Trent: Down and Out? 🛒
- Rupeeting
- Apr 12
- 4 min read
Whenever a Tata Group stock gets bludgeoned by the market, people tend to freak out - and that is what has happened with one of the largest retailers in India: Trent!
Having fallen 18% in a single day (biggest loser of the day on the index), making it the worst fall it has faced in a year, sentiment toward the stock is shaky - but is there cause for concern?
With the trigger being its 4QFY25 business update that didn’t meet analyst expectations, various firms like Goldman Sachs, Morgan Stanley, Kotak, and Antique have cut their long-term price targets by an average of 10% each, causing he crash.
What is happening with the 4th most valuable Tata entity, and should you be wary or double down?
The Zara-Zudio-Westside Story
What Went Right
This holy trifecta of Indian fashion has been on everyone’s watchlists and wish lists, giving investors a clean 10x return since COVID, operating more than 1,000 stores nationwide to cater to any consumer:
At a cursory glance, this business rewiring has been fruitful, with a 30% CAGR revenue growth and a 70% CAGR PAT growth in the last 5 years, outpacing domestic peers like Aditya Birla Fashion (Pantaloons) and international ones like Uniqlo and H&M.
In essence, Zudio has killed it, with a Revenue Per Square Foot average of Rs. 18,000, compared to the industry average of Rs 10,000!
What Went Wrong
Yet, when we take a closer look, 3 metrics seem to paint a different picture:
Sales Per Square Feet have grown at a 8% CAGR over the last 5 years
Operating margins have grown from 9% to 11%, and
Gross Margins have actually fallen from 49% to 44%
Furthermore, as mentioned in the former section, the FY25 results seem to paint a grimmer picture of Trent’s prosperity. While every year saw a growth in revenue by 60-80%, this year showcased a 39% YoY revenue growth while also seeing the largest uptick in store expansion for Zudio ever!
Furthermore, with each passing year, Zudio stores are getting larger as well, with store sizes going from 7,000 square feet to almost 10,000 square feet over the last 5 years! This, coupled with the Sales Per Square Feet metric we measured earlier, suggests that an overall slowdown or moderating in the breakneck speeds of Trent’s growth is imminent.
Competition Ensues
Along with a possible moderation in growth (slower store additions, slower growth in Sales Per Square Feet and contracting margins), there is also the comeback of a player that got banned back in 2020 - Shein, facilitated by none other than Reliance Retail.A direct competitor to Zudio at every level, Shein could disrupt the whole game owing to its ultra-low price points. With the backing of a giant like Reliance to infuse cash and expand rapidly, the new app saw 10,000 downloads within the first week of its launch!
Yet another reputational dent was when the iconic Zara store in Mumbai, sprawling 50,000 square feet, was vacated, since while that outlet may generate over Rs. 120 crore in revenue a year, the rent of the space (of which 60% is used) is Rs. 35 crore a year.
Doesn’t This Sound Familiar?
When we look at this story from a macro view, this story resembles the start of yet another famous retailer that went down a similar path - Avenue Supermarts, known fondly as DMart. The story for the chain that lives by a “value for money” went something like this:
Slower Expansion: DMart's store growth was lagging, adding only 40 stores in FY23 versus 50 in FY22, the highest ever. In tandem, competition like Reliance Retail added 966 stores in just one quarter (March 2023), highlighting DMart's struggle to keep pace.
Decreasing Revenue Per Square Foot: Revenue per square foot decreased from Rs. 34,647 in FY19 to Rs. 27,545 in FY22. This is attributed to inflation-driven budget cuts and a shift towards larger store formats.
Margin Compression: A shift in revenue mix away from the higher-margin General Merchandise & Apparel segment (25-28% margin) towards lower-margin groceries (10-12% margin), combined with competition, has pressured DMart's EBITDA margins, which fell to 7.3% in 4QFY23 from 8.4% a year prior.
All of this resulted in the stock price tanking by 35% in 6 months, much like Trent faced.
With the same narrative playing out, we have a sneak peek into the possible future of Trent over the next year - but just like with DMart, which is a solid company in a solid business that faced a momentary lapse, the same seems to be the case for Trent as well.
Within a year after this lapse, the Revenue Per Square Foot shot back up to Rs. 31,096 in FY23 and to Rs. 32,941 in FY24, surpassing pre-COVID levels as the new, larger stores matured, with competition unable to phase them materially in the long run!
The Valuation Trigger
Now, this is where the real kicker is. Based on the last 6 months of share price data, we can see that in October 2024, at an all-time high of around Rs. 8,300, the stock was trading at a 1-year forward PE of 136x, double the valuation of its peers.
Since then, the stock has fallen by 44% to Rs. 4,620 (as of 9th April 2025), trading at a 60x 1-year forward PE for FY26 estimates - almost half the valuation vanished in 6 months!
If we expect a similar bounce-back as we saw with DMart, where valuations stayed stable but growth caught up and made it worth the wait, a similar situation could arise with Trent.
Considering this is where the industry average hovers around, and Trent follows a similar trajectory, the valuation multiples stay at these levels, and the overexpansion of Zudio pays off.
Alongside the business triggers like its entry into Beauty and Lab-grown Diamonds (by the brand name POME) to expand its in-house product portfolio and chase the dream of 100% own-brand targets (selling only in-house brands in stores), we could see more value in Trent.
Those who find this interesting will just have to wait and see if the stock “trents” down or up!
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