JPMorgan -Company Visit Note : Pausing at Shoppers Stop

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Shoppers Stop (SSL) is a leading lifestyle retailer in the country operating 41
department stores across 18 cities. Its 51% owned subsidiary operates 9 Hypercity
(premium value retail) stores. We recently met Shoppers Stop management
discussing emerging retail trends and company’s growth outlook.
 Optimistic on consumer demand, though near-term blip on inflationary
concerns cannot be ruled out: Management thinks that while 1HFY12 could
witness moderation in SSS growth trends owing to inflationary pressures (apparel
prices have risen by 10-12% over the past 3-4 months), medium-to-long-term
demand for lifestyle products remains intact.
 Expansion plans on track: SSL is looking to add 1.5mn sq ft of retail space (~
25 stores) for its department store format over FY11-14. In addition it intends to
open 15 Hypercity stores (~1mn sqft) over the same period. Specialty formats like
Crosswords and Home Stop will also witness disciplined store openings. In terms
of geographical mix, top 6 cities will likely continue to contribute ~70% of
company’s sales, according to management.
 Management expects Hypercity to witness PAT breakeven over the next two
years supported by scale leverage and improved product mix. Likely healthy mid
teens SSS growth and higher share of better margin non-food products in overall
sales mix will lead to enhanced profitability for this format which has already
achieved store level EBITDA breakeven, according to management.
 Stable margins for department stores, but consolidated margins to be
subdued due to lower profitability for Hypercity. Management noted that there
is scope for 30-40bp of gross margin improvement on account of better mix and
lower input costs. However start-up losses relating to new stores will likely keep
margins stable for department stores in FY12. Consolidated margins will be lower
owing to Hypercity format. Management believes GST implementation should
lead to another 60-70bp improvement (set-off of service tax on rentals and others
expenses).
 Capex and WC needs to be met from internal accruals for incremental space
addition as per management. SSL’s current consolidated net debt/equity is at 0.49,
as of FY11 end.
 SSL is trading at 47.5x FY12E and 34.5x FY13E Bloomberg consensus earnings.
NOTE: THIS DOCUMENT IS INTENDED AS INFORMATION ONLY AND NOT AS A
RECOMMENDATION FOR ANY STOCK. IT CONTAINS FACTUAL INFORMATION,
OBTAINED BY THE ANALYST DURING MEETINGS WITH MANAGEMENT. J.P. MORGAN
DOES NOT COVER THIS COMPANY AND HAS NO RATING ON THE STOCK.