Demand recovery, expansion plans may keep apparel retailers in fashion

Aggressive expansion, online sales, and margin gains are positive for ABFRL and Trent

The stocks of apparel retail companies are witnessing an up-move over the past couple of trading sessions despite weakness in the markets and the benchmark indices. Trent, Aditya Birla Fashion Retail (ABFRL), and V-Mart Retail have gained 3-9 per cent amid expectations of demand recovery and improvement in profitability. Gradual reopening of stores, rising footfall, and higher discretionary spending have led to greater investor interest in these stocks. 

In a recent report on V-Mart Retail, analysts at Antique Stock Broking highlighted that consumer sentiment has changed towards indulgence and discretionary, as the shift is towards occasion-buying against last year's need-based buying. While sales in the festival period are expected to be good, restrictions by governments to prevent large gatherings during the season may restrict exceptional performance, they added. Apparel stocks were one of the worst-affected during the pandemic with revenues in FY21 dropping 40 per cent and an even greater impact on operating profits. Most retailers had posted losses at the net level. 

While the second Covid wave dented the financials in Q1FY22, recovery has been faster than the year-ago quarter. With most stores operational and footfall improving, brokerages expect sales and margins to pick up sharply. 

Krupal Maniar and Darshit Shah of ICICI Securities believe demand will surpass pre-Covid sales from the December quarter (Q3FY22) with further easing of restrictions, healthy pace of vaccination, and increased mobility (opening of offices, malls, multiplexes). Saving on fixed costs and higher operating leverage are expected to expand operating profit margins. 

What should boost demand and volumes further is the festive and wedding season. 

Optimism around growth is also reflected in the aggressive store expansion plans of the two large players. Trent has a network of 184 Westside and 137 Zudio stores, with an additional 13 Westside and 12 Zudio stores expected to open amid easing restrictions. Jefferies Research expects store additions at the standalone level to increase from 64 in FY21 to 88 in the current financial year. The company, which is aiming to scale up its store presence significantly, is expected to end FY23 with 95 store additions. 

Revenue recovery, increased online presence, aggressive expansion of its store footprint, and structural cost-savings should help the company to post 25 per cent operating profit growth going ahead, said ICICI Securities. It has a target price of Rs 1,170 — a 12 per cent upside from the current levels. The stock has gained 55 per cent over the past year. 

ABFRL’s Lifestyle Brands segment added 380 new stores in FY21, reaching a total of 2,379 stores. The company expects to add 250 stores annually, tapping into higher growth categories of women’s and kids’ wear, as well as Peter England/Allen Solly. The Pantaloons segment added 19 stores in FY21 and plans to increase the store count by 60 stores in FY22. Revenues of the two formats are expected to see a 17-22 per cent growth over FY20 levels. 

While the ABFRL stock recovered sharply over the past year, analysts at Motilal Oswal Research highlight that it has trailed in comparison to its peers in the sector primarily due to its high leverage position. “With leverage reaching comfortable levels and return ratios/cash flows expected to improve over the next five years, we believe the stock does not fully capture the company’s steady growth potential, even after factoring in the losses in ethnic wear during the gestation period,” they wrote. 

While brokerages are bullish on the prospects of the two largest apparel retail players and there can be near-term gains, investors should await consistent improvement on the sales and margin fronts in the coming quarters, as well as a dip in their prices before considering these stocks.