Q2FY24 Review: Shoppers Stop: Ticking the right boxes

20 Oct 2023 , 01:13 PM

Shoppers Stop delivered a sub-par Q2FY24 performance with a mid single-digit decline in LTL sales and a lower-than-expected gross margin, resulting in a large miss at Ebitda/PAT level. Momentum on store additions has picked up however, in both department stores and the recently launched value fashion format In-tune, and the company has increased its guidance on store openings in the medium term, across formats. Trading at 20x EV/adj. Ebitda (FY25), analysts of IIFL Capital Services find the risk-reward favourable. Maintain BUY with a TP of Rs800. 

Below estimates: 

Shoppers Stop’s (SHOP) non-GAAP sales were flat in Q2 (3% below analysts of IIFL Capital Services estimates), with a mid-single-digit decline in like-to-like (LTL) performance, driven by a soft demand environment, presence of Adhik Maas and shift in pujo (in Q2 last year vs Q3 this year). A lower-than expected gross margin resulted in a large miss at the Ebitda level. SHOP added four department stores in Q2 and has increased its annual store addition guidance in this format to 15 stores (vs 12 earlier). So far, the festive period has fared well, delivering a high-single-digit LTL growth; management is confident of delivering at least a mid-single digit LTL growth in H2. 

Plans to scale up Intune: 

In June 2023, SHOP had launched its value fashion format Intune with two stores; it added four more stores in Q2FY24. The format has exceeded expectations, clocking an annualised sales per sq.ft of Rs14,000 and store-level Ebitda margin of 10%+ in its first four months of operations. With a differentiated positioning (target audience is young families), management is confident of scaling up this format and plans to add 18 stores in H2FY24, followed by 60/80 stores in FY25/26 respectively, using a cluster-based approach. 

Broadly maintain analysts of IIFL Capital Services estimates: 

Analysts of IIFL Capital Services factor in the Q2 miss and higher store additions in department stores and Intune (albeit, lower than management guidance). While analysts of IIFL Capital Services adj. Ebitda estimate for FY24 is downgraded by 3%, there is a 1%/3% upgrade in FY25/26 estimates. The stock has corrected ~15% post the announcement of the CEO’s resignation in Aug’23; and is currently trading at 20x EV/adj. Ebitda (FY25). A recovery in LTL growth and delivery on store additions, as per guidance will drive earnings upgrades and a potential re-rating in the stock. Analysts of IIFL Capital Services find the risk-reward favourable and retain their BUY rating with a TP of Rs800.