Once a darling of the stock markets, Avenue Supermarts, the parent company of D-Mart, is facing challenges in maintaining its growth and profitability equation as sales from apps and larger format stores impact its traditional business model. The stock, which has always traded at expensive valuations right from day one of listing, has been moving downhill since hitting a high around Rs 5300 levels in October 2021.
Although the stock has seen a good bounce since mid-May, the muted sentiment towards the stock stems from a combination of factors that threaten to impact both, the company’s growth and profitability in the medium-term. This, amid weak same-store sales growth (SSSG) is leading analysts to believe that further correction may be needed for the stock to become attractive for investors once again.
For the quarter ended June 2023, Avenue Supermarts reported a standalone revenue growth of 18 percent year-on-year, reaching Rs 11,584 crore. It added three new D-Mart stores during the quarter, taking the total store count to 327.
However, both sales growth and store additions fell below expectations, with implied SSSG estimated at 7 percent, according to foreign broking firm Morgan Stanley. “D-Mart’s sales per store growth is correlated to inflation, as 77 percent of sales is daily use staple products where price elasticity is high. With inflation now decelerating, sales growth of the FMCG universe (proxy for D-Mart grocery sales) is likely to slow down by 414 basis points in FY24 YoY,” according to IIFL Securities’ analysts. Consequently, there could be pressure on SSSG in FY24. But that may only be a temporary concern, for once inflation stabilises, sales value could bounce back.
The bigger worry is how the competitive landscape is evolving as also its own business model.
Increasing competitive intensity has impacted D-Mart's merchandise sales, as consumers have sought other avenues for their purchases. Competitors like Trent's Zudio and Landmark Group's Max, offering affordable clothing ranges, have been expanding aggressively, diverting consumers from D-Mart. Both Trent’s Zudio and Landmark Group’s Max offer clothing range below Rs 1000, and the former in its FY23 annual meeting said it would open 200 stores of Zudio in FY24, much higher than analysts’ estimates.
This has obviously dented the performance of general merchandise and apparel (GM&A) sales.
Additionally, the rise in popularity of the D-Mart ready app has affected GM&A sales, as certain items may not be available for online orders. Plus, people ordering online may use it more for groceries and other staples than apparels and other household wares.
Since apparels and other general merchandise enjoy higher margins, this shift to app-based shopping has put pressure on the company's overall margins. GM&A contributed 23 percent to the topline in FY23, compared to 28 percent in pre-COVID period. “Per our channel checks, in apparel segment, D-Mart is facing strong competition from specialist retailers like Zudio, Max etc,” according to ICICI Securities.
“As some consumers move from visiting the store to ordering on the app, sales for GM&A may have fallen since one would typically not order that on the app (and many items are not even available),” IIFL Securities’ Percy Pathanki wrote in a note dated June 30.
Investors as well as analysts are now tracking when the discretionary segment will show signs of improvement, which can lead to improvement in margins. In the quarter ended March 2023, the company had reported 100 basis point year-on-year contraction in margins to 7 percent.
Besides, sales per square feet for D-Mart have also been on a downward trend, lower by approximately 9 percent compared to Q4 FY19. Apart from the unfavourable sales mix, addition of large size stores is also impacting the sales per sq. ft calculations. Currently, roughly 60 percent of Avenue Supermart’s total retail area represent large size stores.
“Larger and newer stores are struggling to improve their store matrix as these stores have higher gestation periods, thus impacting the overall profitability,” said Preeyam Tolia, research analyst at Axis Securities.
Currently, the stock has 7 Hold, 10 Sell calls, and only 9 Buy calls, with a 12-month target price indicating a 1 percent downside from the current levels.
In its heydays, the stock soared higher and higher despite expensive valuations, as it was the only company that had perfected the Indian retail business model, and nothing could derail its growth or dent its profitability.
Despite its underperformance since October 2021, the stock has compounded at the rate of 20 percent over the past five years. Currently, at a trailing at a price-to-earnings ratio of 106x and forward P/E of 85x, and niggling issues around growth, the stock may take some time to regain its past glory.
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