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Softening growth hurts earnings; focus on new format “Intune”

* Shoppers Stop (SHOP) reported a moderate 2% YoY EBITDA growth (in line) to INR2.2b in 3QFY24, as the 7% YoY revenue growth was offset by gross margin contraction of 120bp YoY. The margin decline was attributed to weak demand despite the festive season and continued muted performance within Private Labels.

* Management has indicated that the softness in demand is likely to persist for another quarter and anticipates a reversal in FY25. This, along with steady store additions, particularly in the recently launched value retail format “Intune”, and growth in the beauty segment, could drive growth in the coming period. We expect a 9%/11% CAGR in revenue/EBITDA over FY23-25. We value SHOP at 10x FY26E EV/EBITDA to arrive at our TP of INR695. Reiterate Neutral.

EBITDA flat YoY (in line) due to muted demand

* SHOP’s standalone revenue grew 7% YoY to INR12.1b (in line) in 3QFY24, mainly driven by store additions and expansion of Intune.

* LFL growth YoY (calculated) is estimated to be flat (~1% YoY).

* Private Brands’ revenue declined 6% YoY to INR1.9b, whereas the Beauty segment reported 13% YoY growth.

* Revenue from Intune stood at INR110m, with a gradual improvement in items per ticket and ATV.

* Gross margin contracted 120bp YoY to 39.7% (est. 40.9%), mainly due to a drop in the share of private labels and some impact of EOSS.

* Employee costs/other expenses grew 9%/4% YoY during the quarter.

* Hence, EBITDA grew merely by 2% YoY to INR2.2b (in line), dragged by a contraction in gross margin. EBITDA margin contracted 90bp YoY to 17.8%.

* Other income dipped 86% YoY to INR33m, while finance cost rose 12% YoY.

* PAT, at INR356m, declined 43% YoY due to lower other income and reduced operating profits (a big miss).

* SHOP’s 9MFY24 revenue grew moderately, while EBITDA remained flat YoY, with margins declining 60bp YoY to 17%. PAT for 9MFY24 declined 49% YoY hit by lower operating profits and lower other income.

Highlights from the management commentary

* Overall LFL growth declined 1% for 3QFY24, despite a healthy LFL growth of 4% and revenue growth of 9% seen during the festive period.

* Margin contraction was mainly due to inventory clean up (60bp GM impact), higher discounts within private labels, and operating deleverage.

* Management has suggested a mid-single-digit growth range for revenue growth for 4QFY24 and aims to achieve a LFL growth ranging between midhigh single-digit in the long term with resumption of demand.

* SHOP would look to grow Intune through its own stores initially and later explore the franchise model after attaining scale.

* SHOP opened four new stores under beauty and departmental stores and targets to add 56 stores in FY24, of which 32 have already been added.

Valuation and view

* SHOP’s focus on: 1) opening smaller stores (30k sqft vs. existing average of 50k sqft) to improve store efficiency; 2) reviving the Private Label mix; and 3) focusing on the high-growth and margin-accretive Beauty segment could drive growth. It plans to step up on the pace of store additions with 12/15 additions in the departmental/beauty segments.

* Its recent foray into the value segment category through ‘In-Tune’ is a welcome move, which witnessed healthy traction and good EBITDA margin. The aggressive expansion plan of reaching 164 stores by FY26E from 10 currently could be a key lever for growth and re-rating going forward. However, it will be crucial to expand design and private label merchandising capabilities to enhance the value proposition.

* Sustained weakness in discretionary demand has continued to hinder revenue growth, with a weak SSSG. Sustaining high single-digit SSSG will be crucial for driving overall growth and re-rating potential of the company.

* The stock is currently trading at a healthy valuation of 11.8x EV/EBITDA on FY25E. We expect a 9%/11% CAGR in revenue/EBITDA to reach INR47.9b/INR8.6b over FY23-25.

* We value SHOP at 10x FY26E EV/EBITDA to arrive at our TP of INR695. Reiterate Neutral.

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