Apparel Retailers to Stitch 21-23 pc Revenue Growth this Fiscal

Operating margin to expand, but inflation to limit it below pre-pandemic levels.
Apparel Retailers to Stitch 21-23 pc Revenue Growth this Fiscal

A combination of strong same-store sales, new store launches, and higher contribution from online channels will sew 21-23 percent revenue growth for apparel retailers this fiscal, or ~500 basis points (bps) more than the pre-pandemic (fiscal 2020) level, despite elevated inflation impacting discretionary demand.

According to a report by CRISIL Ratings, “Operating margin1 will improve 175-200 bps on-year to 7.75-8 percent, supported by an increase in scale leading to better fixed-cost absorption, price hikes, and greater share of private labels. 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 than what it was before the pandemic.”

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 organized sector’s revenue of ~Rs 90,000 crore, indicates as much.

Naveen Vaidyanathan, Director, CRISIL Ratings, says, “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 are helping offset in-store footfalls that continue to trail pre-pandemic levels amid high inflation.”
 

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