Improving prospects for Trent

Westside will contribute to sales growth; lower losses at Star Bazaar will improve consolidated profit

The Trent stock has risen 40 per cent over the past three months. The company plans to significantly accelerate the addition of Westside outlets and reduce losses at its hypermarket chain, Star Bazaar, are key reasons for the Street’s bullishness. The company, currently has 95 Westside stores, plans to add 25 new stores in FY17.

The robust store addition target comes on the back of consistent same-store-sales growth over the past eight-nine quarters, largely on the back of strong portfolio of own brands at attractive price points. About 90 per cent of Westside’s revenues come from private labels (own brands), mostly from the apparel segment. Abhishek Ranganathan of Ambit Capital believes there is scope to add stores in the existing 58 cities as well as new cities, given the pricing of the format, which is at a 30-40 per cent discount to national brands.

The company has been conservative in its store additions adding between 7-10 new stores every year over the last four fiscal years. The new additions going ahead are expected to improve sales visibility for Westside, which accounts for over half of Trent’s overall sales and operating profits. While sales growth for Westside has been 15-17 per cent over FY14-16, same-store-sales growth has been a healthy 8-12 per cent in that period. Even in recent quarters of March and June, the company’s sales grew 14 per cent and same-store-sales grew 8 per cent, which is better than what its peers have reported. Despite the scaling up of new stores, better product portfolio has helped it increase its sales per square feet from Rs 7,217 in FY14 to Rs 8,425 in FY16.

The company is also expanding its Star Bazaar (hypermarket format) stores, which retails multi-brand food and grocery products. The format, which is run in a joint venture with Tesco, saw its losses reduce 18 per cent to Rs 60 crore in FY16 due to rationalisation of employee costs on revenues of Rs 849 crore. Same-store-sales growth came in at 9.2 per cent in FY16. The company added only eight stores during FY12-15. However, it added 26 stores in FY16 and 12 stores in the June quarter of FY17. The company expected to add about 30 over the next four years. The management has guided for the joint venture to break-even by FY19, on the back of smaller stores and scale efficiencies.

The stock currently trades at 47.8 times Trent’s FY17 earnings estimates. Given the recent run-up, investors can await a better opportunity to take exposure to the stock.