Nirmalya Kumar, director of Centre for Marketing at the London Business School, recently told this newspaper that there was no retail competency in India. Investors of Shoppers Stop Ltd weren’t listening though.
After the company posted a 45% gain in the December quarter net profit from a year ago, they pushed the stock up 3.36% over the next two days. This was after a stellar 2010, when the stock gained 92.7% when peers delivered single-digit returns.
That’s not surprising as the company has spruced up its act. The core business—excluding numbers of its subsidiaries such as Crossword and HyperCity— grew revenue by 20%. Same store sales growth—which reflects growth in existing stores rather than from expansion— came in at 22% over a year ago for the December quarter.
True, operating profit grew by a less than exciting 13.16%. Operating margins too fell some 60 basis points, but that had to do with both rising prices and the change in business model. More than half of Shoppers Stop’s sales now come from consignment and concession sales, which are typically low margin. But the positive from that is reflected in lower inventory costs and better working capital management. As a result, according to Fitch Ratings, Shoppers Stop is a rare listed retail firm in India that is cash flow positive. That augurs well for its expansion plans, too, as does the low debt, which the company achieved by selling stock to institutions in the September quarter.
If there’s anything to quibble about, it’s the consolidated numbers although the comparisons are not strictly apple-to-apple, since HyperCity was integrated only from June 2010. Here, operating profit actually dips by 3.6% from a year ago, and margins are a poor 6.5% because HyperCity is still making losses.
But that seems priced in the stock. The company has generally been spot on in its guidance, for example, the 20-22% revenue growth prediction for this fiscal. Investors seem willing to trust its indications that the subsidiary will make profits in another 24 months. Once that happens the company may be able to negotiate costs better and shore up margins. That is probably why investors are still buying the stock despite it trading at 30 times estimated earning for fiscal 2012.
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