Zudio’s overpopulation problem
“They realized that Zdio store growth, especially in urban micro markets, has gone beyond what it should have been,” Gor explained in an interview with ET Now. “A more gradual approach would probably have been more sustainable.”The company explicitly acknowledged this strategic misstep in its investor presentation, admitting that store cannibalization and market share saturation in certain urban areas have compressed both margins and growth rates in the near term.
This mirrors a similar reset that Trent performed several years ago with its Westside format, where the company had to recalibrate its expansion strategy after overexpanding into the markets.
Five headwinds are converging on India’s fashion leader
Gor identified a “combination of many issues” that derailed Trent’s previously blistering growth trajectory:
- Save cannibalization: Over-concentration of outlets in the same micro-markets affects productivity per store
- Brand Fatigue: A natural ceiling arises as consumers grow tired of seeing the same fashionable clothes everywhere – ‘people don’t want to wear the same clothes that they see a lot of other people wearing’
- Operational challenges: The need for larger store sizes and expansion into new cities required organizational restructuring
- Soft urban consumption: Broader economic headwinds dampen discretionary spending in the metro areas
- Intensifying competition: Increased rivalry, even in urban strongholds where Trent previously dominated
The gamble at level II/III: different game, different rules
Trent’s solution – accelerating expansion into Tier II and Tier III cities – comes with its own risks. These markets are characterized by vastly different customer profiles, lower purchasing power and unproven retail economics compared to the metro playbook that fueled Zdio’s meteoric rise. However, Gor expects competition in smaller cities will be “not as fierce” as in metros. He says value rivals like Vishal Mega Mart and V-Mart focus on “family-oriented value propositions” that focus on the grassroots, while “Zudio is a much younger population, and much more fashionable clothing.”
This differentiated positioning could provide breathing space, although execution risks remain significant.
Growth expectations: 20% new normal versus 25-30% glory days
Bernstein Projects Trent will deliver 20% revenue CAGR over the next three years – a significant step back from the 25-30% growth rates that justified sky-high valuations during the company’s peak expansion phase.
“I don’t expect the growth rate to be that low in the future,” Gor said, although he was clear that a return to previous growth levels seems unlikely. “We believe that growth will not return to the 25% or 30% level, but to the 20% level.”
The Street is currently posting growth of 21-22%, slightly above Bernstein’s forecast.
Can margins hold up? Technology bets are paying off
Despite the pressure on growth, Gor expressed confidence that current margins are sustainable, rewarding technology investments that have reduced staff costs and generated economies of scale in logistics.
“This margin is sustainable. It cannot improve from here, but it is sustainable,” he stressed, suggesting that operational improvements can partially offset the headwinds of slower growth and market share ceilings.
Valuation tightrope: Price-to-earnings ratio is already falling faster than growth
Interestingly, Trent’s share price has corrected more aggressively than growth expectations have fallen, suggesting the market may already have priced in significant pessimism. “In some ways, earnings have fallen faster than growth expectations,” Gor noted.
Bernstein maintains the 60x multiple as appropriate given Trent’s position as “the best fashion franchise in India” and makes “the right decisions” on store locations, inventory management and competitive positioning.
However, Gor issued a stark warning: “I don’t think the valuation will impact a scenario where growth declines further. If that happens, I can expect a significant derating from now on.”
Quick Trade Battle: Swiggy vs Zomato’s Blinkit
Beyond retail, Gor provided perspective on the fierce high-speed trade war, characterizing Zomato’s Blinkit as the clear market leader, while positioning Swiggy’s Instamart as an undervalued ‘turnaround story’.
Swiggy’s contribution margin should reach breakeven in the first quarter of FY27 as per management guidance, although the path to EBITDA profitability remains uncertain due to the “competitive intensity” of Zepto, Flipkart, Amazon and Reliance.
“The competition is real and will remain,” Gor warned, predicting revenue volatility for both platforms in the coming quarters.
Tactically, Bernstein prefers Swiggy at current prices due to the limited valuation assigned to Instamart, while Zomato remains the structural winner in the long term.
QSR Sector: Still waiting for inflection
The quick-service restaurant industry continues to languish despite menu innovations and cost restructuring efforts by major chains. While recent commentary from Devyani and Westlife suggested January showed improvement, Gor remained cautious.
“Until that happens and people are convinced that demand is coming back, the names are going to struggle,” he said, emphasizing that “margin expansion isn’t really why investors like these companies, it’s just for growth.”
The sector needs a broad-based recovery in consumption for stock prices to move meaningfully – a catalyst that remains elusive.
The verdict: execute or devalue
Trent faces a decisive moment. Successfully executing the Tier II/III expansion while maintaining margins could justify premium valuations and restore investor confidence. However, failure to achieve growth above 20% would likely lead to a “significant derating” of the already compressed multiples.
For India’s leading fashion retailer, the reset is real, and the pressure is on.
This analysis reflects expert market commentary and should not be considered investment advice. Retail stocks are subject to significant volatility and investors should conduct thorough research before making any investment decisions.
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