EBITDA margin may expand led by increasing share of high margin private labels and beauty portfolio and better cost efficiencies.
We initiate coverage on Shoppers Stop (SHOP) with BUY rating and a target price of `480/share based on 12xFY21E EV/E. With the new management team in place, SHOP expects to revive growth by accelerating store additions, providing better shopping experience like Personal Shopper and improving product offerings.
EBITDA margin may expand led by increasing share of high margin private labels and beauty portfolio and better cost efficiencies. We factor 8% revenue and 13% EBITDA CAGR (on non-GAAP basis) over FY19-22E with sharp ~700bps RoCE expansion also aided by recently announced lower tax rates.
SHOP enjoys negative working capital, strong balance sheet and better than peers 18% pre-tax RoCE. SHOP’s discount to peers could narrow with revival in growth.
New management in place, key focus is to revive growth: SHOP is undergoing various structural changes especially on product and customers front post the joining of seven new CXOs in the past 15-18 months. Management is targeting mid to high single digit SSSG over the next few years (vs low single digit over FY16-FY19) by providing better shopping experience (via personal shopper, refurbishment of stores etc.), improving product assortments and targeting First Citizen members with exclusive offers. Besides, the management is looking to accelerate gross store additions to 6-8 stores p.a. with optimising store size.
Increasing share of private labels and beauty portfolio to boost margins: In the past few years, SHOP private labels have faced issues relating to elevated pricing and fashion-forward products, which seems to have been corrected. SHOP has set up a dedicated design studio for private labels in May’19, which would reduce time-to-market. It is also targeting exclusive tie-ups with few more brands/celebrities, which will help to improve overall product offerings. SHOP enjoys leadership position in brick & mortar beauty segment given its exclusive range of products. Management plans to add 15-20 beauty stores p.a. over the next few years.