Lifestyle retailers may face liquidity pressure at least for one year

Lifestyle retailers such as Lifestyle International, Shoppers Stop, Trent, Pantaloon may face liquidity pressure at least for a year due to slower sales coupled with growing debt, higher rentals and slower expansion, which are bringing down their profitability, rating agencies and analysts said.

On Friday, rating firm Crisil downgraded ratings on Lifestyle International, part of Dubai-based Landmark group, by a notch due to Lifestyle’s financial risk profile, expectation of continued losses, and weaker debt protection measures. In December last year, Fitch Ratings downgraded short-term debt and commercial papers of the Raheja-owned Shoppers Stop due to ongoing margin pressures resulting from slower sales growth and losses from new businesses.

According to experts, slower sales from existing stores and delay in opening new stores, which were expected to add to their top lines, have impacted their profitability negatively.

Privately-held Lifestyle International, which runs Lifestyle departmental stores Home Centre stores and value format Max stores, posted a pre-tax loss of Rs 46.5 crore for the first nine months of 2008-09, further to its losses of Rs 18.9 crore in 2007-08, according to rating firm Crisil.

Crisil cited this dismal performance to higher rental expenses and service tax, increased employee and power costs, lower productivity of its stores because of reduced consumer spending, and initial losses of start-up Max stores.

The performance of listed retailers was also no better. Pantaloon Retail’s net profit grew by 6 per cent in the December quarter, which was its lowest growth in the last four quarters. Department store chain Shoppers Stop made a combined net loss of Rs 36.84 crore in the last three quarters.

“All the lifestyle retailers have seen their profitability coming down, though their top lines have not fallen much. Their same store sales have also fallen as footfalls are coming down. Most of the retailers were banking on sales from new stores. But that has also not happened as malls are not coming up on time or footfalls not yet started in some cases,” said Amod Khanorkar, head, corporate and infrastructure ratings, Crisil Ratings.

Retailers attribute overall slowdown in the economy for their falling sales. “It’s the impact of overall slowdown that is hurting retailers. Shoppers are downtrading and deferring big-ticket buys as they are unsure of their jobs, incomes, and economic scenario. We are working on plans to become profitable once gain,’’ said PVK Sundaram, director of finance, Lifestyle Group.

“Consumption demand in the first three quarters of the next financial year look tough,” said Shoppers Stop Managing Director B S Nagesh in December last year.

Analysts also said that retailers were borrowing more debt to fund their expansion and operations. Shoppers Stop’s gearing (debt to equity) has increased to about 3 times as on September 30, 2008 from around 2.5 times as on March 31, 2008, while that of Lifestyle International improved, despite losses, because of heavy promoter fund infusion, Crisil said. Its adjusted gearing is expected to be 2 times as on March 31, 2009 as against 2.5 times as on March 31, 2008.

“They are not able to pass on the expenditure to consumers as they could not expand as planned. If their scale had increased, they could have better bargain power with merchandisers, spread their fixed costs, which would have improved their margins. They were adding 0.5 per cent to 0.7 per cent of gross margins every year between 2003 and 2007. But increase in rentals and taxes on that increased their costs,’’ said Khanorkar.

Pantaloon added 0.3 million sq ft of space in the December quarter of the current financial year, compared to 0.9 million it added in the corresponding quarter last year. New Delhi-based Vishal Retail added only 0.2 million sq ft of space in the just-concluded quarter compared to 0.5 million sq ft it added in the December quarter of the last financial year. However, Shoppers Stop added the same amount of space in the December quarter this year as in the corresponding quarter last year.

The performance of existing stores is also declining. The same store growth in lifestyle segment of Pantaloon Retail fell 14 per cent in December 2008 before being increased by 12.5 per cent in January 2009. Same store growth in home segment fell 10 per cent and 4.32 per cent in December 2008 and January 2009 respectively.

Lifestyle’s operating margin for the nine months of 2008-09 fell by 500 basis points from the margin of 2007-08 and expected to remain subdued over the medium term, according to Crisil. Shoppers Stop’s margins have dropped by 150 basis points due to a drop in consumer spending, Crisil said.

Source: http://www.business-standard.com/india/