Shopper's Stop - 3QFY11 results were above our estimates: Motilal Oswal

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Shopper's Stop (SHOP IN; Mkt Cap USD0.7b, CMP Rs371, Neutral)

3QFY11 results were above our estimates with adjusted PAT growth of 131% to Rs279m. Net sales grew 22% to Rs4.6b aided by strong same store sales growth of 22%. Gross margins contracted 130bp to 38.2% and lower lease rent (down 80bp), administrative expense (down 140bp) enabled EBITDA margin expansion of 90bp to 11.2%.

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We estimate mid single digit same store sales growth and 70bp margin expansion over FY11-13. We are increasing standalone FY11 EPS estimates by 8% to Rs8.6 (Rs7.9 earlier) and FY12 EPS estimates by 

 4% to Rs13.1 (Rs12.6 earlier). Our estimates for FY13 are unchanged at Rs17.6.  

 We expect the department store format to be free cash flow positive and fund its growth in the coming years. However, Hypercity is likely to require incremental investment in the coming few years. We expect 

 Hypercity to turn EBITDA positive by FY12 and PAT positive by FY14. The stock trades at 28.4x FY12E EPS of Rs13.1 and 21.1x FY13E EPS of Rs17.6 on a standalone basis. Maintain Neutral.

3QFY11 results above estimates
 Shoppers Stop's 3QFY11 results were above our estimates with adjusted PAT of
Rs279m (against our estimate of Rs223m).
 Net sales grew 22% to Rs4.6b (against our estimate of Rs4.6b) aided by strong same
store sales growth of 22%. Sales would have been higher by 4-5% had it not been for
the hive off of Crossword Book Stores.
 Gross margin contracted 130bp to 38.2% due to higher VAT in select states (40-50bp
impact), increased share of consignment & concession sales (up 300bp YoY at 56%).
 Lower lease rent (down 80bp), administrative expenses (down 140bp) enabled margin
expansion of 90bp to 11.2%.
 EBITDA grew 32.3% YoY to Rs515m (against our estimate of Rs482m). A sharp
decline in net interest expense from Rs57m to Rs3m enabled adjusted PAT growth of
45% to Rs279m.
 Hypercity Retail (51% stake) reported sales of Rs1.5b (Rs1.4b in 2QFY11), gross
margins of 16.5% (17.8% in 2QFY11), store level EBITDA of Rs-13.4m (Rs8.2m in
2QFY11).
 EBITDA loss increased from Rs56.9m to Rs90.2m. The loss increased from Rs138m
to Rs183m. The company added one store in Bhopal during the quarter.
LTL grows due to a surge in customer entry; area addition of ~100,000 sq
feet in 3QFY11
Shoppers Stop surprised on LTL sales growth (up 22% in 3QFY11) enabling sales growth
of 23.4%. Sales growth in 3QFY11 was higher (by 4-5%), but for the hive-off of Crossword.
Crossword Bookstores was hived off to a wholly owned subsidiary Crossword Bookstores
Ltd. The vertical ended FY10 with sales of Rs707m (~5% of standalone sales) and negligible
EBITDA.

Strong LTL sales growth was aided by high growth in customer entry (up 18% YoY for
LTL stores) and better conversions (down just 6%). The growth has been pre-dominantly
volume led (up 15%) and ASP (Average Selling Price) increased 7% led by price increases
and a mix improvement. The company added one Shoppers Stop outlet in Aurangabad
(taking the total number to 36) and one Mac store in Chennai. The company's last Arcelia
store (Pune) was closed, with which the company has exited the format. Area added
during the quarter was ~100,000 sq feet.
The store additions by the company have been predominantly in tier-II cities in the past
few quarters. The success of these stores has increased the geographical reach of the
company from the top 10 to the top 14 cities. The management indicated a 10-15% increase
in apparel prices from 1QFY12 due to a sharp increase in input costs. This can adversely
impact sales growth. We expect same store sales growth to tend lower as it had four
consecutive quarters of high growth on a low base.

Gross margin contraction offset by operating leverage as EBITDA margins expand
80bp: Gross margins contracted 130bp to 38.2% due to higher VAT in select states (40-
50bp impact), increased share of consignment & concession sales (up 300bp YoY at
56%). Strong LTL sales growth enabled operating leverage in lease rent (down 80bp) and
administrative expense (down 140bp) enabling EBITDA margin expansion of 90bp to
11.2%. EBITDA grew 32.3% YoY to Rs515m (against our estimate of Rs482m). We
believe 3Q usually has higher proportion of full price sales, which boost margins. A late
Diwali in the current financial year also contributed to higher same store sales growth.

Shoppers Stop increased the share of its consignment and concessions by 10-12% in the
past three years, which improved cash flows and inventory turns, thus boosting RoCE.
We note that consignment and concession sales increased by a further 300bp YoY in
3QFY11. Interest costs fell to Rs3m (Rs57m in 3QFY10) due to higher financial income
on advances to Hypercity Retail and repayment of debt from the proceeds of a QIP.
However, the management indicated that interest expense was likely to increase as new
store expansion would be funded by debt.
Hypercity sales up 79% at Rs1.5b; in investment mode
Hypercity Retail (51% stake) posted sales of Rs1.5b (Rs1.4b in 2QFY11), 79% YoY due
to 22% LTL sales growth. The format continues to evoke consumer interest as reflected
by increasing footfalls and stable conversion levels (~40%). Hypercity posted gross margins
of 16.5% in 3QFY11 (17.8% in 2QFY11), store level EBITDA of Rs-13.4m (Rs8.2m in
2QFY11). Format EBITDA loss increased from Rs56.9m to Rs90.2m. The loss increased
from Rs138m to Rs183m. Hypercity reported a decline in gross margins as the share of
food and groceries increased from 55% to 57%. Low margin consumer durables and
electronics also posted higher sales growth.

The management indicted that stores that are in operation for more than 18 months were
generating store level EBITDA margins of 4-6% and those above three years were
generating margins of 7-8%. Company level EBITDA is negative due to corporate
overheads and new store additions. In 3QFY11 the company added one store in Bhopal
(55,000sq ft). The company has three store sizes of 55k, 75k and 100k sq ft, which it can
launch in metros, tier-II and tier-III cities. It plans to add 4-5 stores every year and aims
at turning EBITDA positive in 24 months. Hypercity Retail repaid loans worth Rs400m,
which were funded by Shoppers Stop. However we are concerned about the weak balance
sheet funded by promoters' preference capital and debt. We estimate accumulated losses
of Rs2.5b as on December 2010. The company suffered net loss of Rs502m in 9mFY11.

Strong traction for Shoppers Stop; upgrading FY11, FY12 estimates by 3-
8%; Hypercity a long term bet; Neutral
We are positive about sales growth and margin outlook in the standalone business, but the
high base will reduce growth rates. We expect Shoppers Stop to benefit from buoyant
consumer sentiment and estimate mid single digit same store sales growth and 70bp margin
expansion over FY11-13. We are increasing standalone FY11 EPS estimates by 8% to
Rs8.6 (earlier Rs7.9) and FY12 EPS estimates by 4% to Rs13.1 (Rs12.6 earlier). Our
estimates for FY13 are unchanged at Rs17.6 mainly due to higher same store sales growth
in the current year. We expect the department store format to remain free cash flow
positive and fund its own growth in the coming years. However Hypercity is likely to
require incremental investment for next few years. We expect Hypercity to turn EBITDA
positive by FY12 and PAT positive by FY14. The stock trades at 28.4x FY12E EPS of
Rs13.1 and 21.1x FY13E EPS of Rs17.6 on a standalone basis. Maintain Neutral.

Company description
Shoppers Stop is one of the largest departmental store chains
in India with 37 stores and retail space of about 2.3msf.
The company is promoted by the CL Raheja Group, one of
the largest real estate groups in India. The company has
entered specialty retail formats like home furnishing (Home
Stop), baby care (Mothercare) and beauty (Estee Lauder
and Mac). Shoppers Stop has a presence in the high potential
hypermarket space through its 51% subsidiary Hypercity.
Key investment arguments
 We believe Shoppers Stop is ideally positioned to benefit
from the up-tick in consumption sentiment. The
department store format has reached critical mass and
is likely to fund its capex program from internal cash
flows.
 ~75% of Shoppers Stop's revenue is contributed by its
First Citizen members (members of its loyalty program),
suggesting that the brand enjoys strong loyalty from its
customers.
 The company is present in the high potential
hypermarket space through its 51% subsidiary
Hypercity. The SBU is ramping up its stores, and is
likely to add ~10 over the next two years.
Key investment risks
 Shoppers Stop caters to the upper end of the income
pyramid, which makes the nature of offering extremely
discretionary. We believe the performance will be highly
dependant on underlying consumption.
 The company is likely to effect a price increase of 10-
15% in 1QFY12 which could have an impact on volume
offtake.
Recent developments
 The company opened the thirty-sixth Shoppers Stop in
Aurangabad.
 It launched the eigth Hypercity in Bhopal
Valuation and view
 We are upgrading our FY11 EPS estimates by 8% to
Rs8.6 and by 4% for FY12 to Rs12.6. Our FY13
estimates are broadly unchanged.
 The stock trades at 28.4x FY12E EPS and 21.1x FY13E
EPS. We maintain Neutral.
Sector view
 We have a positive view on the sector. We expect the
sector to clock revenue growth of 20-25% CAGR over
the next five years.
 Players with a strong hypermarket format and presence
in a large number of categories are likely to be winners.