Demand still looks good for retailers in 2011

Demand still looks good for retailers in 2011

Shoppers Stop Ltd’s investors would have rejoiced this year. The stock has appreciated by 86% since the beginning of this fiscal to 730 per share compared with a 12% increase in the BSE 200 index in the same period.

The reasons for this outperformance are not unknown. Shoppers Stop has turned around. From a loss making entity at the net level in fiscal 2009, the company swung to a profit in fiscal 2010. For the half year ending September 2010, Shoppers Stop posted a consolidated net profit of 19 crore against 10 crore in the same period last year. The consolidated net profit includes the impact of a net loss from HyperCity Retail (India) Ltd of 32 crore.

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Shoppers Stop has taken many cost rationalization measures to improve profitability. For instance, “to reduce the pressure of fixed payouts, it has strategically entered into revenue sharing agreements for 12 out of 30 new planned stores. It has also reduced its capex costs on new stores from 1,600-1,800 per sq. ft to 1,200–1,400", wrote analysts from IIFL Research in a note to clients last month. Shoppers Stop also has enough funds in place to pursue its expansion plans.

Meanwhile, rival Pantaloon Retail (India) Ltd has failed to cheer investors. Pantaloon’s stock is down by 11% since the beginning of the fiscal to 349 per share. One of the reasons, say analysts, is that its restructuring is taking longer than anticipated. Another concern for Pantaloon is its lower net profit margin. Needless to say, the company would do well to improve its margin.

Analysts were disappointed with the space addition that Pantaloon made in the September 2010 quarter. “Retail space expansion of 0.15 million sq. ft during Q1FY11 (the September 2010 quarter for Pantaloon) was below expectations," wrote analysts from JP Morgan in a post-results note. Pantaloon intends to add about 2.5 million sq. ft of retail space in fiscal 2011, which ends in June for the company.

The sharp appreciation in Shoppers Stop’s share price does make valuation expensive while Pantaloon’s under-performance makes it attractive from a valuation point of view. Even as prospects for Shoppers Stop appear bright, the upside in its stock price may be limited.

Going forward, the December 2010 quarter is expected to be better for all retail companies, as the festival season (Dussehra and Diwali) got pushed to the third quarter this fiscal compared with the second quarter last fiscal. So investors can expect good numbers from retail companies.

However, from the beginning of calendar year 2011, the benefits of a lower base effect are likely to even out. Also, higher employee costs may put some pressure on operating profit margins. On the revenue front, though, retailers should see a decent performance on the back of robust demand and higher purchasing power in the hands of consumers.

Graphics by Yogesh Kumar/Mint

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