September 21, 2023: Network expansion to support revenue growth in FY2024 despite inflationary headwinds Debt coverage metrics set to moderate in FY2024 due to weakened cash flows and large capital expenditure plans toward store additions
Higher discounts following a demand slowdown and increased advertising and promotion expenses to support revenue growth are likely to pressurise profit margins of fashion retailers in FY2024. According to ICRA’s recent industry analysis, the operating profit margins of 11 listed retail entities in its sample set, which accounts for 23% of industry revenue, will moderate by close to 120 bps to ~5.2% in FY2024. This is despite a 13% YoY revenue growth, estimated during the year, supported by network expansion. The rating agency currently has a Stable outlook on the retail sector.
The fashion retail segment has been struggling with a demand slowdown since Q3 FY2022 due to inflationary headwinds. Following a weak Q4 FY2023, the fashion retailers in ICRA’s sample set reported a sequential growth of 13% in sales in Q1 FY2024, led by expansion in store network and some uptick in discretionary spending, partly attributable to the preponement of end-of-season sales.
Segment-wise, the value fashion segment remained more impacted than the premium one and is yet to attain its pre-pandemic level average sales per sq ft. ICRA expects the players to report a flattish QoQ revenue growth in Q2 FY2024, as inflationary pressures continue to play spoilsport. Shifting of the festive season to Q3 FY2024 will additionally restrict growth in Q2, with meaningful growth in revenues to start flowing in from Q3 onwards. This, coupled with regular network expansion, will result in a 13% YoY revenue growth in FY2024.
Commenting on the trends, Ms. Sakshi Suneja, Vice President & Sector Head – Corporate Ratings, ICRA, said: “In line with our expectations, fashion retailers increased their discounting levels in YTD FY2024 to spruce up sales, which have been under pressure since the last festive season due to inflationary pressures. Retailers are pinning hopes of a demand recovery on the festive season and thus, continue to spend aggressively on advertisement and promotions. Most large retailers are also undertaking substantial investments to ramp up the visibility of their brands in the ethnic wear segment, which have been acquired/launched recently. Consequently, despite moderate revenue growth, operating margins are set to contract in FY2024 and trail their pre-pandemic levels by around 270 bps”.
Post the pandemic, fashion retailers focused on the rapid expansion of their store networks in FY2023, given the muted store expansions during the pandemic period in FY2021 and FY2022. Overall, the retail space area increased YoY by 27% (aided by a low base), with retailers in ICRA’s sample set spending Rs. 1,460 crore towards capex in FY2023, despite the demand slowdown in the value fashion segment. No major pruning of capex has been announced by retailers so far, given the expected demand revival during the festive season and a favourable long-term demand prospects of the Indian retail industry.
Capex outlay towards store additions is thus expected to increase further by 18% in FY2024 to 1,750 crore. Going forward, offline store addition will remain the key channel of expansion for retailers, given the low level of penetration of organised segment within the retail sector. Online sales also continue to grow, albeit at a much slower pace. These sales accounted for only ~8% of the overall revenues of entities in ICRA’s sample set and are likely to increase to 10% 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 1.4 times in FY2023, with interest cover moderating to 8 times vis-à-vis ~12 times in FY2023. The same shall, however, improve to 8 times and 1.07 times, respectively in FY2025.” Ms. Suneja reiterates.
About ICRA Limited:
ICRA Limited was set up in 1991 by leading financial/investment institutions, commercial banks and financial services companies as an independent and professional investment Information and Credit Rating Agency. Today, ICRA and its subsidiaries together form the ICRA Group of Companies (Group ICRA). ICRA is a Public Limited Company, with its shares listed on the Bombay Stock Exchange and the National Stock Exchange. The International Credit Rating Agency Moody’s Investors Service is ICRA’s largest shareholder.
