Shoppers Stop's expansion proves a drag on its profit

The Chandru Raheja-owned Shoppers Stop's 47 per cent decline in net profit in the fourth quarter of 2013-14 was its highest fall in five quarters. The previous highest decline in profit after tax was in the second quarter of 2012-13, when it posted a net profit of Rs 6 crore. On both occasions, profits had dropped mainly because of higher interest costs. But the latest quarter was also hit by the opening of 39 stores, including 13 Shoppers Stop outlets, during the year. Interest charges climbed 37 per cent during the quarter, year-on-year, and wages rose by about a third on increments and hiring.


The store openings exceeded the company's target of eight a year, analysts said, when the economy was hit by a slowdown and the retail sector was going through a rough patch. According to Dun & Bradstreet, the sector grew 13 per cent in 2012-13 and 2013-14, after growing at about 20 per cent in previous years.

But Managing Director Govind Shrikhande said the expansion strategy was well thought. "As we continue large-scale expansion over the next 12 months, profit after tax will be under pressure. But growth does have a cost and if the property pipeline remains weak, expanding today makes sense," he said.

Although Shoppers Stop booked stores four years in advance, delivery was beyond its control because of the many approvals it needed, he added.

"We prefer opening six stores a year so that profitability can be matched with growth," Shrikhande said. "The number of properties available is reducing. Also, the percentage addition will fall as the base becomes large. This will impact profitability favourably," he added.

"You cannot halt expansion mid-way due to economic ups and downs," said Abneesh Roy, associate director for institutional equities at Edelweiss Securities. He added stores opening now would acquire scale in 2014-15 and the next year, which would help Shoppers Stop improve profitability. Interest costs, too, would decline as expansion eased, Roy said.

"Consumer sentiment is average but Shoppers Stop's performance continues to be good. When you open new stores, it takes time to be profitable," said a chief executive of a Mumbai-based retail chain who did not wished to be named.

Shoppers Stop's margins were also squeezed by extended discount sales. Like its rivals, the company advanced its end-of-season sale by eight-10 days in Mumbai and Chennai, as most retailers did not have good festival sales last year. Operating profit margins of the company fell to six per cent in the fourth quarter of 2013-14 from seven per cent in the comparable period a year ago. The discount period for most retailers had risen from three-four weeks in a year to six weeks, said Abhishek Ranganathan, vice-president at Philip Capital.

Shoppers Stop is investing in private labels to boost profit. Although private label sales grew 11 per cent year-on-year, their share fell 60 basis points, as competing fashion brands were being offered at a discount in the fourth quarter of 2013-14.

"Private label is a play about variety, exclusivity and profitability. We have underplayed our private labels. We plan to invest in labels to make them brands," Shrikhande said. Signing Bollywood and Tamil actor Shruti Haasan as brand ambassador for Haute Curry was the direction Shoppers Stop was taking for each of its labels, he added.

GAIN BRINGS PAIN

WHAT: Shoppers Stop's Q4 profit dips 46.6%

REASON: Primarily, aggressive expansion; Interest costs up 37%, employee costs rise 30%

COURSE CORRECTION: Company plans slower expansion, to invest more in private labels