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Shares of retail chain D-Mart operator Avenue Supermarts dipped 4 per cent to Rs 3,694 on the BSE in Monday’s intra-day trade in an otherwise firm market after the company reported a 2.46 per cent rise in its consolidated net profit at Rs 658.71 crore in April-June 2023 quarter (Q1FY24), as lower sales of apparel and general merchandise impacted margins. The company had posted a net profit of Rs 642.89 crore in the corresponding quarter a year ago (Q1FY23).
With today’s decline, in past one month, the stock has fallen 10 per cent, as compared to near 5 per cent rise in the S&P BSE Sensex.
In Q1FY23, the company’s reported earnings before interest, tax, depreciation and amortization (EBITDA) margin contracted 130 bps to 8.7 per cent in Q1FY24 as compared to 10.0 per cent in Q1FY23.
Overall gross margins were lower compared to same period in the previous year, primarily due to lower sales contribution of apparel and general merchandise. However, general merchandise contribution is recovering and trending towards prepandemic levels, the management said.
However, the company’s revenue from operations was up 18.20 per cent to Rs 11,865 crore during the quarter under review as against Rs 10,038 crore in the same quarter last fiscal. The company opened 3 new stores during the quarter and total stores now stand at 327.
Heightened competitive intensity (especially in value fashion space) and inflationary stress is probably curtailing the growth of discretionary products and resulting in the company reporting subdued margin. Also, company's revenue growth trajectory has tapered down to 18-20 per cent in the past 4-5 quarters (vs. 25 per cent growth recorded during pre-covid era), ICICI Securities said in a note.
The new larger stores which were designed to provide more space for discretionary products have not been able to deliver higher growth of discretionary products inspite of the operating business scenario normalising in the last few quarters. Hence, the store size of the new outlets added during the quarter (added 3 taking the total count to 327) were comparatively smaller at ~33000 sq. ft (vs. average store size of 41000 and 60000- added In last two years), the brokerage firm said.
Motilal Oswal Financial Services (MOFSL) believes SSSG (same store sales growth) is set to recover in FY24, due to easing general inflation along with raw material cost reduction that may help in reviving discretionary demand; and the company’s strategy to open larger stores as the smaller ones are likely to report a growth plateau after almost three years (with their SSSG peaking out). Those larger stores are now in the base and will start contributing to store productivity, with further room to grow their footfalls.
“The key question remains if the mix change/GM profile is transient or marks a structural shift. Management did make a statement of the mix improving and trending towards prepandemic levels, but Q1FY24’s performance was not an improvement over last. Hence, this remains a concern while we await further clarity,” analysts at Nuvama Wealth Management said, with maintain ‘hold’ rating on the stock.
D-Mart needs to restructure its apparel business given new threat perception, which will take a few quarters for turnaround. D’Mart Ready is on fine footing with highly competitive consumer pricing and increase in delivery charges by competitors due to huge losses, said analysts at Prabhudas Liladher. They believes D’Mart has a huge runway to grow with 1500+ store potential and scale up in D’Mart Ready. “We expect growth pressures to sustain in Q2 also before recovery in H2FY24. D’Mart lacks near triggers, although the stock remains a long term Buy,” the brokerage firm said.
