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Shoppers’ Stop: Losses mount - Views on News from Equitymaster

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Shoppers’ Stop: Losses mount
Nov 4, 2008

Performance summary
  • Consolidated revenues grow by 25% YoY in 2QFY09, while on a standalone basis topline growth stands at 22% YoY during the same period under consideration.

  • Shoppers’s Stop continues to report operating loss in 2QFY09 as costs grow at a faster rate as compared to topline growth.

  • Besides the operating losses, high depreciation charges and interest costs aggravate losses at the net level.



Financial performance snapshot

Rs (m) 2QFY08 2QFY09 Change 1HFY08 1HFY09 Change
Net sales 2,793 3,501 25.3% 4,988 6,335 27.0%
Expenditure 2,641 3,506 32.8% 4,698 6,394 36.1%
Operating profit (EBDITA) 152 (6)   290 (58)  
EBDITA margin (%) 5.4% -0.2%   5.8% -0.9%  
Interest 17 70 306.2% 29 123 324.7%
Depreciation 115 165 43.2% 206 315 53.1%
Profit before tax 20 (241)   56 (497)  
Tax 19 (14)   38 (27)  
Minority Interest** 2 44   4 74  
Net profit 2 (183)   22 (396)  
Net profit margin (%) 0.1% -5.2%   0.4% -6.3%  
No. of shares (m) 35 35        
Diluted earnings per share (Rs)*   (11.2)        
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 2QFY09?
  • The retail major reported a decent 25% YoY growth in topline backed by growth across its offerings. The company’s departmental stores (Shopper’s Stop) witnessed 17% 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 7% YoY. While the sales per sq ft for departmental stores reported marginal 1.2% YoY growth, customer entry decreased by 6% YoY. The fall in footfalls could be attributed to the economic slowdown and inflationary situation witnessed during the quarter. In case of slowdown, luxury retailing, the segment in which the company primarily operates, is the first one to take hit.

  • Private labels that fetch high margins reported 17% YoY growth during 2QFY09 and their contribution to total revenues improved marginally by 0.4% to 22.4% during 2QFY09. As far as the revenue mix is concerned, the company’s apparels to non-apparels ratio stood at 63:37. As regards divisional sales in the apparel category, the contribution of men’s apparel to total apparels stood at 34.4% in 2QFY09, while in case of kids apparel, divisional sales improved by 0.6% to 9% during the same period. The contribution of women’s apparel increased by 0.7% to 19.3% in 2QFY09.

  • The company reported a loss of Rs 6 m at the operating level in 2QFY09 as costs grew at a faster pace as compared to topline. The general increase in price level seemed to have boosted the cost of operation. The increase in the cost of sourcing might be a result of increased competition and ambitious expansion plans (store roll out necessitates prior inventory booking). However, the company has not divulged the exact reason for the same. The company’s move to increase retail footprint across categories has also boosted employee costs and lease rentals.

  • 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 respectively.

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, Shoppers' 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 of nearly Rs 3 bn 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.

The company has announced that it will raise Rs 3 bn through rights issue, while we had factored in Rs 5 bn. The company has outlined huge expansion plans and for the same it will have to borrow funds. Thus, the debt burden will increase that will exert pressure on the already strained margins. We had earlier opined that while the company’s expansion moves are a positive in the long term, in the medium term, there is hardly any upside potential left. We maintain this view.

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