Fashioning A Successful Retail Story : TRENT Limited
With its portfolio of various brands such as Westside, Zudio, Landmark and Star, Trent has been able to spread its retail presence across various fashion and lifestyle products, thus beating competition even during the current downturn. However, it may have reached its peak, which is what should be of concern to investors
Trent Limited is engaged in the retail sale of readymade garments. The company primarily operates stores across four concepts, which are Westside, Zudio, Star and Landmark. During the year, the company continued to focus on robust and sustainable business models in each of its retail concepts, thus aiding growth. Trent focuses on the importance of establishing the viability of a retail concept with a limited portfolio of stores prior to embarking on rapid expansion. Moreover, recently, it also took a progressive step through the integration of stores and online platforms for Westside, enabling it to extend its reach across a higher number of cities.
Industry Overview
Tier II and III cities have seen rapid urbanisation which has influenced the traction for organised retail in the country. Since 69 per cent of the country’s population lives in these cities, it contributes up to 54 per cent to the total retail consumption, indicating significant purchasing power and retail opportunities. India is assumed to be one of the most dynamic retail markets around the globe, growing at a CAGR of around 14 per cent during 2017-20. Its growth is mainly driven by increasing share of urbanisation as well as rise in retail development and consumption. The entry of international players as well as brand consciousness has created various growth opportunities in the industry.
E-commerce and the growing influence of social media due to better internet penetration and cheaper availability of internet and smart phones has been a boost for the industry. The overall fashion and lifestyle market in India is expected to grow at a CAGR of around 14 per cent during 2017-25 to reach around Rs. 21 lakh crore with the total apparel market expected to grow at a CAGR of around 9 per cent during the same period. Specialty retail accounts for nearly 5 per cent of the total Indian retail market and is expected to witness huge growth by Indian as well as international leaders in the future.
Trent’s Retail Concepts
Westside : Westside is Trent’s flagship concept offering branded fashion apparel, footwear and accessories for women, men and children, along with a range of home furnishings and decor. As part of its unique strategy to mitigate the risks posed by diverse competition, it offers a differentiated portfolio of exclusive brands which represent the latest fashion trends, hence appealing to a wide spectrum of style-conscious consumers. Westside contributes around 90 per cent to the company’s total revenues. Its online reach across India is exclusively managed through Tatacliq.
Westside follows a own-brand-led business model which allows it to maintain active control across its value chain in terms of key aspects such as design, branding, sourcing, logistics, pricing, display, promotion and selling. With a strong growth-oriented approach, Westside has registered 9 per cent like-for-like (LFL) growth in sales in FY19 with 17 per cent growth in total net sales. Westside opened 27 new stores in FY19 with its cumulative reach counting up to 150 stores.
Zudio : During the financial year of FY18, Trent had acquired value fashion apparel business Zudio from Trent Hypermarket Private Limited (THPL). Zudio aims at appealing to the fashion needs of the consumers at sharper price points along with having infrastructure and backend processes closely similar to that of Westside. Zudio is the company’s accelerated expansion program with an aim to gain maximum market presence. It is expected to bring in considerable growth opportunities for Trent in the business area of value fashion retail with robust focus on new store additions for the next years. Zudio specialises in offering own-branded as well as curated fashion apparels.For FY19, the revenues of Zudio – including sales from Zudio standalone, Star and Tatacliq – stood at Rs. 204 crore which is a 41.6 per cent increase from Rs. 144 crore reported in the previous fiscal year. Sales per square feet for LFL independent stores were more than Rs. 14,000 per sq. feet. Trent realises that the growth of Zudio, going forward, is in strong supply chain, vibrant stores and attractive fashion products at accurate pricing along with a sustainable business model.
Star : Star stores are operated by Trent Hypermarket Private Limited (THPL), which is joint venture between Trent Ltd. and Tesco PLC UK. Its portfolio comprises hypermarket and neighbourhood stores which primarily focus on categories like food and groceries, home care, apparel, home decor, health and beauty products. Additionally, Fiora Hypermarket Ltd. (FHL), which is a wholly owned subsidiary of Trent, operates two Star Hyper and three Star Market stores.The business model of Star Market is basically targeted to fulfill monthly and top-up needs for groceries, fresh produce, FMCG, personal grooming products and general merchandise in around 5,000- 10,000 sq. feet footprint area. In FY19, THPL posted a total income of Rs. 1,007.84 crore, thus clocking a growth of 4.8 per cent compared to Rs. 961.66 crore in FY18. Starquik is the online grocery portal allowing the business to be tightly integrated with store operations, hence offering omnichannel convenience to its customers.
Landmark : Landmark is considered to be an entertainment and leisure concept offering a range of curated lifestyle products which also includes toys, front-list books, stationery, latest gadgets and sports merchandise. Leveraging the strength of Westside’s backend operations, the format has been able to drive synergies and contain overhead costs. Landmark is retailed through Westside locations as well as has independent stores. During FY19, Landmark witnessed a 4 per cent LFL growth. To increase its consumer base, Landmark engages in various consumerbased interactive events and activities.
Financials
On a consolidated quarterly front, for Q3FY20, the company reported a 45.27 per cent increase in net sales to Rs. 988.29 crore from Rs. 680.30 reported in Q3FY19. The rise in revenues can mainly be attributed to a sterling performance led by Westside stores which brought about a 22 per cent YoY revenue growth. The PBDT stood at Rs. 145.70 crore for Q3FY20, almost doubling from Rs. 72.87 crore in Q3FY19. Trent Ltd. gained a net profit of Rs. 37.67 crore in the third quarter of the current fiscal year, thus clocking a growth of 9.69 per cent compared to net profit of Rs. 34.34 crore gained in the same quarter of the previous fiscal year. On the annual front, net sales grew by 21.91 per cent in FY19 to Rs. 2,630.24 crore from Rs. 2,157.46 crore in FY18. Subsequently PBDT expanded by 7.89 per cent to be Rs. 231.79 crore in FY19 as compared to Rs. 214.84 crore in FY18. During FY19, the company witnessed a comparative decrease in net profit by 2.89 per cent to be Rs. 106.51 crore as against Rs. 109.68 crore gained in the previous fiscal year.
Conclusion
During the recently ended quarter of December 2019, Trent posted positive financial results even when its peer retail companies were facing the harsh effects of slowing consumer spends. Despite the stress on demand in the industry, the company is assumed to be able to achieve its growth potential owing to continuous growth as well as improved financial performance from its apparel segment. Trent has long ago stabilised Westside as it primary source for revenue and growth but with the introduction of newbie Zudio the opinion is that its performance would be in line with Westside
Thus, high expectations are put on the growth potentials of Zudio to bring in higher revenues and profits for Trent as well as to increase its consumer base. During Q3FY20, the gross margins of Trent were impacted as Zudio’s skew increased the company’s revenue mix. We believe that as far as growth is concerned the company has peaked in terms of revenues, profit, expansion, etc. and therefore this would be a good time to EXIT from the stock.