Large organized retail players have successfully overcome the recessionary phase that gripped the sector last year. The past few quarters have seen a steady improvement in their performance, with the December quarter seeing substantial growth. While an improvement in demand is the key reason, some credit also goes to a low base effect and festival season impact.
Improving gross domestic product (GDP) growth augurs well for the sector, as higher disposable income levels should see it gradually returning to the growth levels seen a few years ago. This time, however, retailers are likely to stick to a more robust model, instead of ramping up too fast, and the lagged revival of the commercial real estate sector should give retailers better bargaining power in negotiating rentals with developers for new properties.
In the December quarter, most retailers saw a return to sales growth, partly due to new stores that have been opened. Same-store sales are a more reliable parameter, as they reflect sustainable sales growth, but the opening of new stores in the same city, or even area, is leading to a cannibalization of sales from existing stores.
Graphic: Yogesh Kumar/Mint
Pantaloon Retail (India) Ltd’s sales rose 25.4% to Rs1,913 crore but its same-store sales grew by 6.9% in its value retailing business and 12% in the lifestyle business. In the case of Shopper’s Stop Ltd, its department store sales grew 11.1% but same-store sales grew by only 2.1%. Trent Ltd’s sales rose 23% in the December quarter, and it opened six new Westside stores and three under other formats in the first nine months of the current fiscal.
While sales growth is showing encouraging trends, so is profitability.
Pantaloon’s operating margins were only marginally higher at 10.6% compared with the year-ago period. Both Trent and Shopper’s Stop’s operating margins improved by nearly 5 percentage points to 8.2% and 11.8%, respectively. The ability of retailers to sustain current growth and improve profitability, open new stores and fund store expansion efficiently will determine how these companies perform on the bourses. Over a month, Pantaloon’s shares have outperformed the Sensex whereas both Shopper’s Stop and Trent were underperformers.