Tata-owned Trent drops 3% as pocket-friendly Zudio hits margins

Shares of Tata Group-owned retailer Trent Ltd fell as much as 3% in intraday trade on Friday after the company's gross margin declined due to the increased revenue share from budget-friendly Zudio stores.

Trent's gross margin contracted for the sixth consecutive quarter by 833 basis points year-on-year to 40.8% due to change in revenue contribution from Zudio, according to ICICI Securities.

"The decline in gross margin can be attributed to the increased revenue share from Zudio, which accounts for approximately 35% of revenue based on our estimates," ICICI Securities says in a note.

However, the higher inventory turnover at Zudio is expected to counterbalance the effects of the reduced gross margin and have a positive impact on the net profit margin, the domestic brokerage says, adding the net profit margin stood at 7% in FY23, the highest it has been in the last eight years.

Trent's net profit stood at ₹54.2 crore for the January-March quarter compared with ₹20.87 crore in the corresponding period last year. Revenue from operations jumped 64% year on year to ₹2,182.8 crore as against ₹1,328.9 crore in Q4 FY22.

"Trent continues to outperform peers on most parameters (like-for-like revenue, retail expansion, operating profit). This is the seventh consecutive quarter of outperformance. LFL revenue growth for Westside continues to be impressive while retail expansion rate of Zudio (over 50% YoY since last two years) instills confidence in relative success of the franchise in value segment. It is inspiring to see that emerging categories such as beauty and personal care, footwear, and innerwear, which now account for approximately 18% of the revenue, are gaining significant traction. Contribution from online business is healthy at 6%," says ICICI Securities.

"In our view, Trent has created a unique and strong competitive edge in apparel retail by having complete control over the customer experience through its own stores and private labels. It is able to offer comparable quality products at significantly lower price point (approximately 25-30% less) than comparable brands," the brokerage says.

ICICI Securities has a 'Buy' rating on the stock with a target price of ₹1,600.

Trent added 14 Westside stores in FY23, taking the total Westside store count to 214. Similarly, it added 117 Zudio stores in FY23, taking the total Zudio store count to 352. A slower than expected pick-up in discretionary consumption, a rise in competitive intensity from peers (Reliance Trends, Max, Pantaloons, etc.), and execution challenges are some key downside risks, according to ICICI Securities.

According to foreign brokerage Jefferies, the revised higher revenue assumptions are offset by lower margins, which resulted in a 2-3% tweak to FY24-25 EBITDA estimates. Jefferies has maintained a 'Hold' rating on the counter with an unchanged price target of ₹1,400.