Shoppers Stop Result Update Jul 08 Edel

India Equity Research

|

Retail

Result Update

SHOPPERS STOP

INR 300

Unabated margin pressures

SELL

Results well below expectations; visible signs of slowdown

July 30, 2008 Priya Ayyar

Shoppers Stop (SSL) reported extremely poor Q1FY09 numbers with net retail revenues of INR 2.9 bn (up 28% Y-o-Y) and net losses of INR 213 mn against a profit

+91-22-4063 5413 [email protected]

of INR 20 mn in Q1FY08, much lower than our expectations. Revenue growth has mainly come from price increases, with both average selling price and transaction size increasing 12% Y-o-Y each and a 5% decline in volumes in like-to-like stores. Severe cost pressures impact margins; one time brand spend of INR 112 mn Severe cost pressures have impacted margins and SSL has reported losses of INR 71 mn at the EBITDA level against a gain of INR 138mn in the previous year. All operating cost heads have contributed to this margin erosion, with total operating expenses accounting for 97.6% of revenues against 87.3% in Q1FY08. Selling costs included a one-time spend of INR 112 mn on brand logo and campaigns, but even

Reuters

:

SHOP.BO

after adjusting for the same, total operating expenses amounted to 94.3% of

Bloomberg

:

SHOP IN

:

628 / 272

revenues. Slowdown in consumption to hit SSL

Market Data

We had pointed out in our retail sector note, ‘A bumpy ride ahead’ dated July 2 that

52-week range (INR)

we expect large value-focused retailers to fare better than lifestyle-focused players

Share in issue (mn)

:

34.9

like SSL in times of rising inflation and consumption slowdown. The continued rollout

M cap (INR bn/USD mn)

:

10.5 / 246.3

Avg. Daily Vol. BSE/NSE (‘000) :

9.5

delays, unabated margin pressures, slowing down of same store sales growth, and growing macro concerns that could slow down consumption, make the next 12-18 months very difficult for SSL. Additionally, given that some of the new ventures and department stores are yet to turn profitable, the pressure on growth and margins will continue.

Share Holding Pattern (%) Promoters

Outlook and Valuations: Bleak outlook; downgrade to ‘SELL’ In view of the deteriorating growth outlook, we have downgraded our estimates and

:

66.1

MFs, FIs & Banks

:

8.1

FIIs

:

14.8

Others

:

11.0

Sensex

Stock

Stock over Sensex

2.5

(14.1)

(16.6)

our recommendation to ‘SELL’. We have increased the discount rate in our DCF model from 11.5% to 14% to account for higher cost of debt and equity. Our revised value for SSL stands at INR 8.7 bn, which translates into INR 251/share against INR 432/share earlier. The stock currently trades at an EV/sales multiple of 0.8x FY09E and 0.6x FY10E revenues and an earnings multiple of 86.3x FY10E EPS of INR 3.5.

Relative Performance (%)

1 month 3 months

(20.2)

(26.0)

(5.8)

12 months

(9.6)

(46.8)

(37.2

Financials Year to March Revenues (INR mn) EBITDA (INR mn)

Q1FY09 2,944

Q1FY08 % change 2,303

(88)

126

Net profit (INR mn)

(231)

8

Diluted EPS (INR)

(6.6)

0.2

27.8 (169.9) NA

Q4FY08 % change

FY08

FY09E

3,143

(6.4)

11,651

14,515

137

(164.2)

550

(4)

NA

(0.1)

682

26

(182)

0.8

(5.2)

Diluted P/E (x)

396.1

NA

EV/EBITDA (x)

22.5

18.2

ROAE (%) Edelweiss Research is also available on Bloomberg EDEL , Thomson First Call, Reuters and Factset.

(6.7) Edelweiss Securities Limited 1

Shoppers Stop Key highlights „

Same store sales growth for the company in the quarter stood at 8.9%, down from 13% in Q1FY08. For the department store format, growth stood at 7% with stores older than five years growing at only 1%.

„

Share of private labels declined marginally to 20.4% from 21% in the previous year.

„

Shrinkage for the quarter stood at 0.62% against 0.26% in Q1FY08. Shrinkage has been on the rise in the past two quarters, which is a cause of concern.

„

Among the new initiatives, Crossword, M.A.C., and Clinique have turned EBITDA-positive. This has led to lower EBITDA losses of INR 27.9 mn, against a loss of INR 139 mn in Q4FY08.

„

Operating metrics like GMROF and GMROL have shown an improvement of 7% and 8%, respectively, despite margin pressures. However, some inventory pile up has led to a 9% decline in GMROI.

„

We have downgraded our revenue estimates by 6% for FY09E from INR 15.3 bn to INR 14.5 bn, EBITDA estimates by 26% from INR 919 mn to INR 682 mn and reduced the net profit of INR 125 mn to a net loss of INR 182mn. For FY10E we have reduced our revenue estimates by 19% from INR 22.8 bn to INR 18.7 bn, EBITDA estimates by 20% from INR 1.5 bn to INR 1.2 bn and net profit estimates form INR 265 mn to INR 121 mn. The revised EPS for FY10E stands at INR 3.5.

Edelweiss Securities Limited 2

Shoppers Stop

Financial snapshot Year to March

(INR mn) Q1FY09

Q1FY08

% change

Q4FY08

2,944

2,303

27.8

3,143

1,858

1,447

28.3

2,077

Employee costs

243

188

28.9

189

SGA expenses

932

541

72.3

740

(88)

126

Total revenue Raw materials

EBITDA Interest Depreciation Other income PBT Provisions for taxation Net profit Minority interest Reported profit Equity capital (FV INR 10) No. of shares (mn) Diluted EPS (INR)

53

12

150 18

(169.9)

FY09E

FY10E

(6.4)

11,651

14,515

18,777

(10.6)

7,503

9,381

12,038

28.4

809

1,111

1,404

25.9

2,789

3,341

4,097

550

682

1,239

69.1

131

354

507 576

(164.2)

32

93

60.6

117

27.9

435

481

5

259.4

5

246.9

88

51

4,486.8

72

26

(1,139.3)

(12)

19

(165.3)

(261)

8

NA

8

NA

30

FY08

354.1

(273)

(231)

137

% change

-

(6) 20 (26)

(161.9) NA

22 (4)

79 (7) 33

5,836

26

(102) 80 (182) -

61 217 96 121 -

(182)

121

349

348

350

349

348

348

35

35

35

35

35

35

(6.6)

0.2

(0.1)

0.8

(5.2)

3.5

Diluted P/E (x)

396.1

NA

86.3

EV/EBITDA (x)

22.5

18.2

10.0

64.1

As % of net revenues Purchases

63.1

62.9

66.1

64.4

64.6

8.2

8.2

6.0

6.9

7.7

7.5

SGA expenses

31.7

23.5

23.5

23.9

23.0

21.8

EBITDA

(3.0)

5.5

4.4

4.7

4.7

6.6

Net profit

(7.8)

0.3

(0.1)

0.2

(1.3)

0.6

Employee costs

Edelweiss Securities Limited 3

Shoppers Stop Company Description SSL, part of the K Raheja Group of Companies, is a focused luxury segment department store player. It has presence in high opportunity segments like home improvement through Home Stop; infant and mothers to be care through Mothercare (a franchise with Mothercare PLC); cosmetics and beauty care through M.A.C. and Clinique (a retail agreement with Estee Lauder) and Arcelia; the books and music space through Crossword; fast food through Cafe Bistro and Desi café; and in airport retailing through a JV with Nuance from Switzerland. It also has the option to acquire 51% in HyperCity, a hypermarket venture promoted by a group company, by December 31, 2008, at an agreed amount of cost +10% or market value, whichever is lower. SSL has already acquired 19% in HyperCity for INR 2 mn towards share capital. HyperCity has announced plans to set up 20 hypermarkets over the next three to four years. The company operates 1.6 mn sq ft of space.

Investment Theme The Indian retail landscape is evolving with interplay of several demographic and economic factors. A strong 9% GDP growth, backed by changing consumer behaviour in favour of larger discretionary spend, has set the stage for a healthy 8.6% growth in the retail space over FY07-11E. The big opportunity lies in the growing share of organised retail with the growing trend of consumers to allocate a larger share of income to consumption and gradual improvement in lifestyle. We expect organised retail to grow at 42% CAGR, to reach USD 70 bn by FY11E, accounting for 15% of total retail, against 4.1% currently. SSL is a niche play with strong brand position in the lifestyle space. It has assiduously positioned itself as a retailer since 1991 of superior quality products and services, offering an international shopping experience. This strong positioning and brand recall gives the company a strategic advantage in the light of increasing competition. With its steadfast focus on systems and processes and its ability to attract global brands as venture partners, we believe SSL is an attractive bet on the lifestyle retail evolving in the country.

Key Risks Store rollout delays A large number of retailers are facing delays in roll outs due to delays by developers. This is a significant risk and can lead to cost overruns. Additionally, delays can also lead to capital crunch with a large number of stores bunching up. Pressure on margins due to cost escalation and competition Escalation in lease rentals and administration expenses can impact margins. With increasing competition, catchment areas are shrinking and the PSFPA’s are not scaling up as expected. Slow down in same store sales A large part of the growth of the growth for the company comes from growth in older stores. Any significant slowdown in this growth will be a risk to the company’s growth.

Edelweiss Securities Limited 4

Shoppers Stop

Financial Statements Income statement Year to March

FY06

FY07

FY08

FY09E

FY10E

Net revenues

6,811

8,778

11,459

14,262

18,466

116

156

192

253

311

Total operating income

6,928

8,934

11,651

14,515

18,777

Cost of goods sold

Other operating income

(INR mn)

4,617

5,882

7,503

9,381

12,038

Rent and Lease expenses

495

637

1,020

1,334

1,673

Employee expenses

436

600

809

1,111

1,404

SG&A expenses

892

1,131

1,769

2,006

2,424

Total expenditure

6,440

8,250

11,101

13,832

17,538

EBITDA

487

684

550

682

1,239

Depreciation

166

290

435

481

576

EBIT

322

394

115

202

663

Interest expenditure

28

50

131

354

507

Other income

78

127

88

51

61

Profit before tax

371

471

72

Provision for taxation

133

226

79

4

2

33

Minority interest

(102) 80 -

217 96 -

Profit after tax

243

247

26

(182)

121

Recurring net profit

243

247

26

(182)

121

EPS (INR) fully diluted

7.1

7.0

0.8

(5.2)

3.5

34

35

35

35

35

11.9

15.4

12.3

8.6

20.0

1.5

1.5

1.5

1.5

1.5

FY06

FY07

FY08

FY09E

FY10E

66.7

65.8

64.4

64.6

64.1

Rent and Lease expenss

7.1

7.1

8.8

9.2

8.9

Employee expenses

6.3

6.7

6.9

7.7

7.5

12.9

12.7

15.2

13.8

12.9

EBITDA margin

7.0

7.7

4.7

4.7

6.6

Depreciation

2.4

3.2

3.7

3.3

3.1

Interest expenditure

0.4

0.6

1.1

2.4

2.7

EBIT margin

4.6

4.4

1.0

1.4

3.5

Net profit margin

3.5

2.8

0.2

(1.3)

0.6

No. of shares CEPS (INR) fully diluted Dividend per share Common size metrics- as % of net revenues Year to March Cost of goods sold

SG&A expenses

Growth metrics (%) Year to March

FY06

FY07

FY08

FY09E

Net revenues

30.8

28.9

30.5

24.5

29.5

EBITDA

41.8

40.4

(19.6)

24.0

81.6

EBIT

38.6

22.6

(70.9)

Net profit

28.2

1.9

(89.3)

(791.1)

166.4

(1.0)

(89.2)

(791.1)

166.4

EPS

2.3

75.9

FY10E

228.9

Edelweiss Securities Limited 5

Shoppers Stop

Balance sheet As on 31st March

(INR mn) FY06

FY07

FY08

FY09E

344

348

349

348

348

Reserves

2,285

2,510

2,484

2,242

2,303

Shareholders funds

2,629

2,859

2,833

2,590

2,651

635

1,304

2,071

3,462

4,987

4

41

17

17

17

3,267

4,204

4,888

6,035

7,622

1,866

2,350

3,684

4,112

5,527

565

846

1,272

1,753

2,329

1,302

1,504

2,412

2,360

3,199

Capital WIP

87

228

355

930

930

Goodwill

96

109

132

132

132

0

190

190

190

2,733

3,767

3,989

4,510

5,796

93

128

88

143

178

1,138

1,015

136

485

622

737

1,154

1,822

2,066

2,656

Advances

765

1,470

1,943

1,816

2,340

Current liabilities

950

1,405

2,190

2,086

2,624

Creditors

819

1,276

2,129

1,957

2,510

Other liabilities

72

67

67

53

Provisions

59

61

61

61

61

Working capital

1,783

2,362

1,799

2,424

3,172

Uses of funds

3,267

4,204

4,888

6,035

7,622

76.5

82.1

81.3

74.4

76.1

FY06

FY07

FY08

FY09E

Net profit

243

247

26

Add: Depreciation

166

290

Gross cash flow

409

Less: Changes in W. C.

(83)

Share capital

Long term debt Deferred tax Sources of funds Gross assets Less: depreciation Net fixed assets

Investments Current assets Debtors Cash & bank balance Inventory

BV (INR) Free cash flow Year to March

Operating cash flow Less: Capex Free cash flow

-

-

FY10E

(INR mn) FY10E

(182)

121

435

481

576

537

462

298

697

(703)

(301)

(277)

(611)

325

(165)

(335)

(654)

(1,677)

161

(1,003)

22

(1,415)

86

(10)

(819)

(1,516)

(981)

(1,329)

Cash flow metrics Year to March

FY06

Operating cash flow

325

Financing cash flow

1,069

Investing cash flow NET CASH FLOW

(278) 1,117

FY07

FY08

FY09E

(165)

161

22

86

611

580

975

959

(563) (118)

Capex

335

654

Dividend paid

(52)

(52)

Edelweiss Securities Limited 6

(1,620) (879) 1,677 (52)

(952) 45 1,003 (52)

FY10E

(1,354) (309) 1,415 (52)

Shoppers Stop

Ratios Year to March

FY06

FY07

FY08

ROAE (%)

13.7

9.0

0.9

(6.7)

4.6

ROACE (%)

12.5

10.6

2.5

3.7

9.7

Debtor days Inventory days Fixed assets t/o (x) Debt/Equity

FY09E

FY10E

5

5

3

4

3

38

46

55

51

50

6.1

6.4

6.0

6.1

6.8

0.2

0.5

0.7

1.3

1.9

11.4

7.9

0.9

0.6

1.3

Payable days

42

51

65

48

47

Current ratio

2.9

2.7

1.8

2.2

2.2

FY10E

Interest coverage (x)

Operating ratios Year to March

FY06

FY07

FY08

FY09E

Total asset turnover

2.0

1.8

1.8

1.9

2.0

Fixed asset turnover

6.1

8.0

1.8

2.7

7.2

Equity turnover Valuations parameters Year to March

3.9

3.3

4.1

5.4

FY06

FY07

FY08

EPS (diluted) (INR)

7.1

7.0

0.8

(5.2)

3.5

Y-o-Y growth (%)

2.3

(1.0)

(89.2)

(791.1)

166.4

CEPS (INR) Y-o-Y growth (%) P/E (x) EV/Sales (x) EV/EBITDA (x) P/BV (x) FCFPS (INR)

FY09E

7.2

FY10E

11.9

15.4

12.3

8.6

20.0

8.2

29.4

(20.0)

(30.4)

133.8

42.5

42.9

395.7

(57.3)

86.3

1.4

1.2

1.0

0.8

0.6

20.1

15.7

22.5

18.2

10.0

3.9 (0.3)

3.7 (23.5)

3.7 (43.5)

4.0 (28.2)

3.9 (38.2)

Edelweiss Securities Limited 7

Edelweiss Securities Limited, 14th Floor, Express Towers, Nariman Point, Mumbai – 400 021, Board: (91-22) 2286 4400, Email: [email protected]

Naresh Kothari

Co-Head

Institutional Equities

[email protected]

+91 22 2286 4246

Vikas Khemani

Co-Head

Institutional Equities

[email protected]

+91 22 2286 4206

Shriram Iyer

Head

[email protected]

+91 22 2286 4256

Research

Coverage group(s) of stocks by primary analyst(s): Retail: Pantaloon Retail & Shoppers Stop

Shoppers Stop

Recent Research

650

Date

(INR)

570 490

Company

Title

Price (INR)

Recos

02-Jul-08

Retail

29-Apr-08

Shoppers Stop

Rising costs, high 406 depreciation impact Margins; Result Update

Accum.

26-Apr-08

Pantaloon Retail

Strong growth coupled478 with margin improvement; Result Update

Buy

15-Feb-08

Retail

Accm

410

A bumpy ride ahead; Sector Update

330 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08

250

Distribution of Ratings / Market Cap

Rating Interpretation

Edelweiss Research Coverage Universe Buy Rating Distribution*

101

Rating

Accumulate Reduce 62

14

Sell 2

Total 188

*8 stocks under review / 1 rating withheld > 50bn Market Cap (INR)

77

Shopping goes hyper; Sector Report

Between 10bn and 50 bn 70

< 10bn 41

Expected to

Buy

appreciate more than 20% over a 12-month period

Accumulate

appreciate up to 20% over a 12-month period

Reduce

depreciate up to 10% over a 12-month period

Sell

depreciate more than 10% over a 12-month period

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stock: no. Copyright 2007 Edelweiss Research (Edelweiss Securities Ltd). All rights reserved Edelweiss Research is also available on Bloomberg EDEL , Thomson First Call, Reuters and Factset. 8