The Future Retail Ltd (FRL) stock is up a huge 244% so far this calendar year. A part of that appreciation can be attributed to the superlative debut of bigger peer Avenue Supermarts Ltd (running D-Mart), which brought retail stocks into the limelight. But FRL too hasn’t disappointed on its quarterly performances recently. In fact, better-than expected June quarter numbers took the stock to its year-to-date closing high on Tuesday, a day when broader markets ended lower.
What surprised the Street was not so much revenue performance but profitability, which was ahead of estimates. For the June quarter, FRL’s operating profit margin increased 160 basis points compared to the same period last year, to 4.5%. The measure was better than 4% seen in the March quarter as well.
According to Himanshu Nayyar, research analyst at Systematix Shares & Stocks (I) Ltd, on the operating profit margin front, more than the sales mix, FRL benefitted from an overall favourable operating leverage. “Future Retail’s margins also got a boost from lack of pre-GST discount sales, which other retailers had in order to liquidate their inventory,” added Nayyar.
FRL’s same store sales growth for its hypermarket format Big Bazaar came at 15.9%, the highest in the past five quarters according to its investor presentation. On an overall basis, same store growth stood at 11.8%, lower than 13.3% seen in the March quarter. Same store sales growth is the comparable sales growth of stores that have been operational for over a year.
Strong operating profit growth and a slower pace of increase in finance costs translated into more than doubling of FRL’s net profit to Rs147.8 crore. Currently, the FRL stock trades at 26 times estimated earnings for financial year 2019, based on Bloomberg data. In comparison, the D-Mart stock trades at 55 times FY19 estimated earnings. Of course, superior growth, low free float and strong management pedigree ensure the D-Mart stock fetches a good premium.
If FRL shares have to narrow that gap, needless to say, it will have to continue delivering on the numbers.
There is room for improvement on operating profit margin, say analysts. According to Nayyar, inventory at 80 days is on the higher side and an annual improvement of 3-4 days can be expected. The FRL stock will take cues from these factors.
