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Trent Shifts Focus to Zudio Profitability
Motilal Oswal's latest analyst report highlights a significant change in Trent's growth strategy. The company is moving away from rapid expansion towards consolidating its Zudio value fashion brand. This shift prioritizes improving store profitability over simply adding more stores. While this focus on efficiency is expected to lead to better unit-level performance in the long run, it has resulted in lower earnings estimates for the near term. Despite this, the brokerage maintains a positive view, citing Trent's strong brands and long-term market potential.
Zudio's Consolidation Strategy
Trent's Zudio brand, a key growth driver, is now slowing its expansion pace to concentrate on consolidation. The company is aiming to optimize store profitability rather than aggressively opening new locations. New store openings are increasingly focused on tier-two and smaller cities. These markets typically take longer to become profitable, affecting immediate sales and productivity figures. This approach contrasts with the rapid scaling seen previously and signals a focus on strengthening market presence and improving operations in the value segment. Revenue growth has slowed, particularly in less established areas, with delayed productivity impacting overall results.
Competition Intensifies, Valuations High
Trent operates in India's highly competitive apparel market, which is expected to reach ₹16 lakh crore by 2029-30. The value fashion segment is seeing growing competition, with rivals like Reliance Retail's Yousta, Aditya Birla Fashion and Retail's Style Up, and Max Fashion expanding their store networks. Zudio has grown significantly but still holds less than 2% market share. This strong competition, combined with inconsistent demand and more stores in the same areas leading to sales being taken from each other, has slowed same-store sales growth.
Trent's stock trades at a Price-to-Earnings (P/E) ratio of around 75.1x, or as high as 122.4x for FY25. This is high compared to rivals like Metro Brands (74.2x P/E) and V-Mart Retail (153.8x P/E). These high valuation multiples present a challenge, especially with current difficulties in achieving growth.
Execution Risks and Margin Pressures
Revenue growth has slowed recently due to slower same-store sales, weaker demand for non-essential items, and rising competition. Expanding into smaller towns, while key for long-term reach, creates short-term challenges as these markets take time to develop. Furthermore, more stores in the same areas have led to lower sales per store, which might continue in the near term.
While cost controls and better supply chains are helping margins, most obvious cost savings have been made. Future margin gains depend on sales picking up and stores performing better. The market reacted coolly to the company's Q3 FY26 results, which showed 14.8% revenue growth. Analysts noted slowing growth momentum and sensitivity to high valuations. The stock's performance also reflects these pressures, having fallen about 34.65% in the year leading up to March 2025.
Analyst View and Future Outlook
Motilal Oswal is keeping a 'Buy' rating with a target price of ₹4,350. This positive stance is based on Trent's strong brands, careful cost management, and long-term growth potential, particularly in its Westside format which is seeing planned expansion and a focus on higher-end products. The company's strong past growth, with net sales rising from ₹2,630.24 crore in FY19 to ₹17,134.61 crore in FY25, supports this positive view.
Analysts observe that while earnings forecasts have been lowered, overall sentiment has improved recently, with average price targets suggesting significant room for growth. The company's finances are strong, with a healthy net debt-to-equity ratio of 37.8% and operating cash flow comfortably covering debt. However, investors will watch closely how the consolidation strategy is executed in Zudio and the company's ability to boost same-store sales amid a changing competitive market.