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ICRA predicts that the revenue growth of fashion retailers would slow to 10% in FY24 due to the effects of inflation.

Fashion retailers’ revenue growth is expected to moderate to 10 per cent in the current fiscal amid inflationary headwinds, according to credit rating agency ICRA’s recent industry analysis. The industry reported a 51 per cent YoY revenue growth in the previous fiscal FY2023.

ICRA’s sample set includes 11 listed retail entities. The rating agency expects their operating profit margins (OPMs) to decline by 100 bps to around 5.7 per cent, given the demand softening and continued high advertisement and promotion spending expected during the year. The rating agency currently has a stable outlook on the retail sector.

Commenting on the trends, Sakshi Suneja, Vice President & Sector Head, – Corporate Ratings, ICRA, said,“The fashion retail sector has been facing demand slowdown due to inflationary pressures, especially post the last festive season. The slowdown has been more pronounced in the value fashion segment, where the average sales per square feet still remains lower than pre-pandemic levels and has been witnessing a QoQ decline since Q3 FY2023.”

She added that 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 square feet 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.

Despite robust revenue growth in FY2023 (primarily led by network expansion), the OPMs trailed their pre-pandemic levels by 100 bps, given the demand slowdown and sharp increase in advertisement and promotion expenses undertaken by the retailers to make up for the lost sales of FY2021 and FY2022. Most large retailers also acquired/launched brands in newer categories, especially in the ethnic wear segment and have been undertaking substantial investments to ramp up these brands.

Retailers as of now, have not indicated any reduction in ad-spends in the coming quarters as they are hopeful of demand recovery in H2 FY2024. ICRA also expects discounting levels to go up in H1 FY2024 as retailers look to shore up sales, which shall exert some pressure on the gross margins.

Following limited retail space addition in FY2021, retailers resumed their store expansion plans in FY2022 and FY2023 and added nearly 5.2 million square feet (reflecting 30 per cent addition over the retail space as on March 2021) of space during this period.

Total capex outlay on store additions of entities in ICRA’s sample set increased YoY by 60 per cent (partly aided by a low base) to Rs 1,460 crore in FY2023, despite a slowdown in the value fashion segment. No major pruning of capex has been announced by retailers so far, given the expected demand revival and favourable long-term demand prospects of the Indian retail industry. Capex outlay towards store additions is thus expected to increase further by 10 per cent in FY2024 to 1,600 crore.

Elaborating on this, Suneja shared, “Post the pandemic, retailers have also recalibrated their focus towards expansion via offline channels. Sales through the online channels, which were earlier expected to grow at a faster pace, have now slowed down. Given the low level of penetration of organised segment within the apparel retail and loss-making nature of online operations necessitating substantial investments, physical store expansion is the preferred growth route for the retailers, especially in Tier-II and III cities. Online sales accounted for only ~8 per cent of the overall revenues of entities in ICRA’s sample set and are likely to increase to 10-12 per cent by FY2025/26.”



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