Robust growth to continue for Aditya Birla Fashion Retail and Trent

Steady same-store sales growth and improving margins to help sustain premium valuations

Even as the performance of some retailers was affected by the slowdown, two apparel-focussed companies have bucked the trend in the December quarter (Q3). Trent and Aditya Birla Fashion Retail (ABFRL) have posted numbers which were ahead of brokerage estimates.
 
An analyst at a domestic brokerage believes that the outperformance is because of their ability to expand without taking a hit on profitability, which has been the case with some other retailers. This, coupled with good working capital management, consistent execution, and sound balance sheet, keeps them ahead, he adds. It is not a surprise then that the two have added more than a fifth to their market value after the results were declared a week ago.
 
The immediate trigger for the stocks was the Q3 performance. Led by strong same-store sales (SSS) growth and expansion, revenues for Trent were up 32 per cent year-on-year (YoY). This is the third consecutive quarter of 30 per cent or more growth for the company. Aliasgar Shakir and Suhel Shaikh of Motilal Oswal Financial Services say that the 13-35 per cent beat on operating profit/profit before tax with a SSS growth of 10 per cent comes at a time when other retailers are facing the brunt of the slowing consumer spends. This growth was led by Trent’s flagship unit, Westside, which accounts for 85 per cent of revenues. Revenue growth for this unit came in at 22 per cent, with new store growth slightly more than SSS growth. Brokerages say that the company’s SSS growth for first 9 months of FY20 at 13 per cent is the highest across listed retailers. Analysts believe that the growth trends are expected to remain healthy, given that over 80 per cent of Westside’s sales are on a full price basis (not discounted) and a higher share of private label sales, which fetch better margins, along with strong store addition. The company plans to add 105 stores over the FY19-22 period.

 
The bigger catalyst for Trent is its value-focused store, Zudio. Analysts believe that given the smaller size of the store, the company is able to expand this format faster than the Westside format. For Q3, analysts estimate Zudio’s revenue to have grown two times to Rs 114 crore. The share to standalone revenues is at 13 per cent, as compared to 5 per cent over the year-ago quarter. Given the target of adding 250 Zudio stores by FY22, it could see its revenue contribution rise to over a third.
 
ABFRL, too, had a strong quarter. Despite liquidity pressures, which impacted the wholesale channel, the company posted 12 per cent YoY revenue growth. The company indicated that early severe winters and a strong wedding season led to higher consumer spends. This, coupled with aggressive festival promotions and e-commerce penetration, helped boost growth. While Madura (lifestyle brands) reported SSS growth of 15 per cent, the same for Pantaloons was 5 per cent on a high base of 17 per cent. For the Madura or Lifestyle brand division (Allen Solly, Van Heusen, Louis Phillipe, Peter England), in addition to the core men’s portfolio, growth was led by category expansion with women’s and kids wear growing by 21-35 per cent.
 
Traction in the Pantaloons format has helped expand margins in this segment to its highest level of 10.1 per cent, over 90 basis points, as compared to a year ago. Even as it has expanded, there has been a steady uptick in margins for Pantaloons, from 4 per cent in FY15 to 9 per cent in FY20 (year-to-date). Sustained focus on fresh merchandise, controlled fixed overheads, and higher promotional spends led to better results for Pantaloons. The overall margin would have been higher but for the lifestyle segment because of the shift in channel mix to retail. Madura, which has over 1,900 outlets — including exclusive outlets, premium multi-brand, and department stores — is looking at a higher number of owned stores, given the challenges in the traditional channel.
 
ABFRL reported its highest-ever store addition across formats in a quarter at 150 and is looking to aggressively expand presence. It plans to increase Pantaloons store-count from 343 now to 433 over the next couple of years. Though debt for ABFRL at Rs 2,200 crore is on the higher side, analysts at Emkay believe that stronger cash flows and steady capex should result in lower debt.
 
While both stocks are trading at 70-80 times one-year forward estimates, analysts believe they deserve a premium, given steady growth, higher margins, and robust execution.