Q3FY24 Review: Trent: Firing on all cylinders

8 Feb 2024 , 12:03 PM

Trent reported a strong Q3FY24 performance with 86% increase in Ebitda (20% above analysts of IIFL Capital Services estimate), driven by higher gross margin and lower rental costs. It continues to be an outlier, amid a subdued demand environment and remains well poised to deliver sales/ adj Ebitda Cagr of 39% over FY23-28. Zudio sales per sq ft is still in the process of ramping up, which could drive more earnings’ upgrades in the stock. Maintain BUY with a target price of ₹4,000. 

Above estimates: 

Trent continued its robust performance, with sales growth of 52.5% and Ebitda growth of 86% during the quarter. Ebitda came in 20% above analysts of IIFL Capital Services estimates on the back of better than expected gross margin and lower rental costs. The revenue growth has been largely driven by store additions in the Zudio format (108 net store additions YTD). Emerging categories – beauty, personal care, innerwear and footwear contributed ~19% to standalone sales. 

Firing on all cylinders: 

Trent’s gross margin improved 57bps YoY vs. 230bps / 479bps contraction witnessed in the previous two quarters respectively. In addition to Zudio store addition, analysts of IIFL Capital Services believe that the sales ramp up in recently opened Zudio stores has been very sharp, which is driving the top-line performance. Trent continues to be an outlier in the apparel retail space, with a like for like growth of 10% (similar to previous quarter) amid a challenging demand environment in which most peers are struggling. 

Adj Ebitda upgrade of 7-13%: 

Analysts of IIFL Capital Services upgrade their adj Ebitda estimates by 13%/8%/7% over FY24/25/26 respectively to factor in the Q3 beat. With 108 net Zudio store additions YTD, Trent is well on track to meet analysts of IIFL Capital Services full year estimate of 502 stores in this format. The stock is up 50% since its last published result, but still remains the best placed stock in terms of growth in the consumer discretionary space, well poised to deliver sales/ adj Ebitda Cagr of 36%/39% over FY23-28, driven by steady and differentiated execution in its value fashion format – Zudio. As highlighted in analysts of IIFL Capital Services recently published note dated 16th January 2024, there is more upside possible in Zudio sales per sq ft which could drive further upgrades in their estimates.