Avenue’s poor sales mix is a drag

While announcing the December quarter results (Q3FY23) on Saturday, the company said that the FMCG (fast-moving consumer goods) and staples segment continued to outperform the general merchandise and apparel segments. The latter’s share in revenue was about 25% in H1FY23. Consequently, the weak sales mix has taken a toll on margins. D-Mart’s standalone gross profit margin in Q3 fell by 60 basis points (bps) year-on-year (y-o-y) and 20bps sequentially to 14.3%, below analysts’ expectations. One basis point is 0.01%. While earnings before interest, tax, depreciation and amortization (Ebitda) margin remained flat sequentially, the measure has contracted by 96bps y-o-y.

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Unsurprisingly, post Q3 results, analysts have trimmed their respective near-to-medium earnings estimates. Some also cut their target prices for the stock. For example, analysts from Jefferies India have lowered its FY23-25 earnings by 6-8% factoring in softer store adds and lower margins. The broking firm has lowered its price target for the stock to ₹3,550 apiece. According to Jefferies, growth pick-up, especially in general merchandise, is a must for share price performance.

D-Mart’s Q3 revenues have risen by nearly 25% y-o-y to ₹11,305 crore and it seems impressive. But this growth was primarily driven by store area additions, which was up by 22% y-o-y. Further, it is incrementally adding larger sized stores and this has partly weighed on the recovery in revenue per square feet as newer stores take longer to ramp up. Data from Nuvama Research shows on an annualized basis, Avenue’s revenue per square feet in Q3 was 10% lower than Q3FY20, a pre-covid quarter. Y-o-y, revenue per square feet was down by 1.5%. Muted show on this front indicates pressure on volumes, point out analysts.

The upshot is D-Mart’s net profit increased at a comparatively slower rate (than revenue growth) of 9.4% y-o-y to ₹641 crore.

Hereon, investors will watch the pace of recovery closely. “Channel checks suggest D-Mart’s weaker unit economics (than usual) is not just a function of high inflation keeping discretionary purchases in check but also a consequence of a fair challenge to D-Mart’s value proposition by deep-pocketed peers within D-Mart’s top districts,” said HDFC Securities Ltd analysts in a report.

In Q3, D-Mart has further expanded its e-commerce operations in four new cities. The number of store additions last quarter were soft at only four stores, taking the total count to 306. Analysts expect store additions to be higher in the ongoing March quarter as seen in previous years. Meanwhile, D-Mart is in the process of starting a pharmacy shop-in-shop via its subsidiary, Reflect Healthcare and Retail Pvt. Ltd at one of its stores. This is yet another pilot and will help the company use its existing store infrastructure. However, near-term benefits from this move would be limited.

Against this backdrop, investors are visibly anxious. The company’s shares were down by almost 5% on Monday to ₹3678.35 apiece. The stock has now fallen by 20% from its 52-week highs seen on 2 September on NSE, reflecting the concerns to a good extent. Even so, the stock’s pricey valuation may keep sharp near-term upsides at bay. Avenue shares trade at 76 times estimated earnings for FY24, shows Bloomberg data. The key question for investors is whether the muted growth will persist in the coming quarters or if recovery will gather pace.