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Shoppers’ Stop: Top up, bottom down! - Views on News from Equitymaster

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Shoppers’ Stop: Top up, bottom down!
Oct 29, 2007

Performance summary
  • Consolidated topline grows 38% YoY; driven by strong growth across its core categories.
  • Operating profits decline by almost 16% YoY owing to increase in cost of operation besides opening of new stores.

  • Net profits decline considerably by 97% YoY.

  • Started utilising the surplus cash towards expansion resulting in decline in interest income.

Consolidated financial snapshot
Rs (m) 2QFY07 2QFY08 Change 1HFY07 1HFY08 Change
Net sales 2,010 2,774 38.0% 3,730 4,962 33.0%
Expenditure 1,852 2,640 42.6% 3,452 4,696 36.0%
Operating profit (EBDITA) 159 134 -15.7% 278 267 -4.1%
EBDITA margin (%) 7.9% 4.8%   7.5% 5.4%  
Other income 7 19 167.6% 11 24 122.1%
Interest (13) 17 -237.7% (25) 29 -215.8%
Depreciation 52 115 122.4% 93 206 121.1%
Profit before tax 126 20 -84.4% 221 56 -74.8%
Tax 46 19 -58.6% 87 38 -56.5%
Profit after tax 80 1 -99.2% 134 18 -86.7%
Share of loss in associate - -   - -  
Minority Interest** - 2   - 4  
Net profit 80 2 -97.1% 134 22 -83.6%
Net profit margin (%) 4.0% 0.1%   3.6% 0.4%  
No. of shares (m)       35 35  
Diluted earnings per share (Rs)*         3.7  
Price to earnings ratio (x)         138.1  
* 12 month trailing earnings
** In Gateway Multichannel Retail (Inida) Ltd.

What is the company’s business?
Shopper’s Stop is the pioneer of pan-nation one-stop retail outlets. Starting in 1991 with a single store in Mumbai, it has now developed 23 stores and the 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 47 stores spread across the country. This store specialises in books, gift articles and stationery. The company has added approximately 186,640 sq ft of area during 1HFY08 taking its total store area to 1,365,070 as on September 2007. In FY07, it acquired 19% shareholding of M/s. HyperCity Retail (India) Ltd., out of the total 51% of the option available to it.

The group primarily caters to lifestyle retailing segment but has also forayed into speciality retailing and has taken up some other initiatives too. Within lifestyle segment, the group operates department stores (Shopper’s Stop), Home Stores (Home Stop) and Concept Stores (Arcelia) offering a wide range and brands of cosmetics, footwear, etc.

Foraying in to speciality retailing, the company has opened stores that offer products or brands of a particular product line. For instance, Mother Care 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. To gain the first mover advantage, the company has marked its entry into other 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 Shopper’s Stop and its promoter group).

What has driven performance in 2QFY08?
Sturdy topline growth: The retail major continues to clock robust topline growth with its own merchandising seen growing at the rate of 39% YoY during 2QY08. While merchandise sold on consignment basis has witnessed a decline of 4% YoY, other retail income has witnessed whopping 119% YoY growth. The 38% YoY and 33% YoY growth in topline during 2QFY08 and 1HFY08 respectively has been driven by growth across its offerings. The topline growth of retailing companies is a function of the number of stores and the average sales per store (or average sales per square feet at the broader level). During the quarter (towards the end of 1QFY08), the company opened one Shoppers’ Stop store (1,40,000 sq ft) in Delhi and two Arcelia stores (avg area 7,765 sq ft). Arcelia is a non-apparel store, offering cosmetics, jewellery, accessories, bags and footwear, targeting the woman customer.

The first Arcelia store was opened in Pune in September and the second store in Select CityWalk Mall, Delhi in October. During 1HFY08, like to like sales increased by 20% YoY, while customer entry increased by 26% YoY. Though customer entry has increased, conversion ratio dropped by 11% YoY in 1HFY08. However, transaction size has increased by 12% YoY resulting into 1% growth in sales per sq ft. The conversion ratio dropped on account of opening of new stores, which is expected to ramp up once the new store sales pick up. The growth in same store sales has been on the higher side compared to new stores, which is indicative of the company being able to convert footfalls into revenues.

Segmental revenue break-up
(Rs m) 2QFY07 2QFY08 Change 1HFY07 1HFY08 Change
Own merchandise 2,008 2,797 39.3% 3,727 4,986 33.8%
% of total revenue 89.0% 91.3%   89.0% 90.9%  
Consignment merchandise 224 214 -4.3% 403 396 -1.7%
% of total revenue 9.9% 7.0%   9.6% 7.2%  
Other retail income 24 53 118.7% 57 102 80.1%
% of total revenue 1.1% 1.7%   1.4% 1.9%  

Costs take a toll on margins: The operating profits of the company declined by 16% YoY owing to increase in cost of operations and opening of new stores. The EBITDA margins contracted by 3.1% in 2QFY08 as the operating costs grew at faster pace as compared to sales growth on a YoY basis. Staff costs (as percentage of sales) have increased by 0.2% on account of expansion of outlets and retention costs. In order to curtail the high attrition rate, the company has had to review salaries/wages on a time-to-time basis, which has now become an industry practice. On account of new roll out of stores, in order to maintain market share and ensure proper supply chain, the company had to incur huge selling and distribution costs.

Though the company has contracted properties at a much lower rate than the current prices for its upcoming expansion plans, the lease and rental costs have gone up on account of provision made to the tune of Rs 100 m (in case the court judgment says retailers have to pay service tax on rentals). The other expenditure has also gone up considerably owing to rise in electricity charges. Thus the rising electricity charges, newly imposed service tax on rentals and attrition levels has exerted pressure on the operating margins of the retail major.

Though in 1HFY08, Cross Word witnessed a turnaround, the company’s new stores and new initiatives like Mother care (standalone) are yet to breakeven. However, the stores in operation across formats are contributing to the topline but are expected to generate profits in the next three to four quarters depending upon the format.

Consolidated cost break-up
(as a % of net sales) 2QFY07 2QFY08 1HFY07 1HFY08
Total Cost of goods 65.3% 62.7% 64.2% 61.7%
Staff Cost 6.8% 7.8% 7.3% 8.2%
Selling & distribution expenses 3.2% 3.7% 3.6% 3.5%
Lease rent and hire charges 7.6% 8.9% 7.7% 9.0%
Other Expenditure 9.2% 12.1% 9.7% 12.2%

Net margin tumbles: Net profits declined considerably by 97% YoY on account of contraction in EBITDA margins and higher depreciation charges (the latter is the fallout of re-estimation of useful life of its assets). The company has leveraged its balance sheet and has started utilising the surplus cash towards expansion, which has resulted in a decline in interest income and increased interest expenses leading to strained net margins. Few of the recently opened stores have witnessed break even at the operating level and in the next 2 to 3 quarters are expected to start contributing at the net level.

The management has indicated that once the new store openings growth reaches 20%, the EBDITA 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. However, Shopper’s Stop is feeling the heat currently on account of a lower base.

What to expect?
At the current price of Rs 510, the stock is trading at a price to earnings multiple of 16 times our estimated FY10 earnings.

The retail sector in India is on a growth trajectory and considering Shopper’s Stop position within the industry, the company is all set to capitalise on the opportunity. 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 it will de-risk the company’s dependence on the flagship Shopper’s Stop stores. Given that the net profit numbers reported by the company for 1HFY08 are significantly lower than our estimates, we shall have to downgrade our numbers accordingly.

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