Retail major Trent Ltd. maintained its strong performance in the June quarter (Q1F424), with a 53.5% year-on-year (YoY) surge in revenue to ₹2,536 crore, far exceeding analysts’ expectations. Note that, this rise comes despite a slowdown in discretionary consumption, and was led by a 12% growth in same store sales in Trent’s fashion concepts – Westside and Zudio. Westside is Trent’s flagship format, while Zudio is the value-fashion concept.
“New concepts in ethnic wear and inner-wear may keep the revenue trajectory higher for longer,” said analysts at Kotak Institutional Equities in a report on 10 August. Kotak has raised FY2024-26 revenue forecast by 11-32% on account of the strong Q1 performance and sustained growth momentum.
This robust outlook has triggered a surge in investor sentiment, pushing up Trent shares by over 10% within the past 48 hours. On Thursday, the company’s shares touched a 52-week high of ₹1,894.40 apiece on Thursday.
However, despite the strong revenue growth, Trent’s margin performance leaves a lot to be desired. In the June quarter, the company’s gross margin dipped a stark 479 basis points YoY, to 44.5%. This sharp drop is likely due to an increasing mix of Zudio, which has a relatively lower margin profile. Further, an increase in rental expenses added to the woes. As such, Kotak analysts have cut earnings per share estimates by 3-16% for FY2024-26 on account of strong store addition expectations.
In this backdrop, one needs to keep an eye on the pace of store additions. In Q1, Trent added seven Westside and 40 Zudio stores. As things stand, Zudio stores formed about 61% of total count as of end of June. “Increasing franchise of Zudio is a watch out and clearly seems to be altering the capex intensity/return profile of the business,” said analysts at Nuvama Research in a report on 9 August.
To be sure, shares of Trent have risen by 44% in the last one year. “Overall, we remain optimistic about Trent’s future growth potential. However, we believe that a majority of the growth prospects are already priced in for the short term,” said analysts at Antique Stock Broking in a report on 9 August. The broking firm has a Hold rating on the Trent stock.
“We will monitor how the expansion trajectory and profitability pans out in the upcoming quarters, which will be a major trigger for any re-rating,” added the Antique report.