In today’s Finshots, we tell you why Trent’s stock has been on a downward spiral of late.

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The Story

About a year ago, we wrote about Trent, the Tata-owned retail darling that was on a roll. Despite the broader apparel retail sector going through a bit of a slump, Trent was defying the odds. Its expansion plans looked unstoppable and its stock was flying high.

And although the stock kept climbing after that, hitting an all-time high of around ₹8,345 per share sometime last year, the rally didn’t last. Over the past six months, it’s shed nearly a third of its value. And again just this Monday, it took another massive 15% nosedive. That’s one of its worst single-day crashes since the COVID chaos of March 2020.

So, what’s going on?

Let’s start with the heart of the matter — Trent’s operating profit, or more precisely, its EBITDA margins. Now, if you’re familiar with the company, you’d know that most of its revenue comes from two key brands: Zudio and Westside. And in the last quarter of FY25, both these brands have been growing aggressively. Especially Zudio, which went on an expansion spree, opening 132 new stores and taking the total count to 765. That’s a staggering 5-year compound annual growth rate (CAGR) of 57% in store additions!

But such rapid growth doesn’t come cheap. More stores mean higher operational costs. There’s staff salaries, rentals, supply chain, the whole shebang. And that has likely put pressure on Trent’s operating profits this year.

But rising costs aren’t the only reason margins are under strain. There’s also been a subtle but important shift in Trent’s revenue mix. Last year, Zudio contributed about 57% to the company’s revenue, while Westside made up 43%. This year, the script has flipped. Zudio’s share has dipped to 49%, while Westside now makes up 50%.

On paper, that might not seem like a big deal. After all, Westside has higher operating margins, right? But Zudio was the real money spinner in terms of volume. Its low cost, fast fashion appeal, sub ₹500 average selling prices and quicker inventory replenishments made it the poster child of Trent’s growth story. So, a decline in Zudio’s share raises eyebrows.

And that dip likely came down to two key factors.

First, Kotak Institutional Equities pointed out a potential issue: store cannibalisation. Zudio’s breakneck expansion led to overlapping locations. Basically, stores opening up in the same pin codes. That means they ended up eating into each other’s sales, keeping revenue growth flat even though new stores were mushrooming.

Second, Westside has been making quiet gains in the digital space. Online sales through westside.com and the Tata Neu platform grew by 45% year on year in the first nine months of FY25. Online now makes up over 6% of Westside’s total revenue. So while Zudio’s physical store expansion hit a ceiling, Westside was quietly capturing more ground online.

Then there’s rising competition. Just a few months ago, Shein made its comeback in India through Reliance after a five year break. And it isn’t stopping there. Reliance also has big plans for Yousta, its affordable fashion brand, with a bold target of 1,000+ stores. Sure, Yousta had only about 55 stores as of October 2024, but the intent is clear. The fast fashion game is heating up, and investors are watching closely.

But perhaps the biggest trigger for Trent’s stock crash was the Q4FY25 financial update that dropped last weekend. Investors weren’t thrilled. And when they’re disappointed, they don’t hold back.

To put things in perspective, Trent’s revenue for Q4 grew by 28% quarter on quarter to ₹4,300 crores. And for the full year, revenue jumped by 39% to ₹17,600 crores compared to FY24. But wait… That’s a good thing right?

Maybe. But if you’ve been a long observer or investor in Trent you might not feel the same.

That’s because this is a company that’s been setting the bar high for years. In Q4FY24, revenue had jumped 53% over the previous quarter. And over the past five years, quarterly revenue had been compounding at a whopping 43%. Compare that to this quarter’s 28% and the growth feels underwhelming. Even the 39% annual growth pales a bit when stacked up against FY24’s 54% jump over FY23.

So the problem isn’t the results. It’s the expectations. Investors had gotten used to a certain rhythm — quarter on quarter revenue growth of 45% and EBITDA margins shooting up at a CAGR of 162% until FY24. And when this year’s numbers didn’t keep up that pace, the mood soured.

And why did this happen, you ask?

You could blame the high base effect. Put simply, even though Trent added ₹4,955 crores in revenue this year, more than the ₹4,456 crores it added the year before, the percentage growth looks smaller because it’s now growing off a much bigger base. Think of it this way. If Trent earned ₹100 crores one year and ₹200 crores the next, that’s a 100% jump. But if it earns ₹350 crores the year after, that’s still a ₹150 crore increase. But percentage wise, it’s just 75%. So even if the company is growing more in absolute terms, it can mislead investors into thinking that the growth isn’t good enough.

Add to that the fact that the broader markets aren’t exactly in a cheerful mood either, thanks to global jitters sparked by Trump’s tariffs kicking in, and Trent has become a casualty in the process too.

But let’s not throw the baby out with the bathwater. Trent’s fundamentals are still strong. It’s just that investor expectations shot through the roof. And when reality didn’t keep pace, the stock took a beating.

So yeah, maybe it’s worth looking at Trent with a bit more optimism.

Until next time…

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