Retail: Gross margins may improve for retailers
Indian retail stocks have been in fashion this fiscal year. Shares of Titan Co. Ltd, Avenue Supermarts Ltd (owner of D-Mart), Future Retail Ltd and Shoppers Stop Ltd have outperformed the benchmark Sensex so far.
Encouragingly, for the December quarter, many companies managed to improve their gross margins. For instance, D-Mart’s gross margin improved almost 140 basis points year-on-year, a positive surprise. The company maintains that about 50 basis points of gross margin improvement is driven by the impact of the goods and services tax (GST) and the remaining 90 basis points gain is on account of better sales mix and efficiency of centralized procurement.
A basis point is 0.01%.
Future Retail too improved its gross margins by 71 basis points to 25.3%, probably helped by better performance of its mainstay Big Bazaar outlets and FBB (fashion products format). Additionally, same-store sales growth was a notch higher sequentially at 10.4% (10.2% in the September quarter). This was driven by 13.1% same-store sales growth at Big Bazaar, which had a high base of 15.3% same store growth in the December 2016 quarter.
Titan’s standalone profits grew by 22% year-on-year on account of gross margin improvement and overhead efficiencies. On a consolidated basis, growth in jewellery revenues, (a major contributor to total revenues), of 8% pales in comparison with 37% growth in the September quarter and a much higher 56% growth in the June quarter. The jewellery business faced a high base considering that festival season for December 2016 quarter was a strong one with Dussehra and Diwali falling in the same quarter. Overall, Titan’s numbers were weaker than expected. Nevertheless, it is comforting that the company has maintained its jewellery segment revenue growth guidance at 25% for fiscal 2018.
On the other hand, Shoppers Stop revised its FY18 same store sales guidance to about 5% from around 7%. December quarter same store growth was rather muted at 1.4% though better ebitda margins compensated to an extent. Ebitda is short for earnings before interest, tax, depreciation and amortization and is a key measure of profitability. The company plans to be debt free by fiscal 2019. IIFL Institutional Equities believes improving balance sheet health should allow Shoppers Stop to invest in same-store-sales growth improvement.
Of course, improvement in consumer demand would augur well for all retailers. Having said that, the sharp run-up in shares of the these companies, as mentioned earlier, will mean another dramatic rise may not happen anytime soon.