Shoppers Stop - Slow down in Sales intensity affecting margins... - MSFL Research

Shoppers Stop Limited (SSL) expectedly reported a weak set of operational numbers. Both the department & hypermarket business were affected by poor consumer spending trends. Standalone Sales for the quarter was up 17% y-o-y at Rs.5796mln. However EBIDTA & EBIDTA margins declined by 25% y-o-y & 2.7% y-o-y to come in at Rs.291mln & 5% respectively. The drop in margins was mainly due to (1) Poor LTL Sales growth @ 5% (2) Sharp rise in Power Costs (~26% y-o-y) (3) 200 bps Increase in service tax on rentals. The last two factors put together incrementally decreased operating profits by ~Rs.100mln. Overall PAT for the quarter was down 67% at Rs.64mln. The hypercity business which registered a sales growth of 5.6%, continues to drag the overall profitability down. Its EBIDTA margins further declined by 102 bps on an annual basis to come in at -4.64%. On a consolidated basis net SSL reported grew its sales by 20% to Rs.8622mln & reported a loss of Rs.56mln.

Key Operating Data Points

- Total Chargeable area at the end of Q2FY13 @ 4.78mln sq ft (vs 3.92mln sq ft y-o-y)
- Dept. Stores LTL Volume Growth @-4% (vs 1% y-o-y) & LTL Sales Growth @5% (vs 11% y-o-y)
- Dept Sales per sq ft @ Rs.2052 (vs 2186 y-o-y), Bought out mix % @ 42% (vs 43.8% y-o-y)
- Hypercity LTL Volume Growth @-7%(vs 4% y-o-y) & LTL Sales Growth @ 2% (vs 8% y-o-y)
- Hypercity Sales per sq ft @ Rs.1623 (vs Rs.1658 y-o-y)

Key takeaways from Conference Call :-

a) Going ahead Company expects good traction in sales & is targeting 7-8% LTL Sales growth in Q3 & Q4 of FY13

b) The kids section of business is undergoing turbulence as leading players in this section have cut down on production.

c) As of date the management has taken no call on roping in a FDI/partner for any particular business.

d) Last quarter the industry as whole witnessed an extended sale period of over 8 weeks

e) Power Rates & Service tax on rentals contributed significantly in bringing down margins. Management is hopeful of offsetting these additional costs as & when GST is implemented.

f) At the end of H1FY13 Consolidated Debt, Standalone Debt:Equity Ratio stood at Rs.4500mln & 0.44 respectively

g) The management expects to open 16 SS & 4 Hyper city stores over the next two years.

h) Percentage of Boughtout within the merchandise mix dropped to 42% (vs 44% y-o-y)

Revised Estimates: Following the results, we have tweaked some of modeling assumption in line with the current business environment. We raise our revenue growth expectations for FY13P/FY14P to 15.4%/18.3%.However we drop EBIDTA margins for FY13P/14P by 46/115 bps to 3.0%/3.9%. We expect the company to carry out capex of Rs.920mln & Rs.1251mln in FY13P & FY14P respectively. The above changes decreases our earnings estimates for FY13/14 to Rs.3.4/6.1 (vs. earlier estimates of Rs.4.1/ 9.2 in FY13P/FY14P.)

Outlook -

We continue to believe that from a risk reward perspective, SSL has the best business model among its peers. However, at CMP of Rs.417 we find SSL is richly valued as this market price does not reflect the inherent slow down in sales intensity & attendant margins. We role forward our target price base year to FY14 & value the company at Rs.322, implying a down side of 23%.

Source : Equity Bulls

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