Markets
Fashion forward: Trent captivates with zesty Zudio expansion
Summary
- While it is vital to monitor if the strong revenue and margin trajectory continues, investors would do well to note that Trent’s outperformance has led to a whopping 211% surge in the company’s share price in the past year.
Just when you thought Trent Ltd had done its best, the apparel retailer surprised investors again. The swift expansion of Zudio, the Tata group company's budget-friendly fashion line, continues to be a crucial catalyst for its impressive revenue surge over recent quarters, with the December quarter (Q3FY24) maintaining this trend.
Last quarter, Trent added four Westside stores and 49 Zudio outlets, enhancing its market presence. “Zudio per-square foot revenue is about 1.5 times that of Westside and overall revenue pool is 1.3 times, on our calculations," analysts at Jefferies India said in a report dated 7 February.
As of 31 December, Zudio’s store count stood at 460, twice that of Westside, which is Trent’s other crucial fashion concept. This lifted Trent’s standalone revenue in Q3 by 52.5% year-on-year to ₹3312 crore on the back of 10% like-for-like growth across its fashion concepts and store additions.
On a four-year compound annual growth rate (CAGR) basis, Trent’s revenue grew close to 40%, which is nothing to sneeze at.
Investors are thrilled, evidenced by the 27% jump in Trent’s share price in the past two days following Q3 results. “Admittedly, we underestimated the ramp-up in Zudio as well as management execution," said Jefferies’ analysts. The broking firm has sharply raised its earnings per share (EPS) forecasts again. Building in higher growth and margin, Jefferies has raised EPS estimates for Trent by 17-21% over FY24-26.
Trent's remarkable performance comes at a time when the demand for discretionary products is still muted. “We believe that superior merchandising and value proposition to customers are driving growth that continues to defy the overall weakness in discretionary consumption trends," said analysts at Kotak Institutional Equities in a report on 8 February.
It also helps that Q3 margin performance has been decent. After several quarters of gross margin contraction, the metric rose 57 basis points year-on-year to nearly 46% amid a growing share of Zudio in the overall business that offers lower margins compared to Westside.
Further, Trent’s Ebit margin (pre-Ind AS) rose by 450 basis points year-on-year to 13%. Ebit is earnings before interest and tax. On better-than-expected margin performance, Kotak noted that it is possible that an increasing number of stores are being added on a franchisee format.
Going ahead, it is vital to monitor if the strong revenue and margin trajectory continues amid store expansion. Emerging categories such as beauty and personal care, innerwear and footwear which form over 19% of Trent’s revenue, may fuel revenue growth.
Meanwhile, Trent’s supermarket business Star is seeing strong customer traction with growing sales densities. This business is a 50:50 joint venture between Trent and Tesco Plc UK. Star saw revenue growth of over 26% in Q3 almost entirely driven by like-for-like growth. Further, an increase in the share of own brands to 69% in Q3 versus 57% in the same period last year augurs well for profitability.
To be sure, Trent’s outperformance has led to a whopping 211% surge in the company’s share price in the past year. This also means valuations are rich.
“Trent’s disciplined working capital management and well-capitalized balance sheet do not allow us to fault the business," said analysts at HDFC Securities in a report on 8 February. “However, its heady valuation (about 104x FY26 price-to-earnings multiple) restrains us from becoming constructive on the stock," the brokerage firm said while maintaining a ‘sell’ rating on the stock.
