Apparel retailers in tight spot amid Covid restrictions
Profitability to see more pressure owing to higher raw material costs
After a strong start to the March quarter, restrictions following the second wave of Covid infections have dented the sales growth of most segments, with apparel retailers being the worst-impacted.
A sales update by retailers for the March quarter conveys strong growth over the year-ago quarter, which had a weak base.
While grocery retailers such as Avenue Supermarts have reported 17 per cent growth in the quarter, Titan (jewellery) saw sales spurt 60 per cent, and quick-service restaurants too are expected to have posted double-digit growth. Among discretionary categories, footwear, innerwear/athleisure, and kitchen appliances too are expected to sustain strong growth.
Apparel retailers, however, are expected to be at the bottom of the growth chart with average sales either flattish or marginally lower year on year. While higher footfalls at the start of the quarter were aided by end-of-season sales, the gains were offset by a temporary shutdown of malls and stores and other restrictions by state governments, including sales being restricted to essential categories.
Within the segment, the exceptions are Trent and V-mart, which are expected to post high single-digit growth, led by Zudio stores and a nonmetro presence. Higher demand for athleisure and a lower base would also help Page Industries and TCNS Clothing report double-digit growth.
In the near term, the sector faces multiple headwinds both on account of lockdown in multiple states as well as a rise in raw material costs. Companies with a higher presence in Maharashtra will be hit more than panindian players. About 29 per cent of
Shoppers Stop stores are in Maharashtra, while the metric for Avenue Supermarts and Westlife Development is 36 per cent and 41 per cent, respectively.
While the margin trajectory is improving, Edelweiss Research highlights that raw material costs are witnessing a spike, especially for apparel players, with yarn prices rising by 30 per cent over the past six months. The impact on profitability, however, is lower than was the case last year when the sudden lockdown caught them unawares.
Analysts at ICICI Securities say companies have rationalised many fixed-cost items and strengthened their balance sheet via equity dilution over the past year and are in a much better position to operate in the pandemic-hit environment. Investors should await consistent growth improvement before considering investment in the retail space.