Shoppers Stop's Q3FY18 results (Outperformer) - Strong margin expansion offsets weak revenues
Q3FY18 result highlights
- Shoppers Stop’s (SHOP) standalone revenues declined by 5% yoy to Rs9.63bn. EBITDA grew by 16% yoy to Rs794m (est: Rs824m). Reported PAT declined by 14% yoy to Rs163m, impacted by exceptional loss of Rs 166m. Adjusted for this, PAT was up 42% at Rs269m (est Rs306m)
- Comparable sales declined by 2% yoy. Departmental stores like to like (LTL) sales increased by 1.4%. However, adjusting for the price cut in its non-apparel portfolio due to GST, LTL sales were up ~4.5%
- Gross margins improved 180bps yoy. Share of private & Exclusive brands declined by 300bps to 12.6%. Other expenses declined by 11% yoy aided by operating efficiencies and flow through of service tax benefit. Resultant EBITDA increased by 16% yoy with EBITDA margin expansion of 140bp to 8.2%.
- Exceptional loss of Rs 166m pertains to a)Rs 148.6m towards loss on sale of Hypercity investment, b) provision of diminution in value of investment in Timezone entertainment Pvt ltd of Rs17m.
Key positives: Healthy operating margin improvement
Key negative: Weakness in LTL sales and private brand mix
Impact on financials: We cut FY18/19/20E EBITDA by 5%/5%/4% respectively.
Valuations and View
LTL growth in the current year has been a challenge impacted largely by disruptions due to regulation. We believe SHOP will get back to its high single digit LTL growth trajectory in FY19E and continue to drive margin improvement. The Amazon deal provides the twin benefits of cash infusion as well as a participation in e-commerce growth which bodes well for LTL growth FY19 onwards. Further, the Hypercity deal reduces pressure on SHOP’s cash flows and frees up the company’s financial and management bandwidth to improve the cash flow accretive SHOP model. Given the improving balance sheet and attractive valuations of 14xFY20E EBITDA, we maintain our Outperformer rating on the stock.
Shoppers Stop Limited is a holding company. The Company is engaged in the business of retailing a range of household and consumer products through departmental stores. It operates through approximately 80 such departmental stores located in approximately 40 cities. Its products include apparels and non-apparels. Its non-apparel category includes cosmetics, personal accessories and leather goods, home wares, electronics, books and music. The Company, through its Website, Shoppersstop.com, offers international and national brands in men's, women's and kids apparel; gifts and fashion accessories, such as ladies watches, men's watches, artificial jewelry, fine jewelry, handbags, fragrances, men's and women's footwear, home furnishing and decor products. It has over six private brands namely STOP, Kashish, Life, Haute Curry, Velorio Fratini and Elliza Donatein. It offers First Citizen Loyalty Program for customers. Its application is available on Google Play Store and Apple App Store.
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