New Delhi [India], August 10 (ANI): Revenue of apparel retailers is expected to grow by 21 to 23 per cent in the current financial year driven by better same-store sales and higher contribution from new stores set up in the past 2-3 fiscals, CRISIL Ratings said in a report.
A combination of strong same-store sales, new store launches and higher contribution from online channels will sew 21-23 per cent revenue growth for apparel retailers this fiscal, or 500 basis points (bps) more than the pre-pandemic (fiscal 2020) level, despite elevated inflation impacting discretionary demand, CRISIL Ratings said.
"Revenue growth of apparel retailers will be driven by better same-store sales and higher contribution from new stores set up in the past 2-3 fiscals. These had contributed sub-optimally during the pandemic. Additionally, rising average selling price and transaction size is helping offset in-store footfalls that continue to trail pre-pandemic levels amid high inflation," Naveen Vaidyanathan, Director, CRISIL Ratings, said in the report.
Apparel retailers' operating margin is expected to improve 175-200 bps on-year to 7.75-8 per cent, supported by increase in scale leading to better fixed-cost absorption, price hikes, and greater share of private labels.
However, higher input prices will cap the operating margin 50-70 bps below the pre-pandemic level. Among the key inputs, domestic prices of cotton almost doubled between April 2020 and May 2022. Despite some moderation since June 2022, they are expected to remain higher that what it was before the pandemic.
Balance sheets of apparel retailers were managed well during the pandemic through timely equity raising, which helped mitigate the impact of volatility in revenue and profitability. Now, given improving revenue and profitability, and therefore higher cash from operations, apparel retailers are well placed to invest in increasing stores and online presence, which will gradually benefit their credit profiles.
The study is based on 46 CRISIL-rated apparel retailers, which account for more than a third of the organised sector's revenue of Rs 90,000 crore.
CRISIL Ratings expects large apparel retailers to grow faster at 25-30 per cent this fiscal, compared with 10-15 per cent by their small and mid-sized counterparts.
This would be on a relatively lower base as the large ones, being predominantly situated in malls and high streets, were impacted more by the pandemic-related lockdowns.
They will also lead the improvement in operating margins with 250-300 bps expansion this fiscal. Because of higher fixed costs, their operating margins were more negatively impacted during the pandemic. That situation will now reverse.
Moreover, they typically have stronger and well-established brands that command higher gross margins compared with mid-sized apparel retailers.
Capex by apparel retailers is set to rise over 30 per cent on-year this fiscal because of the improvement in demand. Apart from store expansions, addition of warehousing space and investment towards brand acquisitions, a significant part of the spending would be to augment tech platforms and online offerings. The share of online channels in the overall revenue of apparel retailers is expected to cross 15 per cent this fiscal vs 5 per cent in fiscal 2020. (ANI)