DMart shares fall over margin decline and slow recovery in footfalls

• 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.

Shares of Avenue Supermarts fell over 3% in the first half today, after the retail chain reported a decline in margins in Q2 FY23. Weak market sentiments and fears of recession dragged the markets down, contributing to Avenue Supermarts trading in the red.

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, CEO and MD, Avenue Supermarts, explaining how the demand situation is like across its key segments.

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. DMart retails a wide variety of products like toys, bedsheets, cosmetics and utensils in addition to small appliances.

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

Here’s what brokerages recommend

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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