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Shoppers Stop: Research meet excerpts

Sep 14, 2007

We recently met with the management of Shoppers Stop Ltd in order to get a deeper understanding of the company’s business and its future plans. Here are the extracts of the meeting. Business model: The company has a distinctive business model. It has presence across retail formats except medical care and health services.

The group primarily caters to lifestyle retailing segment, however it has forayed into speciality retailing and has taken up some other initiatives too. Let us take a look at various segments it caters to and the formats within the segments.

  • Lifestyle retailing: Lifestyle retailing is a business of high margins and low volumes.

    Within this segment, the group operates department stores (Shoppers Stop), Home Stores (Home Stop) and concept Stores (arcelia).

  • Value retailing: These stores offer wide range of products and goods. Compared to lifestyle retailing, this is a high volume low margin business. Hypercity is a departmental store that offers products of various brands right from food and grocery to apparels. While Express City store has on shelf products such as dairy products, grocery, bakery items and personal care products.

  • Speciality retailing: These stores offer products or brands of a particular product line such as Mother Care brand offers wide range of apparels for infants and expecting mothers, the café shop offers coffee and pastries, while desi café offers Indian food. The company’s tie up with Mac has enabled the group to cater to the make up and cosmetics segment.

There are other retail formats not so popular in India as of now, however the group is the first retail player to foray into these kinds of formats such as airport retailing (duty free retail outlets, a 50:50 JV with The Nuance Group AG) and Timezone, (a fun family interactive entertainment centre and a 50:50 JV formed between LAI, Australia and the shoppers stop and its promoter group).

Expansion plans: From around 550,000 sq feet in FY03, Shopper’s Stop has increased its retail space at a CAGR of 20% over the last five years to 1.4 m sq ft in FY07. By FY10, this is expected to touch 3.6 m (i.e. increasing at CAGR of almost 46% in next three years), even after accounting for around six months delay in the delivery of already agreed retail space. While this pertains to departmental stores, other formats such as value retailing is expected to achieve size of 2 m sq ft by 2010 and speciality retailing to around 0.8 m sq ft. Thus, by 2010, the group will have ramped up its operational retail space to around 6.9 m sq ft.

Gaining larger share of customers’ wallet: As compared to its peers, the company offers wide range of various products. Private labels (own labels) account for only 30% of the company’s total sales, while in case of its peers it’s other way round. Though private labels have higher gross margins, the company’s strategy helps it to attract more customers and increase customer base by virtue of being able to cater to the needs of the diverse set of consumers.

While the existing retail players are expanding reach, new players are also coming in, thus expanding competition. However, Shoppers Stop is well placed here since its target customer segment is the B+ segment, which is more concentrated in the Tier I cites and select Tier II cities. The new entrants are foraying into value retailing business segment. Further, those who are venturing into the retail sector as direct competitor to Shoppers Stop will have to face entry hurdles in terms of sky rocketing rentals, rising cost of operation, availability of quality retail space etc. And by the time these players start their full-fledged operations, Shoppers Stop would have further increased its penetration in Indian markets. Further, the company has already tested the markets and has a hands on experience (as compared to others in lifestyle retailing segment) as compared to its peers.

Operational efficiency: Competition is bound to increase going forward, however, one must note that currently in India, retailing is in the second phase of evolution, a period of rapid revenue growth as customers become aware of products. This leads to strong growth led by strong demand by the consumers. During the growth stage, the goal is to increase consumer base, cater to customer preferences and increase sales and profitability.

The company has already finalized properties for its expansion plans and that too, not at the current high levels but at reasonable or feasible rates (almost at 50% lower to the current rates prevailing in the market). For Shoppers Stop, properties have been signed at approximately Rs 60 per sq ft and for Hypercity, the departmental stores, lease contrasts have been entered into at much lower rate of Rs 40 per sq ft. This strengthens their position. Though the company is expected to witness cost pressures in terms of employee costs, power costs etc, these are industry wide issues.

The rising electricity charges, newly imposed service tax on rentals and attrition levels are bound to exert pressure on operating margins of the group. However, considering the current retail boom, changing lifestyle, rising disposal income levels and changing consumer mindset regarding credit, achieving EBITDA margins of around 7% to 8% is feasible and the company is confident of achieving the same.

New initiatives: 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, Time Zone (a kids-related initiative) and latest on the list is the acquisition of the 51% stake in Gateway Multichannel Retail (India) Ltd (a company engaged in retailing of home and general merchandise through various channels and has the franchise for operating under Hypercity Agros brand, retailing through catalogue and internet). These moves will broaden its offerings and de-risk its dependence on the flagship Shoppers’ Stop stores.

Funding: The company’s debt to equity ratio stood at 0.5 as per FY07 consolidated numbers. To fund its expansion plans, the company is planning to come up with a rights issue during 3QFY08.

What to expect?
At the current price of Rs 550, the stock is trading at a price to earnings multiple of 93.1 times its trailing twelve months earnings.

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. However, execution risks remain a concern in view of the aggressive growth plans. We will soon put up a detailed research report.

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Mar 22, 2019 12:05 PM


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