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Demand recovery post Covid disruption augurs well

About the stock: Shoppers Stop (SSL) is one of India’s leading departmental stores and has undergone various structural changes with focus on enhancing its share of private label brands and beauty portfolio, accelerating growth through digital channels and providing a better shopping experience through ‘personal shoppers’.

Operates 88 departmental stores, 171 beauty format stores spread across 4.2 million sq ft while being present in 47 cities

Q4FY22 Results: Covid-led disruptions in January-February and one-off expenses (~| 21 crore) led to a subdued performance in Q4FY22. The revenue recovery rate declined to 90% in Q4FY22 vs. 96% in Q3FY22

On a favourable base, revenue grew 6% YoY to | 709.9 crore

Increase in operating costs (owing to higher store additions) and one-off expenses (| 21 crore) led EBITDA margins to decline 343 bps YoY to 10.8% with absolute EBITDA declining 20% YoY to | 76.7 crore

PBT losses were at | 49 crore vs. | 37.2 crore in Q4FY21

What should investors do? The stock price has underperformed the broader indices over the last five years on account of weak SSSG, muted store addition pace and lower share of private label brands.

With the new management team in place, we expect a revival in SSL’s revenue trajectory and margin profile. Reasonable valuations prompt us to remain positive on the stock and maintain BUY

Target Price and Valuation: We value SSL at | 595 i.e. 10.0x FY24E EV/EBITDA

Key triggers for future price performance:

We believe the new MD (former Westside CEO) would bring in his expertise in the private label brands domain and focus on enhancing the share of high margin private label brands (~14% of revenues)

It has embarked on a healthy store addition plan with the opening of 12 departmental stores and 15 beauty stores in FY23E. Majority of the store additions in Tier II/III cities. Capex for the same is expected to be | 150 crore, which will be funded mainly through internal accruals

The management expects steady SSSG growth of 9-11% in the near term

Key thrust on accelerating investments in omni-channel with long term target of channel contributing 20% of sales from current ~8%

Higher focus on beauty segment (currently ~17% of revenues) through scaling up of its own private brand Arcelia

Alternate Stock Idea: Apart from SSL, in our retail coverage we also like ABFRL

ABFRL has charted out growth strategies to become a ~US$2.8 billion entity by FY26E, translating into 15% CAGR in FY20-26E

BUY with a target price of | 360

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