Trent stock again trending with investors as growth visibility improves

Well-placed in the apparel retailing market to benefit from the macro recovery, say analysts

Shares of retail major Trent are up 39 per cent in the past one month against an under 3 per cent gain for the BSE200 index during the same period.
 
Improving consumer sentiment, continued store expansion, and a superior balance sheet make it the best-placed to benefit from the underlying macro recovery, say analysts.
 
The performance of Trent, which operates retail chains like Westside and Star Bazaar, surprised the Street positively in the October-December (Q3) period also. Revenues at Rs 725 crore recovered to near 80 per cent of pre-Covid levels, aided by a further easing of lockdown restrictions, strong festive-led demand, and continued traction in online sales.
 
“Despite delayed store openings, Westside revenues touched 78 per cent of pre-Covid levels and look promising in our view. Back-end calculations suggest that Zudio (another brand) revenues would have crossed last year levels with minor growth,” said Vikas Jain, research analyst at Equirus Securities.
 
According to the management, the revenue trajectory remained strong even in January, as full price merchandise sales exceeded previous year levels — both in volume and value terms.
 
The key highlight of the quarter, however, was the healthy expansion in profit margins. Even after adjusting for one-offs, gross margins expanded by 380 bps over the previous year to 54.4 per cent — the highest since Q3FY18 — aided by lower discounting and overall tight cost control. Consequently, Ebitda margins also improved sharply.

 
While costs have started to normalise, analysts say some of these savings are structural in nature and should sustain, thereby aiding margins.
 
Trent is also on track with its plans of expanding its retail footprint and indicated that its pace of store expansion will not be affected by near-term headwinds.
 
“Trent has accelerated its store expansions meaningfully across all three fashion formats (Westside, Zudio, and Utsa), adding about 50 per cent of their 250 fashion stores in the last two years. While the pace of store roll-outs in FY21 would get hit and may miss the ambitious intent of management, we expect it to recover to pre-Covid pace in FY22,” said analysts at Ambit Capital.
 
During the first nine months of FY21, the company opened 28 new stores.
 
In this backdrop, most analysts have raised their earnings and target price estimates for the stock.
 
However, with the sharp appreciation in the share price, the price-earnings valuations of 70 (based on FY22 estimated earnings) have turned rich. Investors may, therefore, want to accumulate the stock on dips.