Reason for report: Annual general meeting update and earnings revision
Key takeaways from Trent’s FY18 annual general meeting (AGM) include: 1) Aggressive store addition plans to add >30 stores in FY19 across each of its formats – Westside, Zudio and Star Market; 2) Zudio to be one of the key growth engines which is likely to be scaled up significantly given increased traction in value fashion; 3) While gross margin in Westside may have peaked out at ~60%, there exist enough scope to improve EBITDA margin with increased operating leverage; 4) higher losses in Trent Hypermarket (THPL) in FY18 was due to store rationalisation costs, impairment charges on property and lower other income, management is targeting to turn around Star Market format over next three years; 5) In Zara, impact of the recent proposed import duty hike on garments may be passed on over a period of time. Factoring the acceleration in store additions, we increase our FY19E-20E revenue by 8-9% and EBITDA by 3-4% and raise our SoTP-based target price to Rs425/share (earlier: Rs390/share) based on 25x Jun’20 EV/E. Maintain BUY. Trent remains our top pick in the apparels retail.
* Plans to add >30 stores in FY19 across each of its formats:
Westside store count has increased to 131 stores (vs 125 in end-FY18) with presence across >70 cities. Zudio is currently retailed through 7 standalone stores along with 15 SIS within Westside stores. Total store count in THPL had reduced from 41 in FY17 to 35 in FY18 on closure/conversion of Star Daily format. Trent has accelerated its expansion plan with guidance of >30 stores additions across formats in FY19 and a capex of Rs1bn and Rs600mn in Westside and THPL, respectively. Trent has already signed agreements for ~30 properties in each format. Additionally, the company is looking to refurbish 20 Westside stores in FY19 (vs 11 in FY18).
* Management sees Zudio (value fashion business) as one of the key growth engines in medium to long-term and intends to scale it up significantly. Zudio addresses the fast and edgy fashion needs of customers at sharper price points with entire product offerings available at <Rs1,000 and 2/3rd product offerings even <Rs500. Zudio revenues grew 22% YoY to Rs1.4bn in FY18. The format is gaining traction and delivered encouraging result with gross margin in the range of 40-45%, already profitable at store level and registered EBIT loss of just Rs100mn in FY18.
* THPL EBITDA losses (including other income) widened to Rs715mn in FY18 (vs Rs166mn in FY17) owing to one off charges like store rationalisation costs and impairment charges in one of the properties along with lower other income. Management believes Star Market (5,000-10,000sqft) is a sustainable format with majority of stores already at break-even level. Management is targeting to become profitable at format level by focusing on efficient supply chain and increasing private label offerings. To recap, THPL has launched three brands in FY18 with 51 products variants and 82 SKUs.
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