PL Stock Report - Avenue Supermarts (DMART IN) - Q1FY24 Result Update - Apparel segment drags, EPS cut by 1.5-3% - BUY

Avenue Supermarts (DMART IN) - Amnish Aggarwal - Head of Research, Prabhudas Lilladher Pvt Ltd

Rating: BUY | CMP: Rs3,840 | TP: Rs4,587

Q1FY24 Result Update - Apparel segment drags, EPS cut by 1.5-3%

Quick Pointers:

§ GM/ EBIDTA margin declines 120/130bps YoY to 15.2%/8.7%.

§ General merchandise has seen recovery with sales moving towards Pre covid levels, Apparel segment remains under pressure.

§ 3 stores added in 1QFY24, av. Area/store at 33.3k (44.4 k QoQ and 60k YoY)

We cut EPS estimates of D’Mart by 3%/1.5% for FY24/25 and target price to Rs4587 (Rs4651 earlier) following disappointing margin performance led by 1) deterioration in sales mix given lower sales in General merchandise and apparel and 2) structural competitive pressures from mass market apparel players (Zudio, Reliance Trends). D’Mart needs to restructure its apparel business given new threat perception, which will take a few quarters for turnaround. D’Mart Ready is on fine footing with highly competitive consumer pricing and increase in delivery charges by competitors due to huge losses.

We factor in 13% growth in Bills cuts but 6% decline in average bill value (6% higher than 2H levels). We now build in 40/33bps decline in GM/EBIDTA margin in FY24 before it starts recovering in FY25. We now estimate 15.3% PBT growth in FY24 and 22.2% over FY23-25. We believe D’Mart has a huge runway to grow with 1500+ store potential and scale up in D’Mart Ready. We expect growth pressures to sustain in 2Q also before recovery in 2H24. D’Mart lacks near triggers, although the stock remains a long term Buy.

Consol Revenues grew by 18.2% YoY to Rs118.7bn. Gross margins contracted by -115bps YoY to 15.2% (PLe:15.0%). EBITDA grew by 2.7% YoY to Rs10.4bn (PLe: Rs10.9bn). Margins contracted by -132bps YoY to 8.7%. (PLe:9.2%). Cost of Retail increased by 16bps YoY to 6.5%. Sales/ store increased by 4.9% in comparison to 4.3/4.4% in 4Q/3Q Sales/ft increased by 3.6% YoY versus 0.7%/-2% in 4Q/3Q Adj PAT grew by 2.5% YoY to Rs6.6bn (PLe: Rs6.9bn). D’Mart Ready: Computed Revenues grew by 29.8% YoY and 16.7% QoQ.

Discretionary continues to remains under stress: General merchandise and apparel remains under pressure in 1Q24 after disappointing 4Q23. Although General merchandise is fast catching up towards pre covid levels, apparel continues to remain under pressure. We believe aggressive pricing and store expansions of Zudio and Reliance trends is diverting customers away from Supermarts to apparel centric stores. We believe that a part of trend is structural and D’Mart needs to make some structural adjustments in coming quarters. We note that General merchandise and apparel share at 23% of sales as of 4QFY23, down 30bps YoY and 180bps lower than 1HFY23 level of 24.8%.

Adds 3 stores in 1Q, store size lower both YoY and QoQ: D’Mart added just 3 stores in 1QFY24 vs 10 stores in 1QFY23 taking the total store count to 327 with retail business area of 13.5mn sq. ft. the average area per new store opened is 33.3k versus 60k sq ft in 1Q23 and 44.4k in 4Q23.

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