Future Retail: robust same-store sales point to strong urban demand
Retail stocks have done well this fiscal year and Future Retail Ltd is no exception. So far in FY18, the company’s stock has risen by an eye-popping 95%. This is despite the 3.8% decline since its December quarter results were unveiled on Tuesday.
Even as net profit increased as much as 81% over the same period last year to Rs183 crore, revenue growth was a more sober 6% to Rs4,693 crore, which may have disappointed some investors.
According to Future Retail, underlying year-on-year revenue growth stood at about 21%, adjusting for eZone rationalization (scaling down of stores), HomeTown demerger, and the impact of the goods and services tax.
Same-store sales growth was decent. For the December quarter, this yardstick increased 10.4%, a notch higher than 10.2% seen in the September quarter. This was led by 13.1% same-store sales growth at its mainstay Big Bazaar outlets, even on the high base of 15.3% growth in the measure in the December 2016 quarter.
Overall, gross margins improved 71 basis points to 25.3%, probably helped by better performance of Big Bazaar and FBB (fashion products format). A basis point is 0.01%.
Rent and other expenses increased at a relatively slower place, boosting operating profit, which rose by 38% to Rs215 crore. As mentioned earlier, net profit increased at a much faster pace even though “other income” fell sharply. What boosted net profit growth was the substantial 58% decline in interest costs. Interest cost reduction during the quarter was a function of: demerger of HomeTown, conversion of debentures worth Rs150 crore and working capital efficiency kicking in during the quarter, inform analysts from Nomura Financial Advisory and Securities (India) Pvt. Ltd in the management commentary section.
Nomura adds in its results report that Future Retail remains on the path of strong growth, driven by rebounding urban consumption demand, strong cost focus, scale-back of loss-making businesses and a focus on driving growth through store memberships.
While those factors help, the appreciation in the Future Retail stock could well cap another sharp rise. Currently, the stock trades at nearly 25 times estimated earnings for FY19, based on Bloomberg data. If the growth momentum is sustained, valuations offer scope for some improvement.