The stock of Future Retail is down over 26 per cent from its December highs, on worries of margin compression on account of delayed integration with Hypercity, weak performance of smaller format stores in South India, and higher interest costs. The firm is looking at ways of increasing operating profit margins that came in at 5.2 per cent in the December quarter, up 66 basis points over Q3FY18.
The firm aims to improve same store sales (SSS) of its smaller stores that have been in the negative given deflation in the food and staples category, integration pressures, as well as higher share from club members who get an additional 10 per cent discount.
It indicated that the lower base, higher spends by customers, and increased footfalls should ensure sales growth. While Big Bazaar’s SSS growth came in at 10.1 per cent, the overall SSS growth was only 5.9 per cent as it was dragged down by smaller store sales.
Similarly, for the Hypercity format stores that lag Big Bazaar on the margin front, the company is looking to double the share of higher margin apparel to 35 per cent, reduce back-end costs as well as sales and distribution expenses. While there has been an improvement, with margins of Hypercity coming in at 3.6 per cent against losses at the operating level earlier, it still lags Big Bazaar’s 7.4 per cent recorded in the quarter.
Finally, Future Retail is buying retail infrastructure assets that were demerged from the Future Group in 2017 and currently housed in Future Enterprises (FEL). The process — expected to take a year and a half — will help reduce rental costs and improve margins.
Analysts at IIFL believe that after the transaction, there will be a reduction in corporate guarantees given by FRL to FEL. Jefferies, in a recent report, indicated that the step will result in a simplified company structure, with lower related party transactions.
The company intends to fund the asset purchase by a combination of fund infusion by promoters, stake sale proceeds and operating cash flows.