Avenue Supermarts slips 5% on subdued Q4 operational performance

Shares of Avenue Supermarts, which owns and operates D-Mart stores, dipped 5 per cent to Rs 3,501 on the BSE in Monday’s intra-day trade after the company reported a subdued operational performance with profitability coming below market expectation in January-March quarter (Q4FY23).

The company’s reported earnings before interest, taxes, depreciation, and amortization (EBITDA) margin contracted 110 bps to 7.3 per cent in Q4FY23 as compared to 8.4 per cent in Q4FY22. Absolute EBITDA grew by mere 4 per cent YoY to Rs 771 crore.

Lower consumer spending in General Merchandise and Apparel continues and has impacted the margin mix downwards, the company said.

Avenue Supermarts reported consolidated revenue growth of 20.6 per cent year-on-year (YoY) to Rs 10,594 crore. Consolidated net profit grew 7.81 per cent to Rs 460.10 crore, as against Rs 426.75 crore in a year ago quarter.

D-Mart is a national supermarket chain that offers customers a range of home and personal products under one roof. The company offers a wide range of products with a focus on Foods, Non-Foods (FMCG) and General Merchandise & Apparel product categories.

Avenue Supermarts’ consolidated profit after tax grew 8 per cent YoY (25 per cent miss), despite a 21 per cent YoY increase in revenue, driven by the expansion in the company’s footprint. This was due to weak demand in the margin accretive discretionary category, resulting in a 100bp drop in gross margin. Additionally, store productivity remained flat with no increase in revenue/sqft, likely due to larger store sizes, Motilal Oswal Financial Services said in its result update.

While the robust store adds, coupled with strong cost efficiencies, could play a key role in growth, the near-term challenges within the discretionary segment and rich valuations could be the key monitorables for the company, the brokerage firm added.

Though the business scenario has normalised the general merchandise and apparel share continues to be lower than pre-covid level. Heightened competitive intensity and inflationary stress is probably curtailing the growth of discretionary products and resulting in the company reporting subdued margin, ICICI Securities said in its note.

Over the last three years, the company has expanded its square feet addition by an impressive three-year CAGR of ~ 22 per cent with average size of new stores being bigger (~55000+ vs. average 35000 sq ft).

The new larger stores which were designed to provide more space for discretionary products have not been able to deliver higher growth of discretionary products inspite of the operating business scenario normalising in the last few quarters. Hence, the revenue throughput per square ft has remained below pre-Covid levels. The critical factors for an improved operational performance would be increase in revenue per square feet and enhancement in the gross margins, the brokerage firm added.