Stock Review: Pantaloon Retail

Kishore Biyani's sabse sasta strategy may be driving store traffic, but this very strategy is now coming to haunt Pantaloon's balancesheet. Analysts are concerned about the flat growth in bottom line reported by the retailer in its second quarter results.

Even as core retail revenues grew 31.2 per cent year-on-year in the second quarter of FY11 to `2,758 crore, the company's profit after tax stood at `47.2 crore, a modest 5.5 per cent growth in the same period.

The company's same store sales — a good barometer to measure consumer demand — grew 11.5 per cent in the value segment (12.5 per cent in the first quarter of FY11), 20.9 per cent in lifestyle segment (22.1per cent in the first quarter of FY11) and 18.3 per cent in home retailing (151 per cent in the first quarter of FY11). This was driven mainly due to buoyancy in sales during the festive season.

Given that the company's second quarter has already seen a spike in sales, the street is worried about the company's performance in the third quarter, where consumer spends may not be as high as the last quarter.

While earnings before interest, taxes, depreciation and amortisation grew a robust 12.1 per cent to `230 crore, margins dipped 147 basis points to 8.6 per cent, primarily due to inflation.

Also, the increased share of low margin-based food impacted margins further. Another matter of concern is the debt which stands at `108 crore. The company has also undertaken several restructuring measures such as hiving off certain units like Future Value Retail and electronics division as stand-alone subsidiaries. This will also impact revenues.

On the brighter side, the retailer has added 0.8 million sq ft of retail space in the second quarter, taking the total space to 14.17 million sq ft.

Edelweiss Capital believes this is a testimony that the company's expansion plans has improved against poor expansion (0.12 mn sq ft) in the first quarter.

The company has added five new Pantaloon stores, two Central, eight Big Bazaar and 36 KB fair price stores during the quarter. The company has also launched a slew of private labels in the food category ranging from tea to toothpaste. These should impact revenues in the coming quarter.

Given that the stock price has taken a substantial beating in the last couple of weeks, it would be a value pick believes Sharekhan.

While sales across formats have grown 31 per cent, bottom line shows a modest increase of 5.5 per cent due to eroding margins