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Shopper's Stop: Focused effort pays - Views on News from Equitymaster
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Shopper's Stop: Focused effort pays
Aug 28, 2009

We recently met the management of Shopper's Stop Ltd. to understand the prospects of the Indian retailing sector in general and the company's strategy to withstand the current difficult times and its future prospects. Here are the key takeaways from research meet. Focused effort pays: Shopper's Stop had run into losses in FY09. However, it was back to reporting profits in 1QFY10. The positive change has not come in on account of robust sales but cost reduction measures, change in merchandise mix etc.

How have things been so far...

  • Shopper's Stop standalone revenues account for 85% of its consolidated revenues, while other formats and group ventures make up the balance. Going forward, the revenue mix is likely to remain more or less similar as the company has not shifted focus from the core business while expanding into other retail formats and ventures.

  • To support margins, the company as planned is concentrating on increasing the share of private labels to 25% of revenues. However, in the recent quarter it came down to 17% from 20% on account of two factors namely the economic slowdown that impacted sales in general and steep discounts offered on branded stuff to clear off inventory which considerably narrowed the price difference. Thus branded products were available at prices which were nearly at par with those of private labels.

  • Except for the Home Stop and Arcelia, other formats have broken even at least at the store level. While the company is optimistic about these two initiatives, they will take a little longer time to turn profitable as the market in India for high end luxury items is at a very nascent stage. On a consolidated basis, the airport retailing venture with Nuance group is yet to break-even and is expected to take a little longer than expected on account of slowdown in the travel and tourism industry as the growth of this format is linked to tourist traffic at the airports. In the near to medium term this format is likely to continue being a drag on the company's overall performance though in the long run it is expected to support growth.

  • The like to like store growth has been cannibalized to some extent in a few regions that has also impacted the overall growth.

Few of the strategies adopted by the company are as follows:

  • On a planned basis the company has reduced the share of bought out merchandise to release cash and avoid the risk of holding inventory on books. In FY09 the bought out merchandise accounted for 56% of revenues as against 58% in FY08. The same in 1QFY10 has come down to 51%.

  • As mentioned earlier, the company plans to increase the share of private label to 25% to support profitability.

  • The top 150 employees have taken a 15% pay cut, while the upcoming properties have been contracted at prices which are lower by 20% to 30% (around Rs 60 per sq ft). The company has planned to adopt a revenue sharing model.

  • The company has shrunk the office space by 20% and reduced corporate expenses by 40%. These initiatives apart from non replacement of 300 employees enabled the company to improve profitability. The impact of all these initiatives would also be reflected in the coming quarters.

The cost rationalization by way of optimum utilization of resources, changing the revenue mix depending upon demand, lowering inventory holding period from 16 weeks to 12 weeks especially in case of private labels has also enabled the company to unlock cash. While these are some of the initiatives taken by the company, the change in policy such as removal of service tax on lease rentals have also come as a big positive for the retailers. Also during the same quarter last year the company had spent on brand campaign and logo change, which inflated its cost of operation. The company has also re-estimated useful life of assets that led to a change in depreciation policy. The company was very conservative in its approach and the changed policy is more realistic and in line with industry practice.

On the expansion plans front: The company is adding 4 stores each year in the coming two to three years as far as Shopper's Stop departmental stores are concerned. All formats put together the company is adding approximately 20% more space every year and this will be funded through internal accruals.

The company had earlier outlined a rights issue. The plans are very much on the anvil and the company would go ahead with the same when it plans to increase the stake from 19% to 51% in Hypercity (by June 2010), which is growing at approximately 5% to 7%.

What to expect?
The company's focus lies on high end and luxury retail markets. Considering India's demographic profile, there is lot of scope for modern retail to flourish in India. The company is comfortable with a debt to equity ratio of 1 and is targeting a return on capital employed of above 20% going forward. However, considering the growth phase of the Indian retail sector, the company's focus on high end customers, slim margins, huge expansion plans and slower growth of the retailing sector in the medium term, it is likely to be difficult to achieve such a high return on capital.

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