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Trent Q1FY23 result review: Delivers industry leading revenue growth yet again

ICICIdirect Research 12 Aug 2022 DISCLAIMER

What's Buzzing:

Trent reported a superlative performance with industry best revenue growth and a strong beat on almost all parameters (change in useful life of certain stores impacted PAT). The key positive surprise was company specifically highlighting performance of Star Bazar (50-50 JV), which has witnessed improvement in store economics.

Context

Trent's Q1FY23 revenue print is a strong beat on our/consensus estimates. Sales on a favourable base grew 405% YoY to Rs 1653 crore (I-direct estimate: Rs 1302 crore) On a three-year CAGR basis, revenue growth was at 29%, which is the highest among other lifestyle retailers (215% of pre-Covid levels). The growth is driven by robust store addition trajectory over the last two years. Fashion portfolio now is over 450 stores (Westside & Zudio) vs. ~200 in pre-Covid levels. The growth is also driven by healthy SSSG for Westside, which was at 24% in Q1FY23 (over Q1FY20). Gross margin contraction was higher than anticipated (down 430 bps QoQ to 49.3% vs. I-direct estimate 52.3%). Subsequently, EBITDA margins came in lower than our estimates at 18.4% (vs. I-direct estimate: 19.5%). However, given the strong beat on topline, EBITDA in absolute terms came in much higher than our estimate at Rs 304.1 crore (I-direct estimate: Rs 256 crore, three-year CAGR: 23%). The company revisited its estimates with respect to useful life of certain store assets and consequently has taken a one-off additional depreciation charge in the quarter of Rs 28 crore (depreciation expense up 40% QoQ). Also higher finance cost (up 22% QoQ) impacted PAT to a certain extent. Ensuing PAT came in at Rs 103 crore (I-direct estimate: Rs 106 crore, three year CAGR: 21%).

Our Perspective:

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). We expect Westside and Zudio format to report revenue CAGR of 25% and 48%, respectively in FY20-24E. Share of Zudio format in standalone revenues to increase to 32% by FY24E. Furthermore, sharp increase in profits in share of associates (Zara and Star Bazar) during the quarter is a key positive and signals emphasis on cost cutting measures and its journey towards improving profitability of the ‘Star’ format. We build in revenue and EBITDA CAGR of 25% and 27%, respectively, in FY20-24E. Industry leading performance and consistent revenue growth will enable Trent to sustain its premium valuations, going forward.

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