Avenue Supermarts: Many roadblocks to clear on its growth runway

• DMart management says that its general merchandise and apparel business has stabilized after Diwali.
• Its Q3 revenue growth has been slower due to muted festive sales, with high inflation eating into staples business.
• It has also slowed down the pace of new store additions even as the sales of its large format stores has improved.
• DMart Ready is yet to show a turnaround but its revenue growth has been strong and net loss percentage has truncated.
  

The third quarter earnings of Avenue Supermarts, which runs DMart lacked the festive boost, as its consolidated revenues and net profit grew 17% each. Its revenue print is lower than the 19-20% compounded annual growth rate (CAGR) it has been clocking in the last nine quarters.

Its foods and non-foods (FMCG) business, which contributes over three quarters of its revenues, has been hit by high-inflation. “This time the festive season sales were lower than expected in non-FMCG. Within FMCG, agri-staples (ex-edible oil) are going through significantly high inflation,” said Neville Noronha, CEO & MD of Avenue Supermarts in its press release.

Analysts feel that the impact of inflation might taper off as soon as the macroeconomic situation improves. But the biggest disappointment comes from its per store growth where revenue grew by 5.2% YoY – below 6.5% seen in the second quarter.

“Sales per store that accelerated somewhat during 2Q seems to have softened a tad again during 3Q – weaker-than-warranted festive offtakes have impacted non-essential sales and salience with consequential impact on margin as well, in our view. Interestingly, however, management commentaries point to a silver-lining on this front (GM&A),” said J M Financial.

Margins to improve only in FY25

Its consolidated operating margin also was flat at 8.3% during the quarter. “A combination of significantly higher store sizes of new stores, which take time to reach stable economics and a soft performance from the high-margin non-staples categories, where demand was impacted by weak footfalls amidst high inflation has been impacting the EBITDA margin,” said Systematix Research.

Its high-margin business of general merchandise and apparel (GM&A) too has been reeling from high competition this fiscal year. Systematix expects margins to normalize only in FY25, driven by increased demand on cooling inflation, along with a pick-up in its GM&A business. DMart has been fighting off the onslaught of stores like Zudio and Reliance Trends, and in Q3, the company said that its apparel business ‘stabilized’ post-Diwali.

In the first two quarters of this year, its general merchandise and apparel (GM&A) sales contribution to total revenue fell by 150 basis points. It has settled at 23% as of Q3, which is 8% lower than its pre-Covid levels. While management paints a better picture for the times to come, analysts prefer to wait and watch to see how competition would play out.

“Although general merchandise and apparel have stabilized in Q3, but loss of sales in apparel is structural and value formats like Zudio and Reliance Trends have reduced the consumer appeal of hypermarts,” says Prabhudas Liladher.

It won’t be an easy fight as well. “DMart is likely to struggle in improving its overall store matrix in the near term as delayed recovery in general merchandise sales has continued to impact the margins over the last several quarters,” adds Axis Securities.

Good times long-term

Despite the challenges, brokerages believe that the company has a long runway for growth. “While store-adds and mix remained weak for many quarters, the worst seems to be behind, in our view. Store additions already underway across the underpenetrated states should support growth ahead,” says Jefferies.

DMart has slowed down the pace of new store addition in the third quarter. It added five stores due to land restrictions and rising real estate prices. The size of stores added were also larger indicating a longer gestation period. But, there is a silver lining here too.

“The gap between revenue per sqft (up 4% YoY) and revenue per store (up 5% YoY) continue to shrink, indicating an improvement in the share of larger-format stores, marking a positive trend. Further, healthy cost efficiencies and a recovery in discretionary demand are likely to drive growth,” opines Motilal Oswal.

The third roadblock that DMart has to clear before it charts a growth path is the turnaround of its e-commerce business. DMart Ready, which is now present across 22 cities, saw its revenues grow by 23% in Q3. Its net loss percentage came in at 14% as compared to 19% in Q3 FY23.

Analysts, however, do believe that the company has the ability to build its business in spite of competition from offline and online players. As it expands in under-penetrated states, it offers visibility of growth. But it has to jump a few hoops to chart a full-fledged recovery after a massive Covid hit.