Shoppers' Stop

Investors can retain their investments in premium retailer, Shoppers' Stop (SS). At Rs 393, the stock trades at 35 times estimated consolidated per share earnings for FY-10, lower than comparable retailers such as Trent.

The company has started making profits after the losses of the previous financial year. Same-store sales growth has moved into the positive territory.

Consumer spending in lifestyle retail has shown sustained revival; this is the segment in which Shoppers' Stop wholly operates.

Even so, valuations remain on the high side and investors are advised against entering this stock at these levels. Sales growth is yet to match that seen in earlier years.

While margins have improved, it came about largely due to cuts in manpower and interest costs, both of which are not likely to remain low. Margins remain on the low side compared to peers. Stores are also centred in the competitive bigger cities, even as bulk of purchasing power lies in smaller towns.

Far-reaching presence

Shoppers' Stop manages varied stores chains — from its flagship Shoppers' Stop offering apparel and accessories; Crosswords offering books and music to Mothercare (a UK-based brand) addressing needs of infants, mothers and toddlers; MAC Clinique offering cosmetics and hypermarket HyperCity. Smaller chains include HomeStop (home solutions), Nuance (airport retail) and TimeZone (entertainment centres).

Shoppers' Stop had entered nascent retail avenues such as catalogue and airport retailing, besides food and beverage retail in a diversification bid and to tap different markets.

However, on grounds of poor performance, it has since exited catalogue retail and handed over its food and beverage chain to Café Coffee Day. These moves may help improve margins.

Being among the early movers in organised retail, Shoppers' Stop has carved out, and maintains, a healthy brand image.

Customer loyalty is a key factor that drives sales with almost 70 per cent stemming from its First Citizens Club loyalty programme.

Expansion

Number of club members grew from one million in 2007-08 to 1.4 million now. Private brands such as STOP also enjoy fairly good brand presence.

The company's additions to retail space were never aggressive.

Total retail space rose from 1.6 million sq. ft in March 2008 to the current 1.9 million, across formats. It has added about 11 lakh sq. ft of retail space in the nine months ended December 09.

The company, therefore, did not suffer the heavy debt, store closures and substantial scale back of expansion plans that beset a good many retailers. Shoppers' Stop has plans to open ten stores by end-FY-11.

Given that a chunk of purchasing power rests outside the bigger cities where most of its stores are located, Shoppers' Stop has plans to move into Tier-II cities such as Coimbatore, Ahmedabad and so on.

Bankrolling expansion may not be hard to come by given relatively low debt equity of 0.72 and a further Rs 350 crore in the pipeline from warrant conversions and qualified institutional placements.

About Rs 125 crore of this may, however, go towards hiking its stake in HyperCity from 19 per cent to 51 per cent by June 2010.

Sales and margins pick up

With its marked concentration in the premium segment and bigger cities such as Mumbai and Bangalore, Shoppers' Stop fell prey to the spending slowdown that cramped most retailers, posting (adjusted) net losses of Rs 37 crore in 2008-09.

Recovery in lifestyle retail and cost controls helped the company record profits once again with the nine-month period ending December 09 posting Rs 23 crore in consolidated net profits against a Rs 39 crore loss in the same period a year earlier.

From a decrease in customer footfalls by 20 per cent in the December 2008 quarter, Shoppers' Stop saw footfalls increase by 1.5 per cent in the December 2009 quarter.

Similarly, sales growth of stores that were open for more than a year rose by 2 per cent in the December 09 quarter against a decline of 4 per cent in the same quarter in 2008. Still, for the nine-month period ending December 09, same-store sales growth is down 0.2 per cent.

On the costs front, manpower expenses were cut by 20 per cent and other expenses reduced by 3 per cent.

Interest costs dropped 21 per cent, but with a higher interest rate cycle in the offing, these costs may rise.

Salary cuts by top management accounted for a fair bit to reducing staff costs, and such cost controls are unlikely to continue in the coming quarters.

Consolidated operating margins improved to 7.3 per cent in the nine-month period ended December 2009 against the 0.5 per cent and 5.2 per cent in the same period in 2008 and 2007 respectively.

Consolidated net profit margins stood at 2 per cent for the nine months ending December 09, against the negligible levels of the earlier years.