Shareholders can retain the stock of Shoppers' Stop (SSL). The underperformance in retail stocks in recent months could well be recognition of the challenges in sustaining strong growth rates in a hyper-competitive retail environment. With a focus on the premium segment and a dominating presence in the departmental store format (which is relatively less contested), however, SSL remains a superior option among retail stocks. However, rising rental and employee costs could be a damper on margins in the near term. Any slow down in growth could cause valuations to temper; the stock remains richly valued at about 36-38 times the FY-08 per share earnings, assuming current growth rates. However, given the scarcity of options in the space, the stock could attract buying interest at lower levels.
Delays in store openings
SSLhopes to have four million sq. ft of retail space by 2010 from 1.1 million sq. ft now. With 20 stores and an additional six to open this fiscal, the retailer is behind its initial target of 39 stores by FY-08The company is, however, fairly positive that it will meet its 2010 target with improving competence on the part of mall developers. Despite a slower pace of store openings, revenue growth continues to be robust on the back of strong same-store sales, which was nearly 20 per cent in the December quarter. Such strong same-store growth could further boost profitability, as according to the management, its stores reach their peak profitability between three and five years from their opening.
Focus on premium
Operating margin at close to 10 per cent is better than its peers despite a comparatively low share of private labels in overall sales. The retailer focusses on the higher end of the market and is well-placed to partner with international retailers that seek an entry into the Indian market. The UK-based Home Retail Group is the latest partner, which will be introducing its Argos chain of stores, which sells products for homes through its stores, as well as online and via the telephone. The first store is expected to open by the end of this year.
Through its tie-up with the Nuance Group, it also recently won a bid to set up duty-free retailing for the Hyderabad International Airport; it bagged a similar concession in November last year for the Bangalore International Airport.
The concession of the Hyderabad airport, which is likely to commence operations in April 2008, is expected to earn $240 million over the next seven years. Such tie-ups appear to tap unexplored markets, which could have high growth potential if the current growth trend in discretionary spending continues. SSL has recently taken a 19 per cent stake in HyperCity, the hypermarket format operated by the Rahejas. This opens up a bigger opportunity in food and grocery retailing. The initial response to the store has been impressive with the store expected to break even within its first year of operation. However, we expect substantial competition in this segment from players with deep pockets. SSL has the option to buy a 51 per cent stake by December 31, 2008.
Margin pressure
Continued spending on lifestyle products and an improving share of private labels in the revenue mix has so far helped the retailer to stave off the inevitable margin pressure that could weigh on earnings growth in the medium term. With the industry in the throes of change, attrition levels remain high and a scarcity of talent in the middle management levels is leading to increasing employee costs.
While the management has indicated that it would only take up properties on realistic rental rates, its format lends itself to a greater presence in premium locations where rentals will be higher.
Several of the new stores that are likely to come up over the next couple of quarters are in the North where rentals are higher and this could skew the margins picture in the medium term.
Over the long term, however, once operational ramp up takes place, the pressure should ease, as these properties are also likely to command higher realisations per square feet.