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) high, despite high inflation impacting discretionary demand, Crisil said.
“Operating margin will improve by 175-200 basis points year on year to 7.75-8%, supported by increased scale leading to better absorption of fixed costs, price increases and more large share of private label However, higher input prices will cap operating lower margin 50-70 basis points from pre-pandemic level Among major 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,” the rating agency said.
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.
According to Naveen Vaidyanathan, Director of CRISIL Ratings, “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 fiscal years. 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 inflation high.”
CRISIL Ratings expects large apparel retailers to grow 25-30% faster this fiscal year, compared to 10-15% for their small and medium-sized counterparts2. This would be on a relatively lower basis as large ones, being mostly located in shopping malls and high streets, have been impacted more by pandemic-related closures.
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Article first published: Thursday, August 11, 2022, 11:04 a.m. [IST]