Never mind Sep quarter blip, Trent outlook looks good


Shares of retail company Trent Ltd fell by more than 3% on Friday, a day when the benchmark Nifty50 index was up 1.8%. One likely reason for the drop in the shares is the disappointing margins in the September quarter (Q2FY23). Standalone gross margin contracted as much as 515 basis points (bps) year-on-year (y-o-y).

High operating expenses such as employee costs added to woes at the earnings before interest, taxes, depreciation and amortisation (Ebitda) level. Thus, Ebitda margin fell by 693 bps y-o-y to 14.8% in Q2. Consolidated Ebitda margin also fell.

Losing grip

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Losing grip

“In the absence of adequate disclosures, it is difficult to ascertain the cause for weak margins,” said analysts from Jefferies India in a report dated 10 November. “Possible reasons include higher promotions/discounting, increased share of Zudio revenues and faster store ramp-up adding to operating costs,” they said. Zudio is Trent’s value retail format.

The upshot is that earnings before tax and exceptional items increased by almost 38% to 243 crore even as revenues were up by a robust 78%. Trent has consistently delivered on revenue growth. Last quarter’s revenues are nearly 122% higher than Q2FY20 (a pre-covid quarter).

The emerging categories, including beauty and personal care, innerwear, and footwear, now contribute more than 15% of standalone revenues. The company’s flagship concept, Westside, saw 20% like-for-like growth vis-à-vis Q2FY20. This isn’t bad though this figure has dropped from the 24% of Q1FY23.

In Q2, the company added around 50 stores taking Trent’s portfolio across Westside and Zudio formats to more than 500 stores. Trent said the Star business is seeing better customer traction and it remains another growth engine. Overall, consolidated Q2 net profit was flat.

Despite the fall in Trent’s shares post the announcement of the Q2 results, investors are sitting on handsome gains with the stock appreciating by 33% so far in CY22. This could limit strong near-term upsides. Potential for growth is huge, however. “Trent continues to outperform its peers and offers a huge runway for growth over the next three-to-five years,” said a report of Motilal Oswal Financial Services on 11 November.

“We have maintained our FY23-24 revenue/Ebitda estimate, factoring in a consolidated revenue/Ebitda compound annual growth rate of 52%/72% over FY22-24, led by continued growth in revenue and 130/35 store additions for Zudio/Westside,” it added. Margins and the Star business performance are key monitorables.

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