Apparel retailers’ revenue to grow 25% on strong demand recovery, says CRISIL

Traditional brick and mortar apparel stores are likely to witness an increase of 20-25% year-on-year in its revenue this fiscal, on the back of strong demand recovery despite the third wave of the pandemic, according to a report by CRISIL rating agency. This is in contrast to a 40% decline in revenue, last fiscal.

The rating agency said that the apparel retailers are expected to register an operating margins of 5-7% this fiscal, compared with 9% registered during the pre-pandemic period, driven by improving operating leverage, continued cost rationalisation, and prudent inventory management.

The industry faced losses during the last fiscal and they raised equity capital of about Rs 2,000 crore, thus limiting the deterioration in their capital structure. In addition, recovery in accruals this fiscal will improve credit profiles.

“The rebound in the second and third quarters of this fiscal, and the likely strong performance in the fourth quarter, will push revenue to 75-80% of the pre-pandemic level,” said Anuj Sethi, Senior Director, CRISIL Ratings. He added that less restrictions and shorter duration of the third wave resulted in minimal disruptions of retailers’ operations. Sethi also expects the revenue to be lower than the pre-pandemic levels, despite the retailers’revenue expected to grow 8-10% next fiscal due to improving footfalls and waning impact of the pandemic.

As the traditional retail operations were hit by the pandemic, the retailers have focused on increasing their omni-channel presence. As a result, the share of online revenue is expected to be about 8-9% this fiscal, compared with the pre-pandemic level of 4-5%.

Clothing retailers renegotiated rentals agreements and entered into revenue-sharing models, which led to inventory rationalisation and lower working capital requirement.

“The retailers’ interest coverage ratio is expected to improve to 4-5 times this fiscal from 1 time last fiscal, while total outside liabilities to tangible net worth ratio is set to improve to ~1.4 times from 1.7 times,” said Gautam Shahi, Director, CRISIL Ratings. He added that capital spends on new store openings are expected to be calibrated, resulting in better debt protection metrics.

However, new Covid waves in the future, sustainability of cost optimisation measures and consumer spending in the industry remain key factors to be monitored.