Shoppers Stop - HOLD

Up one time and down the next, retail stocks have been on a rollercoaster over the past several months. The Government going back and forth over permitting foreign direct investment in multi-brand retail, consumers reducing their spending, costly funding and rising prices have combined to paint a gloomy picture for Indian retail.

The stock of Shoppers Stop has dropped 22 per cent in a year. At Rs 374, it trades at 48 times the standalone trailing earnings. Investors with a long-term perspective can retain holdings in the stock, but refrain from fresh purchases, given the high valuations.

While among the more expensive stocks in the retail universe, Shoppers Stop has an edge over peers. It is widely diversified through fashion, cosmetics and hypermarket formats. It is also among the few listed retailers with a nationwide presence and has strong brands across product categories, while addressing a wide consumer base.

Space addition has been aggressive and the company’s lower debt compared to other retail players leaves it in a comfortable position on the funding front. Revenues have also seen steady growth, with a degree of price hikes being managed.

However, its hypermarket format remains a drag on profitability, resulting in low operating and net margins. Net profits for the year ending March 2012 dropped by half. Consumer sentiment too is likely to remain subdued until inflation and interest rates let up.

Finger in many pies

Shoppers Stop is a bridge-to-luxury play encompassing fashion, cosmetics and home solutions. Its flagship fashion format Shoppers Stop number 51 stores in March 2012, up from 38 a year ago. Plans are to add 24 stores over the next three years.

Besides exclusive labels such as French Connection, Tommy Hilfiger, Mango, and so on, it also houses private labels. These labels, such as Stop and Haute Curry, have a strong brand standing, and serve well in improving sales. The company had earlier reduced focus on private labels in favour of pushing its positioning as a house of brands.

But with brands raising product prices throughout last year, the company used its private brands to bring in sales, dropping prices by 3 to 5 per cent. Currently contributing about 16 per cent to revenues, the management aims at taking the share of private labels to 20 per cent.

In cosmetics, Shoppers Stop has the high-end chains — MAC, Clinique and Estee Lauder. In these, the company has shut down unviable stores while opening new ones. The three chains together number 35 stores, the same level as last March.

Hypermarket effort

Other offerings in its diverse portfolio are baby products store Mothercare, home solutions Home Stop, and books and gifts chain Crossword. Expansion in these chains has been robust.

While its other formats are a bridge-to-luxury, the company addresses the middle-income segment, especially in Tier-II cities, through hypermarket chain, HyperCITY. Three stores in this format have been added in 2011-12, taking total store count to 12.

But HyperCITY has yet to breakeven, with the management pushing estimated chain-level breakeven time to FY15. Partly to blame was the higher share of low-margin food and groceries, at 60 per cent of revenues for FY-12.

The format is being resized to smaller sizes to reduce operating and rental costs, while pushing up the share of higher margin apparel, jewellery and general merchandise such as home care. The benefits from these strategies remain to be seen. But sales growth for the format has held up. Growth in sales for stores open more than a year, a measure of sustainability in growth, stood at 9 per cent for FY-12.

Consolidated revenues have grown at a compounded annual rate of 29 per cent over the past three years. Helped partly by the discount season, same-store growth for the flagship Shoppers Stop improved in the March 12 quarter.

Healthy revenue growth

This countered a decline in quarter before, and helped the company end the year with a 7 per cent same-store growth.

The company moved out of net consolidated losses in FY-10 and notched up profits in FY-11; a bad FY-12 though led to net profit decline of 56 per cent.

Higher material, marketing and employee costs weighed on operating margins. Quick addition of stores in the Shoppers Stop chain in FY-12 led to bunching up of expenses such as employee costs and rental deposits.

With the planned store addition in mind, operating margins are unlikely to see significant expansion. A turnaround in HyperCITY is also required to pull operating margins out of the low single digits.

Consolidated operating margins for the year stood at 4 per cent, down from the 6 per cent the year before. Net margins stand at 1 per cent. Interest cover is comfortable at three times, and debt-to-equity is on the lower side at 0.8 times.

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