Koutons Retail

Investors with a long-term perspective can buy the stock of Koutons Retail. At a price of Rs 386, the stock trades at 14.7 times its trailing four quarter earnings.

On an Enterprise Value basis, the stock trades at 1.6 times trailing sales and 1.1 times estimated FY10 sales. Though a shade more expensive, Koutons may deliver growth that is superior to its peers due to its focus on value retail, its presence outside the metros and good profit margins.

Going by numbers posted by listed retailers, consumers are loosening their purse strings in the value retail segment. Koutons offers branded, quality apparel and accessories at affordable costs, and takes to deep discounting from time to time to draw in customers. Koutons’ sales have expanded 32 per cent in FY09, placing it among the top performers in the retail space.

The bulk of retail spending in recent times has originated outside the metros and Tier I cities. Koutons has a retail footprint spanning 1,400 stores, much of it in the smaller cities. Moving into such cities ahead of competition has given it an edge by aiding brand recall.

Koutons plans to further penetrate the smaller cities this year. The company embraced the franchisee mode for expansion early on, quickly establishing a wide store network while controlling costs and capital requirements. Existing smaller stores are being expanded to family-size stores making each store address a wide customer base.

The company has a broad product portfolio, covering apparel for men, women and children, under multiple brands such as ‘Koutons’, ‘Charlie Outlaw’ and ‘Les Femme’ besides accessories, footwear under brand name ‘K2One’ and leather accessories. It plans to introduce new brands, as well as expand into innerwear, further increasing product lines. Operating margins have been maintained at a hefty 21 per cent for FY09, with the June 2009 quarter margins at 24 per cent, due to controlled raw material cost and backward integration.

It also managed to lower store rentals by 15-20 per cent for about 125 of its stores, and is negotiating on rentals for others. It shut 140 unviable stores in an effort to maintain profitability.

However, Koutons still suffers from high debt of 1.2 times equity, and interest and depreciation costs combined have cut net profit margins to 8 per cent in FY09; even so, it has performed better than most peers. The company is targeting a store count of 2,000 for this year, with a capex of Rs 60 crore.

via BL