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Hold Shoppers Stop Ltd For Target Rs.220

Relatively slower recovery

* Q3 revenue declined ~30% YoY, largely in line with our/Street expectations. The recovery remains slow due to higher mall exposure (74 mall stores out of total 85 stores). With staggered multiplex opening, SHOP expects full revenue recovery by Q2/Q3FY22E.

* Cost savings have been good at Rs3.8bn/Rs4.5bn in 9MFY21/FY21E, of which Rs2bn is expected to sustain in FY22E. However, SHOP indicated plans to re-invest these savings partially in augmenting its omni-channel capabilities.

* SHOP retired Rs1.3bn debt in Q3FY21 using its Rs3bn rights issue proceeds. The rights issue has addressed negative net worth and liquidity concerns, turning net cash positive (Rs0.5bn net cash balance as of Dec’20 end).

* Recovery remains slow due to higher exposure to malls, which are yet to fully recover. The appointment of new CEO with a strong track record is positive. We wait for improvement indicators before turning constructive. Retain Hold with a revised TP of Rs220.

Higher mall exposure leads to a slower recovery: While all stores are fully operational, footfalls still remain low (~50% of pre-Covid levels) due to partial opening of multiplex/foodcourts, leading to a slower recovery (~70% of pre-covid sales in Q3FY21). SHOP expects full recovery by Q2/Q3FY22E. SHOP continues to expect 10-12 department store additions in FY22E with higher salience in Tier2/3 towns and relatively smaller store size (~25,000sqft vs. ~35,000sqft earlier). Connectivity of stores with Amazon remained at Q2FY21 levels i.e. 50 out of total 85 stores. However, SHOP highlighted that listed SKUs have increased to 61,000 vs. 20,000 earlier and tech-integration issues have been completely resolved.

Decent cost savings but omni-channel growth shall partially erode gains: Higher discounts on private labels and provision related to inventory obsolescence (~Rs30/160mn in Q3/9MFY21) led to a ~400bps YoY decline in gross margins on expected lines. Cost savings have been decent at ~Rs0.8bn/Rs3.8bn in Q3/9MFY21. SHOP maintained its guidance of Rs4.5bn cost savings in FY21E and expects ~Rs2bn of these savings to sustain into FY22E. It plans to invest some of these savings to drive growth in the omni-channel business.

CEO suggests no major change in strategy: New CEO Venu Nair (Ex-Westside/M&S/ ABFRL) suggested no major deviation from earlier strategy of focusing on private labels, omni-channel, beauty and personal shoppers. However, he indicated focus on (1) filling the category gaps within private labels to garner value-focused consumers, (2) new monthly launches to drive consumer interest in beauty and (3) improving order fulfillment capabilities for omni-channel, leading to an increase in omni-channel mix (~25% by FY24E vs. 6.0%/1.5% in Q3FY21/FY20). Private brands/Beauty contributed ~13%/16% of overall sales in Q3FY21.

Await improvement in recovery; maintain Hold: While new CEO has a good track record, slower recovery due to higher mall exposure (74/85 stores are in malls) and growth challenges in the past keep us on the sideline as of now. Retain Hold with a revised TP of Rs220 (vs. Rs210 earlier) on roll over to Dec’22E EBITDA from Sep’22E EBITDA. Target Price is based on 10x Dec’22E pre-IndAS116 EBITDA.

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