Trent outperforms peers in retail space with best in class growth

Valuations, however, are at a sharp premium compared to its peers

Led by strong same store sales growth of Westside and traction for value fashion franchise Zudio, Trent continues to outperform its peers in the retail space. The company posted a 33 per cent year-on-year revenue growth in the September quarter which was ahead of peers both on standalone and consolidated basis.

The better than expected performance was led by a 13 per cent jump in same store sales growth in Westside, which is the best in the retail industry in the quarter. The overall growth in this format too was strong 25 per cent. Analysts at IDBI Capital say the performance comes at a time when the consumption slowdown is at its peak. The company believes that it can sustain revenue growth of 17 per cent in the current financial year on the back of a focus on private labels where the returns are higher and inventory turnover is also high. Trent plans to add about 30 Westside stores to its FY19 number of 150.

In addition to Westside what has helped boost standalone sales is the sharp gains for Zudio format. Analysts at Edelweiss Research believe that the segment’s revenue would have grown by two and a half times on a small base in the September quarter. While the segment which over 40 stores has posted revenues of Rs 150 crore in FY19, analysts expect it to grow at a fast clip given the store additions. Analysts at Motilal Oswal Research believe that the format will see store addition to the tune of 70-100 each over the next couple of years to reach a total of 290 by FY22. Moreover, while Zudio’s revenues are a smaller part of Trent’s consolidated revenues of about Rs 2,700 crore, they expect it to scale up to a quarter of revenues by FY22.

While the top line growth is expected to be strong, there are two areas the street will keep an eye on. The first is gross margins which fell over 290 basis points year on year to 47.8 per cent in the September quarter due to higher share of lower margin Zudio format revenues and higher discounting on account of end of season sales. Margins would continue to be under pressure which coupled with higher losses at Star Bazaar could impact the bottom line.

Valuations seem to be a bigger hurdle as at over 52 times its FY21 earnings estimates it is trading at a large premium to peers. Aditya Birla Fashions its nearest peer is trading at 34 times. Investors will have to wait for an improvement in margins and lower losses at its joint ventures before considering the stock.