Trent's weak Q1 update may keep growth expectations under pressure

Trent's Q1FY27 business update fell short of Street expectations on revenue growth and store additions, raising concerns over valuations despite continued expansion

The Q1FY27 business update from Trent, which missed revenue growth estimates considerably, disappointed the Street.

 

Revenue growth for the standalone business was 19 per cent year-on-year (Y-o-Y), around 150-200 basis points (bps) below consensus estimates.

 

Store additions were also low with Westside adding one store while Zudio added 19 and other fashion format stores added 6 net stores.

 

Given accelerated store addition guidance for FY27, this is a monitorable number.

 

Analysts calculated that Q1 revenue per square feet would have reduced by 5-7 per cent Y-o-Y. Comparable players like VMart and Style Bazaar, among others, seem to have witnessed positive growth on this metric in Q1.

 

The Q1 standalone revenue grew 19 per cent Y-o-Y, similar to 20 per cent growth reported in Q4. Store expansion pace moderated. The Q1 standalone operating profit margin may improve somewhat or remain flat quarter-on-quarter (Q-o-Q) compared to 18.6 per cent per cent margin in Q4.

 

Trent’s Q1 standalone revenue stood at ₹5,670 crore. Revenue growth was primarily driven by a 26 per cent Y-o-Y increase in store count, with revenue per store declining 5 per cent.

 

The total store additions were net 26 stores in Q1FY27, bringing total fashion store count to 1,312 (up 26 per cent Y-o-Y). Westside added one store, with store count at 301, up 21 per cent Y-o-Y. Zudio added 19 in Q1, reaching 982 stores, up 28 per cent Y-o-Y.

 

The count for other fashion-format stores increased by net 6 Q-o-Q, to 29 which is flat Y-o-Y.

 

Given the past record of strong revenue and earnings growth, Trent may now be looking at stabilising at a revenue growth rate of around 20 per cent, unless there’s a big jump in urban consumption patterns. That seems unlikely in the short-run.

 

An upside could come from reducing losses in non-fashion (Star) and lower investments in non-fashion, or squeezing out higher margins.

 

But the grocery business has high competitive intensity, and Trent cannot turn away from non-fashion without a big change in its strategic direction.

 

The 19 per cent Y-o-Y sales growth in Q1 comes on a relatively soft base of 20 per cent growth in Q1FY26.

 

Same store sales growth (SSSG) also seems to have been tepid, given the significant store additions in FY26 and may be similar to low-single-digit as was the case in Q4FY26.

 

Other apparel retailers have similar SSSG trends in Q1, going by business updates from other players. Conservative analysts will be looking at 19-20 per cent growth to be maintained, with the downside risks more apparent than upside. This is because consensus expectations may be higher and lead to more selloffs.

 

Seasonally, Q1 is usually weak for store additions. In FY26, Westside and Zudio added a net 52 and net 198 stores respectively (16 Westside, 220 Zudio in FY25).

 

Given the possible cannibalisation, and likely lower revenue per store from new store expansions in Tier-II and III cities, SSSG and revenue/square feet expectations may be toned down. 

 

Trent is net debt free and holds cash valued at ₹110 per share on the balance sheet. The assorted businesses of the company are in different stages of growth, profitability, and scale, which make it harder to set valuations.

 

The standalone entity may see a lower growth trend if revenue growth falls to around 20 per cent in the medium-term versus 39 per cent annual growth rate for FY20-FY25.

 

Star currently has significantly lower profitability than DMart, which is a comparable business and presumably be valued at lower enterprise value to operating profit. And, Zara could be valued at buyback price.

 

It is hard to judge what the pace of discretionary spending on fashion will be, since consumer sentiment has a relationship with per capita income.

 

Per capita varies considerably across metros, Tier-II and III cities and different regions. If Star also improves growth and profitability in what is a highly-competitive segment, that could be an upside.

 

The stock saw a big selloff on the update. Adjusted for the 1:2 bonus in early June, the stock had rallied over 20 per cent in the past four weeks before the update.

 

The correction has knocked off 12.65 per cent of the share price in one session.