The Hindu Business Line : Retailers falter as same-store sales skid

The retail sector saw a disheartening December quarter, with a sharp deceleration in sales growth and a contraction in profits. Sales growth for the quarter slid to 15 per cent, from 65 and 61 per cent respectively in the preceding September and June quarters. Though sales did expand, net profits fell by more than half, after declining 15 per cent in September and growing 8 per cent in June.

Even as footfalls declined and retailers scaled-back expansion plans, same-store sales (sales in the stores that existed last year) succumbed to the slowdown. Retailers had to extend discount periods to draw consumers.

Sales slowdown

The December quarter, usually a peak season on account of festival sales, saw a 15 per cent increase in sales over the December 2007 quarter. Players such as Trent and Kewal Kiran actually posted a sales decline of 15 and 18 per cent respectively. Indeed, most listed retailers’ sales in the past four quarters have seen decelerating growth.

As retailers slowed the pace of space additions, sales at existing stores too flagged. December saw retailers (who report these numbers) post a 4 to 10 per cent decline in same-store sales, after lower growth in the September 2008 quarter, presenting a gloomy picture for earnings growth in the coming quarters. Curbed expansion puts the onus for sales growth on existing stores, rather than space additions, as has been the case thus far.

Margin contraction

Though sales slipped, retailers have managed to hold on to operating margins by curtailing expenses, averaging at an 8 per cent margin. Barring Shoppers Stop and Trent, all retailers had operating margins above 10 per cent.

However, interest cost increases dented net profit margins (at 3 per cent) as expansion and working capital requirements called for sizeable debt. Interest payouts in the December quarter almost doubled over the same period in 2007.

Expansion reworked

Expansion plans have been put off or scaled back due to lower customer entry, reduced purchases and funding constraints.

Retailers are now looking to the franchisee route of expansion instead of owning new stores. On a positive note, rentals have been softening and landlords are open to negotiation. Vishal Retail has managed, in some cases, a 40 to 50 per cent reduction in store rentals.

Value vs. premium

Given that consumers tightened their purse strings, are “value” retailers doing better than “premium” retailers? There is no consistent evidence of this. Premium player Shoppers Stop has seen a sales slowdown, with sales in the December quarter rising 9 per cent over the corresponding period in 2007, after a 22 and 29 per cent increase in the preceding quarters. Their losses continued and footfalls decreased.

At the other end of the spectrum, value retailer Vishal Retail has suffered sales declines, high interest costs and thin margins for three succeeding quarters.

Food spend

Trends revealed by the numbers, however, suggest that consumers continue to spend on groceries and food, even as they may be curtailing discretionary spending on big-ticket purchases such as electronics and furniture.

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