Shoppers Stop doubles investors’ wealth in 2022. Is it still a fashionable buy?

Revenge shopping was the name of the game when India re-opened its doors after the pandemic. Stocks of quick-service restaurants, hotels and fashion retailers became big beneficiaries of this theme and one such name is Shoppers Stop.

The share price of this fashion retailer has surged 125 percent in 2022 so far. In the last 12 months, it has gained more than 200 percent, nearly quadrupling investors’ wealth.

It hit a fresh 52-week high of Rs 779 on September 16 and is currently trading near the Rs 740 level. So, what’s fuelling this rally and is there more room for upside?

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According to Kaustubh Pawaskar, an analyst at Sharekhan by BNP Paribas, the stock rallied 73 percent in the last three months on the back of consistent improvement in operating performance with revival in the retail sector, along with strong support from strategic pillars - repeat sales from First Citizen loyalty customers, increasing contribution from private labels, higher sales from beauty segment and traction in omnichannel.

Strong quarterly performance and healthy store additions

In the quarter gone by, Shoppers Stop swung back to black reporting a profit of Rs 22 crore. Standalone revenue at Rs 942 crore, grew 13 percent above the pre-Covid levels (Q1FY20). EBITDA margin improved to 17.2 percent versus 16.6 percent in Q1FY20.

In the quarter gone by, the company opened six new outlets - two department stores, three beauty stores, and one at an international airport. It has a robust pipeline of store additions in place and aims to open 12-15 stores in FY23.

The management plans to launch stores primarily in tier-2 and tier-3 cities. The store sizes will be around 25,000-30,000 square feet, considerably lower than the average Shoppers Stop store size of 40,000–50,000 sq ft, according to an ICICI Securities note.

Net debt free and traction from beauty segment

The company continues to remain net debt free and reported net cash of Rs 8 crore in Q1FY23. “Balance sheet strengthening aided by reduction in debt through fund raising, hiving of non-core businesses, reduction in store sizes and improvement in working capital, also augurs well for the company,” Pawaskar said.

According to a Motilal Oswal report, the improving share of private labels and beauty segment, is driving store economics and is expected to boost growth. In Q1FY23, revenue from private brands and beauty segment grew 29 percent and 28 percent respectively versus the pre-Covid levels.

STOP, Kashish, Back to Earth, Bandeya, Arcelia are some labels from the house of Shoppers Stop.

Key risks: Inflation, e-commerce, expensive valuation

Despite e-commerce sales growing 266 percent versus FY20, analysts at HDFC Securities believe long-term risks to Shopper Stop’s business longevity remain, given its direct conflict with deep pocketed e-tailers. They have a 'sell' rating on the stock, with a target price of Rs 370.

Analysts at Motilal Oswal remain cautious on inflationary pressures in the discretionary spending space. They have a Neutral rating with a target price of Rs 610 on the stock.

But the management is not too bothered by inflation. “We operate in the premium segment of the market and I the impact is slightly lesser there. In times like these, people prioritise quality, they prioritise brands like us, who they trust,” MD and CEO Venugopal Nair said in a recent interview with CNBC-TV18.

Pawaskar believes investors should exercise caution. “With recent run-up in the stock price, the risk-reward is unfavourable and it would be better to await a better opportunity to re-enter the stock, as its long-term growth prospects are intact,” he said.

Valuation doesn’t look attractive, either. Shoppers Stop is trading at a price-to-earnings (P/E) ratio of 152x, while its peers Aditya Birla Fashion Retail and Trent command a P/E of 82x and 115x respectively. Meanwhile, sectoral index – which is the Nifty 500 – has a P/E of 22.47x.

A technical perspective

"The stock on all the time frames has been trading in a strong uptrend with higher top and higher bottom formations intact,” said Kunal Shah, Senior Technical and Derivative Analyst at LKP Securities. “The stock's long-term breakout was seen at 550 which will now act as support on the downside. The stock remain in a buy on dip mode with the momentum oscillator RSI trading in the strong buy zone of 80.”

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