Growth worries, competitive pressures weigh on Trent stock performance

Elara Securities expects gross margin for the March quarter to come down by 71 basis points quarter-on-quarter and 129 basis points year-on-year due to seasonality

The stock of India’s largest listed pure play retail major Trent was down 14.76 per cent at close on Monday after a fall in revenue growth for the March quarter of 2024-25 (Q4FY25). The sales growth trajectory has been in a declining trend over the last few quarters, which, coupled with falling operational metrics, higher competitive intensity, and expensive valuations, has seen the stock crack about 44 per cent since its 52-week highs in October last year. Despite the correction, the stock has delivered a 21 per cent return, comfortably beating the Nifty 50, which is down 1.5 per cent over this period.

 

While the company’s March quarter revenue growth rate at 28 per cent over the year-ago quarter is expected to be ahead of its peers and comes at a time when the discretionary segment is weak, the trajectory is coming off its peaks. Most brokerages had pegged the growth rate at 36 per cent. After hitting a high of 56 per cent in the June quarter last year, revenue growth has trended down for four consecutive quarters now. Like-for-like growth, which has also been moderating, is expected to be lower than the high single-digit achieved in the December quarter.

 

The declining sales trend, however, comes on a high base as sales growth in each of FY24 quarters was in the 52-59 per cent range.

 

Abhijeet Kundu of Antique Stock Broking says that after delivering strong double-digit like-for-like growth, and aggressively expanding its store network, the high base effect is beginning to moderate Trent’s growth momentum. Given the robust store network and its expansion, Trent is expected to maintain its leadership and outperform peers over the medium-to-long term, says the brokerage, which has maintained its “buy” rating.

 

Trent recently announced that its store count has crossed the 1,000 mark and its brands Westside and Zudio have thus far served 100 million customers across 230 cities. The store count for Zudio at 757 is up 38.9 per cent year-on-year (Y-o-Y) while the number of stores for Westside stands at 248, higher by 6.9 per cent. The company has added 136 net stores (up 29 per cent Y-o-Y) across its fashion formats in Q4FY25, says Motilal Oswal Research, though the bulk of the store additions were back-ended. This could add incremental gains to the growth trajectory in the coming June quarter. 

 

In addition to sales growth, Street will also focus on increased competitive intensity (Reliance Retail) and operational metrics such as revenue per square feet/store additions, which have led to some cuts in operating profit and earnings estimates.

 

Global online fast fashion retailer Shein has re-entered the Indian market (it was banned earlier on account of data security concerns) through a tie-up with Reliance Industries (Retail). While this will lead to higher competition, Shein’s re-entry is subject to strict conditions on control, with all operations/data managed by Reliance Retail where Shein is only a technological partner.

 

Avi Mehta and Anshu Dayani of Macquarie Research believe it would be difficult for Shein to replicate its China production cost advantage with an Indian supply chain. Further, Shein does not have a strong understanding of Indian style sensibilities. These factors lead them to believe that Shein's re-entry is not a significant threat.

 

On the operational front, IIFL Research points out that the recent slowdown in the revenue-per-square-feet trajectory is likely to be driven by a combination of factors, including increased competitive intensity.  While competitive intensity has increased and is likely to have an impact in the short term, analysts led by Sameer Gupta of the brokerage believe that Trent’s business model has been built on multiple strengths, which are difficult to replicate, thereby not allowing it to handle business complexities that increase with scale.  Even after factoring in competitive risks and lower throughput potential in new geographies, Zudio’s revenue per square feet is likely to grow at 4 per cent over FY25-30, driven primarily by a rise in the proportion of mature stores.