Shoppers Stop: Buy

Shoppers Stop is comfortably placed on the funding side, while still ramping up store presence at a good pace.



Holding back foreign direct investment in the retail sector has wreaked havoc on stocks of large Indian retailers. Shoppers Stop saw its stock lose 27 per cent in value over just a month.

This places it at an attractive price for investors with a two-to-three year perspective. At Rs 259, the stock trades at 26 times estimated consolidated earnings for FY-13. While closest comparable, Pantaloon Retail, trades at much lower an earnings multiple, it is plagued by higher debt. Other comparable retailer, Trent, has struggled to maintain profit growth.

Shoppers Stop is comfortably placed on the funding side, while still ramping up store presence at a good pace. It is also among the few listed retailers with a nation-wide presence and strong brands across product categories that address a wide consumer base. Material prices on the wane, healthy sales growth in older stores (operational for a year or more) and increasing customer footfalls are other factors indicating a bright future for the company.

Tapping a wide market

The company's flagship, Shoppers Stop department store, cosmetics chains MAC, Clinique and Estee Lauder, baby products store, Mothercare, and home solutions, Home Stop, are premium to luxury plays. The company currently has 49 Shoppers Stop stores, 36 MAC/Clinique/Estee Lauder stores and 38 Mothercare stores, including shop-in-shops.

Through its hypermarket chain, HyperCITY, which retails fruits, vegetables, groceries, household goods and appliances, apparel and toys, the company addresses the middle-income segment as well. The company currently has 11 stores in this chain. Crosswords, which retails books and gifts, rounds off the company's diverse product portfolio. Using franchisees to expand this chain, the stores now number 87.

A presence in the luxury segment shields the company from consumers reducing discretionary spends in the face of rising living costs.

At the same time, its hypermarket presence allows it to tap the burgeoning mass market to capitalise on the demand for non-discretionary staple products, as well as a bounce back in demand for discretionary items.

It is further reducing its focus on its own private label and stocking more international brands. These brands — such as Mango, Espirit, Tommy Hilfiger, Lancome, and so on — are well-established on the international and domestic scene.

Expansion on track

In the first half of this fiscal, Shoppers Stop added 0.6 million square feet to store space across formats, keeping pace with its intended roll-out for the fiscal. On the funding side the company is well-placed with consolidated debt:equity at a low 0.6 times (end-March '11). The company plans to add eight Shoppers Stop stores and 4 HyperCITY stores by the end of the next fiscal year. Hitherto concentrated in metros and other large cities, the company is gradually moving into the next rung of cities to capture the growing demand there.

If FDI in multi-brand retail, which has been put on hold, is allowed, the company will benefit in the long term. Hypermarkets usually operate on a discount model, relying on volumes. That makes efficient supply chains and technology imperative to keep costs under control.

The current FDI rules stipulate a minimum investment in such infrastructure. The company will thus have the option of partnering foreign players to bring in the know-how and capital required, which was not available till now.

Healthy pace of growth

Consolidated revenues grew a strong 39 per cent in the first half of this fiscal. Sales growth in stores, operational for over a year for the Shoppers Stop chain, stood at a healthy 11 per cent, while the figure for HyperCITY was 8 per cent. These figures indicate that existing stores are doing well, and the company is not relying entirely on new stores to grow revenues. Hiccups in opening new stores will, therefore, not heavily impact earnings.

With HyperCITY still in a nascent stage, break-even is likely to be achieved only in the later half of the next financial year. Consolidated operating and net margins, therefore, are unlikely to show much improvement. Where margins could receive a boost is from lower cost of material.

Exclusive of HyperCITY, apparel accounts for about 60 per cent of revenues. Waning cotton and synthetic prices on reduced global demand and a supply glut will help reduce input costs. Operating and net margins currently stand at 4 per cent and 1 per cent respectively.

For the year-ended March '11, operating margins were 7 per cent while net margins were 2 per cent.

The June '11 quarter saw the company slip into net losses at the consolidated level due to higher costs in HyperCITY. It then managed to move back into profits in the September '11 quarter on lower material prices and other expenses.

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