Retailers: Shelved!

Not too many people are shopping; that’s resulting in poor sales growth as also smaller profits for retailers.

It’s almost a fire sale now with retail stocks getting cheaper and cheaper. Pantaloon Retail hit a three-year low on Thursday while Shopper’s Stop hit an all –time low. The December 2008 quarter numbers posted by retailers show that while consumers may have money, they’re not about to spend in a hurry even if there’s an occasion to do so. So even in the most festive season of the year, consumers haven’t loosened their purse strings.

Despite offering discounts, Pantaloon’s sales, were up just about one per cent sequentially though y-o-y the increase was slightly better 24 per cent. The more relevant indicator of same store sales —was up just a shade under 5 per cent. If that’s seems disappointing then the 3 per cent fall in same store sales at Shopper’s Stop was unbelievable; even overall sales that the Raheja-owned reported, were up 14 per cent y-oy. That’s way below than the average growth of 30 per cent seen in the last five quarters.

The worst performance was that of Tata-owned Trent, which believe it or not, reported a fall in revenues,down 13 per cent. Consumers in smaller cities too aren’t exactly upbeat. Vishal Retail, which has most of its outlets in smaller cities — Delhi and Mumbai account for just about 20-25 per cent of its space — actually reported a sequential fall in sales. And though the retailer had increased the shop space by 55 per cent, sales were up just 18 per cent y-o-y.

The branded apparel segment appears to be bearing the brunt of the of the slowdown — Aditya Birla Nuvo’s business saw a sharp fall in operating profit margins of 640 basis points, possibly the highest fall in the space. Sales at Raymonds and Provogue were up just one per cent. However, jewellery sales at Titan were up a smart 33 per cent though approximately half of this growth would have come from volumes. With the wedding season now over, and gold prices moving up, the retailer may not sustain this kind of growth.

Most retailers appear to be going slow on rollouts and are taking steps to bring down operating costs.That together with some focus on the product mix has helped them sustain or even improve their operating profit margins(opm). Shopper’s for instance sold more high-margin apparel for women and children and also more cosmetics. That helped reverse the operating losses of the past two quarters with better margins, up 120 basis points at 6 per cent. Trent also bettered its gross margins by 350 basis points while Pantaloon managed to cut staff costs and thereby expand margins by 140 basis points.

However, the product mix for Vishal deteriorated with the share of FMCG products going up to almost a fourth of revenues from 18 per cent in the December 2007 quarter. Despite staff costs being pruned , the operating margin fell 130 basis y-o-y points to 12.3 per cent and the net profit fell 6 per cent y-o-y. With sales losing momentum, retailers are being compelled to keep smaller quantums of stocks — the increase in Pantaloon’s inventory was the lowest in five years while Vishal Retail’s inventory fell during the quarter.

Although lease rentals are trending lower given the abundance of space in malls, most players are going slow on their expansion plans. With just 1.8 mn sq ft of space, Shopper’s store rollout has been slowest in the industry — it has added just a fraction of the space that others have. Pantaloon has around 11 million sq ft while Vishal has around 3.5 mn sq ft.

Even though the Shoppers is a strong brand, the company is available for a market capitalisation of just 282 crore.That’s possibly because the combination of sales tapering off and the lack of scale to absorb costs could prove to be a double whammy. Pantaloon which has a market capitalisation of Rs 2,600 crore, is highly leveraged with the debt-equity ratio expected to rise to 130 per cent in 2009-10. In the December quarter, interest costs were up 78 per cent y-o-y and together with higher depreciation were responsible for the poor growth in the net profit of just 7 per cent.