The December quarter profit at Trent Ltd, the retail arm of the Tata group that runs the Westside chain of stores, fell even though sales rose 18.34% as higher costs of doing business eroded margins, the company said.
Sales rose to Rs144.16 crore, for the quarter from Rs121.82 crore a year ago, but net profit fell 4.73% to Rs10.2 crore from Rs10.71 crore a year ago.
The dent in Trent’s profits, in the face of rising revenues, comes in what analysts say is typically the strongest quarter for retailers as shoppers spend more during Diwali, Christmas and new year, which fall in this period. While festive shopping yields better results for retailers, most retailers are getting hit by rising rental costs, increased competition and a growing wage bill. This trend of higher sales and lower profit margins could well be an industry trend as more retail results come in, analysts say.
Trent also runs a supermarket chain called Star India Bazaar and a bookstore chain called Landmark. Results released on Friday indicated that margins had been dented by staff costs, which had gone up an entire percentage point as a proportion of sales, while advertising costs had gone up 2.97 percentage points and other expenses, which includes rental costs, had risen 4.40 percentage points.
Other retailers that report earnings next week may well face similar issues.
In a recent report Merrill Lynchsaid it expects Pantaloon Retail India Ltd, India’s listed retailer, to face increased competition from new entrants in the retail space, which is “likely to sustain pressure on rent and salary cost, which means margins are likely to remain subdued.” Even for Shoppers’ Stop Ltd, which runs a department store chain, a book store chain, a cosmetics chain and a childrens’ store chain, the report said margins are likely to be subdued for two to three years because of increasing salary and rental costs and because the company will have to see through a gestation period for its newly opened stores. Merrill has put a sell rating on both Shoppers’ Stop and Pantaloon.
However, the report added that while increased power costs, store opening delays and investments in new store formats had affected Shoppers’ Stop margins over the last two quarters, the firm’s emphasis on selling higher end, niche products could start paying off.
Other analysts say Pantaloon’s strategy of securing real estate early on and getting into non-retail business such as mall management will shield it from margin pressures. Hemant Patel, a retail analyst, at Enam Securities, a brokerage said he expects the firm’s revenues to grow by around 66% and net profit by around 80- 90%. “I do not expect any margin pressure at Pantaloon,” he said. Pantaloon will announce results on 22 January.