Trent's outperformance likely to continue on strong topline momentum

The Trent stock was up sharply after gaining 8.7 per cent in trade on Thursday on the back of a strong top-line performance in the December quarter (Q3FY23). Led by growth across its businesses, the Tata Group-owned retailer yet again outperformed the sector with a reported revenue growth of 61 per cent to ­Rs 2,171.5 crore.

Over a three-year period, the annual revenue growth for the company stands at 36 per cent. The company indicated that Q3 financials were not comparable to year-ago period numbers given the change in profile; Q3FY22 had accounting for rent waivers and reversals relating to inventory provisioning.

A part of the growth was driven by like-for-like (LFL) sales growth of 17 per cent for Westside stores while the rest came from expansion. However, the main growth driver remains its value format Zudio. “While Westside’s growth seems more balanced between same store sales growth (or LFL) and expansion, the big swing in topline is likely a consequence of Zudio’s fast paced scale up. In 9MFY23, Westside and Zudio have added 11 and 93 stores respectively, taking their total store counts to 211 and 326 respectively,” says Jay Gandhi of HDFC Securities. 

The company registered its highest-ever revenues in the quarter partly aided by a 32 per cent growth in online sales which now account for 6 per cent (up 100 basis points over the year ago quarter) of Westside’s revenue. The company also indicated that emerging categories such as beauty and personal care, innerwear and footwear contribution in the December quarter was at 18 per cent of standalone revenue up 300 basis points on a sequential basis. 

Even as the top-line performance exceeded estimates, the company’s margin performance was disappointing. Gross profit margins came in at 45.4 per cent down 586 basis points year-on-year (YoY) and 158 basis points on a sequential basis given the higher online sales mix, tilt towards value fashion with increased share of Zudio in the sales mix, limited price hikes taken to offset inflationary pressures on input cost and reversals of inventory provisioning last year. Gross profit margins were 525 basis points lower than Q3FY20 levels. 

While PhillipCapital Research has revised its revenue estimates for FY23/FY24 over the next couple of years by 1-2 per cent given robust store expansion, they have reduced their profit estimates by 1-8 per cent citing costs associated with new store openings and higher sales mix of Zudio which has an inferior margin profile. It, however, has a ‘buy’ rating (target price of Rs 1,525 a share) given industry leading growth metrics and sturdy balance sheet.

Motilal Oswal Research, however, has maintained its estimates for this year and the next and expects revenues and operating profit to grow by 52-72 per cent over FY22-24 led by continued growth in revenue and 130/35 store additions for Zudio/Westside. It has a buy rating with a target price of Rs 1,700 per share. 

While HDFC Securities is positive about the disciplined working capital management and well-capitalised balance sheet of Trent, it has a sell rating given the heady valuation at 60 times its Dec-24 consolidated enterprise value to operating profit estimates.