New Delhi: With rise in discretionary spending and normalisation of store operations post the pandemic, the fashion retail sector is expected to see a 45 per cent increase in year-on-year (YoY) sales in FY23, according to a report by credit rating agency ICRA.
As there is significant increase in advertisement and promotion spending during the year, the fashion retail entities’ operating profit margins (OPMs) are expected to remain range-bound at 7-7.3 per cent, read the report.
The retail sector reported a 55 per cent YoY revenue growth in first nine months of FY2023 due to improved economic activity and an uptick in discretionary spends. On this Sakshi Suneja, vice president and sector head of corporate ratings at ICRA, said, “While this was admittedly partly led by a low base, it also reflects a sharp 35 per cent growth over the pre-pandemic period of first nine months(9M) of FY2020.”
This favourable performance was also aided by nearly 5 million square feet of additional store space set up during FY20-FY22. Segment-wise, the revenue growth is led by premium brands in the metros or tier-I cities. The value-fashion segment, on the other hand, is facing inflationary headwinds and reported a negative same-store-sales growth when compared with the pre-covid period of the first nine months (9M) of FY2020.”
While the 55 per cent revenue expansion achieved in 9M of FY2023 factored in the seasonally strong Q3, the same is likely to sequentially moderate in Q4, translating to the projected 45 per cent YoY revenue growth for FY2023 as a whole, as per the ICRA report.
It said that the gross margins for the retailers in 9M of FY2023 remained largely in line with the FY2022 levels, as the retailers passed on increased raw material costs (led by the increase in cotton prices) to end-consumers. The other key cost heads for a retailer include rental, employee costs, and selling/promotional expenses, which together account for about 30 per cent of the total cost.
Following a lull in FY21, retailers resumed their store expansion plans in FY22, which have continued in FY23 as well. This was also enabled by the large equity raisings in FY2021, coupled with improved cash flows during FY22 and YTD FY23.
Elaborating further, Suneja, said, “Entities in our sample set increased their capital spending to Rs 14 billion in FY2023, implying a YoY expansion of 55 per cent.
While players present in the value-fashion segment continued with their capex plans in FY2023, ICRA expects some curtailment/re-calibration in capex spending by these players in FY2024, till inflationary pressures ease.
Online sales also continue to grow, though at a slower pace, with the waning impact of the pandemic. ICRA expects the share of online sales to increase to 12-14 per cent of revenues by FY25 as against 8 per cent in FY22. This is, however, unlikely to replace the brick-and-mortar sales model any time soon.