How to Analyse Retail Sector Companies

Umesh Tripathi: 
Hello everyone, I am Umesh Tripathi and we are learning the concepts of fundamental analysis. In this video, we will learn how to analyse investable companies in the retail sector. We will understand what the retail sector is, look at examples of leading companies, and then discuss how to evaluate businesses in this space. 

What is the Retail Sector? 

The retail sector includes businesses that sell goods and services directly to end consumers. These are the products and services we use in our daily lives and buy either online or from physical stores. 

Retail companies can be: 

• Organised retail such as large chains like supermarkets, department stores and branded outlets. 

• Unorganised retail such as local kirana shops and small neighbourhood stores. 

Within retail, there are important sub-segments, including: 

• Grocery and supermarkets 

• Apparel and fashion 

• Electronics and digital appliances 

• E-commerce platforms 

• Omni-channel formats that combine offline and online 

In India, the retail sector is large and significant. Its overall size in FY24 was around ₹85 lakh crore, contributing roughly 10% to GDP, and it is one of the largest employers in the country. 

Leading Retail Companies 

Some key examples of organised retail companies include: 

• Reliance Retail: diversified presence across grocery, fashion, electronics and more via formats such as Reliance Smart and AJIO. 

• DMart (Avenue Supermarts): operates low-cost hypermarkets focused mainly on grocery and daily needs. 

• Trent (Tata Group) : apparel and lifestyle retail through brands such as Westside and Zudio. 

• Aditya Birla Fashion and Retail: apparel and lifestyle brands including Pantaloons and Louis Philippe. 

These companies may operate through: 

• Brick-and-mortar formats where customers visit physical stores. 

• E-commerce formats where customers order through websites or apps such as Amazon and Flipkart. 

• Omni-channel models that offer both store presence and online shopping options. 

How Retail Businesses Earn Revenue 

Retail companies generate revenue by selling: 

• Merchandise such as groceries, apparel, footwear, electronics, and lifestyle products. 

• Services and value-added offerings such as loyalty programmes and add-on services in stores or online. 

Understanding where the company sells, what it sells, and how it sells is central to analysing the retail business model. 

Key Factors to Analyse in Retail Companies 

1. Business Model and Store Format 

First, understand the business model and format mix: 

• Is the company mainly offline, online, or omni-channel? 

• Which categories does it focus on: grocery, apparel, electronics or a mix? 

• What is the positioning: value, mass, premium or luxury? 

A clear business model helps you understand how the company plans to grow and maintain profitability. 

2. Revenue Metrics and Same Store Sales Growth (SSSG) 

Revenue analysis is crucial for retail. Two key aspects are: 

• Overall revenue growth: is the company growing consistently year on year? 

• Same Store Sales Growth (SSSG): performance of existing stores over time. 

SSSG helps measure organic growth from the current store network. 

For example, if a company has 10 stores, you can either: 

• Look at consolidated revenue from all stores, or 

• Track store-wise historical revenue to understand performance at the individual store level. 

A healthy SSSG, typically above 6–8%, suggests that existing stores are performing well and not just relying on new store additions. 

3. Margins and Cost Efficiency 

Important profitability metrics include: 

• Gross Margin: gross profit as a percentage of revenue, indicating how much the company earns after cost of goods sold. 

• EBITDA Margin: operational efficiency before interest, tax, depreciation and amortisation. 

For grocery formats, a typical benchmark for operating EBITDA margin is around 6–8%. 

Net profit margin (3–5%, depending on format) shows overall profitability after tax and interest. 

4. Store Expansion and Footprint 

Store count and expansion plans are key to growth in retail. Analyse: 

• How many stores does the company have? 

• In which cities and regions is it present (Tier 1, Tier 2 and Tier 3 cities)? 

• Is the network expanding consistently year on year? 

For example, formats like Zudio have expanded rapidly into Tier 2 and Tier 3 cities, which can support future revenue and profit growth. 

5. Inventory Turnover and Working Capital 

Inventory management is critical for retail businesses. 

• Inventory turnover ratio shows how efficiently a company converts inventory into sales. Higher is generally better. 

• Some companies, such as DMart, maintain lower inventory days (for example, around 35 days) compared with peers at 60–65 days, indicating faster stock rotation and better cash conversion. 

You should also review: 

• Debt levels: whether the company is using sustainable levels of borrowing. 

• Working capital: how efficiently the company manages cash, inventory and payables. 

6. Customer Loyalty and Brand Strength 

Brand strength and customer loyalty are very important in retail. Look at: 

• Brand recall and positioning. 

• Loyalty programmes and repeat purchase behaviour. 

• App downloads or membership programmes where relevant. 

Strong brands with loyal customers are better placed to maintain margins and withstand competition. 

7. Omni-channel and Digital Strategy 

Digital adoption and omni-channel capability are increasingly crucial. Check: 

• Whether the company has an active online presence. 

• What percentage of total revenue comes from online sales. 

• How well the online and offline channels are integrated. 

A strong omni-channel strategy can improve reach, convenience and customer engagement. 

Key Ratios for Retail Sector Analysis 

Some important ratios and benchmarks to consider are: 

• Revenue growth: ideally 15% or more year on year, indicating strong top-line growth and market expansion. 

• Same Store Sales Growth (SSSG): preferably above 6–8%, reflecting healthy performance of existing stores. 

• Operating EBITDA margin: for grocery retailers, a range of 6–8% is a reasonable benchmark. 

• Net profit margin: typically, 3–5%, depending on format and category mix. 

• Inventory turnover ratio: ideally 5 times or more, indicating efficient stock management. 

• Return on Capital Employed (ROCE): greater than 15%. 

• Return on Equity (ROE): greater than 15%. 

• Debt-to-Equity ratio: less than 1 is generally comfortable. 

• Footfall growth: positive year on year growth in customer traffic for physical stores. 

• Store count expansion: consistent increase in store network, with a clear strategy across city tiers. 

• Digital sales percentage: growing share of revenue from online channels, indicating omni-channel strength. 

Summary 

Retail sector companies can offer strong long-term potential. To analyse them, focus on: 

• Business model and store formats. 

• Revenue growth and same store sales growth. 

• Margins and cost efficiency. 

• Store expansion and city-level footprint. 

• Inventory turnover, debt and working capital. 

• Brand strength, customer loyalty and digital strategy. 

Companies with strong unit economics, scalable and adaptable models, and disciplined execution can be attractive investment candidates in the retail sector. It is also important to track digital disruption and changing consumer behaviour when making investment decisions in this space. 

This is all for this video. See you in the next one. 

Disclaimer: Investments in securities markets are subject to market risks. Read all related documents carefully before investing.