Q1FY24 Review: Shoppers Stop: A subdued quarter

26 Jul 2023 , 01:32 PM

Shoppers Stop (SHOP) Q1FY24 results were above IIFL estimates, but on the weaker side with SSS growth of just 1% and sales growth of 4%. Adj. Ebitda declined by 17% with margin contracting by 112bps, due to negative operating leverage. During the quarter, SHOP has launched its value fashion format “Intune” with encouraging early results. Analysts of IIFL Capital Services downgrade their adj. Ebitda estimates by 7%/5%/3% over FY24/25/26 to factor in a more gradual recovery in SSS growth and Ebitda margin. Maintain BUY rating with a TP of Rs850. 

Weak performance: 

Even though SHOP’s Q1FY24 results were above IIFL Capital Services estimates at Ebitda level, performance was weak. Sales were up 4% (3% above analysts of IIFL Capital Services estimate) with SSS growth of 1% and adj. Ebitda declined 17% (adj Ebitda was 7% above analysts of IIFL Capital Services estimate) with Ebitda margin contracting 112bps to 4.3%, primarily due to negative operating leverage. Apparel had a muted quarter with some pickup in June, while Non-apparel and Beauty grew 13% YoY. Footfalls picked up towards the end of the quarter with EOSS. During the quarter, SHOP launched its value fashion format “Intune” and plans few more store additions in its trial phase. 

Reiterate store addition and margin guidance: 

With the arrival of fresh fashion inventory in its stores, SHOP expects demand revival from August. While no department store was added in Q1FY24, SHOP reiterated its store addition guidance of 12 department stores in FY24, with 5 stores currently in fit-out stage. Management also reiterated its medium-term Ebitda margin guidance (pre IND AS, on non GAAP sales) of high-single digits, driven by revival in demand and ramp-up in share of private brands and beauty. 

Adj. Ebitda downgrade of 7%/5%/3%: 

Analysts of IIFL Capital Services build in a more gradual improvement in SSS growth as well as Ebitda margin, resulting in a downgrade of 7%/5%/3% in their adj. Ebitda estimates over FY24/25/26. Analysts of IIFL Capital Services forecast 11%/14% sales / adj. Ebitda Cagr over FY23-26, driven by pickup in SSS growth, steady store addition and modest Ebitda margin improvement to 6% by FY26. A successful execution in SHOP’s strategy around private brands, beauty, value fashion or the beauty distribution business, can lead to earnings upgrades in the medium term.