Sales recovery, margin expansion mark Q3 revival for retail major Trent

The pace of recovery and margin expansion for retail major Trent in the December quarter got a thumbs up from the Street. The Trent stock was up 3 per cent in trade on Friday on expectations that Q3 performance will gather momentum in the March quarter leading to lower losses for FY21 than predicted earlier.
 

The key takeaway was the sharp recovery in revenues driven by both physical retail as well as digital format. Sales, which were down 45-87 per cent in the last two quarters, recovered posting a 17 per cent decline in the December quarter.
 

Easing of lockdown restrictions, festival demand and jump in online sales aided the sales performance. While online sales were up 80 per cent, sales at Westside recovered to 78 per cent; like for like sales for Westside format are still down 26 per cent.
 

HDFC Securities’ Jay Gandhi believes that the better than expected sales recovery was a function of growth led by value format stores, Zudio. The store expansion is also driven by the value format with the company adding 12 Zudio stores in the quarter out of a total of 17, including Westside and Landmark. Similarly for FY21 year-to-date, 20 of the 28 new stores are in the Zudio format.

Despite the contribution from Zudio (lower profitability compared to Westside) going up, the margin performance continues to improve. Adjusted for inventory write back, gross margins expanded 381 basis points y-o-y, the highest in the last three years, according to analysts at IDBI Capital.

However, given that the reported operating level margin expansion was lower than gross margins, some of the costs which were curtailed during the pandemic are making a comeback.
 

What should be positive from the margin perspective are sales trends highlighted by the company, especially the traction for full price merchandise, which was in line with year ago levels both in quantity and value terms.
 

While analysts have revised their estimates for the current financial year upwards after Q3 performance, the stock may continue to underperform the benchmarks going ahead. While the Sensex returns have stood at 35 per cent over the last six months, gains for the Trent stock is at 23 per cent. The stock could hit the valuation barrier given that at current levels it is trading at over 30 times its FY23 enterprise value to operating profit. Investors should await sharp corrections and better entry points into the stock.