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Shopper's Stop: Banking on margins - Views on News from Equitymaster

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Shopper's Stop: Banking on margins
Nov 4, 2009

Performance summary
  • Standalone topline grows by a subdued 9.6% YoY. This muted growth is the result of lower sales per sq. ft.
  • Operating margins expand by 5.3% on account of slower growth in cost of operations.
  • The company reports net profit of Rs 121 m as against a loss of Rs 110 m during the same period last year. The same is on account of a strong show at the operating level and lower depreciation charges.
  • On a consolidated basis, topline grows by 9.3% YoY. At the net level, the company reports a profit of Rs 87 m during the quarter as against a loss of Rs 183 m in 2QFY09.


Financial performance snapshot
Rs (m) 2QFY09 2QFY10 Change 1HFY09 1HFY10 Change
Net sales 3,389 3,715 9.6% 6,149 6,481 5.4%
Expenditure 3,324 3,448 3.7% 6,079 6,062 -0.3%
Operating profit (EBDITA) 65 267 313.1% 70 418 500.5%
EBDITA margin (%) 1.9% 7.2%   1.1% 6.5%  
Interest 50 54 8.8% 86 109 27.5%
Depreciation 142 62 -55.9% 277 123 -55.5%
Profit before tax (127) 150   (293) 185  
Tax (17) 29   (30) 40  
Exceptional Items - -   - -  
Net profit (110) 121   (263) 146  
Net profit margin (%) -3.3% 3.2%   -4.3% 2.3%  
No. of shares (m)       34.9 34.9  
Diluted earnings per share (Rs)*         (6.5)  
Price to earnings ratio (x)   -     -  
* 12 month trailing earnings

What has driven performance in 2QFY10?
  • Shopper’s Stop’s revenues grew by 10% during 2QFY10. The double digit growth was largely supported by the double digit growth in sales of departmental stores (up 10% YoY). The same was the result of increase in footfalls (up by 5.6% YoY) and new store openings. The growth in sales across formats stood at 11% YoY. The growth came in on account of increase in customer entry, increase in transaction size (up 12% YoY) and increase in average selling price (up by 5.3% YoY). Otherwise, revenue per sq ft declined by approximately 3% YoY. The same could be the result of de-growth reported (6.6% YoY) by stores that were operational during both the quarters and are older than five years, while stores less than five years reported growth of 7.9% YoY.

  • The company increased its focus on consignment merchandise (lower bought out merchandise means lower mark downs) to sustain margins. The revenue contribution of consignment merchandise improved to 39% from 30% in 2QFY09. The share of private labels decreased by 2.3% YoY to 20.19% in 2QFY10. The company consciously changed its merchandise mix to lower the cost of inventory, which in turn perked up margins.

  • As regards revenue mix, the share of non-apparel segment is increasing. The apparel segment share declined from 62.7% in 2QFY09 to 61% in 2QFY10. As regards divisional sales in the apparel category, the contribution of men’s apparel to total apparels declined to 32.4% in 2QFY10 from 34.4% in 2QFY09, while contribution of women’s apparel improved marginally by 0.2% to 19.5%. The kid’s apparel contribution remained constant.

  • The company reported four-fold growth in operating profits as costs grew at a slower pace as compared to growth in revenues. The cost control measures undertaken by the company enabled it to report superior growth in profitability. The top 150 employees took a pay cut. Further, last year the lifestyle retailing marketing costs were on the higher side on account of huge amount spent on brand campaigns and logo change. Thus, the company was able to bring down employee costs and selling and distribution costs. Moreover, the company reduced power units consumed and right-sized the organization at the store level. All of this led to the 5.3% expansion in EBITDA margins.

  • At the net level the company was back to reporting profits on account of the impressive show put up at the operating level and lower depreciation charges. The company had re-estimated useful life of assets and accordingly revised depreciation rates from 1 April, 2009. This resulted in lower depreciation cost to the tune of Rs 83 m which further boosted the bottomline.

What to expect?
The company holds 19% stake in Hypercity and can increase it to 51% by the end of June 2010 (period extended from December 2008). Post the acquisition of this stake, Shopper’s Stop and Hypercity would make up for majority of the consolidated revenues and the remaining would be contributed by the other initiatives taken by the company such as airport retailing (Nuance group) and Time Zone entertainment (interactive entertainment, games).

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. 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. It remains to be seen whether the same is achievable and sustainable 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.

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