Review of Shopper's Stop's Q4 earnings by Edelweiss

External factors impair growth; result update Q4FY17; Buy

Shoppers Stop’s (SSL) Q4FY17 revenue belied expectation on account of stores being non-functional due to a few malls going under renovation.

Key positives were: i) 5.8% YoY LTL sales growth for HyperCity (2.1% YoY in base); and ii) EBITDA increased marginally by 12bps YoY due to lower other expenses (down 153bps YoY). Key negatives were: i) LTL departmental store sales dip of 1.1% YoY (lowest in past many quarters); and ii) LTL department store volume decline of 3.3% YoY (lowest in 22 quarters).

It posted a loss of INR361mn due to impairment loss of HyperCity (INR360mn) and NGIPL (INR118mn). We are enthused by SSL’s investments in omni-channels and expect its LTL sales growth to bounce back with recovery in urban consumption. Maintain ‘BUY’.

Non-functional stores pinch growth

SSL’s departmental stores’ LTL sales declined 1.1% YoY in Q4FY17, while LTL volume fell 3.3% YoY due to stores being non-functional owing to a few malls going under renovation; the impact is expected to wane by Q2FY18.

Proportion of private labels slipped 200bps YoY resulting in to lower EBITDA margin. Overall conversion ratio increased by 1.1%. While average selling price rose 2.2% YoY, transaction size grew 7.2% YoY. Hypercity reported robust LTL spurt of 5.8% YoY.

Q4FY17 conference call: Key takeaways

In SSL, the company is targeting 6.5% YoY LTL growth in departmental stores and 40-50bps YoY EBITDA margin expansion in FY18. The company will invest in brand marketing.

Further, the company is focussing on reducing sale period (55 days versus 65 days in base). In Hypercity, the company estimates double-digit LTL in FY18 and EBITDA to break even at the company level by Q4FY18. LTL online growth stood at 50% YoY. It will be fully omni-channel by September 2017.

Outlook and valuations: Positive; maintain ‘BUY’

The government’s recent directive (press note 3) on online players is a positive for physical retailers. Further, SSL is envisaged to reap benefits of its expansion strategy aided further by a normal monsoon and improvement in discretionary spends. We maintain ‘BUY/SP’ with SOTP-based target price of INR415. At CMP, the stock is trading at 9.8x FY19E EV/EBITDA.

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