Why is D-Street's love for D-Mart fading?

There's trouble in paradise for D-Mart. Once a darling of D-Street, the retail giant is no longer winning over investors. In the past three years, its share price has barely budged, and in just the last two trading sessions, the stock dropped around 8 per cent— despite reporting a healthy 14 per cent YoY revenue growth in Q2 FY25. This cooling enthusiasm, however, isn't due to any significant drop in quality. The company has kept its balance sheet clean, earnings growth green and its sales have surged 27 per cent annually in the past 10 years.

So, what's casting a shadow on this once-bright star? We've identified three key challenges that seem to be weighing on investors' minds.

#1 Rise of E-commerce

For years, D-Mart's edge lay in offering unbeatable bargains. But the Indian consumer has changed dramatically. Convenience is now king, and the allure of doorstep delivery often trumps a trip to the store for a better deal. Quick-commerce platforms are flourishing, and even Dabur recently reported that while its retail inventory is piling up, its e-commerce division is thriving. D-Mart, which built its empire on brick-and-mortar stores, is feeling the pinch.

#2 Surging real estate costs

Owning property is easier these days—but it's also far more expensive. In 2017, D-Mart spent around Rs 28 crore to open a new store. Fast forward to FY24, and that figure has skyrocketed to Rs 68 crore. This has forced D-Mart to scale back its expansion plans. Its store count grew by just 12 per cent in FY24, a steep drop from the 18 per cent annual growth it enjoyed between FY13 and FY23. Worse still, it may miss its target of opening 45 new stores in FY25, having added only 12 in the first two quarters. This sluggish expansion could spell trouble in the long run, as fewer new stores means less overall revenue growth.

#3 An alarming drop in Same-Store Sales Growth (SSSG)

Same-store sales growth (SSSG), a key metric that tracks how existing stores are performing, has been another source of concern. In Q2FY25, D-Mart's SSSG fell to a meagre 2 per cent, a far cry from its historical average of 10-11 per cent. Even more troubling, this decline seems unique to D-Mart. Competitors like V-Mart Retail and Baazar Style reported SSSG between 15 to 40 per cent in Q2FY25. If D-Mart's older stores are losing their appeal while competitors thrive, it suggests that the retailer may be struggling to keep pace with evolving consumer preferences.

Final verdict

Let's be straightforward. While there are indeed fundamental business concerns presently for D-Mart, it remains a quality company. Even our proprietary Value Research Stock Ratings has assigned an impressive Quality Score of 9 to the retail giant. However, competitive threats are known to put pressure on even the best of companies, with Asian Paints being a prime example. D-Mart's recent underperformance serves as a reminder of the same. Investors should approach the stock with caution until the retail giant finds sustainable solutions to counter the threats mentioned above.

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