Avenue Supermarts: Growth potential on new stores
Company predicts higher store productivity with larger store format.
Avenue Supermarts‘ (DMART) consolidated profit after tax (PAT) grew 8% y-o-y, which was lower than expected and a 25% miss. This growth came despite a 21% y-o-y increase in revenue, which was primarily due to the company’s expansion in its store network. The reason for this lower than expected growth was weak demand in the margin accretive discretionary category, resulting in a 100 bps drop in gross margin. Furthermore, store productivity remained flat with no increase in revenue per square foot, which was likely due to larger store sizes.
Over the last three years, Dmart has been adding larger stores to their retail chain. With these larger stores, the company expects to see an increase in store productivity. The previously smaller stores are expected to experience a growth plateau after three years. This, along with gradual recovery in discretionary demand, general inflation cool off, softening raw material (RM) pricing and healthy cost efficiency may see improvement in earnings growth. While the robust store adds, coupled with strong cost efficiencies, could play a key role in growth, the near-term challenges within the discretionary segment and rich valuations could be the key monitorables for the company. We have factored revenue/PAT CAGR of 26%/29% over FY23-25E. Consolidated revenue grew 21% y-o-y to `105.9 bn, driven by 14% store area addition. Standalone revenue grew 20% y-o-y to `103.4 bn in Q4FY23. Blended revenue per sqft remained flat y-o-y for Q4FY23 at `31,800, while revenue per store improved 4% y-o-y to `1.3 bn.
DMART saw footprint led revenue CAGR of 20% over FY20-23E, which was 10- 15% lower due to subdued SSSG mainly impacted by 1) the addition of bigger stores in the last couple of years, and 2) weak discretionary demand. However, despite its weak SSSG, DMART has managed to protect its Ebitda margin at pre-covid levels, through its strong cost-control measures unlike most other retailers.