Apparel retailers’ growth outlook has improved but pre-pandemic level is still far away

Brick-and-mortar apparel retailers, which faced a major challenge in the previous financial year due to the onset of the Covid-19 pandemic, will likely record better-than-expected growth in the fiscal year ending this month.

According to ratings firm CRISIL, apparel retailers are likely to clock 20-25% growth for 2021-22. This is better than the last revised projection of 15-20% growth but comes after a 40% decline in business for the year ended March 31, 2021.

The new growth projections are much lower than original expectations but won’t help the retailers return to the pre-pandemic level any time soon.

CRISIL had initially projected growth of 30-35% for the current fiscal year. This was tempered down last June due to the second wave of the pandemic that had a serious impact on consumer sentiment in March-May, especially in North India.

The rating agency said that the strong recovery in demand despite the third wave of the pandemic in December 2021 and January 2022 has given a tailwind to the sector.

“As for profitability, apparel retailers, which could barely break-even last fiscal, should log operating margins of 5-7% this fiscal — compared with around 9% pre-pandemic — backed by improving operating leverage, continued cost rationalisation, and prudent inventory management,” CRISIL said.

The ratings firm said the losses last fiscal year were funded by raising equity capital of Rs 2,000 crore, thus limiting the deterioration in capital structure. That, coupled with the recovery in accruals this fiscal year, will strengthen credit profiles of the retailers.

The firm analysed the numbers of 35 apparel retailers, accounting for a fourth of the sector’s revenue.

“Of these, the top eight apparel retailers, representing a fifth of the sector’s revenue, have seen strong recovery in the first nine months of this fiscal, with revenue growing 55-60% on-year on higher festive and wedding sales,” CRISIL said.

On the flip side, even though the sector is expected to record growth of 8-10% in the coming year, it may be a tad lower than the level required to go to the pre-pandemic level.

Meanwhile, with retail operations curtailed over the past two years, retailers have augmented their omni-channel presence. Consequently, the share of e-retail sales is seen at 8-9% this fiscal year, compared with the pre-pandemic level of 4-5%.

Apparel retailers renegotiated rentals and entered into revenue-sharing agreements after the first wave of the pandemic in 2020. They have also limited seasonal collections, leading to inventory rationalisation and lower working capital requirement, CRISIL said.