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Focus on smaller stores to improve productivity

Store additions, Beauty and Private labels to revive growth

We met with the management of Shoppers Stop to understand the:

revenue trends amid the third COVID wave in Jan’22

performance of the new smaller stores opened in tier 2-3 cities; and

traction on its ambitious target to double its revenue in the next 3-4 years.

Key highlights of our discussion

Shoppers Stop’s revenue was adversely impacted in Jan’22 due to COVID-19. However, its revenue recovered strongly and almost reached the pre-COVID levels in Feb’22; further, early trend in Mar’22 indicates the revenue scale to surpass the pre-COVID levels.

According to our channel checks, the new smaller compact feature stores (of 20k-25k sqft) enjoy significantly better revenue/sqft (of ~1.5x) v/s the existing bigger stores (of 40k-50k sqft).

Management targets to double revenue over the next 3-4 years backed by: a) its strategy of adding 10-12% new stores annually, b) its initiative to revive SSSG to high single or double digit on improved new store productivity and focus on private labels, c) strong growth in the Beauty segment and d) ecommerce initiatives.

However, our revenue estimates are nearly 40% below the management guidance (building in FY23E revenue at 6% above FY20), which reflect in its valuation of 12x EV/EBITDA – at 40-50% discount to its peers.

Even if the company achieves 60-70% of its guidance, it could significantly surprise the street expectations. The pace of store additions and SSSG remain the key monitorables

We maintain our Neutral rating on the stock with a TP of INR400.

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