Margin Expansion Bolsters Trent Amid Growth Deceleration
Trent's fiscal third quarter revealed a mixed bag of results, with growth rates for same-store sales (SSG) and like-for-like (LFL) figures softening. However, the fashion, beauty, and lifestyle retailer from the Tata group managed to expand its margins, pushing Earnings Before Interest, Taxes, Depreciation, and Amortisation (Ebitda) up by a substantial 194 basis points year-on-year to 20.4%. This margin improvement, coupled with an aggressive store network expansion that saw revenue climb 16% year-on-year, has caught the attention of market watchers.
Aggressive Store Additions Drive Revenue
The company's strategy of rapid expansion is evident in its store additions. Westside opened 17 net new stores, exceeding its annual guidance, bringing its total to 278. Zudio, the value fashion chain, added 48 stores, reaching 854 locations, with a significant portion of this expansion targeting smaller towns and micro-markets. Management reiterated a preference for the company-operated model, and store additions are typically expected to accelerate in the fourth quarter.
Analyst Optimism Despite Decelerating Growth
While standalone revenue grew 16% year-on-year to ₹5,260 crore on a high base, the LFL growth for fashion was marginally negative. This deceleration is attributed to factors such as the goods and services tax (GST) transition, an early festive season shift, and subdued consumer sentiment. Revenue per square foot also declined by 18% year-on-year. Despite these headwinds, a notable 18 out of 26 analysts polled by Bloomberg are bullish on Trent, with an average one-year target price of ₹4,727.77, indicating potential upside from the current ₹4,131.60.
Operational Efficiency and Other Income
Gross margins saw a modest expansion of 29 basis points year-on-year, while Ebitda margin improvement of 194 basis points was significantly boosted by operating leverage. Investments in automation and technology, including a pan-network Radio-Frequency Identification (RFID) deployment, enhanced supply chain efficiency and productivity, leading to manpower optimisation. Other income surged 172% year-on-year to ₹153 crore, likely stemming from proceeds related to the Zara India share buybacks, which contributed to a 40% year-on-year growth in Profit After Tax (PAT).
Star Bazaar's Stagnation
The hypermarket chain, Star, continued to face challenges, reporting a modest 1% year-on-year revenue growth as some stores underwent upgrades. Management has acknowledged the slow pace of store additions in this segment and plans to accelerate expansion. Cost optimisation efforts are expected to rely increasingly on technology and logistics investments going forward, as manpower efficiencies have largely been realized.