The Hindu Business Line : Koutons Retail (India): Hold

In a world of tightening consumer expenditure, value retailers are placed better than their premium counterparts. In the stock markets, Koutons Retail, a value apparel retailer, has fared relatively better than its peers, losing just about half its share value.

Trading at Rs 505, the stock is valued at 19 times its trailing 12- month EPS. On the basis of enterprise value, it is valued at twice its trailing 12 month sales and estimated FY-09 sales.

Though a shade more expensive than other retail stocks, the company’s prospects may justify current values.

Holding this stock will deliver in the long term, as Koutons appears to be able to sustain revenues with its value-based positioning and scale of operations. It has also embraced the franchise route of expansion earlier than other players and, therefore, has a first-mover advantage.

Value-for-money

Koutons owns clothing brands — Koutons and Charlie Outlaw for men, Les Femme for women and Koutons Junior aimed at children. Though a branded player, it delivers quality apparel priced at affordable rates.

It has a massive network of more than 1,400 stores across the country. Sizeable presence in cities besides metros allows it to access the mass market while establishing brand recall in smaller cities where bigger names have not yet entered. A related product line of footwear, KZone2, was launched in late 2008, with an estimated 50 Koutons stores to carry the products.

Manufacture will be outsourced to control costs, but contributions from this brand to revenues this fiscal will be minimal.

Scaling up

About 90 per cent of store expansion is carried out through franchisees. The average agreement period of a franchise spans nine years, and Koutons, thus far, has seen very little churn in its franchisees, a plus for its business growth.

Inventory is provided by Koutons, while costs of securing retail space and rentals have to be borne by the franchisees.

This method of expansion minimises capex requirement, rentals and employee costs, which have been a key drag on margins and funding requirements of many retailers in India. It also makes rapid expansion possible.

Another move involves expanding existing stores to cover bigger areas, rather than opening new ones to control costs. Koutons is pursuing a concept of a ‘family store’ where clothing lines for men, women and children are available together. About 150 such stores are targeted by 2010 in 50 cities.

Owning manufacturing units and centralised distribution centres allows a more efficient supply chain. An investment in information support systems further rationalised logistics.

Sustained performance

Koutons is a good performer at operating margin levels, maintaining a steady growth on an annual basis in a span of three years; operating margins for H1FY09 were at 18 per cent.

Winter clothing tends to offer better margins, and with a majority of Koutons stores located in north-eastern India, winter sales will positively impact margins.

Higher interest payout, however, has pulled PBT margins down to 11 per cent. Interest costs are likely to remain high with significant debt for working capital and inventory still on the books and not due for retirement in this financial year at least.

On the bright side, revenue growth has been robust, growing at a CAGR of 124 per cent in a three-year period. Better sales this Diwali will provide a further boost to revenues.

Koutons also manages an 80-85 per cent conversion of footfalls into sales. Future capex requirement is minimal as there will be no addition to manufacturing units. Economies achieved as a result of scalability allows Koutons to maintain the “value” proposition, through affordably priced merchandise.

Keep an eye on…

Substantial debt and a debt-equity ratio of 1.23 do not bode well for future leveraging. Comfort, however, may be derived from the fact that the cover for interest stands at about 4 times.

Another point of concern lies in lower inventory turnover ratio, and increasing working-capital levels.

However, inventory levels could be explained by recent expansion and a bid to avoid bottlenecks in supply. The company will also not benefit significantly from rental dips due to its reliance on franchisee-managed stores.