Will Trent’s super success with value retailing get dented by Reliance Retail and Shoppers Stop?

The listed players in the value retail segment have hardly put up exciting numbers thus far.

Shares of retailing company Trent has been on a roll this year as investors have been lapping up the shares with its value retailing segment positively surprising analysts.  Trent’s overall sales grew 52 percent in the July- September quarter, while its value retailing segment doubled in the same period. Net profit has increased almost three times in Q2FY24.

Trent’s success with value-fashion arm Zudio has not gone unnoticed. Not only have stock market participants, other retailers too have taken note, as they are now hungry to tap this segment. While old rival Shoppers Stop launched its own value retail store called Intune in July,  the more recent one to join the fray is the big daddy of retailing, Reliance Retail. In August, Reliance Retail launched its first Youtsa apparel store. Can this rush by new players into Trent’s fast-growing business segment dent the Tata Group company’s growth and profitability?

Also read Why investors are unhappy with Aditya Birla Fashion’s performance

The value retail industry, which was at Rs 2.5 lakh crore in CY20, is expected to reach Rs 3.3 lakh crore in CY25, according to data from Motilal Oswal as raw material price turns benign. Zudio is not the first and the only player in this segment. It is an established segment which Zara and Landmark group perfected with its Max brand, and then H&M and several others followed. Zudio contributes 40 percent to the company's total revenues.

The listed players in the value retail segment have hardly put up exciting numbers thus far. While Trent has delivered a sales compound annual growth rate (CAGR) of 33 percent over three years, Shoppers Stop and Aditya Birla Retail and Fashion (ABRFL) are far behind, delivering a overall sales CAGR of 5 percent and 12 percent, respectively, over the same period.

Much of that growth was triggered by a huge expansion in store count. Zudio has expanded rapidly with 411 stores in Q2FY24 compared to 268 stores in Q2FY23.

In fact, it has only just 57 stores in CY20. Over, CY20-23, the store count has grown at a CAGR of 64 percent.

Others have not even scratched the surface. Intune had six stores as of September 30. It plans to take this number to 24 by FY24. Reliance Retail has more ambitious plans.

But thus far, Trent has been playing its cards well. Trent was the only player to not raise prices in response to rising raw material prices over the past year. “Unlike peers, which passed on the sharp raw material price hikes to customers last fiscal, Trent absorbed the impact, seeing strong customer reception, and is now reaping the benefits,” said Motilal Oswal in its result update.

Also read Why HUL is not an analyst darling at the moment

Thus, it was Trent was also the only player that reported buoyant sales and profit growth. “Despite falling gross margins, profitability is high. And because of volume growth, the company is able to absorb input cost inflation,” said Vinit Bolinjkar, head of research at Ventura Securities.  Other listed apparel retailers have been caught on the wrong foot with lower sales and profit growth due to weak consumer demand, and high raw material prices.

But could competition wreck things for Trent? Even though everything looks great for Trent now, Preeyam Toila, consumer and retail analyst at Axis Securities, said that Reliance Retail’s Youtsa is a tough competitor for Zudio. “Unlike Aditya Birla Fashion and Retail or Shoppers Stop, it won’t be difficult for Reliance Retail to incorporate the tactics that Zudio plays,” he said.  “The kind of positioning and distribution Reliance Retail has, they might be able to give some competition to Trent, but for others it seems tough to compete with Zudio,” said Hemang Jani, a market expert.

Reliance Retail has completed a fund raise of Rs 15,314 crore from global marquee investors like KKR, QIA and ADIA. It is a strong business with revenues of Rs 2.6 lakh crore in FY23.  Reliance Retail’s Youtsa plans to open around 200-250 stores in the coming years.

However, experts also noted that other apparel players, including Reliance Retail, will take time to perfect the Zudio model.

“Zudio has learnt from Zara how to do fast fashion. It changes its inventory every 15 days, which attracts customers,” said Toila. Plus Zudio manufactures in-house brands. Too many brands under one roof is a problem for companies like ABFRL as it becomes difficult to churn their inventory every now and then, leading to less appealing designs, said Toila.

Barring Trent, no company follows the 15-day inventory change method to attract customers, putting them at a disadvantage to Zudio, said analysts.

They added  that it will be difficult for new players to attain profitability. “Trent has exclusive design portfolio and a low gross margin of 35-40 percent. This enables the company to achieve a high store productivity with a revenue/sq ft of around Rs 16,300, which is 2 times the industry average,” said Motilal Oswal in a report dated November 20.  It further said that the high productivity helps optimise operating costs and achieve high single-digit EBITDA or earnings before interest, taxes, depreciation and amortisation margin at the store level.

While competition can’t be wished away, Trent has carved its place and is well poised to keep up its growth.

While Trent is expensive compared to other apparel players, analysts say that it is still attractive due to its visible earnings growth. “It is a company with a known promoter, with high growth in EBITDA and top line, so people don’t mind paying a higher valuation,” said Jani.

Valuations are cheap for ABFRL and Shoppers Stop as compared to Trent.

Disclaimer: The views and investment tips expressed by 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.

Disclaimer: Moneycontrol is a part of the Network18 group. Network18 is controlled by Independent Media Trust, of which Reliance Industries is the sole beneficiary.