Trent’s dapper growth is the showstopper, but stock’s pricey
At a time when many consumer-focused companies are finding it hard to lift their revenue growth adequately, Trent Ltd saw another stellar quarter. The retailer’s September quarter (Q2FY24) standalone revenue rose by 59% year-on-year and 37% on a four-year compound annual growth rate basis to ₹2,891 crore, beating estimates.
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Trent’s fashion concepts clocked 10% same store sales growth (SSSG) year-on-year. This is the highest in the sector versus -1% to -18% SSSG for most apparel companies in Q2, notes ICICI Securities. SSSG is a measure of comparable growth over a period. Trent’s flagship format is Westside and Zudio is its value retail format. The company has been rapidly adding stores in its Zudio format, a factor that has been driving overall growth for some time now. Last quarter, Trent added 27 Zudio and six Westside stores, taking the total count to 411 and 223, respectively. Further, Trent’s emerging categories including beauty and personal care, innerwear and footwear continued to gain traction. For the past two quarters, emerging categories have contributed over 19% of standalone revenue.
But rising share of revenue from Zudio, which has a relatively low margin profile, is said to have weighed on the gross margin. In Q2, Trent’s gross margin contracted year-on-year by 230 basis points (bps) to 44.7%, marking the eighth straight quarter of drop in the measure. Even so, operating leverage benefits in Q2 led to 119 bps expansion in Ebitda margin to 15.9%. This meant Ebitda rose by 72% last quarter. Ebitda is earnings before interest, taxes, depreciation, and amortization.
Meanwhile, Trent’s Star Bazaar format, too, did well in Q2, recording 30% growth. “Differentiated SKUs and private label template is working out well in this format too,” according to ICICI Securities.
Trent’s investors are thrilled to say the least, taking the stock up almost 10% in the past two days in reaction to the Q2 results. With this, the stock has gained a whopping 81% so far in 2023. But herein lies the hiccup, too, as valuations have become pricier. “At current valuation, we revise our rating downward to Add,” said ICICI Securities’ analysts in a report on 8 November.
If Trent continues to deliver on revenue growth, then investors will have nothing to complain about. Here, robust store additions would aid growth. “New concepts being seeded by Trent can keep revenue trajectory higher for longer,” said a report by Kotak Institutional Equities. At some point in future, however, growth would slow down as the base becomes high. This, in turn, could cap the gains in the stock.
