Looking at the financial performance of retail players, namely Trent and Shoppers Stop in September 2012 quarter, one can conclude that it is better to grow at a modest rate and maintain profitability than being aggressive, especially in the current stressed environment. While Shoppers Stop reported better growth of 16.6 per cent in standalone sales (accounted for 70 per cent of its consolidated sales in 2011-12) compared to Trent’s 1.1 per cent, the former’s profitability was impacted.
Its operating profit and net profit declined 26 per cent and 67 per cent, respectively mainly due to higher operating expenses (namely lease rentals, which shot up 27 per cent). Secondly, interest and depreciation costs jumped 35 per cent and 62 per cent to Rs 7.7 crore and Rs 14.3 crore, respectively. Part of these can be attributed to the company opening four new stores. On a consolidated basis, Shoppers Stop's net retail sales grew 13.6 per cent year-on-year to Rs 848 crore in September 2012 quarter while it incurred a net loss of Rs 5.6 crore compared to a profit of Rs 10.2 crore in the same quarter last year.
On the other hand, Trent reported an operating profit compared to a loss in same quarter last year and net profit surged 164 per cent as the company substantially brought down its advertising to sales expenses from 8.1 per cent in Q2’FY12 to 3.3 per cent in Q2’FY13. Also, while the company did not open any new store in the quarter, it had also earlier discontinued some non-profitable operations, which added to margins. Thus, the September 2012 quarter saw the company report an operating profit (excluding other income) of Rs 4.3 crore (loss of Rs 7.4 crore in year ago quarter). Given the company’s focus on improving profitability, analysts expect margins to improve going ahead. Historically, the company’s other income has been the key driver of profits, but with core retail business doing well it is a positive sign.
Says Hiral Sanghvi, analyst, Dalal Broacha Stock Broking, “There has been a significant improvement in the Trent's performance on a year-on-year basis. We continue to remain positive on the long term business prospects of the company. We expect the company to post operating margins of 6-7 per cent in the second half of FY13, on the back of higher sales growth due to festive season and expected lower advertisement costs."
However, the outlook for Shoppers Stop continues to be grim. Says Abneesh Roy, analyst, Edelweiss Securities, “We expect cost pressures to continue due to rapid expansion (four more new stores to be added in FY13) and low pricing power due to slowdown in discretionary spend. We remain concerned on the slowdown in sales in HyperCity."