Demand threads a delicate weave for most apparel retail companies

Sean Stress: Retail majors stitch through low single-digit growth or same-store sales decline

For the fourth consecutive quarter, the apparel retail sector has delivered a muted performance. Despite the festival and wedding seasons, most retail majors saw low single-digit growth or a decline in same-store sales. What exacerbated the already-muted demand environment was rising inflation and an inauspicious period (shradh) during the quarter.

While revenue growth for the retail majors was in the 20–25 per cent range year-on-year, this was largely driven by new store additions. The outlier in the listed space was Trent, which delivered revenue growth of over 50 per cent, led by store additions and 10 per cent like-for-like growth.

IIFL Research points out that aggregate sales in the coverage universe grew by 12 per cent, excluding Trent, while growth 

was 7 per cent when comparing the July-September and October-December quarters to the respective year-ago periods.

Overall demand trends remain subdued, and management commentary across the board does not paint a rosy picture for the near term, say analysts at the brokerage, led by Percy Panthaki.
 

PhillipCapital (India) also believes that growth in the short term will be tough to come by. Research analysts Ankit Kedia and Rahul Jain of PhillipCapital state, “Despite the shift of peak winterwear demand to January 2024, the short-term outlook stays challenging, as the majority of the retailers haven’t seen a substantial shift in the consumption trend in the fourth quarter of 2023–24 (FY24). Hence, we expect like-to-like sales to remain flat.”
 

While margins expanded in the December quarter, there could be some pressure on the raw material front. Profitability improved in the quarter as gross margins expanded by 28 basis points (bps) over the year ago, aided by falling raw material prices for the 18 retail companies tracked by PhillipCapital.
 

The brokerage points out that the average cotton price corrected by 30 per cent and 15 per cent, respectively, for the nine months of FY24 and the third quarter of FY24 as compared to the year-ago periods. Prices of Indian cotton increased in February by 5 per cent on account of lower crop arrivals. This could impact the margin outlook of the apparel majors.

At the operating profit level, Trent stood out, registering a growth of 85 per cent. Margins grew by 336 bps to 18.8 per cent.
While Page Industries reported flat sales over the year-ago quarter despite volume growth of 4.5 per cent, margins grew 263 bps to 18.7 per cent.
 

Aditya Birla Fashion Retail (ABFRL) reported a 16 per cent growth in revenues, while operating profit was 27 per cent higher. Margins came in at 13.3 per cent, which was 141 bps higher than the year-ago quarter.
 

The beat on operating profit was led by better-than-expected margin performance in Pantaloons on the back of cost controls.
 

Trent remains the top pick in the apparel retail segment given the growth outperformance amidst a slowdown. While the stock is the key pick for Nuvama Research, it is cautious on Page Industries.
 

For Sharekhan Research and PhillipCapital, too, Trent remains the preferred pick. PhillipCapital is betting on Shoppers Stop among smallcaps while it is ‘neutral’ on ABFRL and Page Industries.
 

IIFL Research has a ‘buy’ on Trent and Shoppers Stop, while it has an ‘add’ rating on ABFRL, Page Industries, and Go Fashion (India).