Shoppers’ Stop poised for a ratings upgrade

Higher share of more profitable private labels and beauty segments expected to help improve earnings and push stock valuation higher

After two years of muted growth in same-store sales (SSS), Shoppers’ Stop is expected to see a revival in fortunes. The year 2017-18 was challenging, with rollout of the goods and services tax (GST), store renovations and increased competitive intensity. In FY19, the company is confident of achieving mid to high single digit SSS growth (this measures the increase in revenue from stores in operations for at least a year) and 100 basis point margin improvement. SSS growth was two to three per cent in the past two financial years; the margin was 5.7 per cent in FY18.

The change in sales and margin growth trend this year is expected on the back of restructuring, improved share of private label merchandise, focus on the beauty segment and scaling up its omni-channel presence. One major differences between Shoppers’ Stop and retailing peers has been a lower share of the more-profitable private labels in the sales mix. While private labels accounted for 10 per cent of Shoppers’ Stop sales in FY18, it was 38 per cent for Central (Future group), 60 per cent at Pantaloons (Aditya Birla Fashions) and 93 per cent at Trent.

In fact, private label sales fell to 8.5 per cent of the total in the March quarter, much lower than the company’s peak of 20 per cent. Analysts at Edelweiss Securities say it is focusing on the STOP, Life and Kashish brands through price cuts and introduction of items at attractive entry price-points. This and a revamped managerial team is expected to help both SSS growth and margins — retailers’ private labels enjoy higher margins than established brands.

What could enhance margins further is the higher share of the beauty segment, now a tenth of sales. As margins in the segment are double that of the departmental store business and there is higher repeat purchase, the intention to consolidate its leadership position in the beauty segment should help overall profitability and SSS.

The strengthening of its online presence as a part of its omni-channel strategy, both through its online offering and tie-up with Amazon, is expected to drive sales further. The company is looking at putting up its catalogue of over 400 brands on the Amazon site by end-September. The company has set up three Amazon experience centres to showcase exclusive Amazon products and will get a commission on the sale of the products and on rentals.

If it is able to leverage the online and offline customer base to drive its sales, there could be significant upside, believe analysts. The share of online sales to overall revenue is expected to hit two per cent in FY19. While this is not significant, it could increase as the consumer shift to online purchases gains momentum.

The other benefit has started reflecting on the company’s financials. This is from the sale of HyperCity (for ~7 billion) and restructuring. Overall gross debt has declined significantly from nearly ~5.8 billion in FY17 to ~0.9 billion at the end of FY18. Interest expense was down 78 per cent in the March quarter and the company expects to be debt-free by the end of FY19. Better financial health also gives more flexibility to fund capacity expansion; the aim is to open around half a dozen departmental stores in the current financial year.

Valuations, too, at just under 15 times the estimate of FY20 enterprise value to operating profit is at a 40-66 per cent discount to peers Future Retail and Avenue Supermarts. Analysts at IDFC Securities say with the new management’s revised strategy to tackle a challenging environment now in place, the focus will shift to execution. If successful, it will drive a re-rating in the stock.