Setting store by consistency; investing aggressively
We pored over TRENT’s annual report to capture key details of the company’s performance over the past year. Key takeaways:
Another year of consistent growth
Standalone revenue increased 23% to INR25.3b in FY19, primarily led by Westside (+18%) and Zudio (newly started fast fashion value format; +42% to INR2b). However, the EBITDA margin contracted 40bp to 9.3%, which, in our view, can be attributed to losses at Zudio.
Healthy operating metrics at Westside/Zudio; extensive capex planned
Westside continued delivering steady revenue/sq. ft. growth of 2.5% to INR10.2k in FY19. Separately, Zudio’s revenue/sq. ft. stood at INR14,000 for independent stores on a like-to-like basis, which is significantly higher than the industry average of INR8-10k. Against this backdrop, management in its AGM revealed its plan to add 35-40 Westside stores and 100 Zudio stores. TRENT intends to raise INR15b to fund its growth plans, of which INR9.5b is already raised from Tata Sons.
Zara slow in store adds; margins weak
Zara’s revenue grew strongly by 17% in FY19. However, PAT declined 13% with the margin shrinking 320bp to 10.7% due to higher COGS. Throughput remains strong though, with revenue/store at INR682m. Zara’s growth has been slow given its limited presence of 22 stores (only two stores added in FY19). We nevertheless see huge growth opportunity for this format in India.
Star not yet shinning; could take longer to turn around
Star continued exhibiting a dismal performance with revenue growth of meager 6% to INR10b. Although EBITDA loss reduced to INR802m from INR1b in the previous year, it still remains at a high level (EBITDA margin of -8% v/s -11% in FY18). In our view, unless revenues scale up to INR40-50b, the format will likely face challenges in delivering profitability given its wafer-thin gross margin of 22%. Star has shut all small stores; it now focuses on the larger-store format (32 stores with avg. size of 7,500 sq. ft. and 12 stores with avg. size of 17,500 sq. ft.).
Westside’s RoCE profile diluted by investment in Star, Zudio, non-core assets
TRENT’s overall RoCE remained weak at 6.4% in FY19. Also, overall RoIC stood at 10.5%, as against ~17% for Westside, due to losses at Star and Zudio. In our view, aggressive investments in store addition could put pressure on the margin and return profile in the near term. However, overall margin, RoIC and RoCE should reach high teens once it achieves healthy scale.
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