The profit margins of fashion retailers are likely to contract by around 120 bps in FY2024 due to higher discounts and ad spends, despite an estimated 13 per cent revenue growth, the rating agency Icra has said.
According to Icra’s recent industry analysis, the operating profit margins of 11 listed retail entities in its sample set, which accounts for 23 per cent of industry revenue, will moderate by close to 120 bps to 5.2 per cent in FY2024. This is despite a 13 per cent year-on-year (YoY) revenue growth, estimated during the year, supported by network expansion.
The rating agency currently has a stable outlook on the retail sector.
Notably, 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 per cent 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. The rating agency 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 per cent YoY revenue growth in FY2024, it added.
Sakshi Suneja, Vice-president and 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.”
Suneja added that 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 recently.
“Consequently, despite moderate revenue growth, operating margins are set to contract in FY2024 and trail their pre-pandemic levels by around 270 bps,” Suneja mentioned.