Significant beat on profitability front
Trent’s Q3FY21 results reflects the inherent strength of the brands and its robust business model made to combat challenges. Trent recorded smart recovery on the revenue front, with sales reaching 83% of pre-Covid levels. Revenue for Q3FY21 de-grew 16.6% YoY to | 725.4 crore (I-direct estimate: | 669.7 crore). Westside format reported sales recovery rate of 78% with same stores sales growth of negative 26%. Back of the envelope calculation suggest that Trent’s value fashion brand Zudio may have reported positive growth in Q3FY21 on the back of healthy store additions during the quarter. Digital platforms witnessed robust 80% growth in Q3FY21 on a low base.
Gross margins came in at a four-year high, which was a positive surprise and were significantly higher than our estimates. This is despite share of Zudio increasing in overall sales (yields lower gross margins than Westside) and higher discounting activities undertaken by other fashion retailers. Gross margins for Q3FY21 expanded significantly by 575 bps YoY to 56.4%. Margins also include reversal in inventory provisions taken in the previous quarter worth | 14 crore. Even after adjusting for the same, gross margins were at 54.4% vs. I-direct estimate of 48.9%.
Furthermore, cost control measures (employee & other expenses declining 15% and 14% to | 68.5 crore and | 160.3 crore, respectively), led to EBITDA margins improving materially by 490 bps YoY to 24.8% (I-direct estimate: 15%). Other income came in at | 42.6 crore of which | 19 crore pertains to lease rent waiver. On account of robust operational performance and lower effective tax rate (24% vs. 40% in Q3FY20), PAT grew 43% YoY to | 79.6 crore (I-direct estimate: | 7.5 crore).
Store addition pace picks up in Q3
On the back of healthy balance sheet, Trent was among the few retailers that had reiterated their stance of aggressively adding stores in FY21E. As on September 30, 2020, it had robust cash & investments worth | 630.7 crore. Trent, during the quarter, added ~17 stores (12 Zudio stores, four Westside Stores and one Landmark store). For YTDFY21, store addition were at 28 (20 Zudio stores, four Westside Stores and one Landmark store). The company continues to aggressively add Zudio stores (company doubled Zudio stores from 40 to 81 in FY20) given the scalability of brand (average store size ~6000 sq ft, one-third of Westside store) and given its shaper price points offerings (two-third of products priced < | 500). We pencil in 200 store additions between Westside and Zudio for FY21-23E.
Valuation & Outlook
Revenue trajectory continues to improve on a month on month basis with encouraging trends. The management indicated that January 2021 (end of season sale month) witnessed nearly 100% revenue recovery rate in both price and volume terms. Trent has over the years consistently outperformed peers given the strong brand patronage (Westside, Zudio, Star, Zara) and proven business model (Westside: 99% private label). Given the encouraging trends in footfall traction, we anticipate revenue trajectory will further accelerate coupled with better profitability. We build in revenue and earnings CAGR of 16% and 40% in FY20-23E. We reiterate BUY rating and maintain target price of | 820 based on SOTP valuation.
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