Shoppers Stop: Sell

Retailer Shoppers Stop has got a lot of things right. Rework on the hypermarket format is starting to pay off, expansion of the other formats is on track, and sales growth is in better shape. The company has low debt and strong brands in its portfolio.

But though the hypermarket business is finding its feet and posting operating profits, actual margins are low. Fresh expansion, if undertaken, can reverse the nebulous profit picture.

Even in the other formats, operating profit margins are low at 5-6 per cent. Steady expansion on this front has kept, and will, keep a lid on quick margin expansion. Strong earnings growth in the next few quarters, therefore, may be hard to manage.

At ₹549, the Shoppers Stop stock trades at 115 times the standalone trailing 12-month earnings. The company makes losses at the consolidated level.

Its 62 per cent rise in the past year appears to have factored in most of the positives. With few triggers to drive prices higher, gains may be limited in the next few quarters. Investors can make the most of the good price run and book profits in the stock.

Shoppers Stop’s diverse store chains encompass Shoppers Stop department store, bookstore Crosswords, cosmetics MAC, Clinique, Bobbi Brown and Estee Lauder, chains Mother Care and Home Stop, and HyperCITY, the hypermarket business.

But HyperCITY had been a drag on the operating profits of the company for years; it forms about a quarter of Shoppers Stop’s consolidated sales.

A higher share of food and groceries, which have lower margins, was partly to blame. Store sizes were then scaled down and product mix shifted towards fashion. The company exited the consumer durables and tech products businesses at select stores. All this helped improve store-level operating profit margins to a little over 1 per cent over the past four quarters — it was incurring losses earlier. But HyperCITY, a subsidiary of Shoppers Stop, is even so barely eking out operating profits. Sale of property aided profit expansion in the past two quarters, but this could dry up going forward. At the net level, HyperCITY is still making huge losses.

Sales growth in this format is flagging too, dropping from 16 per cent in the September 2013 quarter to 8 per cent by June 2014, as customer entry dropped following the resize and exit from some product categories.

The company has held off from quick addition to the HyperCITY’s chain, as it was reworking the strategy. This helped shore up profit margins, as it didn’t have to contend with the high initial expenses involved in new store openings. Should any addition be made to the store count, it could return the format to lower profitability.

In other formats, store expansion has been well on track. Sales for formats outside HyperCITY grew 20 per cent in 2013-14. Part of this healthy growth can be attributed to a slow 9 per cent growth in 2012-13. Sales used to grow above 20 per cent in the years before that. The effect of a lower base can diminish from here. For instance, sales growth in stores open for a year or more was 8 per cent (after factoring in the effect of temporary closure of stores for renovation) for the June 2014 quarter. The June and September 2013 quarters grew 12 and 15.5 per cent.

Next, intense competition and customers unwilling to splurge led to advertising, discounts and other promotions swelling in the past two years. As a proportion of sales, costs accounted for 21-22 per cent in the two previous fiscal years compared with 18 per cent it used to be. Such spending may remain high as the company pushes its product lines.

Operating profit margins in the past two years is at around 5.7 per cent against the 7 per cent in earlier years. This is relatively low, given that Shoppers Stop is entrenched in the premium-to- luxury end of the price spectrum. Low-cost retailers such as V-Mart Retail and Kewal Kiran, or even Future Retail and Trent sport far healthier operating profit margins. Standalone net profit margin is at 1-2 per cent.

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