>Koutons Retail India (ICICI DIRECT)

Koutons Retail India reported a dismal performance in Q4FY10, far below our and the Street expectations. The company reported net sales of Rs 386 crore against our expectation of Rs 460.9 crore. This translates into a meagre 1.9% growth YoY. The EBITDA margin was at 19.4%
against 25% in Q4FY10, a steep contraction of 560 bps YoY. This was mainly driven by lower average realisation per sq ft and higher discounts offered to push sales. Net profit including prior period expenses (Rs 1.2 crore) declined by 12.2% YoY with net margin of 8.1% against 9.5% in the corresponding quarter of the previous year.

■ Retail space declines marginally QoQ but rises 7% YoY
The retail space at the end of the quarter stood at 13.6 lakh sq ft with 95.3% of stores on a franchise basis. The company operates 1,307 stores with 702 stores under Koutons (including 15 racks stores) and 605 stores under Charlie Outlaw.

■ Thrust on better profitability
The company has taken initiatives to improve the profitability by better inventory management, debt restructuring (average cost of capital now between 13-14%), introducing family stores that yield better profitability and focus on better margin products. Koutons is looking at reducing its discounts to improve profitability.

Valuation
We are positive on the business model of Koutons Retail wherein 95.3% of stores are on a franchise model. The refinancing of debt would be a positive for the earnings of the company. The initiatives taken to improve efficiency and profitability would bear fruit in the near term performance of the company. At the CMP of Rs 309 per share, the stock is trading at a P/E of 9.2x and 8x its FY11E and FY12E earnings of Rs 33.6 and Rs 38.4, respectively. We are maintaining our STRONG BUY rating on the stock with a downward revised target price of Rs 384 valuing the stock at 10x its FY12E earnings.

To read the full report: KOUTONS RETAIL