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Focus on efficiency
Two years of restructuring and refocus have helped Spencer’s (CESC’s
retail subsidiary) narrow Ebitda losses from Rs3.03bn to Rs1.69bn and
reduce working capital by Rs0.83bn. Our discussions with management
indicate that this has been driven by a focus on gross profit/sq ft and
efficiency. Spencer’s has improved the offering in food to drive better
turns, while reducing focus on apparel. While Spencer’s has achieved
store level profitability, company level losses remain high and break even
remains some time away with scale and cost efficiencies needed.
FY11 annual report shows narrowing losses, higher efficiency
q Spencer’s saw a 22% improvement in revenue per square foot and a 110bps
improvement in gross margins in FY11. This, along with control over other costs,
drove a decline in Ebitda losses from Rs2.25bn to Rs1.69bn (Rs3.03bn in FY09)
q Working capital days declined from 19 in FY10 to only 2 in FY11 (29 in FY09)
q Gross block efficiency also seems to have seen an inflection point
Using food to drive efficiency
q Spencer’s focuses on gross margin/sq ft rather than revenues or margins
q The improvement in efficiency has been driven by increased rotation in food – a
relatively low margin category but with high turns
q Besides fresh and private label offerings, Spencer’s also features a bakery as well
as a range of gourmet/imported foods
q Liquor, although low margin, contributes through revenues from displays
q Spencer’s is firmly focused on continuing as a staples lead retailer (74% of sales)
A different approach
q Spencer’s has deliberately reduced focus on garments and general merchandise in
Tier I cities given availability of a wide variety of brands. However, these categories
continue to fare well in its tier II store
q On private label (16-17% of sales excluding fresh foods), Spencer’s sees sustaining
a very broad private label portfolio as low return and tries to focus its offerings
q The retailer has largely moved away from electronics
Growth back in focus, costs still too high, profitability needs scale
q Spencer’s is focusing on the hypermarket format and plans to add >0.3m sq ft/year
q However, the cost base remains high with even store driven costs like rent and
staff remaining significantly higher than peers on a per square foot basis
q While it is already profitable at a store Ebitda level, Management indicates that
overall profitability will only be achieved once the business has scaled up to ~2.2-
2.5m sq ft (0.95m in FY11). In the meantime, the parent will invest ~Rs1.5bn/year
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Focus on efficiency
Two years of restructuring and refocus have helped Spencer’s (CESC’s
retail subsidiary) narrow Ebitda losses from Rs3.03bn to Rs1.69bn and
reduce working capital by Rs0.83bn. Our discussions with management
indicate that this has been driven by a focus on gross profit/sq ft and
efficiency. Spencer’s has improved the offering in food to drive better
turns, while reducing focus on apparel. While Spencer’s has achieved
store level profitability, company level losses remain high and break even
remains some time away with scale and cost efficiencies needed.
FY11 annual report shows narrowing losses, higher efficiency
q Spencer’s saw a 22% improvement in revenue per square foot and a 110bps
improvement in gross margins in FY11. This, along with control over other costs,
drove a decline in Ebitda losses from Rs2.25bn to Rs1.69bn (Rs3.03bn in FY09)
q Working capital days declined from 19 in FY10 to only 2 in FY11 (29 in FY09)
q Gross block efficiency also seems to have seen an inflection point
Using food to drive efficiency
q Spencer’s focuses on gross margin/sq ft rather than revenues or margins
q The improvement in efficiency has been driven by increased rotation in food – a
relatively low margin category but with high turns
q Besides fresh and private label offerings, Spencer’s also features a bakery as well
as a range of gourmet/imported foods
q Liquor, although low margin, contributes through revenues from displays
q Spencer’s is firmly focused on continuing as a staples lead retailer (74% of sales)
A different approach
q Spencer’s has deliberately reduced focus on garments and general merchandise in
Tier I cities given availability of a wide variety of brands. However, these categories
continue to fare well in its tier II store
q On private label (16-17% of sales excluding fresh foods), Spencer’s sees sustaining
a very broad private label portfolio as low return and tries to focus its offerings
q The retailer has largely moved away from electronics
Growth back in focus, costs still too high, profitability needs scale
q Spencer’s is focusing on the hypermarket format and plans to add >0.3m sq ft/year
q However, the cost base remains high with even store driven costs like rent and
staff remaining significantly higher than peers on a per square foot basis
q While it is already profitable at a store Ebitda level, Management indicates that
overall profitability will only be achieved once the business has scaled up to ~2.2-
2.5m sq ft (0.95m in FY11). In the meantime, the parent will invest ~Rs1.5bn/year
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