- Inflationary pressures have been adversely impacting demand for fashion retail, particularly in the value-fashion segment
- Operating profit margins to moderate by ~100 bps in FY2024 amid moderation in revenue growth and continued high advertisement and promotion expenses
- Increased focus on retail expansion via offline channel; online sales continue to grow, albeit at a slower pace
After reporting a stellar 51% YoY revenue growth in FY2023, revenue growth of fashion retailers is set to moderate in the current fiscal amid inflationary headwinds. According to ICRA’s most recent industry analysis, revenue growth of 11 listed retail entities in its sample set will moderate to 10% in FY2024. Their operating profit margins (OPMs) are also expected to decline by 100 bps to around 5.7%, given the demand softening and continued high advertisement and promotion spending expected during the year. The rating agency currently has a Stable outlook on the retail sector.
Commenting on the trends, Sakshi Suneja, Vice President & Sector Head, – Corporate Ratings, ICRA, says, “The fashion retail sector has been facing demand slowdown due to inflationary pressures, especially post the last festive season. The slowdown has been more pronounced in the value fashion segment, where the average sales per sq. ft still remains lower than pre-pandemic levels and has been witnessing a QoQ decline since Q3 FY2023. The premium segment, after having remained resilient till December 2023, also started showing signs of demand slowdown in Q4 FY2023, with its average sales per sq. ft remaining below the pre-Covid levels. Demand pressures are expected to persist till H1 FY2024, with the sector expected to show improvement only with the onset of the festive season. This, coupled with regular network expansion, will translate into an estimated 10% revenue growth for FY2024.”
Despite robust revenue growth in FY2023 (primarily led by network expansion), the OPMs trailed their pre-pandemic levels by 100 bps, given the demand slowdown and sharp increase in advertisement and promotion expenses undertaken by the retailers to make up for the lost sales of FY2021 and FY2022. Most large retailers also acquired/launched brands in newer categories, especially in the ethnic wear segment and have been undertaking substantial investments to ramp up these brands. Retailers as of now, have not indicated any reduction in ad-spends in the coming quarters as they are hopeful of demand recovery in H2 FY2024. ICRA also expects discounting levels to go up in H1 FY2024 as retailers look to shore up sales, which shall exert some pressure on the gross margins.
Following limited retail space addition in FY2021, retailers resumed their store expansion plans in FY2022 and FY2023 and added nearly 5.2 million sq. ft (reflecting 30% addition over the retail space as on March 2021) of space during this period.
Total capex outlay on store additions of entities in ICRA’s sample set increased YoY by 60% (partly aided by a low base) to Rs 1,460 crore in FY2023, despite a slowdown in the value fashion segment. No major pruning of capex has been announced by retailers so far, given the expected demand revival and favourable long-term demand prospects of the Indian retail industry. Capex outlay towards store additions is thus expected to increase further by 10% in FY2024 to 1,600 crore.
Elaborating on this, Suneja adds, “Post the pandemic, retailers have also recalibrated their focus towards expansion via offline channels. Sales through the online channels, which were earlier expected to grow at a faster pace, have now slowed down. Given the low level of penetration of organised segment within the apparel retail and loss-making nature of online operations necessitating substantial investments, physical store expansion is the preferred growth route for the retailers, especially in Tier-II and III cities. Online sales accounted for only ~8% of the overall revenues of entities in ICRA’s sample set and are likely to increase to 10-12% by FY2025/26.”
Given the sizeable capex plans and expected weakening in earnings, the credit profile of large, listed entities will moderate in FY2024, though it is expected to improve in FY2025 as demand conditions improve. The total debt-to-operating profit is expected to increase to ~1.9 times in FY2024 from 1.3 times in FY2023, with interest cover moderating to 8 times vis-à-vis ~13 times in FY2023.
