FINAL TRANSCRIPT
Shoppers Stop Limited
Conference Call Transcript
Event: Shoppers Stop Limited
Event Date/Time: May 02, 2006/ 04:00 p.m. IST
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FINAL TRANSCRIPT
Shoppers Stop Limited
Himanshu: Good evening ladies and gentlemen, I am Himanshu, the Moderator for this
conference. Welcome to the conference call of Shoppers Stop Limited. The Managing Director of
Shoppers Stop, Mr. B S Nagesh is your call leader today. For the duration of the presentation, all
participant lines will be in listen-only mode. After the presentation, the question and answer
session will be conducted for the participants in the conference. Now, I handover the floor to Mr.
B S Nagesh. Thank you and over to you Sir.
Mr. B S Nagesh, Managing Director Shoppers Stop Limited: Thank you very much Himanshu
and good evening to all the participants. I once again welcome you to the conference call which
we are conducting post our annual result. This is the first time that we are declaring our annual
result post our IPO and I am very happy to take you through the presentation in which we’ll talk
about the results and we’ll go one by one. The presentation was posted post our Board Meeting
on Saturday. So at the end of the day, I am sure all of you would have got a chance to look at the
presentation and download it. I will follow the sequence of the presentation. I am on page 2 which
is a disclaimer. If you look at page 3 which is a broad business overview which talks about what
we achieved in the quarter. We are very happy that we once again got the Most Admired Fashion
Shopping Destination of the year award from Images. This is an award which is not a jury award
but is a consumer award and I am told that this award is given after about 12,000 odd customers
who’re surveyed. For the first time we participated in the Fair Business Practices award which is
done by the Council of Fair Business Practices. We are very happy that at the very first go we
were also awarded the Certificate for Fair Business Practices and I would like to reiterate the fact
that we are wanting to build Shoppers Stop into a company which is not only performing at the
top line, bottom line but into every aspect of the business to ensure that it’s a good business that
we create as we go forward. The First Citizen members base has now reached 632,000. This is
an increase of about 61% over last year and their contribution to sales has increased to 62%. We
are very,happy with the way the First Citizen program is moving forward. Actually, when we see
the details of the program we’ve realized that there’s a huge contribution jump which has also
happened from our First Citizen gold members which also takes us fairly long in terms of our
loyalty that you see from the members. Our F&B division which is part of our specialty business
unit launched its first café. This is a western café concept. It’s called Café Brio. The first one
opened in Bangalore, the second one opened in Juhu and the third one is opened as part of the
Hypercity. We also got the franchise of Mothercare which I had mentioned in the last quarterly
presentation. We have been able to open four stores in the last four weeks. These are large
shop-in-shops within Shoppers Stop. The fifth one opens in the next one-week’s time and this
takes us to five out of the twenty shop-in-shops that we have committed in five years’ time. It
looks like we are running fairly ahead of schedule on this.
It was also important for us to look at the business from a larger perspective and a long term
perspective. In order to ensure that the professional setup that we have created with the
ownership and the management being separate, we created strong management teams to look
after all the verticals and therefore we have our independent CEO who looks after the Shoppers
Stop and Home Stop which is basically large format life style concept. Mr. Govind Shikhande who
was our Chief Operating Officer was promoted as the CEO of Shoppers Stop and Home Stop, the
large format life style business that we have. We also created a Specialty business unit which will
take care of Crossword, Mothercare, F&B business, MAC and going forward any specialty lines
that we take in. Most of these are actually small store format and therefore will require a different
kind of attention. We are looking at a CEO for this business and we hope that we will be able to
fill this position over the next few months’ time. Till that time I will also be operating as a CEO of
the specialty business. On the other side, the hypermarket business also has a CEO, Mr. Andrew
Levermore, who was the Chief Operating Officer, has been promoted as a Chief Executive Officer
of the business. So, we have three very senior people to back me up, who are going to look after
each of the verticals.
If you go on to page 4, our presence continues to be in 10 cities, a total of 20 stores which is
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about 950,000 square feet. We have not added any large store in the last one quarter. The
pictures continue to be of the new stores that we opened during the last financial year which was
Pune, Juhu, Bangalore, Garuda Mall and Shipra. We opened our Home Stop in the month of
December. We have seen now a full one quarter running of Home Stop. We are very pleased
with the look and feel of the store that we have developed. Extremely positive response from the
consumer. We have actually started fine-tuning the mix realizing that it was a home furnishing
store but the demands of furniture started picking up very much, so we actually created a new
space for furniture. We believe that the learning and the quick reaction and the changes that
we’re doing will take Home Stop within the next one year to the requirement that we have of
delivering the same kind of sales per square foot all across. I am on page number 7. That gives
you a small snap shot of our café which is called Brio. We have seen the F&B concept and
another concept called Desi Café. Brio serves coffee and snacks like puffs and pastries and
bakery products and Desi Café which was launched yesterday, a soft launch in the Hypercity
concept is basically an Indian snacks (outlet). We also have the bakery concept which was
launched yesterday as part of F&B. It’s called Fresh Bar Cakes and it’s actually an in-house
bakery within Hypercity which also has potential for roll out. On page 8 you see some of the
Mothercare store photographs. We are extremely happy with the performance of Mothercare in
the first four stores and we believe that this concept can be rolled out much faster than what we
expected. Anyway, we are very sure that we will meet that commitment that was made to
Mothercare as master franchise unit.
We continue to operate out of 950,000 square feet which is the total area. For the benefit of new
comers we always measure area only in chargeable areas, the area that we sign on. Although
retail area from store to store may be less by anywhere between 15 to 35% depending on the
carpet versus built-up area. The reason we use the chargeable area is this is one very clear area
which is defined in the agreement.
If you look at the key financials for quarter 4, as you know, quarter 2 and quarter 4 are the
quarters when we go on sale and therefore it is very important for us in the business to manage
these two quarters very well. Q-1 and Q-3 give us a high up surge. It is very important for us to
ensure that the Q-4 downside is always mitigated and we saw some very good run for Q-4. The
sales growth, top line grew by 36%. We saw a like to like sales increase of 21%. The sale per
square foot on the chargeable area was at 1,834 against last year’s 1,703 and we saw our
customer entry increase by 29%. This was probably one of the best quarter-4s that we achieved
and then when I look at the yearly performance, the annual performance for financial year 2005-
06, the top line grew by 34%. The like to like sales increased by 17% and the sales per square
foot on chargeable area including the new increased footage have seen a growth and it’s 7,576
compared to last year’s 7,152. The customer entry for the year actually went up by 27%.
I am on slide no. 12. If you look at the operational indicators which actually talks of the like to like
store sales and the like to like store sale per square foot, you see the sales in Q-4 2005 of 1282
going to 1,548 which is like to like sales, and we see the sale per square foot going from 1,703 to
1,834. For the year, the like to like growth has gone up by 17% which is the graphical
representation and the like to like sales has gone up from 4,999 to 5,852. So, we have seen a
very good boost in the like to like sales, not only from an absolute sales perspective but also from
sale per square foot perspective. Sales per square foot has increased by 5.9% despite the
increase in footage.
Now, we come to the operation indicators, the indicators that we continuously monitor as part of
our performance measure. The customer entry for the Q-4 went up from 3.48 million to 4.49
million thus taking our yearly customer entry up from 14.35 million to 18.25 million. The
conversion ratio has been maintained at 27%. The transaction size has actually gone up in the
quarter from 1,324 to 1,400 and for the year from 1,322 to 1,366. The average sale price has also
moved up from 617 to 655 and for the year, if you look at it, it has moved from 610 to 647. I think
an important point to note of the Q-4 performance is that during the discounting period the
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average sales price actually comes down because you sell out at much lower discount. I think
good inventory management from the business has actually kept us on a fairly high average
selling price as well as on a very high transaction size.
The like to like volume growth went up by 13.7% and the volume growth that you see is during
the sale when we sold a lot of volume. We did not discount it as much as one would have done in
the earlier years. So in the Q-4, the sales was managed very well in the business.
I am on to slide no. 15, the merchandise mix for Q-4. The private label mix has gone to 19.4% for
Q-4. The private label sales has increased by 46%. We have been talking about taking private
label to 25% by year 2008 and as part of that plan we were planning at achieving a 20% mark by
the end of this financial year and you will note that in the last quarter we achieved 19.4. So the
private label has been tracking up and this should track up to our expectation by March 2008. For
the year, if you look at the merchandise mix, the private label is now at 19% from last year’s
17.6%. The share has gone up by 46%, the sales has increased by 46% for private label and you
will look at that the bought out and consignment between last year and this year, the bought out
has gone to 61%, the consignment has come down from 28% to 24% and the concession has
gone up from 12% to 15%. So the business continues to derisk its model and maintain at a level
where the inventories are fairly under control.
If you look at the mix of merchandise between the Mens, Ladies, Children and non-apparels,
you’ll notice that for the quarter-4 the category wise apparel sale was about 59% and non-apparel
was 41%. This is where I had mentioned in the last quarter that we had seen the Indian consumer
not necessarily the western dressing Indian female, but even the Indian dressing Indian female
coming into modern format and shopping for lot of accessories. Now this is a very clear indication
of what’s happening. The sales of non-apparel has been boosted because of home, because of
leather, because of watches, jewellery, footwear and personal accessories and this is a trend
which shows that the Indian customers are becoming more and more fashionable and the good
part is in spite of the non-apparel increasing you would have noticed that the margins have not
dropped which means that the business has been able to take in non-apparels which otherwise
traditionally is a lower margin, at a higher margin, so fairly healthy mix being maintained.
I am on slide 18 which is the merchandise mix for 2005-2006. If you look at for the year, we are at
about 61% and 39% apparel versus non-apparel and non-apparel Mens is at about 35% against
last year’s 36% and the maximum increase that has happened has happened for non-apparel
which has gone up from 38.1 to 39.1. Children has more or less maintained and ladies has gone
up by about 0.1%. When we take the contribution of non-apparel where women shop and add up
with the ladies apparel, we are seeing that the women shopping has almost crossed the men
shopping which is ladies apparel plus home plus cosmetics, plus leather bags, plus jewellery plus
footwear. This is also a very healthy trend. Internationally, if you look at it, 55% of the business
always comes from women. We believe that if this trend continues we should be able to see
again between 50-55% shopping happening out of women customers over the next two years’
time.
I am on slide 19 looking at the shrinkage. For the year we have again ended up with shrinkage
which is 0.41%. However, as you would note that the Q-4 the shrinkage was much lower than the
average at 0.3% and Q-4 2005 and this year it was at 0.64%, but this is also the way shrinkage
behaves depending on the quarters when you count, but at the end of the year we have again
maintained the shrinkage at 0.41% which I believe is a very good benchmark to achieve by any
international standard.
I now come to the financial summary of quarter-4. Retail turnover went up from Rs.1.29 billion to
Rs.1.76 billion. You will note that the margin on sales saw a very healthy improvement, 45% on
cash margin on sales. On the percentage margin it went up from 28.4 to 30.3. Mind you this was
the quarter, which had sales. The operating profit moved up from 5.8% to 7.6%. The EBITDA
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moved up by 77% on a cash term from 75 million to 132 million and we saw the profit before tax
going up by 137% and as a full tax paying company in this financial year, the tax went up from 4
million to 37 million but we saw a healthy profit after tax of 74 million against last year’s 42 million
which was a 75% increase and a PAT of 4.2% against last year’s 3.3%. A very good quarter by
any standard. When you look at financial summary for the financial year 2005-2006 the retail
turnover has gone up by 34% from 5.07 billion to 6.77 billion. The margins show a very good
increase from 29.3% to 30.4%. If you look at the operating expenses, operating expenses have
risen but not as sharply as one would have expected, from 24.2% to 24.8% and here also I think
the largest cost increase would have been on employment cost wherein we took a mid-term
revision of our key employees in September-October. We believe that we have been able to
contain the operating expenses and thus we saw an operating profit of 7.6% from last year’s
6.7% which is about 52% growth which led us to a profit before tax growth of about 94% from
4.1% to 6% and the tax of course went into three digits from last year’s 17 million to 131 million
and the profit after tax went up from 190 million of last year to 271 million which take us to a 4.1%
compared to last year’s 3.8%. I do recollect the question that was asked a year back post our IPO
about where I wish the EBITDA of the company to move and I had said by March 2008 we would
like to see EBITDA at around 8% which in spite of the healthy margin growth there could be
competition pressures, markdown pressure. I think the business has moved very well on the track
and has achieved 7.6% EBITDA which I believe is very healthy. With this the EPS has grown by
17% to 8.12. Just for the interest of the analysts who have come on the conference call for the
first time we had written off operating expenses which are pre-operative expenses of about 21.1
million. This was in the first two quarters when we had opened a store and the effective tax rate
now has increased to 32.65% as against last year’s 7.86%.
I am on to slide no. 23 which is a slide that gives us a graphical representation, nice looking
arrows going up which gives us happiness. Retail turnover up by 36% for the quarter growth on
cash margin by 45%, EBITDA grows by 77% and PAT grows by 75% for the quarter. Again, for
the year, growth of 34% on the retail turnover, cash margin grows up by about 38%, EBITDA
growth by 52% and PAT has gone by 42%.
I come to our next slide which is a very important slide and I have always mentioned that we need
to manage this business with the first four slides. In the earlier ones which talks for customer
entry, conversion, transaction size and ASP and when you combine that with the measurement of
shrinkage and then look at the operational efficiencies which is the gross margin return on floor
space, gross margin return on inventory and the gross margin return on labour, it actually tells us
whether we are not only getting increased customers but are we able to drive the efficiencies
within the business right. We have seen the GMROF go up by 15% in the quarter, the gross
margin return on inventory went up by 18% and the gross margin return on labour went up by
30% and for the year, I am on slide 26, the gross margin return on floor space has gone up by
12%, the return on inventory has gone up by 15% and the return on labour has gone up by 27%.
These indicators give us a fairly good sign of the way the businesses are being run and we
believe that all these eight indicators have seen a positive movement over the last twelve months.
When we look at the subsidiaries, Crossword has seen a very good growth of 49%. Last year we
made profit in Crossword, but this year we opened two large stores, in fact three large stores, one
in Mumbai, one in Gurgoan and one in Delhi. The large store take just above two years to
breakeven and therefore we’ve again seen a dip in the profitability of Crossword, but we will
continue to have a run in Crossword store number 32 has opened in Pune last month, sorry in the
month of April and we would continue to grow the business as we believe that the book business
can grow into many more stores. So if you look at the financial summary of Crossword, the retail
turnover has gone up for the year. I am on slide 29, from 357 to 509 million and the profit before
tax compared to last year’s two million, we have lost 27 million. At the operating level, compared
to last 16 million we have lost 6 million and we believe that this situation should get corrected as
the new stores go into the twelfth month or go into a like to like situation.
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On a consolidated basis, the retail turnover for the quarter has moved from 1.37 billion to 1.87.
The margin on sales has of course gone up by 42%. The operating profit has moved up from 84
million to 129 and profit after tax has moved up from 44 to 61which is approximately about 38%
increase. If I come to the consolidated financials for the year which is 2005-2006 the total
turnover of the company is now at about 7.24 billion against 5.39. The operating profit stands at
about 507 million compared to 356 of last year and the PAT consolidated comes to 243 million
compared to 189 of last year, up by 28%. This takes me to the end of the presentation and I
would definitely want to mention that the last year has been a year of lots of firsts for us, but of
course we went public. I got used to making this conference calls, so I am making this conference
call every quarter trying to be as transparent in the business to be able to share our business
information with all the investors and over the year I think the company has become much
stronger in terms of corporate governance, in terms of its board constitution, in terms of the way
we are managing our business and I would definitely like to comment on the whole team of
Shoppers Stop, Mr. Govind Shrikhande, our whole management team which has delivered once
again a great performance for the year that’s gone by.
Thank you very much. I am here with my CFO, Mr. Navalkar and I would love to take any
questions that people on the conference call and investors who are attending this conference call
may have Thank you very much, over to you Himanshu.
Himanshu: Thank you very much, Sir. We will now begin the question and answer interactive
session for the conference participants connected to Audio Conference Service from Airtel.
Participants who wish to ask questions may please press *1 on their touchtone enabled
telephone keypad. On pressing *1 participants will get a chance to present their questions on the
first-in-line basis. To ask the question please press *1 now.
The first question comes from Mr. Harish from HSBC, Mumbai. Mr. Harish, you may ask your
question now.
Mr. Harish, HSBC: Hi Nagesh. Just wanted to check with you when you open a hypermarket
what sort of or period of losses do you look at and what sort of losses, if you can just quantify that
and I am just talking of an average hypermarket which is looking at may be 50,000 square feet or
so. The second question pertains to what you mentioned about Crossword and I missed your
comment on that in the sense how do you ramp that up and when does Crossword turn around?
Thank you.
Mr. B S Nagesh: Harish, if you look at the hypermarket, I would not be wanting to comment on a
50,000 square feet because all our models are 100,000 square feet average plus and for the
benefit of all the listeners, the first hypermarket in Mumbai, Malad has actually opened its doors
yesterday on a trial basis the formal launch happening on Thursday and we saw almost about
8,500 odd customers going through the doors. So, we have seen some very good attraction. A
100,000 square feet hypermarket we believe should at a store level breakeven anywhere
between the first year and the second year. That’s our estimation for hypermarket, but with the
kind of hypermarket that one is looking at setting up your corporate cost. I have mentioned this
earlier also, will show a company level profit only between the third and the fifth year. Coming to
Crossword, Crossword the profitability would depend on the ramp up and what kind of stores you
open. If you open 20 shop-in-shops or 20 small format models like what we have opened in MAC,
we have opened in petrol pumps, in HPCL they make their profits in the first months of the first
quarter whereas the moment you go to a 3,000 to 5,000 square feet branch stores they make
their profit between the ninth month and the twelfth month which is the third and fourth quarter.
The moment you go to a 10,000 square feet plus it takes anywhere between 12 months to 24
months. So I would say that depending on the mix of the business the Crossword business
profitability can change but we expect that this year with lot many stores opening in Crossword
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we should be able to see Crossword turning around by the end of this financial year which is year
2006-2007.
Mr. Harish: Yeah, thank you very much.
Himanshu: Thank you very much, Sir. Participants who wish to ask questions may please press
*1 now. The next question comes from Mr. Bhushan of SSKI Securities Mumbai. Mr. Bhushan,
you may ask your question now.
Mr. Bhushan, SSKI Securities: Hi, this is Nikhil Vohra. Just possibly getting back slightly into the
earlier issues. The Hypercity how would the transaction be, what is the option that right now we
have and what is likely to be the transaction cost and at what stages likely to happen?
Mr. B S Nagesh: The option that we have is to buy 51% of Hypercity on or before December
2008. The 51% we will buy at cost plus 10%. My last check with the Hypercity team and the
Hypercity management, the first two would take anywhere between 15 to 20 crores for the setup
and if you are actually buying including the cost it may not be more than 20 – 25 crores. For a
51% percent it should not be more than 10 to 12 crores. Like you said that the option can be
extended upto 2008 and the call that one takes to the board is to watch the first quarter
performance, second quarter performance and then take the call on the buying, but that decision
would have to be taken by the Board of Shoppers Stop, but since the option is a one-sided option
we have the right to take it and also the right to leave it if we want, but it’s a very positive
development, what we have seen yesterday and the store has come out very well. Probably this
will be the largest hypermarket of the country and the most modern hypermarket of the country.
Mr. Bhushan: Okay, just to understand this better, we do have the option to exercise this earlier
if you choose to but obviously if it’s till December 2008 then the existing sponsors which is
Rahejas can fund the properties and then we can potentially buy it out at cost plus 10%.
Mr. B S Nagesh: Yes, and we have the option to buy it from 0 to 51% starting from the day we
signed up to December 2008. The call can be taken by the management of Shoppers Stop at any
point in time.
Mr. Bhushan: There is no upper ceiling on the buy out on this in terms of the overall cost?
Mr B S Nagesh: No. It’s cost plus 10% or market value whichever is lower.
Mr. Bhushan: Okay. I think that should be it for right now. Thanks.
Mr. B S Nagesh: Thanks very much.
Mr. Bhushan: Thanks for this.
Himanshu: Thank you very much, sir. Participants who wish to ask questions may please press
*1. The next question comes from Mr. Rahul from Voyager Capital, Mumbai. Mr. Rahul, you may
ask your question now.
Mr. Rahul Baijal, Voyager Capital: Hi Nagesh.
Mr. B S Nagesh: Hi Rahul.
Mr. Rahul: Congratulations on a good set of numbers.
Mr. B S Nagesh: Thank you very much.
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Mr. Rahul: Just a couple of questions. Firstly on the guidance for the roll out of the stores, how
many stores do we see opening on the Shoppers Stop front and as well as on the home store? If
you could give some guidance for the next two years.
Mr. B S Nagesh: We had mentioned in our document that we will go up to about 39 stores by
2008 and that meant that we had to go 26 stores by the end of 2007 and 39 stores by the end of
2008. Almost all, in fact all the stores are signed up, the contract has been completed. We are
currently signing plus 39 stores as of now, but in the last one year post the new laws of
environment clearance we are seeing that the properties are running behind by about three to six
months’ time. The properties which were supposed to come to us before March looks like will
come by June/July, so therefore there will be more bunching of properties in the next financial
year. This year we definitely see us crossing the 26 stores, so we would stand by our
commitment. Next year 13 stores (all under construction) either they will all bunch up in the
second/ third/ fourth quarter or there could be much serious bunching happening in the third and
four quarters, but we are going to be on 39 stores covering approximately 2.5 million square feet
of space by March 2008. On the Home Stop front, the first Home Stop, like I said, has finished
three months of operation. We would see the second Home Stop opening may be by the second
quarter end and once we have seen the two Home Stops then we will start ramping up. In most of
the properties that we have taken the property size average is much larger than the current size,
so definitely the Home Stop will get accommodated depending on the kind of run in the margins
we see on Home Stop.
Mr. Rahul: Okay. So if I understand it correctly basically 26 stores for FYO7, they do not include
the two home stores which are expected?
Mr. B S Nagesh: No.
Mr. Rahul: Okay. And can you also, I mean the home store has been opened in Bangalore for
some time now. So if I were to look at the retail sales per square foot matrix and the underlying
profitability of the business how would it compare to the department store business?
Mr. B S Nagesh: See, a home furnishing business generally gives you the same kind of margin
that the department store gets, but we have been pleasantly surprised with the mix of sales in the
first quarter, instead of 33% or 32.5% we have seen 35% margin. So, on the margin front we
have been ahead. On the sales per square foot a home furnishing store generally gives you
about 85 – 90% of the sales which means we should get about Rs.5,500 per square foot. I think
we have seen up to Rs.4,700 also, so I think once we have finished the two store operation we
should be able to achieve traction and once we have added the furniture which were added in the
last one month’s time the sales per square foot can jump very sharply because they are all high
value furniture.
Mr. Rahul: Okay. And thirdly on a new initiative which will happen now under the specialty
format, what kind of investments are planned and what kind of ownership or revenue sharing
arrangements exist, for example in Mothercare or Mac stores coming up?
Mr. B S Nagesh: Mothercare is a 100% revenue coming to us and we just pay a royalty. Royalty
is an extremely small amount compared to the margins we make and the Mothercare margins are
much higher than the average margin either of Shoppers Stop or of the Home Stop business and
its 100% revenues get captured into Shoppers Stop. As far as Mac is concerned it is exactly the
same way; 100% of revenues get captured into Shoppers Stop and Mac also has a much larger
margin than the regular cosmetic margin that we see, so that’s also the full revenue for the
margins will get captured.
Mr. Rahul: Okay and in terms of royalty, it would be like around 5 or 6% or so or…
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Mr. B S Nagesh: Around that much, or may be lower than that.
Mr. Rahul: Okay. And lastly in terms of creating a real estate pipeline beyond FY 09 I am seeing
a lot of retailers citing concerns about the rentals becoming commercially unattractive in many
cities in India, so what would be your take on that?
Mr. B S Nagesh: I would say yes and no. As far as we are concerned in the key cities we have
properties which are already on the line and therefore the last six months of hype that has got
created on the real estate we don’t see that concerning us. We are only looking at properties
which are absolutely green field and that we are an anchor. Now at 20 stores, our anchor
positioning is extremely established, so even I would say, let’s say if our last year’s average was
Rs.40 even today we are signing properties as an anchor at 44 – 45. So I don’t see any kind of
major concerns as far as Shoppers Stop/Department Store is concerned. Yes, what will happen is
that we have large number of stores coming up in Delhi. Delhi, by property standards, the
average cost for an anchor is also double, so during that year you will see the sales per square
foot jumping, but the cost’s also jumping because it will be all Delhi stores which will get opened
but if you average it out we are not currently worried on it. As far as specialty store is concerned,
yes. The specialty store business would see a much larger rental per square foot if we go forward
because specialty stores are signed a little ahead of the store opening and there the rentals are
higher. We are very cautious and therefore all our commitments that we have made to the brand
are mix of Shoppers’ Stop and a mix of Specialty stores where we will be able to bring down the
average. What has really surprised us is both Mothercare and Mac have touched in the first year
of operations the sales per square foot which is in dollar terms equivalent to what’s happening
around the world. So if we see this as not just an opening hype but a thing which can be
sustainable the rentals will again become a normal rental because rentals are high, but the sales
per square foot are also very high.
Mr. Rahul: Right, right. Just one last question for Mr. Navalkar. In terms of the Balance Sheet
and cash flows how has been the year in terms of improvement on the working capital cycles
front, have you released any cash on that front?
Mr. Navalkar, CFO Shoppers Stop Limited: Yes, hi Rahul. See, definitely we have improved on
our inventory turnover and actually we have saved one week cover as far as our inventory levels
go. So to that extent working capital definitely has been efficiently used and we have that savings
added to our cashflow workings. Because the operations cash flow, we already have with us and
about Rs.100 crores available with us for deployment for expansion.
Mr. Rahul: Okay sir. Thank you very much for taking my question.
Mr. Navalkar: My pleasure. Thank you.
Himanshu: Thank you very much sir. The next question comes from Mr. Atul Rastogi from Kotak,
Mumbai. Mr. Atul, you may ask your question now.
Mr. Atul: Yeah, good afternoon Mr. Nagesh.
Mr. B S Nagesh: Hi Atul.
Mr. Atul: Good afternoon. Just one thing on Crossword, I mean considering the gross margin
profile is inherently lower than departmental stores and your…I mean where do you see the
margin improvement coming in? I mean will it be basically the Opex going down as a percentage
of sales or will either gross margin profile itself increase because in Opex even for shoppers there
is a quarter of sales and if you compare that with the Crossword profile and the Crossword gross
margin then EBITDA margins don’t look healthy.
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Mr. B S Nagesh: Let’s take line by line. If you take the margin on sales, Crossword margins are
broken into two portions. One is the franchisees operation and one is our own store. So in the
franchisee operation we only get the royalty and the commission. The full gross margin is
captured by the franchisees and as of today we have almost 50 – 50 split. Out of 32 stores 17,
which are franchise stores, so the margins will increase if we add more of our own stores.
Coming to the Opex, the size of the company is very small and we have put in everything that is
required for a ramp up in terms of technology and in terms of the corporate cost. Now until we are
able to ramp up cost or bring the corporate cost down you will see the Opex remaining at the
same level, but if you ask me again my wish how should the EBITDA of Crossword trade, it has to
reach a 5% plus level and I won’t give it more than an 18 months time to reach, that’s by 2008
Crossword EBITDA should be moving in the 5% plus.
Mr. Atul: There is one thing. In case of franchisee you capture only the royalty. Logically the
gross margin should be higher than that.
Mr. B S Nagesh: No. In franchisee we capture two things. We sell to the franchisee at the
wholesale price. So what happens is where in retail sales we have Rs.100 captured on the
franchisee we capture only Rs.67 or Rs.68 plus we get a small royalty income which is just about
a few percentage point and this therefore…on an overall if you look at it the margin on sales looks
lower because there is a 50% wholesale volume captured and 50% retail volume captured.
Mr. Atul: Okay. Thanks a lot.
Mr. B S Nagesh: Thank you very much.
Himanshu: Thank you very much sir. The next question comes from Mr. Shishir Manuj from Man
Financial, Mumbai. Mr. Shishir Manuj, you may ask your question now.
Mr. Shishir: Hi, great set of numbers. Congratulations.
Mr. B S Nagesh: Thank you very much Shishir.
Mr. Shishir: Just couple of questions. One is kind of extension of Rahul’s question and see if you
can rank Home Stop, Mothercare, Crossword and Mac in terms of margins and sales and sales
per square feet. Just the ranking, if I get a sense of…
Mr. B S Nagesh: Well, if I go by the ranking as an industry you will see the highest sales per
square foot will always come from the hypermarket. The second will come from department store
then the third will come from Home Stop. If you want to add the speciality business although we
should not add because smaller stores give you much larger sales per square foot. If I would
suggest you to look at separately then cosmetic should give you the highest sales per square foot
and next should be Mothercare and third should be Crossword.
Mr. Shishir: Okay, third should be Crossword?
Mr. B S Nagesh: Yeah.
Mr. Shishir: And your private label growth has been pretty robust through the year how do you
see it going forward, one and two it’s impact on margin, I mean margin on sales? Now you have
EBITDA margin target of 8%. You have reached almost 7.4% I believe.
Mr. B S Nagesh: Yeah.
Mr. Shishir: If the private label growth continues to be similar for the next two years do you
believe you would not really need any kind of operational efficiency enhancement to reach 8%
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and if there is further enhancement of efficiency possible should we expect more than 8%
EBITDA margins going forward?
Mr. B S Nagesh: Okay. I would continue to maintain that stance of not giving you any forward
guidance, but let me tell you what was happening to private label. We had said that by 2008 we
should take private label to 25%. I think we are on track. Private label gives us much larger
margins compared to our branded products and private label this year has not only increased its
contribution from 17 to 19 odd percent, but the margins have moved up by about 4.5%. So just
the calculation if you take a 20% contribution and 4.5% increase in margin that itself has boosted
the margin to 0.9%. So if this track continues we would stand to our commitment and our thinking
of an 8% let’s say EBITDA. As far as the operation efficiency is concerned irrespective of what
the gross margin is it is important for us to drive the operations efficiency because it actually
leads to inventory management and inventory is the messiah and the devil for retail. So I would
say that operational efficiency should continue however, there is a word of caution there. The
word of caution is that the way the Indian salary, especially in the management and the senior
management level is growing up. For about a year or two year there will be pressure, so our
attempts will be to increase the margins much more than what the pressure in employment cost
will be to be able to still meet our 8% plan by 2008.
Mr. Shishir: So you are saying single most cost factor that will be bothering is the staff cost
rather than, you know when I say it’s, you know, total employee cost rather than rentals?
Mr. B S Nagesh: Yeah, but see it bothers only when you talk of a gross cost to company, but you
are aware that we as a company have a mix of three components in the employment cost. We
have the base employment cost, we have a performance bonus and we have the ESOP. I think
compared to any other company with the help of these three we should be able to manage the
employment cost much better than purely having cash component as a cash cost to company.
Mr. Shishir: Just coming back to private labels. If you could kind of give a sense of where was
growth coming from, I mean apparels versus non-apparels and where do you see the growth
coming from?
Mr. B S Nagesh: See, the growth is all coming from apparels. We have not really got into non-
apparel in a big way. We have continuously maintained the growth coming out of apparels in
private label. However after having created multiple labels we would now attempt to look at the
non-apparel, but it is still small because their sales are complicated. So let me just sum up. All the
growth in private labels have come from apparels, mostly from women and the strongest growth
has come from the three brands that we have launched in men.
Mr. Shishir: Thanks a lot.
Mr. B S Nagesh: Thank you very much.
Himanshu: Thank you very much sir. The next question comes from Mr. Bhushan of SSKI
Securities Mumbai. Mr. Bhushan, you may ask you question now.
Mr. Bhushan, SSKI Securities: Hi Nagesh. Nikhil here. Just to get through that lease rental
issues? Is it fair to presume that our lease rentals will remain constant broadly on the back of
negotiating both on the Shoppers Stop business and also on the Hypercity model? Is that the
reason why the lease rental will remain constant?
Mr. B S Nagesh: No. See, I think you should take these two separately because these are two
independent things and we should not mix because the sales per square foot that you get from a
hypermarket is almost 1.6 to 2 times that you get from a department store, so therefore lease
rental as a percentage will not…
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Mr. Bhushan: No, no. What I was coming at is that assuming that there is a million square feet of
space which is there available in, let’s assume Vizak or any other place or Mysore for that matter,
you would today have possibly a better bargaining position if you combine that with your
Hypercity model…
Mr. B S Nagesh: Absolutely.
Mr. Bhushan: …So is that a fair assessment that…
Mr. B S Nagesh: Oh, absolutely, absolutely. Let me also tell you that these negotiations that are
done although Hypercity is an independent company but on an arms length basis all the
negotiations are done by the central business development team. So you are absolutely right that
our bargaining power because of the combination of speciality store, department stores and the
hypermarket is definitely there and it gives us a fair good leverage and strength on lease rental.
Mr. Bhushan: Nagesh, just one more thing. Finally thoughts on the industry because I guess all
of us have been throwing some numbers but how big can really the retailing business evolve from
the current level of around 25 – 26 million square feet in the next three to four years and also
what is the space really available for a model like Shoppers Stop standalone in terms of number
of shops that we can really set up profitably?
Mr. B S Nagesh: Let me take your second question first. About 5 years back when we had
looked at the number of cities where Shoppers Stop could go we were not able to go to more
than 15 to 20. Today when we relook at the cities we can go to almost about 25 to 30 although
we have signed 39 stores, but if you ask me to make a right guess saying how many stores can
Shoppers Stop see over the next 3 to 5 years, it can see anywhere between 50 to 75 stores. So
no more the number of cities or the current population is going to limit the growth of Shoppers
Stop. If I go back and look at the industry I think the industry will continue to grow from two
angles. I would again want to bring in caution here. One angle is the same store growth and it’s
very important for everybody to look at that because that’s what drives profitability. The second is
the new store growth. The new store growth will purely depend on the availability, the space
availability is currently being driven at the rate of between 35% to 50%, so I would say that you
could see addition of about 30- 35% space for the coming year. However, 2008, 2009 and 2010
is when you will probably see all the space getting added up. So if everybody is talking of 3
million, 4 million, 5 million…the total 10 to 15 million square foot is what, one is talking of, will get
added up in these 2 – 3 years’ time. So to me this will be the biggest boom that retail will see,
2008, 2009, 2010 and this will also see the bust of quite a few properties which are not being
made in the right sense of modern retailing.
Mr. Bhushan: So your guess will be that this 25 million square feet could go to how much in the
next, say by 2010?
Mr. B S Nagesh: By 2010 it should be approximately three times.
Mr. Bhushan: Okay. This I would imagine you including all the new entrants, potential new
entrants also coming in.
Mr. B S Nagesh: Yes, yes, yes.
Mr. Bhushan: There is no space to go beyond that I would imagine.
Mr. B S Nagesh: No. There is space to go beyond it, but the question is to put up the space and
to put up retail it takes the same time. So anything else can be done. You can speed up
construction you can’t speed up the manpower training, you can’t speed up the sourcing logistic
multiplier. Even if you go to the best suppliers, their capacities are not so much and therefore to
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me there is one buzz that will happen, one big number that will come and after that again the
industry will start getting into 35 – 50% growth.
Mr. Bhushan: Okay. Great. Thanks, thanks a lot.
Mr. B S Nagesh: Thanks very much.
Himanshu: Thank you very much sir. The next question comes from Mr. Avnish from Motilal,
Mumbai. Mr. Avnish, you may ask your question now.
Mr. Avnish, Motilal Oswal Securities Limited: Good evening sir and congrats on good set of
number.
Mr. B S Nagesh: Thank you very much.
Mr. Avnish: I have got a couple of questions.
Mr. B S Nagesh: Please go ahead.
Mr. Avnish: First one is that there has been very sharp jump in the other income reported by the
company, what could be the trend going forward?
Mr. B S Nagesh: Just give me a second. You are referring to which part of, are you referring to
the slide here, the other retail operating income?
Mr. Avnish: Yeah, other income…
Mr. B S Nagesh: …jump 79 to 134…
Mr. Avnish: Other income which has gone up from 11.7 million to 77.8 million.
Mr. Navalkar: Well, Avnish, Navalkar here.
Mr. Avnish: Yeah.
Mr. Navalkar: This time we had a finance income which earned was from the surplus money
which we had from the IPO that was 56 million and that is a part of the operating income, that’s
the major part of it and plus dividend from the preference share capital which we placed with
Crossword during the year. These are the two main components.
Mr. Avnish: What could be the trend because as we ramp up your stores openings the cash
which we had raised from the IPO that will be gradually used?
Mr. Navalkar: Yeah, this will be used during the year. That is our projection. See also what has
happened in the operating income besides the non-operating income we have other incomes
income from the First Citizen base because that is something which grew by 61% during the year
and non-trading concessions facilities in our stores has also grown by 45%, so that will be
sustained. It’s only the IPO money which will be used during the year that income will go out.
Mr. Avnish: But the amount which we received from the First Citizen or the other things are being
included under this very head only?
Mr. Navalkar: Where? In the operating income?
Mr. Avnish: Yeah.
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Mr. Navalkar: This is actually the membership fee that we take to…
Mr. Avnish: I suppose that forms a part of actually the total retail turnover only.
Mr. Navalkar: No, no, no. There are two parts of it. The sales to First Citizens forms part of the
retail turnover and when we make a member and we charge Rs.150 per member and our
membership has grown by almost about 60%, okay. That forms part of the other income.
Mr. Avnish: Okay, okay sir. Second thing is that during the current year your operating costs
have gone down but as a percentage of sales, but as we move forward we go into new formats
like Mothercare is there or Home Stop is there as you expand into suchlike ventures. So what is
the likely trend in the overall operating cost particularly when we are witnessing some sort of
inflationary pressure in terms of employee cost or even the lease rentals and your power charges
in particular? What could be the trend going forward?
Mr. Navalkar: The operating expenses that we reported for the financial year is at 24.8%
compared to last year’s 24.2%. Even if you take away the other income still there is a slight
increase in the operating expenses and like I said we would see only one kind of real pressure
which could be the employment cost, but the other could be also depending on which year we
open most stores in North which is Delhi which has a higher cost of occupation it will go up, but
other than these two we are not seeing any other pressures. The energy cost is whatever it is and
we are constantly looking at in fact maintaining and containing that energy cost, so we do not see
a pressure other than as the employment cost.
Mr. Avnish: Okay sir. My last question is that on slide number 10 you had shown sales per
square feet on chargeable area. Can you throw some light on this?
Mr. B S Nagesh: See, what happens is that every retailer today is using carpet area, retail area,
merchandise area. Now, what happens for us when we look at competition or when we ask you to
look at competition you need to get one common area. So let me just explain – if I pay to the
builder Rs.100 on chargeable area and I get 100 square foot what I get to use as the carpet area
is anywhere between 75 to 80 and that 75 to 80 carpet area square foot that I get when I convert
into my retailing inside after taking out the area in the trial room my efficiencies are anywhere
between 58 to 65. So if I actually give you the sales per square foot I should give you on the 65
and that is the international law. Internationally the sales per square foot is always done on the
retail area, but in India because in the absence of a common process we thought the best is to do
the chargeable area, the area which is put on the agreement so it becomes common. So if you
have to calculate this on international law you will have to increase this close to about 20 – 25%.
Mr. Avnish: Okay. So the total chargeable area which you are having is approximately 950,000
square feet?
Mr. B S Nagesh: Yes.
Mr. Avnish:…and if we multiply this figure by this 1,834 we should be able to arrive at the retail
sales?
Mr.B S Nagesh: Yes.
Mr. Avnish: Okay. Thanks a lot.
Mr. Navalkar: Thank you.
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Himanshu: Thank you very much sir. Participants who wish to ask questions may please press
*1. I repeat participants who wish to ask questions may please press *1. The next question
comes from Mr. Nikhil of SSKI Securities, Mumbai. Mr. Nikhil, you may ask your question now.
Mr. Nikhil, SSKI Securities: Apologies for coming back again. Just getting back to the Hypercity
what are the plans till December 2008 in terms of number of Hyper Cities which will be opened?
Mr. B S Nagesh: See, we had actually said we would look at opening between 3 and 4 in this
financial year and then take a call. As of today I think we should be able to see between 3 and 4
stores size ranging between 85,000 to 120,000 square feet. The first one that’s got opened
yesterday is about 120,000 square feet. So you should see close to about half a million square
feet of operation by 2007 – 2008 depending on which month it actually comes into play. So
between 5 to 7 stores by 2008.
Mr. Nikhil: Is that for the next 3 working years? You are saying it will be half a million square feet
till December 2008?
Mr. B S Nagesh: For about 3 working years? No, we are saying this is 2006-2007…
Mr. Nikhil: This is till December 2008.
Mr. B S Nagesh You are talking of by December 2008?
Mr. Nikhil: Yes.
Mr. B S Nagesh …option comes through?
Mr. Nikhil: Precisely.
Mr. B S Nagesh: Okay. So 2006-2007 we are expecting between 3 and 4 stores which is if you
take an average of 100,000 square feet it should be about 400,000 square feet and we should
expect the same for the next financial year which is 2007-2008, so other 4 stores if they come in it
will run approximately about 800,000 square feet by December 2008 or between 700,000 to
800,000 square feet.
Mr. Nikhil: Okay. It’s just that the benchmark that you talked about what would be the ideal
benchmark if we assume it will be say around 8 Hyper Cities and assuming it’s around a million
square feet? What could be the cost in that?
Mr. B S Nagesh: See, an average Hypercity takes between 15…a good quality Hypercity that we
opened yesterday takes approximately about Rs.1,500 to Rs.1,600 per square foot to build and
these stores should generally deliver. Currently the country’s benchmark of sales per square foot
on a national average is between Rs.10,000 to Rs.14,000 square foot.
Mr. Nikhil: Okay. Thanks for this.
Mr. B S Nagesh: Thanks very much.
Himanshu: Thank you very much sir. The next question comes from Mr. Nitin of Emkay Shares,
Mumbai. Mr. Nitin, you may ask you question now.
Mr. Nitin, Emkay Share and Stock Brokers Limited: Good afternoon sir.
Mr. B S Nagesh: Good afternoon Nitin.
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Mr. Nitin: I think I missed in between the chargeable area it’s 75 – 80% or 58 – 65%?
Mr. B S Nagesh: No, no, no. The chargeable area is 100 for which we pay and therefore we
always calculate as sales per square foot on 100, but the retail area is generally between 58 to 65
and the carpet area is between 75 to 80. So when I pay for 100 what I am able to occupy is about
75 to 80 and from the 75 to 80 that I occupy I retail between 58 to 65.
Mr. Nitin: Okay, and coming to your Hypercity is there any…what is the scope of the private
labels being used in the Hypercity from you?
Mr. B S Nagesh: No. I think these are two different businesses being targeted to two different
kinds of consumers. So the private label of one brand which is Shoppers will not be used in
Hypercity. However, you will find that Hypercity has a lot and lot of private labels across all
categories.
Mr. Nitin: So the Hypercity sort of having its own private labels, what kind of proportion are we
targeting there?
Mr. B S Nagesh: Honestly we just opened yesterday and on behalf of the CEO…
Mr. Nitin: Well, initially you must have shelf occupancy of a certain level of your private labels…
Mr. B S Nagesh: Again I think, if I remember well, it should be around 15 - 20%.
Mr. Nitin: 15 – 20%.
Mr. B S Nagesh: Yes.
Mr. Nitin: Okay. Thank you.
Mr. B S Nagesh: Thank you very much.
Himanshu: Thank you very much sir. The next question comes from Ms. Sunita of UBS
Securities, Mumbai. Ms. Sunita, you may ask your question now.
Ms. Sunita, UBS Securities: Hi Nagesh.
Mr. B S Nagesh: Hi Sunita.
Ms. Sunita: Just a question on the small formats that you have actually started as an initiative
this year; Mac, Mothercare and the Food and Beverage format. These as a percentage of…how
do you see this going forward in 2007 and in 2008 as a percentage of square feet or as a
percentage of revenue? Is this..
Mr. B S Nagesh: It won’t be substantial in 2007-2008. Precisely specialty retailing becoming
substantial only by 2009-2010 when all the malls in the country are operational because it’s only
then that you will be able to get a lot of small store business setting, but till that time it will not be
very substantial. The way it looks like it is in the range of between 10 - 15%.
Ms. Sunita: In 2008?
Mr. B S Nagesh: Yeah.
Ms. Sunita: Okay. Thank you.
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Mr. B S Nagesh: Thank you Sunita.
Himanshu: Thank you very much ma’am. Participants who wish to ask questions may please
press *1. At this moment, there are no further questions from participants. I would now hand over
the floor back to Mr. B S Nagesh for the final remarks.
Mr. B S Nagesh: Thank you Himanshu. Thank you everybody for being on the conference call.
We really appreciate and I would definitely like to invite everybody to make an attempt and come
and see the Hypermarket which is Hypercity which we opened yesterday and I am sure you will
appreciate the efforts taken creating a new benchmark in terms of the store. I look forward to
seeing you again next quarter and we thank you for the support that we have got from each one
of you. Apart from asking questions we have many times asked for information to help us
understand the market on an overall front and we thank you for that and look forward to seeing
you for the next quarter. Thank you.
Himanshu: Ladies and gentlemen, this concludes the conference call. You may now disconnect
your lines. Thank you for connecting to Audio Conference Service from Airtel and have a pleasant
evening.
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