Operating margin will 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, according to a report by analytical company CRISIL. 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.
Strong same-store sales, new store launches, and higher contribution from online channels will add 21-23% revenue growth for apparel retailers in fiscal 2023, or ~500 basis points (bps) more than the pre-pandemic (fiscal 2020) level, despite elevated inflation impacting discretionary demand. Operating margin will improve 175-200 bps on-year to 7.75-8%.
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.
A study of 46 CRISIL-rated apparel retailers, which account for more than a third of the organised sector’s revenue of ~Rs 90,000 crore, indicates as much.
“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,” said Naveen Vaidyanathan, director, CRISIL Ratings, in a press release.
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 overall revenue of apparel retailers is expected to cross 15 per cent this fiscal vs ~5 per cent in fiscal 2020, added the release.
“The expected improvement in cash accrual, which will largely fund capex, will strengthen the credit profiles of apparel retailers this fiscal. Debt metrics are seen comfortable with gearing below 0.5 time and interest coverage set to improve to over 10 times this fiscal, compared with ~6 times last fiscal. Balance sheets are already sound with several apparel retailers having raised equity even during the pandemic,” said Shounak Chakravarty, associate director, CRISIL Ratings.
In the road ahead, further waves of the pandemic, resultant lockdowns and mobility restrictions, and higher-than-expected input cost inflation that could lead to downtrading and ultimately affect profitability would bear watching.
Fibre2Fashion News Desk (NB)