Trent

The Tata Group’s retail business, Trent, straddles several key segments of the Indian retail landscape. It operates apparel, accessories and home furnishings store — Westside; books, music and gifting chain — Landmark; hypermarket — Star Bazaar, and value apparel store — Fashion Yatra.

At Rs 501, the stock trades at 36.6 times its trailing four quarter earnings on a standalone basis. The consolidated EPS for FY-09 is just 0.53. This valuation places Trent at a premium to its retail peers.

Trent’s reliance on the premium segment, even as its value forays are yet to deliver, and a slow rollout of expansion plans, with a cutback in discretionary spends hurting sales, may impose limitations on its growth over the near term. That suggests that Trent’s premium valuation may not be sustainable. Investors can, therefore, make the most of the current stock price run-up and book profits on their holdings in Trent.
Value biz yet to pick up

Trent’s flagship Westside and Landmark stores have a premium positioning and this segment of retailing has been hit harder by the recent slowdown than value retail. Though Trent has a foothold in the value retail segment through its hypermarket business, this format has not picked up as yet, and will still require a few quarters to contribute meaningfully to Trent’s business.

Also, for value retail to deliver, footprint has to be larger than the three stores it is operating under Star Bazaar now. With only one store till date, the same holds true for its other value foray, Fashion Yatra, which operates as a family store, offering fashion apparel, footwear and accessories.

Trent’s partnership, Tesco, inked last August too is likely to contribute only later this financial year.

With flat same-store sales in both Westside and Landmark, Trent will have to rely mainly on its value retail stores for growth.

Numbers from Trent’s retail peers suggest that the recent pick up in consumer spending too has been witnessed mainly in the value and not the premium segment.
Expansion

Trent may hold some edge over its peers when it comes to financing expansion with Rs 89 crore remaining from its July ’07 rights issue, a low leverage of 0.13 times, a positive operating cash flow where its peers are burdened by debt as a result of rapid expansion.

However, funding ability does not necessarily translate into store expansion. The company has fallen short of expansion targets, citing delays in delivery of premises by developers.

A planned store count of 28 for flagship outlet Westside for FY07 fell short by two. The succeeding year’s target of 37 has not been met even in FY-09 with the number of Westside outlets at 36. Landmark has met expansion targets, but Star Bazaar’s reach remains minimal.

In addition, Trent’s presence is restricted to Tier-I cities, which may leave it unable to capitalise on increased spending by the rural consumer.
Financial performance

Given the downturn faced across the industry, Trent posted flat sales for FY-09 over the previous year. A comparative increase in expenditure, though slight, brought operating profits down 18 per cent. However, Trent transferred its hypermarket division into a wholly-owned subsidiary in the year.

On a consolidated basis, therefore, a sales growth of 18 per cent was wiped out with a 24 per cent increase in expenditure driven by higher employee and selling expenses. Increase in depreciation cut deeper into net profits, bringing it down 97 per cent in FY-09 compared to FY-08. Returns on net worth and capital have also been on the decline from 2006.

via BL