After a rough patch through most of 2009, Shoppers Stop did fairly well in the December 2009 quarter to post a net profit of Rs 13.6 crore on revenues of Rs 393 crore. However, the retailer, which now has close to 2 million sq feet of space across formats, reported a same-store growth of just 2% during the three months to December 2009. Govind Shrikhande, CEO, Shoppers Stop, admits there are challenges, but is convinced that sales should pick up as new stores are rolled out. Speaking to Shobhana Subramanian, Shrikhande explains that, going forward, the retailer?s strategy will be to increase penetration by rolling out more shops in cities where it already has a presence so as to capture a larger marketshare. Excerpts:

Your top line grew a somewhat disappointing 11% in the December quarter, given that the base wasn?t too large…

You must remember that we haven?t added any stores during the quarter; so, that would have impacted sales. But, we?ll be adding three stores during the three months up to March 2010. Also for us, the base last year wasn?t too low and we didn?t see a contraction in sales. But, it?s true we haven?t done a topline growth of, say, 20% and one reason for this is that there is a lot of spending being diverted to electronics and this is clearly eating into spends on apparel. However, non-apparel spends, on items such as beauty products, are continuously rising as is the spending on accessories. But yes, overall, apparel sales have been hurt.

Is there competition in the apparel space from standalone stores of big brands?

Yes, there is competition from standalone stores and they continue to open shops, sometimes within a small radius of where our department stores are located. We haven?t been able to convince them not to, but in the last six months many companies have realised that standalone stores are not too profitable and are cutting back. A few of them, like Polo, who have understood this game better, are opting for the shop-in-shop model. There is some cannibalisation from our own stores too. For instance, in Hyderabad where we have rolled out more stores. But we don?t mind that because we?re gaining market share. In fact, of the 18 new stores we?re opening, 12 will be opened in cities where we already have a presence.

What would your like-to-like sales, top line growth and margins look like, say, in three years time?

Next year, we should see single-digit like-to-like growth, while in three years time, we should see a growth of between 5% and 8%. As for topline growth, it should look up from this quarter onwards, and next quarter it would be even stronger. In a steady state, we should do around 20-22 % because we will be adding stores. In the December 2009 quarter, we saw an increase in operating margins of 100 basis points because we got some operating leverage. We have been saying that margins will improve and our steady state Ebitda margins should be above 8%?for the nine months to December 2009, the margin has been 7.6%. What will facilitate this is that around 50% of our new stores are being set up on the revenue-share model and that will bring down our costs. Also we?re also going save on power costs because we?ve switched from Reliance to Tata Power and that will give us a saving of 25% on the tariff alone.

Why did your footfalls in the December 2009 quarter not go up much?

Our footfalls went up by just 1.5% and, yes, I would have preferred to have seen a higher increase of around 4% or so. But it?s also true that in 2009, the festival season was split between two quarters, unlike in 2008. But the mood is better now, though there is concern of volatility in the stock market. When the stock markets go down, especially in Mumbai, the mood changes. We have seven stores in the city; so that does impact us.

Is Shoppers? conversion rate still less than 30%?

Yes, it?s about 28%. In our stores, we get three or four people together in a family; so, a 25% conversion isn?t really too bad because it would imply that every family is buying. As for the ratio of the sales of loyal customers to sales of total customers, it?s currently at around 74%, which is fairly high. I would prefer it to be 70%, but because we haven?t been adding stores, the ratio has gone up. Once we start adding stores, the ratio will fall because we are adding stores in cities like Amritsar and Aurangabad where our customer base is still very small.

Where do you see the share of private labels in the product mix and do you believe your model, of selling more established brands, is working?

The share of private labels is currently less than 18% and it could go up to maybe 20-21%, but not beyond that. We have positioned ourselves as a ?house of brands? and customers like this. We can?t keep launching too many private labels because then it would clash with our positioning. Our average selling price is now just under Rs 1,000 but the ticket size is Rs 2,250. In our case, the ticket size is going up because of the change in the product mix and the addition of big brands; so, that seems to be working.

What kind of revenue-sharing agreements have you been able to negotiate with developers?

We will be paying rents of below 8% of revenues and these are long-term agreements for 24 years. Generally, the range is between 6% and 8 % of sales. Therefore, the average would work out to about 7%. Our current rentals, for the nine months up to December 2009, are way above this level, at around 11% of our total sales. But this 11% will keep falling over a three or four-year period. So, our costs will come down and that will help our margins improve.

Will developers persist with revenue-share agreements once the business cycle turns?

The good news for us is that there are still not too many good anchors that malls can bank on. Developers don?t really have too many options. McDonalds, for instance, can only be a mini anchor because the space they utilise is small and they can?t really drive the traffic.

The big anchors would continue to be the department stores like ours or a Big Bazaar, Hypercity or Star Bazaar in the hypermarket segment. Bharti?s Easy Day, the 30,000-50,000 sq ft format, could be an anchor. too. Therefore, we still have some bargaining power.

When do see Shoppers hypermarket format, Hypercity, making money?

Currently we have five stores and we are opening two more in March in Bangalore and Amritsar. This financial year (2009-10), the target is to break even at a store level. Next year, we should break even at a company level and thereafter, we hope to make money. Three of the Hypercity stores, which have been in operation for more than a year, have broken even. Of course, the board of directors will take a call on whether we will exercise our option to increase our stake in Hypercity, by 32% to 51%, but most likely we should be doing so.

You had planned to review the performance of other retail formats to decide whether to continue with them?

Home Stop has turned around and broken even in the December quarter. We will continue to operate the four stores. But we are not growing the chain because we want the business to stabilise further before we do so.

The Home Area did badly during the downturn, but we?re sure that it will make money. Crossword is also making money and we?re not planning to sell the business. The airport stores, too, are doing well now that domestic traffic is picking up. We have closed down one of the two Arcelia stores, the other one is on the watch list.

When are you planning the placement of shares to various institutions?

The promoters have been issued four million warrants at Rs 308 and they have paid 25% of the cost. We haven?t yet announced a date but the QIP for four million shares should happen anywhere after the March quarter results, perhaps during June quarter. The money will be used to increase the stake in Hypercity.