A recent industry analysis conducted by ICRA foresees that fashion retailers will see a moderation in revenue growth and a decline in operating profit margins (OPMs) in the current fiscal year (FY2024).
The report, based on the analysis of 11 listed retail entities, suggests that revenue growth is expected to moderate to 10 per cent, compared to a stellar 51 per cent year-on-year (YoY) growth achieved in FY2023.
According to ICRA, the expected revenue growth slowdown is mostly attributed to inflationary headwinds impacting the sector.
Sakshi Suneja, Vice President & Sector Head – Corporate Ratings at ICRA, highlighted the demand slowdown experienced by the fashion retail sector, particularly in the value fashion segment.
“The premium segment, after having remained resilient till December 2023, also started showing signs of demand
slowdown in Q4 FY2023, with its average sales per sq. ft remaining below the pre-Covid levels. Demand pressures
are expected to persist till H1 FY2024, with the sector expected to show improvement only with the onset of the
festive season. This, coupled with regular network expansion, will translate into an estimated 10 per cent revenue growth for FY2024,” Suneja said.
ICRA anticipates demand pressures to continue until the first half of FY2024, with a progress project only with the onset of the festive season.
The report also suggests that OPMs are likely to decline by 100 basis points to around 5.7 per cent due to demand softening and continued high advertisement and promotion spending throughout the year.
Additionally, most of the large retailers also acquired/launched brands in newer categories, particularly in the ethnic wear segment, further affecting their profitability. ICRA expects discounting levels to rise in H1 FY2024 as retailers seek to boost sales, putting out pressure on gross margins.
After limited retail space additions in FY2021, retailers resumed their store expansion plans in FY2022 and FY2023, adding nearly 5.2 million square feet of space.
Despite a slowdown in the value fashion segment, the total capex outlay on store additions by entities in ICRA’s sample set increased by 60 per cent YoY to Rs. 1,460 crore in FY2023.
Retailers as of now, have not indicated any reduction in ad spending in the coming quarters as they are hopeful of demand recovery in H2 FY2024, the report said.
ICRA projects a further 10 per cent increase in capex outlay towards store additions in FY2024, reaching Rs. 1,600 crore.
Suneja noted that post-pandemic, retailers have shifted their priority toward offline expansion, as online sales growth has slowed down. Physical store expansion, especially in Tier 2 and 3 cities, has become the preferred growth route for retailers. Online sales accounted for only around 8 per cent of overall revenues for entities in ICRA’s sample set and are expected to increase to 10-12 per cent by FY2025/26.
The ICRA report indicates that the credit profile of large, listed entities will moderate in FY2024 due to substantial capex plans and expected weakening in earnings. However, it is likely to improve in FY2025 as demand conditions recover. The total debt-to-operating profit ratio is projected to increase to approximately 1.9 times in FY2024, compared to 1.3 times in FY2023, while the interest cover is expected to moderate to 8 times, down from approximately 13 times in FY23.