Despite COVID-19 dampening business for most of the year, India Ratings and Research (Ind-Ra) expects apparel retailers to improve operational efficiencies and control costs in FY22. This optimism is based on apparel retailers’ focus on cash preservation and burrowing of additional capital to manage cash crunch. The agency expects demand to recover from the second half of third quarter of FY21 though it does not expect household income to improve throughout FY21.
Ind-Ra expects robust sales growth by large retailers in FY22 to strengthen their financial profile. However, it expects revenues from apparel retail to decline between 40 to 45 per cent year-on-year (yoy) in FY21 as a continued country-wide lockdown beyond the second quarter of FY21 or a prolonged COVID-1 impact may lead to further downward revision of revenue estimates.
COVID-19 to accelerate shift to organized retail
COVID-19 may accelerate the shift from unorganized to organized retail as small players would find it difficult to sustain operations due to declining footfalls, customer apprehension related to store hygiene and sanitization, and credit crunch. The FY21Q1 revenues of apparel retailers declined below 20 per cent with value retailers in Tier II and III cities being marginally placed than metro retailers.
Revenues in the second quarter slowed down due to intermittent lockdowns across the country. The sector could witness only a slow-but-incremental recovery due to the introduction of social distancing norms and the sector could record only 45 per cent sales of the pre-COVID levels.
Pent-up demand to drive sales Q3 FY21
In the third quarter of FY 21, Ind-Ra expects apparel sales to touch 85 per cent of pre-COVID-19 levels. Most sales will be driven by the pent-up festive and wedding season demand as ‘revenge buying’ may play out and support revenues. Apparel demand will finally revive to pre-COVID-19 levels in the fourth of FY21 as the impact of COVID-19 on demand may slowly erode and economic recovery may accelerate.
Ind-Ra expects liquidity profile of its ‘IND A’ and above rated portfolio lo remain adequate for FY21, as large established retailers have already leveraged their balance sheets to address liquidity crunch due to uncertain demand. Their low working capital debt enabled these companies to negotiate favorable terms from their suppliers while largely unutilized working capital provided immediate funding support, says Ind-Ra. The sector’s low-to-moderate leverage levels coupled with strong access to banking services and capital markets also helped these retailers to maintain adequate liquidity reserves for up to three to six months of business needs, it adds. Major retailers like Shoppers Stop, Lifestyle International, Trent, V-mart Retail were net cash positive at FYE20.
Retailers restructure lease expenses, cut discretionary costs
To reduce operating leverage, retailers are restructuring their cost structure besides undertaking multiple cost-cutting initiatives. They are restructuring lease expenses to a revenue-sharing based model besides deferring discretionary capital expenditure including muted new store openings.
Retailers including Lifestyle International, ABFRL and Shoppers Stop plan to reduce their capex by 50 per cent for FY21. They also plan to optimize employee benefit expenses by rationalizing their work force and reducing salaries of the mid- to senior-level employees to lower costs in the near-term. Exiting unviable/low profitability stores may help these retailers preserve cash besides reducing their discretionary costs such as advertisement, sales promotion, travelling expenses and other admin costs.
Online sales to surge
In FY 21, online sales will more than double with digital channels contributing 10 to 15 per cent of total sales by FY22 and beyond. However, physical stores of large retailers will also continue to grow in markets outside Tier I cities due to the low penetration of organized market. Ind-Ra also expects credit levels to increase in FY21 due to lower sales, coupled with almost nil or even negative EBITDA for the full year. However, muted store openings, stable working capital, zero external debt and tight cost control may help the sector preserve cash, thus helping it to rebound strongly in FY22.