Shoppers Stop: Buy

Shoppers Stop (SSL) shut down a loss-making high-end fashion chain, turned around home-solutions chain, increased stake in its budding hypermarket chain, while recording a sharp growth in sales from those stores which have been in existence for at least a year. SSL has charted a steady pace of store expansion, as has been its norm over the years, even as peers vacillated between aggressive and slow expansion.

At Rs 361, the stock trades at 36 times estimated consolidated per share earnings for FY-12. Investors with an appetite for risk and a two-to-three year investment horizon can consider adding the stock to their portfolio. While valuations do appear expensive, the stock has traded in a 27-52 times band, trailing earnings in the past two years.

SSL is among the few listed retailers with a steadily growing national scale of operations and a well-etched brand name. It has store formats across categories ranging from food staples to books and music to luxury apparel and accessories. It further straddles the premium and mass-market segment. SSL has access to a vast consumer market. It has also managed to successfully adapt product offerings between the developed Tier-I cities to the developing Tier-II cities.

Wide presence

Flagship brand Shoppers Stop operates in the premium category in the smaller towns and, additionally, in the bridge-to-luxury segment in the more developed cities. The company's store count numbers 38, up from the 30 in March '10. MAC, Clinique, Estee Lauder and MotherCare are other premium brand lines that SSL offers, together numbering 34 outlets. The targeted consumers for these brands, with their higher disposable incomes, is far less susceptible to curtailed spending in the light of rising inflation.

At the same time, SSL's hypermarket chain, HyperCITY, captures the opportunities in the mass-market segment. The current store count is at 9. Crosswords is its bookstore chain, and the second largest in SSL's kitty at 36 stores. Finally, Home Stop, a home solutions chain, with four stores, has not expanded in FY-11, though the chain turned profitable in the year.

Expansion and growth

All formats total 3.4 million square feet in space with plans to add 7.5 lakh square feet across formats in FY-11 requiring an investment of at least Rs 125 crore. Funding will be met through internal accruals. SSL plans to use internal resources to fund expansion, checking a possible rise in interest costs.

FY-11 saw same-store sales growth (growth in sales from stores open for a year or more) for Shoppers Stop move sharply up to 17 per cent, from the 3.5 per cent the year before. Customer footfalls also showed a marked improvement to a 33 per cent growth in FY-11 over FY-10. Standalone revenues grew a 23 per cent in FY-10. While a part of such high growth may be attributable to a low base, since FY-10 was a year of recovery, a few factors suggest that good growth is still in the offing for SSL.

It has managed to successfully make an entry into smaller towns such as Jaipur, offering premium product lines instead of bridge-to-luxury lines in cities such as Mumbai, with entries into more such Tier-II towns planned. Expanding its hypermarket chain will further allow it to exploit the vast value-for-money consumer segment. A robust job market and a younger population inclined towards aspiration spending are other factors.

Financials

Consolidated revenues clocked a 26 per cent compounded three-year growth to Rs 2,447 crore while net profits grew 153 per cent to Rs 43.2 crore. The turnover of inventory has also staged significant improvement over the past three years, moving to 12 times in FY-11 from eight in FY-09, higher than peers.

Consolidated operating margins, however, were hit by high cost of raw material due to increases in the prices of cotton and synthetics, dropping to 5 per cent for FY-11 against the 7 per cent the year before. The company has effected a price hike of approximately 10 per cent in the March '11 quarter and plans to further see price hikes in the coming months, which may help increase margins. Also pressuring margins was HyperCITY, which is still in the nascent stages of expansion. Break-even at the operating level is likely in FY-12.

As a percentage of sales, interest costs dropped to 1 per cent in FY-11, helping maintain net margins at 2 per cent. With internal accruals funding expansion, tightening liquidity situations and rising interest rates may not pressure margins. The company's debt-equity is also low at 0.5 times.

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