Higher costs put pressure on margins for Pantaloon, Shoppers Stop

Higher costs put pressure on margins for Pantaloon, Shoppers Stop

Higher raw material costs (especially textile prices) have been crucial for retail companies for sometime now. The impact of that is reflected in the March quarter financials of both Pantaloon Retail (India) Ltd and Shoppers Stop Ltd, which saw a decline in their operating profit margins.

Apart from higher raw material costs, Pantaloon’s numbers were affected on account of higher other expenditure and Shoppers Stop’s on account of poor performance of HyperCityRetail (India) Ltd, in which the company holds a 51% stake.

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Though revenue growth appears to be decent, suggesting that demand environment is still looking good. For instance, Shoppers Stop’s stand-alone revenue increased by 20% on a year-on-year (y-o-y) basis. Same store sales growth for Shoppers Stop department stores was 14%, helped by 10% average selling price growth and 4% volume growth. Shoppers Stop’s consolidated revenue increased by about 60%, as consolidated financials include that of HyperCity.

On the other hand, Pantaloon’s revenue from the core retail business increased by 17.6% over the same period a year ago, which came in lower than analysts’ expectations. This growth was helped by store expansion and same store sales growth. In the lifestyle retail segment (including upscale goods such as apparel and accessories), same store sales growth stood at 10.2% and 10.3% in the value retailing business (including value-for-money goods). Same store sales growth in the home retailing segment, which comprises home segment goods, stood at 9.1%. Pantaloon’s same store sales growth may improve from this quarter on account of the upward revision in prices.

But revenue growth was not enough to sustain the operating performance of both companies. Shoppers Stop’s consolidated operating margins (excluding other operating income) fell by 192 basis points on a y-o-y basis to 2.4% on account of a sharp surge in the cost of goods sold, and other operating and administrative expenses. One basis point is one-hundredth of a percentage point.

Also, consolidated numbers include HyperCity’s financials, which is currently a loss-making entity. However, Shoppers Stop’s stand-alone operating margins have improved by about 70 basis points to 6%.

Comparatively, Pantaloon’s operating performance appears better. Operating margin of the core retail business fell by 28 basis points to 8.8%. Pantaloon’s net profit increased by 35% to Rs50.54 crore, thanks to lower tax outgo, while Shoppers Stop’s consolidated net profit fell 38% to Rs7.7 crore (although stand-alone net profit rose by 21% to Rs20 crore). Shoppers Stop’s poor consolidated show is mainly due to losses at HyperCity.

In general, investors should keep a tab on the ability of both companies to pass on the impact of higher raw material costs. Also, there is an imposition of additional excise duty on ready-made garment manufacturers and branded apparel, which is a concern.

The turnaround of HyperCity is something that Shoppers Stop’s investors are likely to keep a close tab on going forward. On the other hand, higher interest and depreciation costs are expected to be key dampeners for Pantaloon.

Graphic by Yogesh Kumar/Mint

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