Weaker-than-expected growth in retail business due to sustained weakness in footfalls is likely to remain near-term drag on both revenue/margin. To revive growth, company has initiated measures like higher media spends, product launches at lower price points and enhanced focus on digital channel. On positive side, distribution business continues to grow at brisk pace and margin erosion is likely to subside in a couple of quarters led by lower crude price.
While FY19 has been challenging, we remain positive on stock given footwear is our preferred category play and Khadim’s strong brand recall, robu-st positioning in fast-growing VFM spa-ce and reasonable valuation (21x FY20E EPS). Retain ‘BUY’ with revised TP of `675 (`800 earlier) as we cut estimates by 9-14%, roll over to Dec-20 EPS and reduce our target PE multiple to 21x (from 24x) on near-term challenges.
Our interaction with management suggests that SSSG in retail business remains muted due to sustained weakness in footfalls (even in festive season) dragged by sluggish demand in core Eastern markets, higher competitive intensity and conscious decision to reduce discounts. Hence, the company has trimmed retail revenue guidance to 7-8% for FY19. It is looking to appoint a third-party consultant to ascertain requisite steps to revive SSSG; key initiatives include higher media spends, product launches at lower price points and enhanced focus on digital channel. Distribution business has posted good growth rate of 25-30% majorly led by volumes and increase in distribution network. Company has added 65-70 distributors in past nine months. While pressure on gross margin is expected to subside on a QoQ basis, real recovery would be visible only from Q4FY19. We cut our EPS estimates for FY19-21E by 9-14% dragged by weaker mix (lower revenue growth in retail business), margin drag due to weak operating leverage from retail business and higher interest costs.
Retail performance remains tepid largely led by store expansion; SSSG in H1 was flattish. The company added 45 stores in H1FY19 – 13 COCO and 32 franchises.