Trent's Q2 update disappointed Street, but outlook still bullish

Trent’s update for July-September quarter (Q2) of FY26 led to some selling, with the fashion and lifestyle retailer reporting year-on-year (Y-o-Y) sales growth of 17 per cent, which was a moderation from 20 per cent Y-o-Y sales growth reported in the April-June quarter (Q1) of FY26. Growth in Q1FY26 itself had slowed from earlier 25 per cent due to one-off factors such as the early monsoon, drop in footfall during the India-Pakistan conflict, and one-off sourcing disruptions, per management. The further slowdown in Q2 indicates headwinds.

 

Trent’s Y-o-Y store growth accelerated vs Q1. With Westside adding 13 stores, Y-o-Y store growth was 15 per cent in Q2 vs 9 per cent in Q1. Zudio added 40 stores with Y-o-Y store growth of 40 per cent in Q2 vs 37 per cent in Q1. The overall store growth was 32 per cent Y-o-Y in Q2FY26 vs 27 per cent Y-o-Y in Q1. The total is now 806 Zudio and 261 Westside stores. Investors should note that there is a high base effect which tends to underestimate Y-o-Y growth.

 

The moderation in sales growth has come despite store additions. This may indicate like-for-like (LFL) growth of negative single digits (it was positive low single digit growth in Q1FY26). It also implies lower sales throughput in stores in Tier-II+ cities that Zudio entered in the last 12 months.

 

Standalone revenue grew 17.4 per cent Y-o-Y to ₹5,000 crore. Most new Westside stores turned operational in September, and would contribute to revenue in coming quarters and sets it up to compete successfully through the medium term. Trent’s focus on Gen-Z through the brand Burnt Toast (BT) could help it tap evolving fashion trends. BT is targeted at Gen-Z consumers with a pricing range of ₹490-₹1,490 and the expansion may be gradual in the near term as aggressive expansion will depend on success. The BT format increased the “other fashion format’s” store count by five quarter-on-quarter (Q-o-Q) to 34. 

 

In the first half (H1) of FY26, revenue grew 18.5 per cent Y-o-Y to ₹10,063 crore. Trent’s revenue grew at compound annual growth rate (CAGR) of 22 per cent from FY16 to FY20, driven by Westside. Post Covid-19, Trent posted revenue CAGR of 63 per cent during FY22-25 with aggressive expansion of Zudio adding 532 net stores. LTL growth was in double digits, resulting in a high base.

 

The implied net of GST revenue is ₹4,740 crore (up 17 per cent Y-o-Y) which is lower than any of the last five or six quarters, probably due to slowing same store sales growth (SSSG) and a high base effect. Revenue per store declined 9 per cent Y-o-Y. Store expansion is the big growth driver given weaker SSSG. GST cuts positively impact a small portion of Trent’s sales and may have a limited impact on near-term revenue growth. GST on apparel priced between ₹1,000-₹2,500 range has been reduced to 5 per cent from 12 per cent earlier. Westside, which will contribute about 35 per cent of Trent’s standalone revenues in FY26, will witness GST benefits, although it may pass on the benefits to consumers. Nearly all of Zudio’s merchandise is priced below ₹1,000 and will not see any change.

 

Operating margin may hold up due to superior employee cost efficiency from measures like RFID implementation. Employee cost savings are being driven by this, as time taken to count apparel etc., is reduced, resulting in better utilisation of employees.

 

The business update has led to downgrades of earnings projections by most analysts who have taken heed of weaker SSSG. This may be offset by cost control measures. The focus on store rollouts, improved profitability, and better return ratios reflects a disciplined approach, which may help Trent to remain ahead in an ultra-competitive segment.

 

According to Bloomberg, four of the seven analysts polled in the last two days are bullish on the stock, two are bearish and one is neutral. Their average one-year target price is ₹5,686.90. The stock, which has been gradually moving down from its 52-week high of ₹8,345.85 seen in October 2024, closed 1.8 per cent down at ₹4,686.40 on Tuesday on the BSE.