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Prolonged recovery

* Hit by COVID-19, SHOP’s revenue declined 29% YoY, led by lower footfalls and improved focus towards strategic initiatives like Personal Shopper and First Citizen. This resulted in a healthy recovery in footfalls and increased sales contribution of ~6% from omni-channels.

* We have cut our FY21E revenue/EBITDA estimate by 12%/92% due to the prolonged impact from the COVID-19 pandemic.

EBITDA turns positive on sharp cost-cutting measures

* Standalone revenue fell 29% YoY to INR7.1b (in line) due to a 50% decline in footfalls. However, revenue was up 142% QoQ as footfalls improved by ~36% during the festive months of October-November.

* Gross margin fell 400bp YoY, despite higher private label mix, on inventory provisioning and deep discounting of private labels and older stock.

* EBITDA declined 52% YoY to INR949m (16% miss), with margin shrinking by 650bp to 13.4%. The miss could be attributed to higher than estimated operational costs, with employee/SG&A cost at INR660m/INR1.1b (v/s our estimate of INR605m/INR869m).

* Other income stood at INR310m (4.7x YoY), which includes INR212m adjusted for rent concessions. Excluding the same, other income stood at INR189m.

* PBT/PAT stood at -INR279m/-INR207m (v/s our estimate of -INR124m/- INR100m).

* Total First Citizen membership stands at 7.7m. It added 0.3m customers in 3QFY21. These customers contributed 83% of sales, with 6% higher average transaction value during the quarter. Personal Shoppers constituted 16% of sales, up 220bp YoY, with an average ticket size of 2.7x.

Highlights from the management commentary

* Once the COVID-19 pandemic ends, business recovery is expected to touch FY19 levels by 2Q or 3QFY22.

* Gross profit was impacted by INR160m provisioning and deep discounted selling by private labels.

* e-commerce sales increased to 6% v/s ~2% last year. Sales from Amazon grew 3x YoY, constituting ~20% of total omni-channel sales. The same is expected to rise to 15-25% over the next 2-3 years.

* Two key positive changes in the business due to the pandemic are: a) New store openings are ~20% smaller in terms of size, at 20-30k sq ft, enhancing productivity significantly; and b.) Increased focus on private labels to improve margin.

* The management expects to open 10-12 departmental stores annually from FY22, majorly in Tier II cities, and close 5-7 non-profitable stores.

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