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Sharekhan Special
Q3FY2011 Retail earnings preview
Retail counter continues ringing
The continued consumer confidence on the back of
sustained economic buoyancy, the festive season (Diwali,
Chirstmas) that fell this time in the third quarter and a
strong winter across the country kept the retail stores
busy with increased footfalls and higher conversion.
Our talks with various retailers (listed as well as non-listed)
have revealed that the same-store sales growth
momentum remains strong in the high teens, with home
retailing witnessing strong traction along with the other
lifestyle categories.
We expect Pantaloon Retail to post a growth of 12%, 15%
and 12% in the same-store sales of the value retailing,
lifestyle retailing and home retailing segments
respectively. The 41.3% year-on-year revenue growth may
not be very meaningful as the third quarter’s numbers
would include the results of the home retailing business,
which was part of the consolidated entity last year.
Shoppers Stop, riding the lifestyle segment with robust
expansion activity, is likely to witness a growth of over
10% in its same-store sales. The year-on-year revenue
comparison again would be misleading due to the inclusion
of Hypercity’s financials in the third quarter. Nevertheless,
the revenue momentum continues to be strong and we
expect Shoppers Stop’s lifestyle segment to deliver a 27.8%
growth in the third quarter.
Among the other retailers, Titan Industries would continue
to have another strong quarter (28% growth year on year)
on the back of a 29% growth in the jewellery business and
a 16% growth in the watch business.
Jubilant Foodworks’ store expansion spree continues and
we expect another blockbuster quarter from the company
with a 40% year-on-year growth driven by a 30% growth in
the same-store sales.
Single category retailers like Page Industries (Jockey),
Kewal Kiran Clothing (Killer) and Provogue India are also
likely to see a strong revenue growth upwards of 20% in
the core retail segment. Kewal Kiran Clothing, amongst
our retail coverage, is likely to see a strong year-on-year
revenue growth of about 51% during the quarter.
Core EBITDA margin strong, in certain cases headline
margin may mask the true picture
Despite rising employee and certain other overhead costs,
the reasonable rentals (booked earlier) and sustained
strong demand environment led to booking higher full price
sales continues to help the retailers to earn high gross
margins and similarly decent operating profit margins. In
certain cases, the consolidated margins may mask the
true picture like in case of Pantaloon Retail (the merger
of its loss-making home retail business) and Shoppers Stop
(the inclusion of its loss-making Hypercity format).
Earnings growth to mirror or exceed operating profit
Over the past 12 months, retail companies have
undertaken stringent cost-control measures,
rationalisation of overheads and inventory, and the
streamlining of the working capital cycle. They have also
taken care of the leverage position in this period. Thus,
overall we expect the below-earnings before interest, tax,
depreciation and amortisation (EBITDA) level costs like
interest and depreciation to remain benign. We, therefore,
expect a strong earnings growth from the sector. In our
retail universe, we expect a 38.4% year-on-year earnings
growth for the quarter.
Kewal Kiran Clothing amongst our retail coverage is likely
to see a strong year-on-year earnings growth of about
70% in the third quarter of FY2011.
Player Key monitorables
KKCL Road map and strategy ahead for achieving 5x revenue target aimed by the company
Performance of brands, Integriti and Easies, and success of accessories category
Operating leverage status
Provogue India The occupancy and the revenue status of the Aurangabad mall
The roadmap for site commencement of the other projects
Check on inventory levels
Pantaloon Retail Same-store sales across categories and business environment post-festive season
Asset turns in the home segment and its performance and operating leverage
Inventory rationalisation’s impact and working capital cycle
Management’s thoughts on foreign direct investment in the retail sector and strategic investor
induction in its newly formed Future Value Retail business
Shoppers Stop Demand environment post-festive season and store performance in tier-2 cities
Cost structure and the strategy ahead for the Hypercity format
Titan Industries Performance of the eyewear segment and the break-even period there
Asset turns in the jewellery segment and share of studded jewellery in the total mix
Jubilant Foodworks Same-store sales growth
Management guidance on the sustainability of the same-store sales growth in the long term
Performance of the new stores added in the hinterland
Status and development of the inorganic plans
Page Industries Sensitivity of rising raw material prices on the margin
Business opportunities in Sri Lanka and Bangladesh, and plans to capitalise on them
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