Stock Review: Shoppers Stop

 

THE Shoppers Stop stock is down by 14 per cent over the last one week on the back of a disappointing June quarter performance. While price hikes and sales growth helped it to record a 15 per cent yearon-year growth in stand-alone net sales, operating profit margins were down by 50 basis points to 6 per cent. One percentage point is 100 basis points. The decline in margins was due to a 20 per cent jump in the operating expenses on account of new stores. Losses at its Hypermart subsidiary, Hyper-City at `23.6 crore was adrag, resulting in a loss of 1.5 crore for the consolidated entity.

While the company recorded a 22 per cent sales growth in departmental stores (Shoppers Stop) due to launch of new ones, the key disappointment was poor store sales growth which stands at 7 per cent. Analysts believe that the company is likely to register a sales growth of 15 per cent over the next two years, but operating profit margins are likely to contract by about 100 bps on higher employee costs and operating expenses. They expect the same store volumes to be under pressure due to a rise in prices. Given the muted outlook and higher PE valuations of 41 times based on FY12 earnings estimates, the stock looks expensive.

SAME STORE SALES HIT

A combination of higher prices, supply issues, a slowing economy and the IPL event during the June quarter led to a deceleration in like-to-like (same store sales) volume and sales growth for Shoppers Stop. Same store sales grew just by 7 per cent compared to 21 per cent growth in previous year's quarter. While the footfalls jumped up by 26 per cent for Shoppers Stop's departmental stores, conversion rates were the lowest in the last few quarters. Conversion rate indicates how much of the footfalls translated into sales.

Govind Shrikhande, the managing director of the company, in the June quarter results conference call said price increase (due to high cotton prices and excise duty) was one of the reasons for drop in volume. Religare analysts in a recent report on the company noted that the 5 per cent fall in volume growth on a like-to-like basis was due to a12 per cent hike in prices.

HYPERCITY LOSSES

Ebidta margins for the consolidated entity stood at 2.1 per cent while losses were reported at `1.5 crore, as compared to amargin of 6.4 per cent and net profit of `9crore in the year ago quarter. However, the numbers are not comparable as last year, HyperCity numbers (among key culprits for the subdued performance) were not included in the consolidated entity. HyperCity's gross margins are down due to higher proportion of food sales (61 per cent versus 57 per cent last year). Average selling prices also fell by `3 to 67 per unit due to higher food prices.

As with department stores, conversion rates fell to 41 per cent (against 42.7 per cent last year) despite the growth of footfalls by 24 per cent. Going ahead and among various measures, the company plans to reduce the proportion of food sales to the overall sales basket and control costs to turn around HyperCity's operations. Analysts, though believe that HyperCity could breakeven by 2013-14.