Retailers to go on expansion spree amid muted same-store sales growth

Aggressive store additions by listed retailers come amid muted same-store sales growth and pressure on margins in March quarter

Though there were mixed signals on growth in the March quarter, fierce competition from online players and margin pressures, retail majors are expanding aggressively in FY20. Same-store sales growth for most retailers in the March quarter were soft, with growth aided by new store additions. Shoppers Stop, Pantaloons, V-Mart, and Future Lifestyle Fashion’s Central reported same-store sales growth of under 6.5 per cent for the quarter. Analysts at Edelweiss Securities say that apparel retailers clocked softer same-store sales growth on general slowdown and a limited period of sale season. Though grocery companies (Future Retail’s Big Bazaar and Avenue Supermarts’ DMart) reported 14-18 per cent growth, margins across all formats were down up to 260 basis points over the year-ago period.
 
While demand trends are mixed, companies are in an aggressive expansion mode. Recently, TRENT — which owns the Westside chain of stores — announced that it will raise up to Rs 1,550 crore in FY20 to fund its expansion plans.
 
The company indicated that it is witnessing positive traction for its lifestyle retail concepts and consequently, pursuing a substantially accelerated growth programme across the Westside, Zudio and Star formats. The funding programme includes a preferential equity issue of Rs 950 crore to the promoter, Tata Sons, which is expected to be followed by Rs 600 crore of an additional equity issuance either through a qualified institutional placement or rights.
 
After a record number of 20 additions to the Westside format in FY19 as against 18 in FY18, the company is expected to continue the pace of store expansion. In the current financial year, Westside is estimated to add over 22 stores to its FY19 base of 145 stores. The management, according to Bharat Chhoda and Cheragh Sidhwa of ICICI Securities, plans to increase its presence in tier II and tier III cities/towns through the franchise route, which currently comprise about 10 per cent of overall stores. The brokerage expects the company to continue the aggressive addition programme and double the store count from 95 in FY16 to about 190 in FY21. Zudio, TRENT’s value fashion segment, too, added 33 stores in FY19. Analysts at Motilal Oswal Financial Services (MOFSL) believe that the gestation period for the format should be behind it with a healthy scale of 105 stores.

 
The company’s operating profit margins declined 60 basis points in FY19 to 8.7 per cent due to an increase in the share of revenues from the Zudio format, which has a lower gross margin (40 per cent), as compared to Westside where margin at the gross level is 60 per cent. This could continue, both on account of a larger number of Zudio stores and an increase in employee and rental costs.
 
Avenue Supermarts, which runs the DMart retail store chain, had a muted retail expansion — 21 stores in FY19 as compared to 24 in FY18. The company, however, indicated that it is looking at increasing the pace of new store additions in the current financial year. Most analysts expect the company’s current store strength of 176 to increase by at least 24, the most in a year.
 
While revenue growth trends should continue to be strong given the company’s price reduction-volume growth strategy, the worry for the Street is the increase in discounting in food and grocery retail over the last year. Increased competition from both online and offline players and discounting by the company led to a 90 basis points contraction in gross margin in FY19 to 15 per cent. Given competitive pressures and higher costs, analysts expect margin pressures for the sector and the company to stay.
 
Future Retail and ABFRL are also expanding rapidly. While Easyday stores are expected to grow by 36 per cent over the next couple of years to reach 1,500 stores, Pantaloons is expanding its network by 42 per cent to reach 438 stores by FY21.
 
Given the weakness in consumption trends, analysts expect a structural revival in the retail space in the second half of FY20. With pressures on margins and higher costs, investors should await stability in growth and margin trends before taking exposure to the sector.