Avenue Supermarts ’ shares fell over 3% after the company reported a 160 bps decline in its Q2 margins to 8.4% on Saturday.- The retail chain operator stated that footfalls are yet to recover to pre-pandemic levels.
- It also reported that inflation has impacted its more profitable discretionary non-FMCG segment, especially at lower price points.
The fall in Avenue Supermarts’ shares comes after the company reported a fall in its margins by 160 bps to 8.4% from 8.6% a year ago on account of rising expenses, slower footfall recovery and inflation impacting its more profitable discretionary non-FMCG segment.
The sequential decline was worse from 10% in Q1 this year.
Overall, Avenue Supermarts’ sales grew ₹10,638 crore at 36.6% year-on-year and 6% sequentially. It added 8 new stores during the quarter.
Another challenge that the company faces is the falling revenue per square feet. While this metric has seen a moderate improvement sequentially, at ₹8,580, it is still 6.8% lower than the pre-pandemic level of ₹9,210 per square feet.
“Underlying profitability disappoints. Higher bill sizes + lower footfalls aid FMCG profitability/productivity but are a sign of more targeted shopping with little room for discovery-based purchases (courtesy inflationary pressures), which in turn make a dent on the more profitable GM & apparel sales,” said a report by HDFC Securities.
“The FMCG and staples segment of the business has performed better than general merchandise and apparel segments. Discretionary items in the non-FMCG segment while recovering have still not come back to pre-pandemic levels,” said Neville
Noronha also added that the impact of inflation is more acute in the discretionary non-FMCG segment – meaning non-essential products in the non-FMCG category.
Coupled with this, a 37% year-on-year increase in expenses to ₹9,926 crore also shaved the company’s margins.
Here’s Avenue Supermarts Q2 in numbers:
Source: Company reports
Slow recovery in footfalls and inflation are hampering Avenue Supermarts’ margins. A report by ICICI Direct Research states that most of the positives of the company are already captured at current valuations. So a re-rating would be based on the footfall recovery and the company managing to control its operating expenditures.
“DMart continues to remain India’s most profitable low cost retailer and a strong play on India’s retail growth story and a key beneficiary of unorganised to organised segment shift. However, we believe current valuations capture most positives,” the ICICI Direct report added.
Note: Change as compared to the closing price of ₹4,303 on October 14, 2022
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