Avenue Supermarts Q2 underwhelms on stiff competition from online rivals; shares crack 8%

According to international brokerage Bernstein, the biggest miss for Avenue Supermarts was revenue growth, which was the slowest in four years. The like-for-like growth was the slowest in three years.

What impacted the Q2 show?

The management noted that the stores/operations in metro cities, including the online offering DMart Ready, were impacted by online grocery format players, including quick commerce players.

Additionally, employee costs were higher-than-expected as a result of DMart's continuing efforts to improve service levels and building capability for the future, noted Nuvama Institutional Equities.

Average bill size, which increased during the pandemic owing to stockpiling, has remained sticky, even as DMart added more stores in new geographies. Average bills cut per store per day, which is a reflection of footfall per store per day, has also grown slightly. "Combining the aforementioned two observations implies the average visitation has not dipped, but part of the buying has shifted to other platforms, such as quick commerce," said Nuvama.

During FY12-20, DMart sustained a consistent SSSG (same store sales growth) above the 10 percent print. However, that has come off with older stores maturing. For Q2, the like-for-like revenue growth for the same cohort of stores was at 5.5 percent.

DMart can return to seeing 20 percent growth on fast store/retail area addition, said Bernstein. If the company pivots its area of focus to 4-6 hour delivery and sees reduced competitive intensity from quick-commerce in metro cities, it could see the same growth rate again. These factors might take 3-5 quarters to impact DMart.

Store additions

For the quarter, DMart opened six stores, as compared to nine in the same quarter of the previous year, taking taking the total store count to 377.

"DMart has a pattern of opening more stores in the second half than in the first half. We are building in 45 stores for FY25, which seems achievable as per the commentary as well as the trailing 12 months’ running rate," said Nuvama Institutional Equities.

Should you buy, sell or hold DMart shares?

Hong Kong-based brokerage CLSA said the net profit was notably below estimates, but the firm is making an appropriate pivot to private labels, which will place it well to meet future competition. Private labels are brands which are owned and sold solely by the owner of the retail store. As a result, CLSA maintained its 'outperform' rating on DMart.

Global broking firm JPMorgan slashed its target price on Avenue Supermarts, downgrading the firm to a 'neutral' rating. "Expanding scale for quick-commerce may continue to weigh on stock performance, depsite the recent share price correction. Also, the extent of SSSG moderation surprised us," said the brokerage. It lowered its SSSG/revenue forecast by 4-6 percent over FY25-26.

Building in the impact of online grocery players and weakness in DMart’s H1FY25 showing, we are cutting FY25E PAT by 7 percent, said Nuvama. This yields a revised target price of Rs 4,500, down from Rs 5,183 per share.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.