 51% of the option available to it. During 4QFY07, 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. The company made an entry into the entertainment sector by acquiring 45% stake in Timezone Entertainment Pvt. Ltd. The company has added 186,757 sq ft of area during the quarter taking its total store area to 1,357,305 as on June 2007.

What has driven performance in 1QFY08?
No stopping: The company witnessed a 27.2% YoY growth in the topline led by growth across its offerings. Shoppers Stop's own merchandise offerings grew by 27% YoY, while the consignment merchandise sales grew by only 2% YoY during 1QFY08. Customer entry increased by 20% YoY. During the quarter, the like to like store sales have registered a 13% YoY growth, while overall sales per square feet has gone up by merely 3% YoY. The new store additions continue to aid topline growth. In 1QFY08, the non-apparel revenue share increased to almost 42% as compared to 40% during the same period last year. Going forward too, the company expects the topline growth to be driven by the growth in revenues from the non-apparel segment.

Segmental revenue break-up
(Rs m) 1QFY07 1QFY08 Change
Own merchandise 1,719 2,189 27.3%
% of total revenue 89.0% 90.4%  
Consignment merchandise 179 182 1.5%
% of total revenue 9.3% 7.5%  
Other retail income 33 50 51.7%
% of total revenue 1.7% 2.1%  
Total 1,931 2,421 25.3%

Costs scale up: The company's operating costs grew at a faster pace than the topline growth, driving down the EBITDA margins, which contracted by 30 basis points (0.3%). Staff costs (as percentage of sales) have increased by 70 basis points on account of expansion of outlets (the company hired 450 employees) and also on account of pay hikes and high attrition rates.

The other reason for dip in EBITDA margins could be attributed to the fact that rentals have skyrocketed during the past few quarters and especially in the northern region. The per square feet rate in the north (as per the company's conference call) is double or more than double of what one has to pay in the west. Considering the competition and little scope left to expand and increase market share in tier I cities, players have to target new markets, increase customer base and market share, which has led to high rentals on account of high demand for space in the north. Factors such as demographics and spending habits have made the Northern region an attractive place and could be the reason why players (including Shoppers Stop, which opened two stores in Delhi this quarter) are moving north. The margins would have witnessed a decline but for the lower raw material costs and advertising and administrative expenses.

Consolidated cost break-up
(as a % of net sales) 1QFY07 1QFY08
Total Cost of goods 62.9% 60.4%
Staff Cost 7.9% 8.6%
Selling & distribution expenses 4.2% 3.4%
Lease rent and hire charges 7.8% 9.4%
Other Expenditure 10.3% 12.0%

Strained net margins: The impact of the contracted EBITDA margins has been reflected in the net margins, which contracted by almost 220 basis points (2.2%) during 1QFY08. However, the fall in net margins is severe as compared to EBIDA margins on account of higher interest costs and depreciation charges (the company re-estimated the useful life of certain classes of assets during the last quarter of FY07). In 1QFY07 the company had earned interest on surplus cash (including the IPO proceeds). The interest income is expected to decline going forward, as the company has started utilising the surplus cash towards expansion. As a result, the bottomline has declined by 64% YoY during 1QFY08.

What to expect?
At the current price of Rs 551, the stock is trading at a price to earnings multiple of 93 times its trailing 12-month consolidated earnings. The company's expansion plans are running well on schedule. Further to fund its ambitious expansion plans the company is planning to come up with a rights issue in 3QFY08 (indicated by the company during the conference call).

The retail sector in India is on a growth trajectory and considering Shoppers Stop position within the industry, the company is all set to capitalise on the opportunity. This is also indicated by its moves such as setting up of new formats like Hypercity, F&B (cafeterias), Mothercare, duty free shops at airports, the acquisition of a 45% stake in Time Zone (a kids-related initiative) and latest on the list is the acquisition of the 51% stake in Gateway Multichannel Retail (India) Ltd. The moves are a positive as they will widen the offerings and de-risk company's dependence on the flagship Shoppers' Stop stores. Considering the growth potential of the sector and the company's initiatives, we maintain our positive view on the stock from a long-term prospective.

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