Shoppers Stop’s (SSL) Q2FY17 revenue came in line with our estimate, but EBITDA and PAT were tepid—down 16.7% and 11% y-o-y, respectively. LTL sales and volume were also soft—up mere 2.2% y-o-y (albeit on a soft base of 0.1% y-o-y) and 3.1% y-o-y decline, respectively. Key positives: (i) 3.4% y-o-y LTL sales in Hypercity. Key negatives were: (i) 14.4% and 13.5% y-o-y jump in employee cost and lease charges, respectively; and (ii) 37bps and 137bps dip in gross and EBITDA margins, respectively; and (iii) tepid LTL sales for stores >5 years (0.5% y-o-y). We are enthused by SSL’s investments in omni-channels (likely to be completed by H1FY18), and anticipated recovery in consumer spending. Maintain buy.
The company is targeting 6·7% y-o-y LTL growth in H2FY17 and 5.0·5.5% y-o-y spurt for FY17. At the departmental store level, it estimates EBITDA margin to be 7.0% and at 6.5% at the company level in FY17. SSL aims to take the proportion of private labels to 25% from 13% currently over the next 2·3 years. In Hypercity, the company estimates double digit LTL for H2FY17 and EBITDA to break even at the company level by Q4FY17. Hypercity is looking to raise funds; deal likely by Q4FY17.
The government’s recent directive and stress in many online players are positive for physical retailers. SSL continues to execute better than most peers. At CMP, the stock is trading at 12.2x FY18E EV/EBITDA. We maintain buy/sp with SoTP based target price of R431.