All glitzy at one end of the spectrum and little to show at the other end
The flagship store
Shoppers Stop is the company's flagship business of departmental stores. It operates 55 stores including 2 airport stores across 24 cities. From what I can make out from the annual report the company offers a bundle of other business formats too. Such as HomeStop a premium home concept store across 13 stores in 10 cities. It is a one stop shop for all home needs ranging from home decor to furniture, bath accessories to bedroom furnishings carpets, health equipment etc, and all under one roof. Then there is Crosswords the lifestyle bookstore with a product mix of books, magazines, movies, music, stationery and toys. There is also the online foray Crosswords online. Not to mention HyperCITY (a 51% subsidiary) which offers the big box mixed retail format. The format includes food and grocery, fashion, electronics, home furniture, sports, toys and stationery. Then there is the tie up with Mothercare PLC of the UK to offer Mothercare shop in shops within Shoppers Stop. This concept is also offered in four standalone stores. There is also a retail agreement with the cosmetics major Estee Lauder to open stores on international brands like M.A.C, Estee Lauder, and Clinique. It has a joint venture called Timezone which is in the business of operating Family Entertainment Centres through 17 outlets, and a 50:50 JV with Nuance group of Switzerland to operate duty free stores at airports. It operates the duty free at Bengaluru International airport. This is quite a mouthful so to speak. Over the four regions -East, West, North and South -- the group operates a total of 68 outlets.
The summary of financial results
The brief summary of the financial results of the past five years reveals that the gross retail sales (net of excise) grew from Rs 13.5 bn in 2008-09 to Rs 24.4 bn in 2012-13.That amounts to an 81% increase in revenues in four years over the base year. The other operating income grew more leisurely and in a zig zag manner to touch a high of Rs 325 m in 2012-13from Rs 256 m in the base year. After provision of interest which too took to the zig zag route, and depreciation provision which too went in all directions, the pre-tax profit quite naturally took to a meandering route. From a pre-tax loss of Rs 395 m in 2008-09 to a pre-tax profit high of Rs 1.13 bn in 2010-11 to Rs 610 m in 2012-13. In 2008-09 there was also an exceptional provisioning of Rs 249 m, thus increasing the pre-tax loss to Rs 644 m. The profit after tax did a similar yo-yo if that is the right term. How do discerning investors make a call in such circumstances? For all the glitz and glamour attached to the biz, retailing appears to be close to a mug's game or some such.
For the matter of record the paid up share capital rose from Rs 349 m in the base year to Rs 415 m in the latest year. The reserves and surplus on the other hand completely humbles the capital with a figure of Rs 6.5 bn, up from Rs 1.98 bn in the base year. Of this figure the contribution of share premium reserves alone amounts to Rs 4.62 bn-or 71% of the total. In other words the increase in capital in the last five years was occasioned by the issue of optionally convertible warrants at a substantial premium to the face value. But given the increased working capital requirements during the year, the debt has risen to Rs 3.29 bn at year end from Rs 2.59 bn previously.
Bedevilled by expenses
Looking at the specifics, this company is bedevilled by expenses on both revenue and capital account which is particular to the retailing industry. This is coupled by its inability to make good of such costs. It is thus all the more surprising that the company does not think of pumping in more permanent long term capital to reduce the press on funds on one hand and on profitability on the other. This is especially so since both the gross block and current assets are growing given that the expansion schemes including that of its siblings, and the surge in current assets requires more liquidity. The company it may be noted has difficulty in raising cash from operations to fund its fixed asset expansion schemes for starters.
The paid up share capital as I said earlier is a very unimpressive Rs 415 m. The promoters hold an impregnable 67.5% of the total. This capital has to be seen in conjunction to the gross outlay of funds to the tune of Rs 14.37 bn. The company generated net revenues to the tune of Rs 22.28 bn in 2012-13 -- up 17% over that of the preceding year. This includes sales on account of own merchandise and consignment merchandise. The revenues include, separately, 'other retail operating revenues' of Rs 281 m. The income is made up in the main of facility management fees, income from store displays, and direct marketing income. One is not clear of the relationship of this source of income to the main body of the revenues. Is there a link or is it independent. Is there any corresponding revenue expense to earn this moolah? Then there is 'other income' of Rs 172 m, and this figure is made up of interest income from subsidiaries, and an item called 'compensation received for loss of business'. The latter figure amounts to 'side' income and hence not quantifiable on a year to year basis.
The other income factor
The point here is that the two other incomes of Rs 281 m and Rs 172 m add up to Rs 453 m. The pre-tax profit before exceptional items amounts to Rs 610 m. The contribution of this manna amounts to a slice over 74% of the pre-tax profit. This is to imply that on a post depreciation basis the company is simply not generating money from its mainline business. That part is coming across very clearly. The cost of materials consumed is as much as 63% of the net revenue from operations and excluding other operating revenues. Employee benefits rose phenomenally by 26% to Rs 1.6 bn. And, with depreciation charges rising to Rs 507 m from Rs 377 m previously the die was cast so to speak. It may be noted that the company acquired fixed assets to the tune of Rs 1 bn during the year.
There are several incongruities about its functioning. Take the fixed assets schedule for example. The tangible gross block at year end amounted to Rs 6.8 bn. The largest constituent in this sub-head is 'leasehold improvements' at Rs 2.38 bn. As the nomenclature suggests the company does not own any of the properties, but has spent considerable sums sprucing up their looks. There is the TINA factor to contend with. Next in line is the 'air-conditioning and other equipment' at Rs 1.97 bn. The sad part to all this is that when the lease term expires and the company is unable to renew the lease for whatever reason the accumulated expenditure may come to nought. But such expense outlays are a part of the larger game that retailers have to put on.
Outlays on capital account
Then there are the large outlays coming under the subhead Long Term Loan and Advances. There are advances to the tune of Rs 1.36 bn towards 'premises and other deposits' and 'Loans and advances to siblings' on a gross basis amounting to Rs 1.2 bn, of which Rs 229 m is considered doubtful. It appears that some of the siblings are real write-offs or some such. (The auditor's in their report have appended an intriguing note stating that the company has granted unsecured loans to one party during the year aggregating Rs 1.53 bn. At year end the outstanding balance aggregated Rs 835 m...... and the maximum amount involved during the year was Rs1.13 bn.) Strange wording to start with given that the maximum balance during the year was Rs 1.53 bn, and besides it is not known whether this yearend outstanding is included in the 'advances' figure of Rs 1.36 bn. Under liabilities there is a 'current liability' outstanding of Rs 718 m towards 'gift vouchers and awards redemptions'. On the revenue expenditure side is the major expense item of 'lease rent and hire charges' of Rs 2.16 bn. No wonder then that retailing outfits-especially those with multihued tentacles -- are scraping the bottom of the barrel at the end of the day.
Where this company scores as does Trent Ltd is in its ability to generate some working capital gains by literally selling cash down and delaying payments for revenue goods purchases. There is a massive gap between trade receivables and trade payables at the end of the day. Where it also scores is in the equally massive gap between current assets and current liabilities at the end of the day. The latter figure is substantially higher at the end of the day. But the latter exercise also involves skating on thin ice if any of the pertinent debtors go belly up for whatever reason. But such deliberate efforts have not quite paid off at the end.
One of the apparent big drain on the company's financials as stated earlier is the investments in its siblings and joint ventures. The company boasts of six direct siblings and two joint ventures. The immediate payback in terms of return of equity is only a trifling. But that is not the whole point. How the company benefits from its inter-se dealings with its siblings is really the issue. There is no clarity on this point and neither will there be any. The company with the largest paid up capital among the siblings is Crosswords Book Stores Ltd with a book investment value of Rs 251 m (shares acquired at a premium to the face value). Four other siblings with an investment value of a mere Rs 0.5 m each are in the boondocks and the investment in each company is fully provided for. But the company sporting the largest investment is its JV --Nuance Group India Pvt. Ltd. This investment has a book value of Rs 364 m. One will not get to know the innards of Nuance given its legal status. The parent owns a 51% stake in Hypercity Retail and a full 100% stake in the other five companies.
The performance of four of the siblings with capital bases of Rs 0.5 m each are not worth expounding on. The other two -Crosswords and Hypercity Retail- are 'nuggets' of their own standing. The first named lost money during the year. On revenues of Rs 908 m it ran up a pre-tax loss of Rs 59 m. And as fate would have it, the company also made a tax provision of Rs 17 m, thus increasing the post tax loss to Rs 76 m. It would appear from the above provision that some of the expenses claimed are not tax deductible or some such. The parent should give some clarity on this aspect. The company however had positive reserves of Rs 41 m.
The other sibling Hypercity Retail is some sort of a knockout. It boasts a paid up capital of Rs4.6 bn. It is not known what the exact makeup of this capital base is. The parent, as I enunciated earlier, has an equity holding valued at Rs 6.8 m which accounts for 51% of the equity capital or some such. The parent also holds 7% compulsorily convertible preference share valued at Rs 1.42 bn acquired at a premium, and separately, 7% cumulative redeemable preference shares valued at Rs 1.03 bn. That makes a total capital holding of Rs 2.46 bn. It is not known in what form the balance capital is held. As against the paid up capital of Rs 4.6 bn, it boasts negative reserves of Rs 4.5 bn. So, effectively speaking, the company is up to no good as the net worth is almost fully eroded. On revenues of Rs 7.8 bn the company toted up a pre-tax loss of Rs 877 m. It appears to have a serious problem here, as inspite of its size it is unable to break ground. It is not also unknown whether the parent has stood guarantee for any loans or some other exigencies on behalf of this ailing sibling. But the picture does not look good at all.
It is very important for companies to explain at length to the main body of the shareholders on the performance or otherwise of their errant or performing siblings. They do not have carte blanche to run companies at their own will and discretion. This is a very erroneous and fateful fait accompli as matters stand it appears. The fact that they do not by law constitute the shareholder base of the siblings is a totally extraneous matter.
The fate of the JVs is unknown, but may well be on expected lines.
All in all, this is not a company which exudes any confidence or positive vibes whatsoever.
Disclosure: I do not hold any shares in this company, either directly, or under any non discretionary portfolio management scheme
This column Cool Hand Luke is written by Luke Verghese. Luke has been a business journalist, financial analyst and knowledge management head with a professional experience of more than 20 years. An avid watcher of the stock market, he has written extensively on stock market trends. His articles have featured in Business Standard, Financial Express and Fortune India amongst others. He has also been the Deputy Editor, Fortune India and the Financial Editor of The Business and Political Observer.