Shoppers Stop takes a giant digital leap

Sale of Hyper City would be the next trigger for the stock

A rerating after Amazon picked up an equity stake on Saturday led to a 20 per cent gain for the Shoppers Stop (SSL) stock on Monday. This coupled with the commercial agreement earlier last week with the world’s largest online retailer will allow SSL to sell its products online, enabling the company to expand its presence and revenues.

The ~179.3-crore investment from Amazon for a five per cent equity stake will help SSL reduce its overall debt of ~885 crore as of FY17 and leverage ratio of 1.8 times to 1.1 times by the next financial year, analysts at ICICI Securities estimate. The sharp drop in interest cost and operational improvement has led analysts at Edelweiss Securities to increase their FY19 diluted earnings per share estimates by 28.4 per cent. More than the money that flows into the company, the presence of Amazon as a stakeholder is a source of comfort for the investors. The investment shows that Amazon is serious about the exclusive commercial tie-up with the company.

For SSL, whose total space and revenues per square feet have been static (due to rationalisation) at around 4.2 million sq ft and about ~2,300, respectively, over the past 10 quarters, the commercial deal is a positive. It will help SSL make inroads into the digital medium through its omnichannel strategy, and get a presence on Amazon for its 400-odd brands. This will open up a large customer base with an estimated 600 million eyeballs (online visitors), especially so in smaller cities and towns where the presence of SSL is weak. The exclusive tieup will translate to a special fashion page to showcase SSL products and will bar Amazon from tying up with other brick-and-mortar stores. Similarly, SSL cannot enter into tie-ups with other online retailers, but can continue its sales through the shoppers stop. website. While Amazon will provide marketing support to promote SSL products, the online retailer will be able to open experience stores in SSL outlets, which would let customers test (touch and feel) Amazon’s online products. This could lead to higher footfalls for SSL.

The company would also like to improve its same store sales growth, which has been in single digits in six of the past 10 quarters. SSL expects sales of ~200 crore, with about sixeight per cent operating profit margin from the tie-up in FY19. Overall margins could perk up given the company’s strategy of improving its highmargin private label (own brand) sales, which as a proportion of sales stands at 16.4 per cent, compared to the sector average of 20 per cent and global average of 35 per cent. The tie-up with Amazon should help SSL on this front.

With this deal done, investors will now shift focus to the timelines of the reported sale of SSL’s hypermart business, which is housed under the Hyper City brand. According to Edelweiss Securities, the reported enterprise value of ~1,000 crore, sharper focus on the departmental business after the sale and further reduction in SSL’s stand-alone debt of about ~490 crore, will lead to further rerating of the stock.