IGI Logo

Avenue Supermarts’ (DMART) share price has been largely flat over last two years. We reckon there are some structural concerns: (1) revenue growth slowing to ~20% from 25-30% (pre-covid), (2) continued underperformance in revenue per sq. ft (9% below pre-covid) due to slower-than-expected recovery in (margin-accretive) general merchandise (GM) and apparel segment. We note over the last five years, (FY19-23) GM and apparel segment for DMart has underperformed its foods and non-foods segments by 26% and 20%, respectively (Chart 2). We believe since apparel is an aspirational category customers are looking for superior brand perception, bold designs (more variety) and elegant shopping experience. This includes expectations for better trial rooms, superior visual merchandising, and hassle-free after-sales service. In our opinion, Zudio and Max rank higher on all these aspects compared to DMart. Consequently, we expect the possible impact of competition on DMart’s apparel business to sustain in medium term. That said, we reckon DMart is a platform business and the downside of this underperformance (in apparels) is limited while all other strengths of the company remain intact. HOLD.

To uncover the primary reasoning for underperformance in GM and apparel segment, we conducted a bottom research (store visits, geo-mapping of stores, price benchmarking etc), as per which we note:

* DMart is facing stiff competition in apparel segment which contributes ~50% of revenue/retail area (as per our estimate) to total GM and apparel segment.

* Margins under stress: GM and apparel segment enjoys the highest gross margin (30-50%), hence, it provides more power to retailers to help them subsidise prices in other lower gross margin segments to compete/win customers. We note DMart’s gross margin during FY21-FY23 contracted to ~14.4% vs >15% during FY17-FY19.

* This competition primarily stems from rapid expansion of specialist apparel retailers (like Zudio and Max) at value price point. We note Zudio and Max have collectively added >400 stores over the last 4 years (FY19-FY23) vs 148 stores added by DMart. Zudio’s store expansion has been most aggressive at >300, while Max Fashion has added ~100 stores during the same period.

* Comparable ASPs: As per our on-ground channel check (in 3 cities: Chennai, Raipur, Tirupur), we note average selling price (ASP) of apparels for DMart is similar to Zudio, while slightly expensive (but still relevant) for Max Fashion in all key segments (men, women, kids). Refer charts 4- 14.

To Read Complete Report & Disclaimer Click Here

For More ICICI Securities Disclaimer https://www.icicisecurities.com/AboutUs.aspx?About=7

Above views are of the author and not of the website kindly read disclaimer