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‘InTune’, SHOP aims to create a new growth engine

Shoppers Stop (SHOP) has recently entered into the fast-fashion value retail segment with the launch of ‘InTune’ stores. The smaller, youth-centric family store has a very trendy look and offers sharp pricing below INR999. With InTune, SHOP aims to create a new growth engine.

Foray into fast-fashion value apparel category

SHOP has entered into the fast-fashion value format with ‘InTune’ brand. It has opened two stores in Hyderabad (GSM Mall and DSL Virtue Mall) spread across ~5,000sqft carpet area. They offer an extensive range of affordable fashion options for the entire family, completely consisting of private labels. Targeting the youth, the product category is mainly tilted toward casual wear, with limited offerings under the formal wear category, similar to Zudio. Competing with formats like Zudio, the product pricing will be sharp, ranging between INR169 and INR999 with an ASP of ~INR500.

Sharper pricing to ensure healthy store economics

Value fashion stores, with an average store size of 4,500-5,000sqft, may garner average store revenue of about INR60-70m, which is equal to an average revenue of about INR12,000-13,000 per sqft. Gross margins are expected to be in the range of 30-35%, which is the typical range for value fashion retailers. With low gross margins, it is challenging to achieve double-digit EBITDA margin at the store level. It is only possible if the rent is INR50-60/sqft or revenue/productivity is high. Zudio’s key success factor is that its revenue per sqft is over INR15,000, which enables healthy store level profitability.

Focus on gradual expansion

In the initial pilot phase, SHOP plans to open 5-7 stores in Mumbai and other cities to check product acceptance. Depending on the traction, it may gradually expand this category in different cities. Thus, in FY24, it may monitor store operations. Once it has perfected the business model, it may expand aggressively. Accordingly, any material contribution may come FY25 onward.

Weak market conditions persist

Our on-the-ground channel check indicates weak demand across lifestyle categories like apparel and footwear for both premium and value segment retailers. As highlighted in our retail day report, most retailers are hinting at flat or lower SSSG. Further, an early EOSS has also been widely initiated by all brands, unlike last year when it was started by the end of June. However, lower RM prices should cushion margins and possibly soften ASPs, which may revive demand by 2HFY24

Valuation and View

* The company has received healthy responses to its recent initiatives of: 1) opening smaller stores (30k sqft vs. existing average of 50k sqft) to improve store efficiency; 2) growing Private Label mix; and 3) focusing on the highgrowth and margin-accretive Beauty segment.

* A healthy recovery in SSSG and steady store addition guidance of 12/15 in the departmental/Beauty segments should aid revenue growth. Further, the contribution from the beauty distribution segment and the value format should help SHOP achieve its target of doubling revenue by FY26.

* A healthy balance sheet, net debt of INR53m (Excluding Lease Liabilities) as on Mar’23, and strong FCF generation capability of INR4-5b could provide comfort on funding the footprint expansion.

* However, persistent demand pressures, particularly in the Tier 2 markets where the company has planned its expansion activities, and increased competition from the newly launched ‘Centro’ may pose risks.

* The stock is currently trading at 10.6x EV/EBITDA and 28x P/E on FY25E, building EBITDA/PAT CAGRs of 17%/41% over FY23-25E.

* We value SHOP at 11x FY25E EV/EBITDA to arrive at a TP of INR800. We reiterate our Neutral rating on the stock.

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