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Fine print
Trent saw sales grow a healthy 42% YoY and most cost ratios declined.
However, lower gross margins, partly from mix change, drove an Ebitda
margin decline from 1.1% to 0.8%. Profits grew more than 350% on a
low base, driven mainly by other income, without which Trent would have
reported losses. Store growth in Westside and Star India Bazaar
accelerated. While profitability in Star Bazaar remains 2-3 years away,
Westside is facing challenges in the near term. The Zara JV is scaling up
well with revenues near the Rs1.5bn mark with Ebitda margins of 25%.
The company is net cash although ongoing investments will cause debt to
rise over FY12-13. Standalone performance has deteriorated in recent
quarters with revenue growth slowing and margin pressures emerging.
FY11: cost pressures emerging
While revenues in FY11 increased by 42% YoY to Rs15.9n, we estimate that
sales/sq ft was a more modest 7%. Trent sites an improved consumer
environment as the driver, particularly in Westside which saw same store
sales growth of over 10%. Total expenses increased 43% YoY and rent and
personnel costs increasing on a per square foot basis while gross margins fell.
Trent had an Ebitda of Rs124m (Rs136m in FY10) and other income of
Rs366m (+114% YoY), reporting a pre-exceptional PBT of Rs79m. During
FY11, Trent opened 11 Westside outlets and 4 Star India Bazaar stores.
Inventory days were steady but still high while working capital days declined.
Store growth to continue
Trent is looking to continue its store opening plans with Westside and Star
Bazaar likely to continue to see rollouts. In Westside, near term pressures are
being felt from higher material and operating costs. Star Bazaar is attempting
to grow the non-food offering to drive margins and focusing on private label.
While scale driven profitability is some time away, Trent highlights a medium
term target of 50 stores (11 now) and a franchise tie up with Tesco for
expertise, IT, operations and sourcing support. Landmark is facing challenges
in the music category with the company attempting to target other segments
Zara performance impressive
The Zara JV (49% stake with Trent) has scaled up well with aggregate
revenues of Rs1.47bn in FY11 despite having only three operational stores
(opened in 1QFY11). The JV delivered Ebitda margins of 25%+. While the
premium positioning may limit a large scale expansion into a wide base, the
JV could become a major driver for Trent from Tier I cities alone.
Near term challenges visible
Recent quarterly results from Trent show weakening top line momentum as
well as cost pressure driven weakness in Ebitda margins. This drives an 18%
cut in our FY12 earnings despite modelling in rising contribution from Zara.
While Trent’s formats are promising, it remains at a premium to retail peers.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Fine print
Trent saw sales grow a healthy 42% YoY and most cost ratios declined.
However, lower gross margins, partly from mix change, drove an Ebitda
margin decline from 1.1% to 0.8%. Profits grew more than 350% on a
low base, driven mainly by other income, without which Trent would have
reported losses. Store growth in Westside and Star India Bazaar
accelerated. While profitability in Star Bazaar remains 2-3 years away,
Westside is facing challenges in the near term. The Zara JV is scaling up
well with revenues near the Rs1.5bn mark with Ebitda margins of 25%.
The company is net cash although ongoing investments will cause debt to
rise over FY12-13. Standalone performance has deteriorated in recent
quarters with revenue growth slowing and margin pressures emerging.
FY11: cost pressures emerging
While revenues in FY11 increased by 42% YoY to Rs15.9n, we estimate that
sales/sq ft was a more modest 7%. Trent sites an improved consumer
environment as the driver, particularly in Westside which saw same store
sales growth of over 10%. Total expenses increased 43% YoY and rent and
personnel costs increasing on a per square foot basis while gross margins fell.
Trent had an Ebitda of Rs124m (Rs136m in FY10) and other income of
Rs366m (+114% YoY), reporting a pre-exceptional PBT of Rs79m. During
FY11, Trent opened 11 Westside outlets and 4 Star India Bazaar stores.
Inventory days were steady but still high while working capital days declined.
Store growth to continue
Trent is looking to continue its store opening plans with Westside and Star
Bazaar likely to continue to see rollouts. In Westside, near term pressures are
being felt from higher material and operating costs. Star Bazaar is attempting
to grow the non-food offering to drive margins and focusing on private label.
While scale driven profitability is some time away, Trent highlights a medium
term target of 50 stores (11 now) and a franchise tie up with Tesco for
expertise, IT, operations and sourcing support. Landmark is facing challenges
in the music category with the company attempting to target other segments
Zara performance impressive
The Zara JV (49% stake with Trent) has scaled up well with aggregate
revenues of Rs1.47bn in FY11 despite having only three operational stores
(opened in 1QFY11). The JV delivered Ebitda margins of 25%+. While the
premium positioning may limit a large scale expansion into a wide base, the
JV could become a major driver for Trent from Tier I cities alone.
Near term challenges visible
Recent quarterly results from Trent show weakening top line momentum as
well as cost pressure driven weakness in Ebitda margins. This drives an 18%
cut in our FY12 earnings despite modelling in rising contribution from Zara.
While Trent’s formats are promising, it remains at a premium to retail peers.
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