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Shoppers Stop witnesses a change in leadership

Management expects existing growth strategy to continue

* Shoppers Stop (SHOP) announced the resignation of its MD and CEO Mr. Venugopal G. Nair after a ~three-year stint at the company. Mr. Kavindra Mishra, formerly Chief Commercial Officer and CEO of the Homestop division, will succeed him and assume the role of CEO and Executive Director.

* The management indicated that there will be no change in the ongoing strategy, with continued emphasis on private label beauty products and smaller-sized stores.

* The stock is currently trading at 10.8x EV/EBITDA and 29.6x P/E on FY25E, building EBITDA/PAT CAGR of 15%/29% over FY23-25E. We value SHOP at 11x FY25E EV/EBITDA to arrive at a TP of INR750. We reiterate our Neutral stance on the stock.

Structural changes brought about by Mr. Venu Nair

During his tenure, Mr. Nair was instrumental in bringing about strategic changes that improved the revenue trajectory, which had been lagging prior to FY20 (3% Revenue CAGR over FY15-19). Decisions including a) opening smaller-sized stores to improve efficiency (30k sqft vs. existing average of 50k sqft), b) prioritizing margin-accretive segments such as private label and beauty, and c) venturing into the value fashion category recently have all been observed to play a significant role in driving revenue growth and bolstering the company’s bottom line. Mr. Kavindra Mishra, formerly Chief Commercial Officer and CEO of the Homestop division, will be succeeding Mr. Nair as the CEO and Executive Director. Mr. Mishra is a Post Graduate Diploma holder from IIM Bangalore and has over 24 years of experience across companies such as ABFRL, UCB, and Pepe Jeans. Prior to joining the company, he was MD and CEO of House of Anita Dongre.

Key takeaways from the management call

Focus on strategic pillars and improved productivity persists

The management has indicated that there will be no change in the ongoing strategy that was implemented under Mr. Venu Nair’s leadership. The management indicated that apart from the continued focus on improving the share of private labels and beauty, it will continue to prioritize opening smaller store-sized stores for enhanced efficiency. It has reiterated its plans to add 12-13 departmental stores for FY24. The value fashion category “In-tune” has seen a strong traction in early days, prompting the management to revise its store add target for FY24 to 25 stores from its earlier target of 10 stores.

Retention of talent and succession management on track

The management stated that it does not expect any additional attrition following the departure of the MD and CEO. The company has also strengthened the leadership team by implementing a strategy of building a robust resource pool beneath the CXO tier. Historically, attrition at the top level has hovered within the 10-15% range, and the management foresees no significant deviation from these levels.

Valuation and View

* The company has received healthy responses to its recent initiatives, which include: 1) opening smaller-sized stores (30k sqft vs. existing average of 50k sqft); 2) growing the Private Label mix; and 3) prioritizing high-growth and margin-accretive Beauty segment. These initiatives have collectively contributed to an improved top-line growth and increased productivity. This along with a steady store addition guidance of 12/15 in the departmental/Beauty segments should aid revenue growth going ahead.

* A healthy balance sheet, coupled with a net debt of INR300m and a strong FCF generation capability of INR4-5b could provide comfort on procuring funding for footprint expansion.

* However, persistent demand pressures, particularly in the Tier 2 markets where the company has strategically focused its expansion efforts, coupled with increased competition from the newly launched ‘Centro’, underscore the importance of closely monitoring the execution of the “In-tune” initiative.

* The stock is currently trading at 10.9x EV/EBITDA and 30.1x P/E on FY25E, building EBITDA/PAT CAGR of 15%/29% over FY23-25E.

* We value SHOP at 11x FY25E EV/EBITDA to arrive at a TP of INR750. We reiterate our Neutral rating on the stock.

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