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MOSL: SPENCERS RETAIL (Buy)-Balancing growth versus profitability

Spencers Retail: Balancing growth versus profitability

(SPENCER IN, Mkt Cap USD0.2b, CMP INR133, TP INR175, 32% Upside, Buy)

 

• Turns profitable: revenue grew 4% YoY to INR5,235m (11% miss). Gross margin expanded 210bp YoY to 21%. EBITDA came in at INR17m (v/s a loss of INR47m in 4QFY18); margin at 0.3% v/s -0.9% in 4QFY18. This, coupled with a steep 137% YoY surge in other income, resulted in PAT of INR18m (v/s a loss of INR89m in 4QFY18). For FY19, revenue grew 6%, while EBITDA/PAT stood at INR89m/INR24m (v/s INR0/-INR290m in FY18).
• Healthy pace of store adds to drive growth: The company added 10 stores in the quarter, but same-store sales (SSS) declined by 1% YoY (v/s 2.3% growth in 4QFY18). After rationalizing/shutting down stores over the past several years, Spencers accelerated the pace of store adds in FY19 (added 29 stores). This will likely provide the necessary thrust to steady revenue growth.
• Natures Basket acquisition a good move, but should extend achievement of profit targets: Spencers announced the acquisition of Godrej’s Natures Basket at INR3b (FY19 sales/stores of INR3.4b/36) – EV/sales of 0.9x. We note that it has store-level EBITDA margin of ~3% with over 2x productivity v/s Spencers, but at company level, it may continue to make EBITDA losses. Thus, cutting company-level losses may take about a year, which may extend the achievement of profit targets for Spencers. We have yet not factored in the acquisition in our model as we seek more clarity. Subsequently, we expect 14% revenue CAGR and 140bp EBITDA margin expansion over FY19-21, driven by healthy store adds, an improving mix of high-margin products, and inherent operating leverage.