Avenue Supermarts Ltd, the operator of the DMart supermarket chain of stores, began FY26 on a dull note. Sure, standalone Ebitda margin for the three months ended June (Q1FY26) expanded from Q4FY25’s multi-quarter lows, but the measure was down year-on-year for the fifth straight quarter. Q1FY26 Ebitda margin came in at 8.24%, up a cool 146 basis points sequentially, but down 66 bps versus the same period last year. Consequently, Q1FY26 Ebitda at ₹1,313 crore grew 7.6% year-on-year, lower than the 10.8% growth seen in FY25.
Avenue’s problems are pretty consistent. Continued competitive intensity within the fast-moving consumer goods (FMCG) sector hurt gross margin. Further, operating costs jumped thanks to efforts to improve service levels, capacity building and inflation in entry-level wages. Nuvama Institutional Equities estimates pressure in margins will continue, given the competitive trends, and has cut FY26 and FY27 profit-after-tax estimates by about 6% and 8%, respectively.
In Q1FY26, Avenue’s staff costs and other expenses as a percentage of revenue rose year-on-year by 21 bps and 19 bps, respectively, to 1.9% and 4.5%. Avenue did not benefit from sales-mix-led margin improvement as well. The share of the comparatively high-margin general merchandise & apparel (GM&A) segment stood at 24.73% in Q1FY26 versus 24.9% in Q1FY25, while the low-margin foods segment’s contribution was 55.6% versus 54.8% in the same periods.
Growth slows further
Put together, overall revenue growth wasn’t exciting. The company had already disclosed its revenue in an update earlier this month, reporting a 16.2% year-on-year growth, which fell short of analysts’ expectations. Revenue growth impact of around 100-150 bps was mainly due to high deflation in many staples and non-food products, said Avenue.
Q1FY26 like-for-like (LFL) growth came in at 7.1%, lower than 8.1% in Q4FY25, and 9.1% in Q1FY25. For Avenue, LFL growth refers to revenue growth from sales of same stores that have been operational for at least 24 months at the end of reporting period.
Sales per store growth has further slowed to 1.9% in Q1FY26 from 2.7% in Q4FY25, said analysts from IIFL Securities, adding, “There could be further downside risk to this metric as inflation moderates.” As per IIFL, moderation in sales per store and expectations of continued margin pressure over the medium-term could result in further earnings cuts.
In short, store additions played a key role in driving Q1FY26 revenue growth. Avenue opened nine stores in the quarter, taking the total count to 424 as of 30 June. Some analysts expect the company to add about 60 stores in FY26 vis-à-vis 50 in FY25.
Rich valuation
Avenue’s shares have risen about 20% from their 52-week low of ₹3,340 on 3 March, but are still down over 25% from their 52-week high. The stock’s expensive valuations continue to be a sore spot, more so now as growth prospects are subdued and elevated costs pose a threat to earnings outlook. Competitive pressures from quick commerce companies in large urban markets is likely to play spoilsport.
“With the new CEO transition now in effect, we remain watchful of any strategic pivot to improve mix, margins, and digital execution,” said an ICICI Securities report dated 14 July. The broking firm feels the sustained tilt towards staples and value baskets raises the risk of a structural shift in consumer spending behaviour, while intensifying competition continues to test the resilience of Avenue’s everyday-low-cost-led model.
Avenue’s shares trade at a whopping about 80 times estimated earnings for FY26, as per Bloomberg consensus. This leaves little room for error.
