Trent's Stock Falls As Brokerages Remain Cautious After Q1
Shares of Trent Ltd. declined as much as 9.9% as brokerages remained cautious over the Tata-owned retailer’s expensive valuation and the Covid-19 impact on its business operations.
The analysts, however, derived optimism from a recovery in sales of the Westside operator as the lockdown restrictions ease further and store additions.
Trent saw its revenue drop 46% sequentially to Rs 492 crore in the quarter ended June, according to an exchange filing. It posted a net loss of Rs 138.29 crore compared with a net profit of Rs 17.44 crore in the previous three months.
The company’s operating losses were at Rs 43.13 crore compared with the Rs 123.77-crore earnings before interest, tax, depreciation and amortisation in the three months to March.
Trent said the second wave of Covid-19 “significantly impacted” operations during the first quarter. “Our fashion business (Westside and Zudio) operated for 46% of the trading days, up from 26% in the corresponding previous period. However, by the close of the quarter, we were operational for over 80% of the trading days. The latter part of the first quarter saw the pandemic-related restrictions ease considerably, aiding sentiment and improving consumer traction,” it said in the filing.
According to the company, it is “encouraging” that more than 90% of its stores are operational on most days of a week with local restrictions being increasingly eased. “We are witnessing a sharp recovery in our fashion business with July registering revenue recovery of over 80% vis-à-vis FY20 levels. Post the first wave, this level of recovery only played out several months following the reopening.”
Shares of Trent fell as much as 9.9% to an intra-day low of Rs 852 apiece in early trade on Wednesday. But the stock then pared some losses to trade 7.5% down as of 10:20 a.m.
Of the 17 analysts tracking the company, eight have a ‘buy’ rating, six suggest a ‘hold’ and three recommend a ‘sell’, according to Bloomberg data. The average of 12-month consensus price targets implies an upside of 4.6%.
Here's what brokerages made of Trent's Q1 performance and its outlook:
Downgrades to ‘hold’ from ‘buy’ with a price target of Rs 870, implying a potential downside of 6.2%.
Trent mirrored the sector weakness in the wake of Covid restrictions and reported loss at Ebitda along with below-normal revenue trend.
The trend is improving with 90% stores operational, which should help.
The store additions pipeline seems good although the company is waiting for approvals in case of 25 new stores.
Trent benefits from reopening but this is partially captured in 25% share price rally in past three months.
Cost controlling measures across rent and other operating expenditures, helped limit losses. Management is continuing efforts for permanent rent reductions.
Maintains ‘sell’ with a target price of Rs 657, implying a potential downside of 31%.
Trent reported better-than-expected results. Apparels being non-essentials has been most significantly impacted due to Covid-19 lockdowns.
Expensive valuation has always been primary barrier to entry for investors and the barrier continues.
Store addition rate remains healthy and aids confidence to the brokerage’s forecast. During the quarter, Trent fitted out 25 stores which are likely to open once Covid restrictions are eased.
Maintains ‘buy’, raises target price from Rs 1,060 to Rs 1,100, implying a potential upside of 16%.
Despite the challenging scenario, Trent reported a resilient performance. Post lockdown relaxations, revenue recovery has been encouraging with July sales tracking 80% of pre-Covid levels and the company reverting to healthy operating profitability.
Expects Zudio to continue to be the next growth engine for Trent with share of revenue increasing to 25% in FY23 from 11% in FY19.
Digital platforms continued to witness robust growth with sales increasing 200% year-on-year and revenue contribution to Westside increasing to more than 5%. It is targeting online sales to reach 10% vs current 5% over the next few years.
Downgradres rating to ‘neutral’ from ‘buy’, but raises target price from Rs 865 to Rs 962, implying a potential upside of 2%.
Cuts revenue estimates for FY22/23 by 2.6%/4.6%, respectively, factoring the second Covid wave.
Continues to like the business model, management aggression in new store opening, Zudio breaking even along with healthy balance sheet and low inventory on books.
However, currently valuations have run ahead of fundamentals with risk of further investment in the Star Bazaar coupled with disappointing performance of Inditex Trent (Zara) in FY21.