Home > Markets > Mark To Market > Retailer revenues remain steady, but margin pressures likely to persist

Retailers’ summer sales have been mixed. Future Lifestyle Fashions Ltd (FLF) and Trent Ltd continued to see festival vibes of the December quarter cheer in the March quarter. FLF and Trent reported robust year-on-year revenue growth of 30.1% and 26.4%, respectively, for the March quarter.

But Shoppers Stop Ltd didn’t see goods fly off the shelves just as fast, and March revenues dipped 6.9% from a year ago.

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Interestingly, there is no broad-based evidence of contraction in retail spending. Consumer spending trends are still positive, at least in the lifestyle and discretionary space. However, Ebitda margins have been marginally tight for a few retailers as they push for growth. FLF’s Ebitda margins shrank slightly to 8.44% from 9.04%, while Trent saw an even smaller hit to 5.04% from 5.06% a year ago. Ebitda is earnings before interest, taxes, depreciation and amortization.

Shoppers Stop saw its Ebitda margins improve to 7.4% from 6.06% in the same period, thanks to big savings in purchasing cost. However, higher taxes pulled the profit down 44%. Analysts expect growth to remain steady. “Management for FY20, indicated LTL (like-to-like) and overall growth to be in the mid high-single digit and mid-double digit, while it guided gross and Ebitda margin improvement of 40-50 bps (basis points) and 80-100 bps, respectively," said JM Financial Services Ltd in a note.

Meanwhile, Trent’s expansion strategy in select markets has been paying off. It notched up 668.7 crore revenue in the March quarter, up 26.4% year-on-year. What’s interesting is that revenue growth has been the highest in the past four quarters. Also, same-store sales growth (SSSG) at Westside has been a robust 9%. Analysts expect SSSG to continue in the coming quarters. Overall, stand-alone margins have declined 0.72 percentage point from a year ago, owing to some less margin-friendly formats such as Zudio.

FLF’s brand strategy helped the company clock decent sales growth. SSSG at Central, Brand Factory and FLF stores have been 7%, 13% and 9%, respectively, for the March quarter. Five more Brand Factory stores were opened in the fourth quarter, aiding revenue growth. “Improving Brand Factory store maturity would drive improvement in BF and overall margins going ahead. FLF continues to rationalise its brands store network and net closed 27 stores during the year, taking the store count to 202 stores," said CLSA India in a note.

However, investors in retailing stocks need to monitor consumer sentiments closely. The threat from online firms continues to remain high for apparel and lifestyle retailers. This is expected to keep margins in check. To top it, stock valuations, particularly for apparel retailers, are trading at stiff prices. Trent is trading at a price-to-earnings (P-E) multiple of 57.65, as per Bloomberg’s one-year forward consensus estimates, and FLF is at a P-E of 41.4 times. Shoppers Stop’s forward P-E has contracted to 30.3 times lately, but it may be still out of reach for most investors.

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