Fashion retail, one of the worst COVID-19 hit sectors, is beginning to breathe again on the back of rising vaccination and normalization of economic activities and may close the year with 23-25 percent revenue growth if there is no third wave.
The sector was badly affected since the beginning of the pandemic last March as high-street malls and other outlets remained shuttered.
Two other reasons for the optimism is the massive 55 percent fall in rentals in Q1 of FY2022 and more adoption of online retailing to the tune of over 50 percent jump in volume on-year, says Icra Ratings in a report, adding expecting better recovery retailers are also likely to increase Capex by at least 45 percent this fiscal.
Therefore, the agency maintains its negative outlook on the sector and expects full recovery only from the second quarter of the next fiscal.
However, the report warns that if there is a third wave, which virologists still do not rule out, it can potentially shave off up to 40 percent of revenue. And even if the sector closes the year with a 25 percent growth, it will still be 20 percent lower than the pre-pandemic volumes.
The fashion retail segment is expected to clip at 15-17 percent year-on-year during July 2021-March 2022, translating into annual revenue growth of 23-25 percent for FY22, provided there is no third wave, Icra said.
Our channel checks suggest that during July-August, the segment saw a healthy recovery to the tune of 70-85 percent of the pre-pandemic level sales. Though the average ticket size has moderated from FY21 levels yet remained higher than the pre-pandemic levels, footfalls have increased, suggesting that this time around consumers are more comfortable in making repeat visits, the report said.
This ongoing recovery is in contrast to a relatively muted recovery (up to 48-50 percent of pre-pandemic sales) in Q2 of FY21 following the reopening after the first wave, as per the report.
According to Sakshi Suneja, the Sector Head at the agency, “With an improvement in the vaccination coverage, the fashion retail is expected to clip at 15-17 percent from Q2 onwards, translating into annual revenue growth of 23-25 percent in the year to March 2022.”
This shall, however, remain lower by up to 20 percent from the pre-pandemic sales, and thus the agency maintains its negative outlook on the segment and expects it to revert to pre-pandemic sales only by Q2 of FY23, she added.
Besides material costs, retailers typically have three key main cost components -rentals, salaries, and marketing/ promotional expenses - which account for around 30 percent of the total cost.
Though operating profit margins are expected to improve in FY22 on account of revenue growth, it will still be lower by around 450 bps from pre-pandemic levels, she said.
The pandemic spurred online retailing with most retailers reporting over a 50 percent jump in sales over FY21.