How Third Covid Wave will Trim Fashion Retailers' Revenue by 8 pc in FY2022

The restrictions are expected to be limited to Q4 FY2022 and estimated to be around six to eight weeks. Strong rebound in sales is, however, expected upon lifting of restrictions, akin to that witnessed post the second wave
How Third Covid Wave will Trim Fashion Retailers’ Revenue by 8 pc in FY2022

Renewed restrictions on operating hours of malls and non-essential stores and curtailment of mobility amid the third Covid wave are expected to shave off about 8 percent of fashion retailers’ revenues in FY2022.

These retailers are expected to reclaim up to 70-72 percent of their pre-pandemic revenue in FY2022 as against 78-80 percent expected earlier, according to a report by ICRA.

This is based on an estimated 20 percent decline in-store operating hours during the fourth quarter vis-à-vis the rating agency’s earlier expectation, leading to a commensurate decline in Q4 revenues. The restrictions are expected to be limited to Q4 FY2022 and are estimated to be around six to eight weeks. A strong rebound in sales is, however, expected upon lifting of restrictions, akin to that witnessed post the second wave.

“Typically, January and February are the months of the end-of-season sales (EOSS), where retailers attempt to liquidate their (winter stock) inventory, prior to the launch of fresh Spring-Summer collections. With restrictions on mobility, retailers face a great risk of inventory markdowns as they are expected to resort to higher levels of discounting to attract customers," said Sakshi Suneja, Assistant Vice President, ICRA.

"While this, coupled with increased input costs, would impact their gross margins, rental negotiations and rationalization of other discretionary spends are expected to somewhat limit the decline in operating profit margins (OPM). Inability to clear out excess stock could result in higher borrowings or depletion in cash balances for some retailers in Q4 FY2022,” Suneja further stated.

ICRA currently has a negative outlook on the segment and expects it to revert to its pre-Covid level of sales by Q2 FY2023, assuming the absence of any fresh wave of infections. On the cost structure front, retail entities typically have three key cost components– rental, employee cost, and selling/ promotional expenses which account for 29-30 percent of their total costs, over and above the material costs.

The decline in revenues and profits is expected to be more pronounced for mall-based retailers, particularly those located in metros and Tier-1 cities where the incidence of infections is higher. As seen during the first two waves, malls are among the last segments to witness the easing of restrictions. Even after reopening, the ramp-up in mall footfalls has been only gradual.

Entities with omnichannel (offline as well as online) presence are, however, better placed to tide over the third wave amid the restrictions on offline sales. The pandemic accelerated the adoption of online retailing in India, with most of the retailers reporting more than 50 percent jump on a Y-o-Y basis, albeit on a low base, in online sales in FY2021. The share of online sales (within the total revenues) will likely rise to 7-8 percent in FY2022 vis-à-vis ~3-4 percent during pre-Covid levels.

Fashion retail staged a strong recovery during Q3 FY2022 and reached its near pre-Covid level of sales during the festive season. Part of the recovery could, however, be attributed to the pent-up demand and is estimated to have softened (sequentially) in the month of December 2021. Led by improved revenues, fashion retailers are estimated to have reported an OPM of 18 percent in Q3 FY2022 (similar to that seen in Q3 FY2021), despite no major rental concessions received this time around.

“While the third wave will dent profitability in Q4 FY2022, the credit profile of large, listed entities is expected to remain adequately supported by strong balance sheets, as evinced by healthy liquidity and improved cash flows in Q3 FY2022. Going forward, further spread and severity of the pandemic, the extent of rental negotiations, and pace of recovery in demand will be key monitorable,” Suneja said.

ICRA expects the food and grocery (F&G) retailers to be less impacted during the third wave (vis-à-vis earlier waves), given the current localized and less severe nature of restrictions on store operating hours and on sale of general merchandise. Given the essential nature of operations, despite reduced footfalls, higher transaction size shall adequately support the revenues and profitability of these retailers. Any extension in restrictions on store operating hours or lockdowns which restrict the sale of non-food items will, however, pose a downside risk to such retailers’ financial performance in the near term.

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