Margin concerns weigh on DMart as shopping cart grows

Bigger and better stores may mean more business for retailers, but higher operating costs can cause niggling worries. Avenue Supermarts, which runs the DMart chain of stores in India, is facing this challenge as it shifts to larger stores in its quest to tap the boom in the trade.

Considered among India’s most-profitable retailers with a steady margin profile, Avenue Supermarts’ operating margins remained flat (8.7%) year-on-year in the June quarter (Q1FY25) because of rising operating costs. Employee expenditure and other expenses jumped 29.2% and 25.8%, respectively, in Q1 as the company added new and bigger stores. Consolidated revenue grew 18.6% YoY to Rs 14,069 crore in line with Street estimates.

Managing director and CEO Neville Noronha admitted that the company had been investing to improve service levels at its stores and building capabilities for the future. Analysts estimate that the company could add 45 stores in FY25 versus 41 it set up in FY24. So far in July, it has rolled out two stores – in Thane and Nagpur – taking the tally to 373 outlets. In the June quarter, the company added six stores.

Cost of retailing in Q1 increased by 45 basis points YoY, wiping off gains made in gross margins for the period (40 bps YoY). Net profit margin declined 10 bps versus the previous year to 5.5%.

Analysts see margins staying restricted in the future as DMart focuses on setting up bigger stores, especially in tier II and III markets. Q1 saw store sizes increase by 50% YoY and 20% sequentially, analysts at Prabhudas Lilladher said. Average sales per sq ft grew 4.4% YoY and nearly 6% sequentially during the reviewed quarter.

“This is in line with the sales trend seen in the last couple of quarters, but still not at par with what we believe is the company’s ability to deliver on the sales front, given the huge runway for growth in the sector,” analysts at JM Financial said in a report on Avenue Supermarts this week.

There are divergent views though. Analysts at HDFC Research believe that the worst is over on the margin front as DMart’s general merchandise and apparel (GM&A) portfolio stabilises. “As the retailer’s GM&A portfolio shows improvement, gross margins will get better,” the brokerage said in its latest report on the company. In Q1, gross margins stood at 15.6% versus 14.5% in Q4FY24 and 15.2% for the first quarter of the previous fiscal.

Noronha said there was an uptick in general merchandise and apparel sales in Q1, which gave the company about 23% of its total sales. The retailer derives around 56% of its revenue from foods and 21% from non-food FMCG.

Over the last three months, the Avenue Supermarts stock gave returns of just 8.6%. However, in the last six months, the rate of return was better at nearly 32% on the bourses.