A combination of strong same-store sales, new store launches and a higher contribution from online channels will drive revenue growth of 21-23% for apparel retailers this fiscal year, or around 500 basis points (bps) higher than pre-pandemic (FY2020), despite high inflation impacting discretionary demand.
According to a report by CRISIL Ratings, “Operating margin1 will improve by 175-200bps year-on-year to 7.75-8%, supported by increased scale leading to better cost absorption fixed prices, price increases and a greater share of private labels.However, the increase in input prices will cap the operating margin at 50-70 basis points below the pre-pandemic level. inputs, domestic cotton prices almost doubled between April 2020 and May 2022. Despite some moderation since June 2022, they are expected to remain higher than before the pandemic.
Apparel retailers’ balance sheets have been well managed during the pandemic through timely fundraising, which has helped to mitigate the impact of revenue and profitability volatility. Now, with improved revenues and profitability, and therefore increased cash flow from operations, apparel retailers are well positioned to invest in increased stores and online presence, which will gradually benefit their credit profiles.
A study of 46 CRISIL-rated clothing retailers, which account for more than a third of organized sector revenue of around Rs 90,000 crore, indicates the same.
Naveen Vaidyanathan, Director of CRISIL Ratings, said: “Revenue growth for apparel retailers will be driven by better same-store sales and a higher contribution from new stores created in the last 2-3 years. These had contributed suboptimally during the pandemic. Additionally, the rise in average selling price and transaction size helps offset in-store footfall which continues to track pre-pandemic levels amid high inflation.