DMart sales recover from June lows though volumes remain sub-par

Sales of general merchandise, competitive pressures in the festive season key for Q3 margins

While there has been a sequential improvement, the second quarter performance of retail chain Avenue Supermarts (DMart) was lower than Street estimates. Easing of lockdown restrictions led to gradual increase in sales due to higher footfalls. While sales were down 12 per cent lower than year ago quarter it was better than the 34 per cent dip reported in the June quarter. Led by sales of staples and fast moving consumer goods (FMCG), the company achieved over 87 per cent of the sales in September as compared to the year ago period. 

Despite the unfavourable conditions and sales yet to hit last year’s levels (same store sales down 12 per cent y-o-y), the company continues to expand adding six stores in the September quarter. The company has closed two of its stores for walk-in customers and converted them to e-fulfillment centres for its e-commerce business. Total store count at the end of the quarter is at 220 as compared to 189 in the year ago period. 

While the sales of FMCG and staples have recovered as shopping continues to be need based, how the volumes in the general merchandise segment is key for both revenues and margins. While gross margins improved by 30 basis points to 14.5 per cent on a sequential basis, they were down 90 basis points over the year ago quarter. While higher contribution of the grocery segment led to the weaker margin profile, improving sales of the more profitable general merchandise and apparel should help in margin recovery going ahead. Muted gross margins and weak operating leverage led to a 240 basis point dip in operating profit margins to 6.2 per cent.

Though the DMart Ready or e-commerce business has more than doubled to Rs 88 crore it still remains a miniscule 2 per cent of its consolidated revenues. Analysts at Prabhudas Lilladher highlight the company’s increasing focus on e-commerce given the rise in digital footprint in Mumbai region and Pune and conversion of existing stores to e-fulfillment centres. 

While the ongoing festival season could improve the sales momentum of the company especially in the general merchandise category, rise in competitive intensity from retailers such as Reliance Retail as well as e-commerce players (Amazon, Flipkart) could have implications for Avenue’s profitability. 

Though the stock has shed 11 per cent since its August highs and has been underperforming the overall markets on operating leverage and discounting concerns, valuations even after the correction are at 78 times its FY22 earnings estimates. Given the pandemic uncertainty and lack of clarity on lockdown relaxation, investors should await further correction and stability in volume trends across segments before considering the stock.