Investors will watch for sustainable signs of recovery during the festive season, but with consumer cutting discretionary spending, recovery could well be a gradual process
When Trent Ltd announced its March quarter results (Q4FY20) in May, the initial signs of covid-19 disruptions were visible. After all, stand-alone revenue growth had slowed to 8% in Q4FY20 from around 30% in the previous three quarters.
With the lockdown remaining in place for a good part of the June quarter, Q1FY21 results showed a much more pronounced impact of the pandemic crisis. Revenues fell 87% year-on-year to ₹96 crore, below analysts’ estimates. The lockdown forced Trent to close its retail stores for a major part of the quarter.
Trent mainly runs stores across five concepts: Westside, Zudio, Star, Landmark and Utsa; with Westside as the flagship chain.
For the quarter, the extended store closures meant the company had to make incremental provisioning with respect to inventories estimated at more than ₹40 crore. Total input costs declined by 77%, slower than the rate of decline in revenue. Further, employee costs fell at a slower pace of 18%, while other expenses fell by 58%. Clearly, this wasn’t enough to compensate for the collapse in revenue and deteriorated operating leverage. As a result, Trent reported an earnings before interest, taxes, depreciation and amortisation (Ebitda) loss of ₹119 crore.
Negotiations on rentals with landlords led to a savings worth ₹36 crore, and this was recognized in other income. Eventually, net loss came in at ₹139 crore.
So far, in FY21, the company has opened six new stores—four Zudio, one Westside, and one Landmark. Overall, Trent has 163 Westside stores and 80 Zudio stores, and over 90% of these stores have now reopened. However, some restrictions continue to apply at the local level and have adversely impacted performance. “Our channel checks indicate sales are at 40–50% of last year’s sales at the opened stores," said analysts from Motilal Oswal Financial Services Ltd in a report on 14 August.
Going forward, investors will watch for sustainable signs of recovery during the festive season. But with consumers cutting discretionary spending, recovery could well be a gradual process.
Note that Trent shares have staged an impressive recovery from its May lows, increasing as much as 40%. “Due to a rally in stock price, our revised rating on the stock stands as ‘sell’,’" said IDBI Capital Markets and Securities Ltd’s analysts in their June quarter results review note.
Even so, the shares are still about 29% away from their pre-covid high seen in February. Some analysts reckon its medium-to-long term prospects are better. “We believe Trent is likely to emerge stronger when normalcy returns and is better positioned to leverage the huge available opportunity, given its value product offerings and robust balance sheet," wrote ICICI Securities Ltd analysts in a report on 14 August.
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