Shoppers Stop Ltd. share price target

1) Languishing throughput, 2) rising cost of retailing and 3) shrinking cost arbitrage between this off-line pipe' (read: department stores) and online folks make us wary about the long-term vitals of this format. Ergo, we downgrade the counter to SELL (earlier NEUTRAL). Note: The de-rating cycle for global department stores has been quite severe and we fail to see why Indian counterparts buck the trend. We revise our DCF-based TP marginally upwards to Rs. 370/sh (earlier Rs. 360) largely mimicking revision in FY21/FY22 EBITDA estimates (+4% each) to factor in better SSSG and revenue per sq. ft on low base. Industry pioneer STOPs performance continues to be lackluster as 1) the department format continues to lose footfalls courtesy struggling legacy standalone stores. 2) Private label-led upside in top-line/profitability is expected to be gradual, if at all as the apparel space continues to fragment, 3) Cost of retailing is inching up (up 96bp/260bp YoY over 9MFY20/2 years), 4) Working capital continues to balloon, 5) Cost arbitrage between this off-line pipe and online folks continues to shrink.

Shoppers Stop reported in-line operating performance, with 1% SSSG and comparable EBITDA margins of 10.2% (up 50bps yoy). The company reported a loss of Rs5.2mn due to the higher deferred tax provisioning of Rs430mn in the Dec'19 quarter. Low SSG growth was attributed to a higher base (~9% growth in the Dec'18 quarter) amid a sluggish economy. The beauty business (~17% of sales in the Dec'19 quarter) grew...

3 February 2020 SHOPs third-quarter performance was broadly in line with our expectations. Weak economy and aggressive store expansion led to marginal contraction in the EBITDA margin on a reported basis (non-GAAP). We largely maintain our revenue estimates but cut our EBITDA estimate marginally by 3%/8.5% for FY20/21 due to lower margins from new stores. SHOPs standalone revenue was flat YoY at INR9.9b, with gross margin expansion of 120bp YoY (+10bp on a reported basis non-GAAP). Pre-Ind-AS 116 EBITDA on a GAAP basis was up 5% YoY at INR1b, with the margin improving 50bp YoY to 10.2% (in-line). On a non-GAAP basis, EBITDA was up 2% YoY at INR1b, with the margin down 10bp YoY. However, PBT (pre-Ind-AS 116) declined 10% YoY (in-line) to INR622m due to accelerated depreciation, as indicated by management in the last quarter. On a reported basis (non-GAAP), PBT grew 4.4% YoY to INR715m.

On the customer front, for products, company is concentrating on aims to keep customers abreast of new season launches and engage them with offers such as (a) priority for EOSS (end of season sale), (b) exclusive discounts, and (c) co-branded credit cards. The First Citizen program has resulted in an increase in SHOPs sales mix and average bill size of customers. program for premium customers is also gaining traction with an increase in the bill size. With an aim to increase revenue contribution to 15% (13.6% currently) from the Personal Shopper initiative, management is planning to boost the strength of its existing personal shoppers force from 250 heads to 300 heads. SHOP aims to increase Private Label contribution to 15-20% over the next 3-4 years from 13% currently. Improving mix of margin-accretive Private labels, Beauty segment contribution along with higher SSSG should improve SHOPs EBITDA margin.

During the year, the company transitioned to Ind-AS 116, which led accounting to shift from operating lease model (off-balance sheet) to finance lease model (on balance sheet). Operating lease expenses will now be replaced by depreciation and interest expenses. The overall effect is likely to be higher EBITDA and lower PBT in initial year (higher PBT in later years) but no major impact on cash flows. The company has recognised a right of use asset worth | 1146 crore and lease liability of | 1940 crore. The net difference is to be adjusted in the opening reserves as on April 1, 2019 and...

Store addition pace of departmental stores decelerates in FY19 After registering healthy SSSG in the previous quarter (8.9%), momentum decelerated in Q4FY19, with SSL reporting 3.7% SSSG in Q4FY19 (I-direct estimate: 3.0%, Q4FY18: (-) 4.1%). On the store addition front, the company added one departmental store and two beauty format stores in Q4FY19. For SSL, the beauty segment (~16% of revenues), has been growing at a swift pace (9% growth in FY19). The management believes there is immense opportunity to scale up this segment, especially in non-metro cities. The...

2 May 2019 declined 7% YoY to INR7.9b (5% miss), with the impact of the GST and the new accounting standard on revenue recognition (Ind-AS 115) coming into play. However, adjusted for the aforesaid factors, revenue was up 4.7% YoY. For FY20, SHOP expects (1) mid- to high-single-digit LTL growth, (2) low-double-digit revenue growth and (3) 40-50bp/80-100bp gross/EBITDA margin expansion. Slower pace of mall openings and geographical/economical limitations for a large-scale branded apparel store restricted SHOPs ability to add new stores (as evident in FY19), impacting its revenue growth. Nevertheless, we expect some pick-up in the pace of new store adds over the coming years 4/15 new store adds for Shoppers Stop/Beauty format in FY20/21 (v/s net adds of 0/12 in FY19). Despite modest revenue growth, the increasing thrust on private labels and cost- efficiency measures should drive margins expansion of 100bp over FY19-21.

ICICI Securities Ltd | Retail Equity Research Revenues for the quarter grew 3.7% YoY to | 999.1 crore. Adjusting for changes on account of GST and Ind-As-115, revenue growth would have been 9.9% YoY. Growth was mainly driven by healthy SSSG of 8.9% YoY (highest in the last five quarters) owing to strong festive season and low base of Q3FY18 Gross margin for the quarter rose ~260 bps YoY due to higher share of private label brands (up 150 bps YoY, 10 bps QoQ to 10.4%)....

ICICI Securities Ltd | Retail Equity Research Revenues for the quarter grew 3.2% YoY to | 864.5 crore (I-direct estimate of | 903.5 crore). The soft revenue growth was on account of a shift in the festive season in Q3FY19. According to the management, revenue growth would have been 7.4% YoY if adjusted for Ind-As 115 and GST impact. Average bill size was up 6.7% YoY to | 3001 while ASP increased 3.6% YoY to | 1169 Gross margins for the quarter improved 147 bps YoY to 41.1%....

ICICI Securities Ltd | Retail Equity Research For Q1FY19, revenues declined 12% YoY to | 826.6 crore, albeit on a high base of Q1FY18. Due to adjustment of Ind-As 115 and implementation of GST, adjusted growth according to the management should have been flattish. For Q1FY19, footfalls for the departmental store declined 8% YoY to 100.92 lakh customers. However, the conversion ratio improved 120 bps YoY to 27.9% Gross margins for the quarter improved 475 bps YoY to 41.0%....