Superior industry outperformance positions Zudio as game changer - Trent Q3 result

What’s Buzzing 

Trent reported superlative sales numbers with growth beating our/consensus estimates. Acceptance of Zudio as a value fashion brand has been a game changer for Trent leading to fastest growing apparel company in India. While EBITDA margins came in below our estimates (broadly owing to higher share of Zudio), profitability in absolute terms was higher owing to robust sales growth. 

Context 

Trent’s Q3FY23 revenue print is a strong beat on our estimates. On a slightly favourable base, revenue grew 61% YoY to Rs 2171 crore (I-direct estimate: Rs 1886.9 crore). On a three-year CAGR basis, revenue growth was at an impressive 36%, which is the highest among other lifestyle retailers. On the store addition front, the company has been aggressive on Zudio format with opening of 91 stores in YTDFY23 taking total store count to 326. For Westside, the company has added 11 new stores taking the total store count to 211. Westside format has been performing well with SSSG of 17% in Q3FY23. Back of the envelope calculation suggests Zudio format to have grown ~2.5x with share in revenue increasing significantly from ~30% to 40%+ (share of Zudio format in FY20 was at ~16%). Emerging categories like beauty and personal care, innerwear and home witnessed healthy traction and now contributes ~15% to sales. Gross margins for the quarter declined 590 bps YoY to 45.4% (I-direct estimate: 49%) possibly on account of a sharp rise in share of Zudio format (yields lower gross margins but has superior asset turn). Higher opex cost on account of new store openings resulted in EBITDA margins declined 620 bps YoY to 15.5% (I-direct estimate: 17.9%). The previous quarter also had one-off benefits of rent waivers and reversals relating to inventory provisioning. Despite lower than anticipated margins absolute EBITDA was at Rs 336 crore (I-direct estimate: Rs 337 crore) with three-year CAGR of 25%. Other income grew 147% YoY to Rs 73 crore (includes recognition of Ind-AS 116 impact of lease modification/termination). Subsequently, PAT grew 21% YoY to Rs 161 crore. 

Our Perspective 

Zudio continues to gain market share in the value fashion space with robust growth. It has been the new growth engine for Trent given its scalable business model (one-third size of Westside format) and strong acceptance in Tier II/III cities with sharp price point assortment (ASP < Rs 500). Trent has, over the years, consistently outperformed peers given the strong brand patronage (Westside, Zudio, Star, Zara) and proven business model (Westside: 100% private label). Robust performance in challenging times and industry leading growth will continue to warrant premium valuations for Trent.