Strong near-term triggers for Future Retail

Achieving ambitious 5-year target of smaller stores, however, hinges on execution and customer acceptance

The Future Retail stock gained 12 per cent after the company unveiled plans to expand through small format stores, while enabling customers to shop both online and offline. The target is opening of 10,000 stores over five years (2022), starting with 1,100 stores in FY18.
 
These members-only stores will have 2,000 members each, translating to 20 million customers. The company will offer a 10 per cent discount on products and expects this business to generate Rs 1.5 lakh crore of annual revenue. Currently, it has 537 smaller format stores under the Easyday brand, with a club membership of 250,000. The Future Group has also a plan to hit the $2-trillion target by 2047.
 

Compiled by BS Research Bureau

Analysts at Edelweiss Securities say the strategy of blending online and offline models is to address the issue of high logistics costs and prohibitive acquisition costs in e-commerce, by bringing physical stores closer to customers (within 2 km) and loyalty programmes (the discount on all products). The company has also tied up with Google and Facebook to leverage consumer data and offer customised products.
 
While it is on the right track to offer an end-to-end experience, using both online and offline services, some analysts say, the task isn’t easy. Says an analyst at a domestic brokerage: “Success depends to a large extent on execution ability and the acceptance by consumers.” Some are also skeptical about the long-term targets, given technological changes and shifting consumer preferences.
 
In the near term, the Street will look at the company’s ability to sustain double-digit growth in same-store-sales (10.2 per cent in the September), as well as the trend of margin expansion (150 basis points to 4.7 per cent). Manish Jain of Nomura believes the company remains on a path of strong growth, driven by rebounding urban consumption demand, strong cost focus, scale-back of loss-making businesses and a focus on driving growth through its store memberships. Edelweiss expects return on equity to improve 742 basis points over two years to 24.1 per cent, on the back of SSS growth, improving margins and better inventory turns.
 
While the near-term outlook is strong and most brokerages have a ‘buy’ rating on the stock, given the surge in prices and target estimates (Rs 620-Rs 640 a share) and there is little upside from these levels.