Launching Omni channel to counter e-com! • Shoppers Stop :: ICICI Securities, report

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Launching Omni channel to counter e-com! • Shoppers Stop’s (SSL) consolidated Q3FY15 sales grew 7.7% YoY to | 1173.1 crore (I-direct estimate: | 1223.4 crore) led by 0.1 million sq ft (msf) space addition YoY to 5.76 msf • Like to like (LTL) sales growth for departmental stores disappointed with marginal growth of 0.8% while the LTL for HyperCity format was at 6.5% • The consolidated operating margin at 6% was better than our expectation of 5.1%. HyperCity performed well and achieved EBITDA breakeven for a second consecutive quarter at the company level as the operating margin improved from -4.9% in Q3FY14 to 0.1% in Q3FY15 Space addition to be slower in FY16E, FY17E Over the last three years, the company has added ~2.0 msf. The store count has increased from 123 stores in FY11 to 234 stores in Q3FY15. During FY15E, SSL had planned to add eight departmental stores of which six have been added till Q3FY15. The remaining two are expected to open over the next two quarters. On HyperCity store addition, the company expects to open two stores by Q3FY16. Thereafter, the departmental store addition is likely to come down to three or four stores per year. We expect the total space to increase from 5.4 mn sq ft in FY14 to 6.8 mn sq ft by FY17E. Omni channel strategy to counter e-com onslaught SSL’s management indicated that departmental stores revenues were lower due to the impact of heavy discounting by online retail players. The management intends to strengthen its own online infrastructure and launch its private labels both on its own website and other market places to ramp up revenues. The strategy is to provide the customer with a better shopping experience on both physical and online platforms for attaining sustained revenue growth. Comfortable leverage with continuous growth compared to peers Despite the aggressive expansion, SSL has curtailed the debt-equity of 1.3x. This is commendable considering that the breakeven for newly added stores takes 18-24 months. Considering the current muted demand scenario, we expect the debt-equity to touch a high of 1.4x in FY15E and come down to 0.9x in FY17E. As compared to other retailers, SSL is comfortably leveraged and will be in a better position to sustain in a tough economic environment or take advantage of an improvement in the business scenario. Strong growth in organised retail segment to aid growth As per a BCG-CII report, the Indian retail industry is slated to grow at a CAGR of 9.1% during FY14-20E. The share of organised retail is likely to go up from 10.6% in FY14 to 21.0% by FY20E. Considering that SSL has considerably expanded over the last few years, we believe it will be well poised to capitalise on this growth opportunity. HyperCity improvement to provide valuation upgrade; recommend BUY The performance of HyperCity has shown a continuous improvement. We believe the departmental format would also perform well with n improvement in consumer sentiment. We expect an improvement in FY16E, FY17E operating performance and maintain our BUY rating with a target price of | 570 (SOTP based - 0.9x (departmental format) and 0.8x (HyperCity format) FY17E EV/sales).

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