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2nd Wave To Hit Apparel Retail Growth, Profitability


Temporary store closures, restricted mobility, and curtailed discretionary spending because of the second wave of Covid-19 infections are set to pull down revenue growth of the organised apparel retail sector to 15-20% this fiscal, from our earlier expectation of 30-35%, CRISIL has stated in a report.


"And this revenue growth would be on a low base of last fiscal, which saw a decline 35-40%. Slower recovery in revenue will mean operating margin of apparel retailers will remain moderate at 4-5% for this fiscal, compared with our earlier expectation of 7-8%.

Retailers may have to take recourse to additional debt to plug near-term cash-flow mismatches, which could impact their credit quality. That said, CRISIL-rated apparel retailers are expected to be better placed due to strengthened balance sheets, supported by equity raise of ~Rs 2,000 crore made last fiscal," CRISIL has stated in a report.

2nd Wave To Hit Apparel Retail Growth, Profitability

This is based on an analysis of 60 CRISIL-rated apparel retailers, which account for a third of the sector revenue. It assumes staggered easing of localised restrictions and reopening of stores, leading to demand recovery from the second quarter of this fiscal, as the impact of the second wave abates and the vaccination drive gathers pace.


Localised restrictions starting from the second half of April this year resulted in pan-India average retail mobility (footfalls to retail stores) falling sharply to 36% of the pre-pandemic level2 in May compared with 77% in February. Temporary store closures and constrained mobility have sharply impacted sales of apparel retailers in the first two months of this fiscal, though reopening from June is likely to ignite a gradual recovery.

Says Anuj Sethi, Senior Director, CRISIL Ratings, "Revenue this fiscal will only be 70-75% of the pre-pandemic level (60% in fiscal 2021). Moreover, unlike the first wave that had higher impact in Tier-1 cities, the second wave has spread in Tier-2 and 3 cities and rural areas as well, resulting in a similar impact on departmental and value fashion retailers."

Amid this sharp impact on offline sales, acceleration in online shopping has been a saving grace and bodes well for retailers with omni-channel presence. The share of e-retail sales will likely rise to 8-9% this fiscal compared with pre pandemic level of 4-5%.

To clear inventory and attract footfalls, retailers may offer higher discounts, especially during initial months of reopening of stores, and this could impact profitability. However, renegotiation of rental arrangements and trimming of employee cost, which together account for 20% of revenue, will help keep operating margin at 4-5% this fiscal, a slight improvement over 3-4% last fiscal, but much below the pre-pandemic level of ~9%.

Read more about: apparel crisil
Story first published: Thursday, July 1, 2021, 13:01 [IST]
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