Trent: Westside outlets, hypermarkets to drive long-term growth

Trent, a Tata Group entity, operates stores such as Westside, Landmark, Zudio, Star Bazaar and Zara. The retail major reported a robust set of numbers in the quarter and fiscal gone by, led by the Westside brand.

Westside’s revenues grew 20 percent year-on-year (YoY) in FY18 on the back of accelerated network augmentation, whereas like-to-like growth was nine percent. Lower discount days, reduction of losses in Landmark outlets and operational efficiencies led to a margin uptick.

Trent’s strategy ahead?

Westside

The management estimates the company’s flagship brand format to sustain 10-11 percent same-store sales growth YoY. Impetus on exclusive brands, higher inventory turns and addition of 20-25 stores per annum (from the present 125 outlets) should enable Westside to contribute substantially to future growth.

Landmark

Toys, stationery, books, technology and sport goods are sold through Trent’s Landmark stores. Going forward, the management aims to undertake cost control initiatives and capitalise on the growth momentum observed in this segment. As a result, the drag on overall margins should reduce.

Zudio

Given the optimistic prospects of Zudio, Trent acquired the same from Trent Hypermarket, a joint-venture of the company, in FY18. Zudio’s value products include apparel, footwear and home accessories. The company will continue expanding its seven-store network to boost topline.

Star Bazaar

Trent’s ‘Star Market’ format has stabilised. Going forward, the management’s focus is on rolling out a wide range of private label merchandise across food, grocery and daily use items. Besides being margin-accretive in the long-run, this could help Trent Hypermarket pare its losses.

Zara

Zara has been a steady performer for Trent because of its brand appeal and ability to tackle competition from other foreign brands. Owing to Zara’s impressive same-store sales growth in recent times, capex is expected to be limited. This may yield better returns on capital invested.

Should investors invest at current levels?

Trent’s JVs witnessed an increase in losses from Rs 8.4 crore (cumulatively) in FY17 to nearly Rs 21.5 crore at the end of FY18. This was mainly attributable to the weak performance of ‘Star’, which is classified under Trent Hypermarket.

Consequently, the effectiveness of store rationalisation steps undertaken through closures or conversions (of ‘Star Daily’ stores to a more sustainable ‘Star Market’ format) will be pivotal in reviving profitability. ‘Star Market’, a mid-sized hypermarket store, is larger than ‘Star Daily’ neighbourhood centres but smaller than ‘Star Bazaar’ outlets.

Tweaks in the Goods and Service Tax (GST) rates/norms caused Zara to pass on the price benefits to consumers, resulting in a one-time inventory write-off in the Inditex JV. It remains to be seen as to how Trent offsets the disadvantage of relatively lower realisations per garment by achieving a higher conversion-to-footfall ratio.

At 41.6 times FY20e earnings, the stock’s valuation doesn’t offer any entry opportunity at current levels. Investors are therefore advised to buy on dips.