Shoppers’ Stop

Shoppers’ Stop, a premium retailer with a pan-India presence, has seen a deteriorating financial performance in recent quarters. Currently priced at Rs. 174.7, this stock is unlikely to deliver in the coming quarters. While holding the stock for a period of two years may be considered, further exposure can be avoided.

On the basis of enterprise value, Shoppers’ Stop trades at 0.6 times its trailing 12 month sales, among the lowest in the retail space. Similarly, market capitalisation is 0.5 times its trailing sales, the ratio, again among the lowest peers.

Shopper’s Stop is present in 12 cities across product segments totalling a store area of more than 1.65 million square feet. It covers apparel, books, accessories, toddler care, food and beverage, airport retail, large format stores, family entertainment, e-tailing and cosmetics.
Slowing growth

Despite its diversified presence, Shoppers’ Stop has been grappling with a slowdown. Slowing footfalls in the existing stores with the possibility of a delayed turnaround in new segments may make the coming year a challenging one for this premium retailer.

Same-store sales growth slowed to 7 per cent for the first half of FY-09, from an annual 20 per cent across formats in FY-08. While transaction size moved up 9 per cent for H1FY-09, volumes actually declined 3 per cent, indicating that the improvement may have been on account of a higher contribution from the ‘luxury’ segment. Apparel sales, usually offering higher margins, have increased to about 62 per cent of sales for H1FY-09 over 59 per cent for the same period last year.
Customer entry

Customer entry, though up by a marginal 1 per cent in H1FY-09, dropped 6 per cent in Q2FY-09. On the bright side, conversion of footfalls into sales improved on a quarterly basis. More than 70 per cent of sales at Shoppers’ Stop come through its loyalty program, First Citizens Club. While being an important measure of customer loyalty and brand strength, it could be a signal that only serious shoppers are entering stores and the company could lose out on impulse shoppers.

Reduced footfalls is a problem most retailers are battling. In a scenario of caution in spending, value retailers score over premium retailers. Given the premium brand image created by Shoppers’ Stop, branching out into value brands may not be a feasible long-term strategy.

However, lack of adequate competition in the near future will continue to give an edge to Shoppers’ Stop. Luxury brands currently entering the market via joint ventures may still take time to get established.
Financials

In terms of financial performance, the past two quarters have been bad, with the company suffering losses due to surge in costs. For example, lease rentals have soared 60 per cent in a single year. A jump in interest cost on account of increased short-term borrowing is another cause for concern as there is low cover for interest.

Margins have, thus, taken quite a beating. Operating profit margins fell below two per cent in H1FY-09 from 5.5 per cent of the same period last year. However, there was a sizeable one-time expenditure relating to branding exercises and a logo change. Reassessment of depreciation resulted in higher charges, squeezing annual profits before tax (PBT) margins by 4 percentage points and turning quarterly profits negative. A prolonged discount sale period further depressed margins.

Compounding these woes, shrinkage (merchandise lost during transit or to pilferage) increased on a half-yearly basis from 0.24 to 0.56 per cent of retail sales. Consolidated, the company is on a loss even at the operating level due to new retailing forays. Only the apparel, cosmetic and toddler care segmentsare profitable.

Expenses are likely to remain high for the coming quarters. Softening of rentals may be seen only in the next financial year since some properties have location advantage where rentals may not be drastically negotiable.

Segments such as HyperCITY, airport retail, family entertainment centres, food and beverage outlets, will remain loss-making as they are recent endeavours. While the prospects for these businesses are bright, a sizeable scale of operations and expansion is required before they turn profitable. This is expected to take about three to four quarters yet. Additions to Shoppers’ Stop department stores too will generate profits after a few quarters of operations.
Funding

With the IPO capital exhausted, debt funded expansion. The debt-equity ratio is relatively healthy at 0.48 times, a position not enjoyed by most retailers. There may be a rights issue in the next quarter which will finance expansion. The scale of the issue has been reduced to Rs 300 crore from Rs 500 crore, with the time period scaled back to 2.5 years from three-four years.

However, with market conditions likely to remain hostile in 2009 and failure of large rights offer to attract sufficient subscription in recent months, pushing through the rights offer may prove a challenge. That suggests that financing costs may remain a drag on margins for a few more quarters.