Aggressive expansion, private labels to power Trent
Record store additions and a larger share of high-margin private label sales to boost earnings
The share price of domestic retailer Trent has gained about 14 per cent since the start of the month on expectations that healthy store addition in Westside, improving profitability at Zara and restructuring of the Star Market format will reflect positively on the company’s FY19 performance. Some of the gains from its operations will be reflected in the June quarter numbers itself, with benefits coming both from robust revenue growth due to higher same-store sales growth (SSSG) and margin expansion on the closure of lossmaking stores. SSSG reflects the sales performance of stores in operations for at least a year, and hence is a good indicator of a company’s revenue performance. Given the outlook, analysts believe long-term investors could consider the stock on declines.
Strong growth
The top line for the June quarter as well as the fiscal year 2018-19 will be led by the flagship Westside stores. Westside registered a strong 20 per cent growth in FY18, its highest since FY12, led by a steady increase in same-store sales and rapid new store additions. Refurbishment of 11 Westside stores as well as good demand translated into a 38 per cent growth in footfalls to 36.1 million in the last year. Prior to the sharp surge in footfalls in FY18, the metric stood in the range of 24-26 million visitors between FY14-17. The company added a record 18 stores in the fiscal signalling aggressive expansion. Brokerages believe that the new store openings will go up from the current levels as the company hikes its number of Westside store from the current 125 to 165 by the end by FY20, adding an average of 20 stores each year. And this would ensure that the top line continues to grow at a brisk pace.
Private labels: Moremargins
The other area which differentiates West side from other retailers is the high level of private labels (inhouse brands) in the portfolio mix. The proportion of private label merchandise to overall sales has steadily increased from 83 per cent in FY14 to 96 per cent in FY18. Increasing mix of private levels is expected to rub off positively on profitability. Analysts believe that the Westside format will be able to grow its revenues and profits by 17-22 per cent, while margins too are expected to improve to the low to mid-teens range. Standalone margins in FY18 came in at 9.7 per cent up 260 basis points over FY17.
Joint ventures rebounding
Inditex Trent India, its joint venture with Spain’s Inditex group, which operates stores under the Zara brand, has shown a significant improvement in margins which have expanded by 440 basis points to 14 per cent in FY18. Same-store sales for the brand is also strong as revenues grew 21 per cent year-on-year, despite no addition in stores. For Trent Hypermarket (a joint venture with Tesco), operating Star format stores, the company is recalibrating the size of the store and has chalked out a strategy to focus on medium format stores of 5,000 to 10,000 square feet. While the venture’s operating loss widened in the last fiscal even as the company shut some loss-making stores, analysts at ICICI Securities believe that rightsizing of store model, along with enhanced private label share would improve the profitability of the joint venture. Prospects for Zudio, the value fashion apparel business are also bright with the company looking at scaling up the operations, both through exclusive stores and shop-in-shop format. This could become a key growth driver for the company going ahead.
Valuations
While valuations of the stock at 32 times its enterprise value to operating profit on FY20 numbers are expensive, analysts at Spark Capital say that in addition to the strong growth outlook, industryleading working capital management and a healthy balance sheet alongside entrenched brand equity add comfort to its valuation. Investors can look at the stock on dips.