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Execution needs to improve to sustain re-rating

Shoppers Stop’s (SHOP) Q4FY22 revenue and EBITDA were below our / consensus estimates as the same were impacted by the third covid wave in Jan’22 coupled with a few one-offs. However, management suggested Mar-Apr’22 recovery has been strong and ahead of pre-covid levels. SHOP added 5 department stores and 8 beauty/others stores (net) in Q4FY22, taking the total store count to 88 and 171, respectively. It plans to add 12 department stores and 15 beauty stores (net), and is targeting ~9% area addition in FY23. Under the new management team, SHOP is likely to post better growth trajectory driven by accelerated small size store expansion, growth in private-label mix and increased focus on high-growth beauty business, aided by improved consumer sentiment, in our view. We raise our pre Ind-AS 116 FY23-24E EBITDA by 2-6%, PAT by 7-19% and DCF-based target price to Rs530/sh (earlier: Rs405). Maintain ADD. Key risks: Lower discretionary spends, execution challenges and lockdown restrictions.

Revenue (Ind-AS) stood at Rs7.1bn, up 6% YoY despite moderate base as Q4FY22 got disrupted owing to partial lockdowns caused by the Omicron wave in Jan’22. As per management, while Jan’22 was subdued, revenue saw a sharp recovery in Mar’22 (up 40% YoY) backed by ensuing wedding season. The average selling price (ASP) has improved by 17% YoY and the average transaction value (ATV) has improved by 17% YoY in Q4FY22, primarily due to premiumisation.

Revenue (non-GAAP) stood at Rs8.9bn, up 8% YoY/ down 25% QoQ. NonGAAP gross margin declined 150bps YoY with EBITDA loss of Rs130mn as against Rs100mn in Q4FY21 owing to 13% higher operating expenses. The company recognised Rs84.2mn of rent concessions during Q4FY22 and Rs1.1bn in FY22. SHOP witnessed significant release in working capital (up Rs1bn YoY) while the company has net debt of Rs160mn as of Mar’22 vs net cash of Rs190mn at Mar’21.

SHOP aims to add 12 department stores and 15 beauty stores (net) in FY23. It added 13 stores (5 on departmental and 8 on beauty) during the quarter and currently has 6 stores under fit-out which are likely to open in Q1FY23. As of FY22, it has 88 department stores (added 5 stores QoQ), 11 home shops, 136 beauty stores (added 7 stores QoQ) and 24 airport doors taking the total store count to 259 spread across 4.5mn-sqft and 46 cities

Improvement in key strategic pillars: ‘First Citizen’ (FC) customers contributed 76.2% of sales, with new enrolments increasing by 5.3%+ YoY in Q4FY22, taking the total count to 8.7mn as of Mar’22-end. ‘Personal Shoppers’ contributed 11% of sales with average ticket size up 3x YoY. ‘Private labels’ grew 9.4% YoY (13% of sales) while beauty portfolio contributed 17.6% of sales (up 20bps YoY). Omnichannel sales grew 5.1% YoY and contributed 6% of total revenue.

SHOP invested Rs530mn in FY22 for building digital capabilities with Rs130mn being opex in omni-channel during Q4FY22. It is likely to invest Rs2bn for building new stores and renovations, and Rs650mn for building its digital capabilities in FY23

SHOP launched 24 new brands in Q4FY22 in its beauty segment (94 brands YTD). ‘Arcelia’, the private brand in the beauty segment, plans to launch 100+ SKUs of make-up and bath & body in Q1FY23

Gross margin and post Ind-AS 116 EBITDA margin declined 80bps YoY and 345bps YoY, respectively mainly due to one-offs such as inventory write-off of Rs90mn, receivable write-off of Rs60mn and lease rental of Rs60mn during store closure period and also due to operating leverage owing to lower revenue in Jan’22.

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