Apparel retailers on weak footing as Covid-related curbs dent sales

Higher raw material costs will put pressure on profitability

After a strong start to the March quarter, the imposition of restrictions following the second wave of Covid infections has dented the sales growth of most segments with apparel retailers being the worst impacted. Sales update by various 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 a 17 per cent growth in the quarter, Titan (jewellery) saw sales spurt 60 per cent, 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 trajectory.

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 helped, the gains were offset by temporary shutdown of malls and stores and other restrictions by various state governments including sales restricted to essential categories.

Within the segment, the exceptions are Trent and V-Mart are expected to post a high single digit growth led by Zudio stores and non-metro presence. Higher demand for athleisure and 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 rise in raw material costs. Companies with a higher presence in Maharashtra will be hit more than pan-India players. About 29 per cent of Shoppers Stop stores are present in Maharashtra, while the metric for Avenue Supermarts and Westlife Development are 36 per cent and 41 per cent respectively.

While the margin trajectory is improving, Edelweiss Research highlights that raw material prices are witnessing a spike especially for apparel players with yarn prices rising by 30 per cent over the last 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 that companies have rationalised many of the fixed costs and strengthened their balance sheet via equity dilution over the past year and are in a much better position to operate in the current pandemic-hit environment.

Investors should await consistent growth improvement before considering an investment in the retail space.