Sharp decline in footfalls drag earnings
Falling SSSG dents profitability: 2QFY20 saw Shoppers Stop witness a ~2% decline in SSSG, led by over 10% drop in footfalls and margin pressure. This pulled down standalone revenue/EBITDA by 2.2%/13.5% YoY to INR8,453m/INR468m (revenue/EBITDA 8%/28% below our est.). Subsequently, EBITDA margins contracted 70bp YoY to 5.5% owing to the revenue decline and 30bp drop in private label margins. PBT shrank 14% YoY to INR196m, partly aided by 6x jump in other income. SHOP has reported net loss of INR59m due to DTA revaluation on account of adopting the lower tax regime. 1HFY20 revenue/EBITDA at INR16.8b/INR959m came in flat YoY.
(1) Expect single-digit recovery in SSSG within 2-3 quarters, even if footfalls decline to low single-digits.
(2) Management has refrained from giving EBITDA margin guidance.
(3) Plans to open 15 stores in FY20 – 8-10 departmental stores and 5-7 beauty stores. However, SHOP will close 2 stores in 3QFY20 and 1 store in 4QFY20.
(4) Total capex guidance for FY20 stands at ~INR1,500m toward new stores and refurbishment for existing stores.
Growth to remain subdued: Management’s focus on customer experience and efforts toward ‘First Citizen’ membership has resulted in higher conversion rate (up 4.4% YoY), increased transaction size (up 6% YoY) and higher ASP (up 2.5% on LTL basis); however, continuous and sharp decline in footfall remains a key concern. We have cut standalone FY20E/FY21E PAT estimate by 17% for FY20, building recovery in FY21 on low single-digit SSSG recovery. Subsequently, we expect standalone revenue/EBITDA growth of 4%/13% over FY19-21E on modest growth, efforts to enhance customer experience and improving KPIs.
Valuation and View: The stock is priced at FY21E EV/EBITDA of 10x and P/E of 35x on FY21E, (~30% discount to three-year average EV/EBITDA). Maintain Neutral, with an SOTP-based TP of INR414. Improvement in SSSG and margins will be key for re-rating of the stock.
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