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Steady growth ahead
Prefer TRENT, ABFRL, FLFL and FRL
With 4QFY19 earnings season behind, we assess the quarter gone by in this report,
discussing our channel checks, margin improvement opportunities and our stock
4QFY19 earnings performance of our retail coverage universe was a mixed bag. While
TRENT, FLFL, and FRL performed well, DMART, VMART, and ABFRL witnessed good
revenue growth, but at the cost of margins.
Though 1QFY20 was off to a slow start, our recent channel checks indicate that the
trend has now reversed. May’19 witnessed a bounce-back in growth coupled with
upbeat market sentiments and favorable outlook.
TRENT, ABFRL, FRL, and Shopper’s Stop should see healthy margin improvement due
to increasing scale, mix of private labels and recovery from loss-making formats. But,
margin improvement cycle for DMART, VMART, and FLFL may be largely behind.
We continue to prefer companies with the value fashion format and the food and
grocery (F&G) segment. Amongst these, our top picks are ABFRL, TRENT, FLFL and FRL.
Refer to our thematic report
published in April 2019
4QFY19 review: Healthy revenue growth led by store additions
Despite 4QFY19 being a seasonally weak quarter, all retail companies in our
coverage universe (except SHOP) posted healthy double-digit revenue growth.
Amongst F&G players, DMART/FRETAIL reported robust 32%/18% YoY growth, while
in the Apparel pack, TRENT/FLFL outperformed peers with strong 27%/29% YoY
growth. Across retailers, growth was largely an outcome of the step-up in pace of
store adds, even as SSSG remained modest due to impact from the pre-ponement of
End of Season Sale (EOSS) in 3QFY19. For Apparel players, the pace of store addition
was supplemented by increasing traction for the value fashion format.
For TRENT, our workings indicate steady 12% SSSG for
Westside, largely driven by footprint addition of 22%/150% YoY in
Westside/Zudio with store count at 152/55. In FLFL, Brand Factory’s healthy
store addition coupled with 13% SSSG (led by strong traction) acted as a key
growth catalyst. For VMART/ Pantaloons, muted 4%/-4% SSSG was more than
offset by 25%/12% footprint adds. Shopper’s Stop witnessed 7% revenue decline
on modest 4% SSSG and no new store adds, that was further impacted by higher
FRL/DMART showed healthy revenue growth in 4QFY19 on robust
SSSG (11% for FRL) and store addition — Big Bazaar (6), FBB (5) and small format
store adds for FRL (56) and DMART (12). The strong SSSG was driven by sharp
price undercutting in the recent past by F&G retailers. This is also evident in
FRL/DMART’s gross margins — reset by -20bp/-50bp YoY.
Margins remain under check
Besides revenue growth, focus was increasingly on margins given the rising intense
competition from offline and online players. Except for ABFRL and SHOP, retailers
across our coverage universe reported a drop in gross margins. DMART/VMART
reported 50bp/100bp YoY gross margin contraction, primarily due to price
competitiveness. TRENT/FLFL reported 290bp/60bp contraction, impacted by
Aliasgar Shakir – Research analyst
(Aliasgar.Shakir@motilaloswal.com); +91 22 6129 1565
Hafeez Patel – Research analyst
(Hafeez.Patel@motilaloswal.com); +91 22 6129 1568
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.