IGI Logo

Demand slowdown and weak SSSG hurt earnings

* Shoppers Stop (SHOP) reported an 18% YoY decline in EBITDA (26% miss) due to weak SSSG and GM contraction. Revenue rose 5% YoY in 1QFY25, largely driven by the Beauty segment and some contribution from Intune.

* Management remains optimistic about Intune (a value segment) and the Beauty business. The departmental store expansion could be weak in FY25, offsetting the aggressive store expansion plan of Intune and growth in beauty distribution. We expect a 15%/20% revenue/EBITDA CAGR over FY24-26. We value SHOP at 13x FY26E EV/EBITDA to arrive at our TP of INR780. Reiterate Neutral.

EBITDA declines 18% YoY (26% miss) due to weak SSSG and GM contraction

* SHOP’s standalone revenue grew 5% YoY to INR10.4b (5% miss) in 1QFY25, hit by LFL decline in the range of high-single digits to mid-teens.

* SHOP added (net) two new departmental stores (total 114) and nine Intune stores (total 31). It also added four Beauty SIS stores (total 148).

* Gross profit inched up 1% YoY, while margin contracted 170bp YoY to 40.6% due to a decline in the share of private labels (12.0% in 1QFY25 vs. 13.8% in 1QFY24) and early EOSS.

* Employee/other expenses were up 4%/21% YoY, led by store additions.

* As a result, EBITDA declined 18% YoY to INR1.4b (26% miss). EBITDA margin contracted 380bp YoY to 13.7%, dragged down by a contraction in gross margin and operating deleverage.

* EBITDA (Pre-Ind-AS) for 1QFY25 stood at INR150m and margin was 1.4%.

* Depreciation/interest costs were up 11%/12% YoY, which led to a net loss of INR225m (est. PAT of INR77m).

* OCF was INR320m, led by an EBITDA of INR150m and working capital release of INR170m. SHOP opened 11 stores and incurred a capex of INR610m, which led to a cash outflow of INR280m and an increase in debt by INR310m.

Highlights from the management commentary

* Demand: The consumption demand environment was subdued due to uneven weather patterns, prolonged heatwaves, general elections, fewer weddings, and inflation. This led to a decline in volumes sold as well as flat footfalls. However, the value and beauty segments continued to do well.

* Outlook: Management expects double-digit revenue growth fueled by ~8- 9% area additions and SSSG. The mid-single-digit (pre-Ind-AS) EBITDA for FY25 will be driven by rationalization of larger-sized stores and cost optimization. SHOP expects the beauty segment to grow 12-15% for FY25.

* Store expansion guidance: Management guided 11 (gross) departmental store additions and rationalization of 4-5 stores in FY25. For Intune, it will add 75 stores in FY25, with a target to add 20+ stores in 2Q. Its focus will be to open stores with a high RoCE and a shorter payback period.

* Capex: For FY25, the company expects to incur INR2.25-2.50b on capex, including the shifting of a warehouse. The capex will be funded by borrowings of INR1b and internal accruals.

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; 3) the highgrowth and margin-accretive Beauty segment, and d) increasing traction in Intune could drive overall growth. It plans to step up the pace of store additions for Intune, with 75+ additions annually, while the pace of departmental store additions is likely to be moderate in FY25.

* Its recent foray into the value category, through Intune, witnessed a healthy traction and had been EBITDA positive at the store level. The aggressive expansion plan of reaching +165 stores by FY26E from 31 currently could be the key lever for growth going forward. However, it will be crucial to expand design and private label merchandising capabilities in Intune to enhance the value proposition.

* Persistent 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 potential re-rating of the company.

*  The stock is currently trading at a valuation of 13x/30x post-/pre-EV/EBITDA on FY26E. We trim our estimates given the slowdown; however, we factor in aggressive store expansion of Intune and expect good growth in the beauty segment.

* We are factoring in 15%/20% revenue/EBITDA CAGR over FY24-26E. We value SHOP at 13x FY26E EV/EBITDA to arrive at our TP of INR780. Reiterate Neutral.

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html

SEBI Registration number is INH000000412