Shoppers Stop's Q1FY20 results (Outperformer) - Decent start in a challenging environment…

Q1FY20 result highlights

• On reported basis (including impact of IndAS 116 accounting), standalone net sales grew by 0.7% yoy to Rs8.3bn, EBITDA increased by 3x to Rs1.38bn, PAT decreased by 75% yoy to Rs24m.
• Adjusting for IndAS 116, Standalone net sales grew by 0.7% yoy to Rs8.32bn (est: Rs8.39bn), EBITDA grew by 18% yoy to Rs491mn (est: Rs493m), PBT declined by 69% yoy to Rs47m (est: Rs218m), PAT fell by 66% yoy to Rs33m.       
• Comparable gross revenues grew by 4.9% yoy to Rs1.09bn (IDFCe: +3%), driven by LTL growth of 5.2% yoy.
• Comparable gross margins improved by 80bps yoy to 33.5% aided by improved mix. Staff cost increased by 10% yoy; however, tight control over rental costs (down 2% yoy) and other expenses (up 2% yoy), resulted in EBITDA growth of 18% yoy with a margin expansion of 90bps to 5.9% (IDFCe: 5.9%).
• Other income was down 66% yoy, interest cost was down 28% yoy. Depreciation was up 47% yoy (incl. Rs165m charge due to accelerated dep which led to miss in PBT/PAT). Tax outgo declined by 75% yoy.

Key positives: Better than expected SSSG & tight control over costs.

Key negatives:  Decline in footfalls yoy.

Impact on financials: Ex Ind AS 116, EBITDA cut is 3-4% for FY20/21E. Factoring IND AS 116 impact, we have cut our FY20/21E EPS by 27/5%.

Valuations & view

Despite challenging market context and decline in footfalls, SHOP has started 1QFY20 on healthy note with SSSG of 5.2%. While management’s guidance of mid-single digit SSSG for the year appears moderate, we like management’s focus on driving growth through internal initiatives like focus on private labels, entry into luxury beauty format and launch of new brand/collections. Factoring moderation in demand environment, we are now factoring ~5% SSSG for FY20E resulting in 9% revenue CAGR over FY19-21E vs 11% earlier. Further steady improvement in mix and operating leverage will aid margins, resulting in a 14% EBITDA CAGR (ex-Ind AS 116 basis) over FY19-20E. Valuations at 11x/10x FY20/21E EV/EBITDA (ex-Ind AS 116 basis) remain attractive. Maintain OP.