Trent stays on growth track, stock rises 18% in 3 months; hit margins in Q4

Higher costs and lower value segment, however, hit margins in Q4

From its lows last week, the stock of retail major Trent has gained over 7 per cent.

Strong March quarter showing, aggressive store additions, especially in the value segment, and strong balance sheet kept brokerages positive. While the stock is up 18 per cent over the last three months, further gains would depend on its ability to maintain sector-leading growth and improvement in margins.

The near-term trigger is the strong top line performance in the March quarter (Q4 of FY23). Standalone revenues increased 75 per cent over the year-ago quarter to Rs 2,077 crore on the back of store expansion as well as like-for-like growth. The growth was better than the three-year annual revenue growth of 42 per cent.

The company added three Westside stores during the quarter, taking the store count to 214 stores. Higher incremental additions came in the value-fashion segment, Zudio. Store count for the value-fashion business increased by 26 taking the total to 352 stores. In addition to store expansion, same-store sales growth for Westside was a healthy 23 per cent.

Online revenues from Westside’s digital offerings and other Tata group platforms contributed 6 per cent to Westside’s revenues. Emerging categories such as beauty and personal care, innerwear and footwear, too, saw good growth of 18 per cent.

The food and grocery (F&G) segment (Star Bazaar) posted a robust growth of 46 per cent, given the focus on fresh foods and own brands. The company believes that its improving positive economics at the store level in the F&G segment will enable it to pursue a scalable model.

While the top line growth has been impressive, higher costs weighed on the company’s profitability. Gross profit margins declined by 833 basis points (bps) year-on-year (YoY) and 400 bps sequentially to 40.8 per cent. Instead of passing on the higher raw material costs, the company absorbed them. This, coupled with higher end-of-season-sales discounting and higher proportion of lower-gross-margin format, led to gross margin decline, said analysts led by Aliasgar Shakir of Motilal Oswal Research.

The fall in operating margins was restricted to 260 bps at 10.2 per cent, given lower other expenses. PhillipCapital Research has cut its operating profit estimates by 3 per cent for FY24. This is given that the revenue share of Zudio continues to increase and this would lead to margin dilution.

Most brokerages believe that the company has a long runway for growth and it would continue to outdo peers, going ahead. This would come without significantly denting its balance sheet.

While the discretionary category is seeing a challenging demand environment, Trent has continued to grow at a healthy pace with steady same-store sales growth, said Motilal Oswal Research. Further, despite adding stores aggressively, the company has observed limited balance sheet risk or weakness in operations, believe analysts at the brokerage.

While analysts are bullish about the company’s prospects, valuations and margin trajectory are factors, which could put a lid on gains.

Jay Gandhi and Riddhi Shah of HDFC Securities said, “Its disciplined working capital management and well-capitalised balance sheet do not allow us to fault the business. But its heady valuation (53 times FY25 enterprise value-to-operating profit, on a consolidated basis) restrains us from becoming constructive on the stock.”