Strong festive demand, early EOSS to aid revenue growth – Retail Q3 Preview

What's Buzzing 

Q3FY23 started on a steady note with companies witnessing strong demand offtake during the festive season (Navratri-Diwali). However, demand momentum started waning off during November and December. Certain apparel retailers preponed their end of season sales (EOSS) by ~15 days during mid-December. We expect retail companies in our coverage universe to register double digit revenue growth (~15% excluding D-Mart) in Q3FY23. 

Context 

Titan's jewellery division is expected to register revenue growth to the tune of 11% YoY in Q3FY23 (12% including CaratLane). Prima facie, the growth trajectory appears to have moderated but we believe the growth rate should be viewed in the context of a very strong base of Q3FY22 (the division had recorded 37% YoY growth). On a three-year CAGR basis, revenue growth continues to be impressive at 21%. Watches segment (7% of revenue) reported 14% YoY revenue growth in Q3FY23 on the back of strong traction in the wearables segment. For Avenue Supermarts, consolidated revenues are expected to grow 25% YoY (three-year CAGR: 19%). Revenue/sq ft for D-Mart is expected to improve marginally by 2% YoY to | 9130/sq ft but continues to remain below pre-Covid levels (Q3FY20: Rs 9700/sq ft). Among apparel players, Trent continues to outperform. We expect it to report 40% YoY revenue growth (three-year CAGR: 29%). For ABFRL, we expect Lifestyle brands to register 16% YoY growth whereas Pantaloons division is expected to register subdued growth of ~9%. We expect Bata to record 11% revenue growth with sneaker category (~20% revenues) expected to outperform formal category. For V-Mart (excluding Unlimited format), we bake in revenue per store at Rs 2.1 crore (that is ~90% of pre-Covid levels). Overall revenues for V-Mart are expected to increase 19% YoY driven by healthy store additions. 

Our Perspective 

Despite a challenging environment, retailers continued calibrated expansion of their store network with opening of 15 V-Mart stores, 22 Titan's Jewellery stores, 48 Titan watches and wearable stores, 25 Zudio stores, 40+ Bata Franchise stores and four D-Mart stores. With softening of key raw material prices, we expect companies to undertake price cuts of 3-5% on a sequential basis (but remain elevated YoY). EBITDA margins are expected to remain under pressure mainly due to higher operating expenses on the back of new store opening and investments in marketing spends. Hence, we anticipate EBITDA margins will decline 140 bps YoY to 12.9%. Retail companies’ stock prices have corrected from their three-month peak to factor in the weakness in Q3FY23 margin profile. We believe softening of margin profile is transitionary and over the longer term the sector will continue to witness strong sustained growth in revenues and gradual improvement in margin profile, which would enable retail companies to maintain premium valuation multiple, going ahead.