Elevated inflation will cap operating margin of apparel retailers to below pre-pandemic level, even though they are on course to stitch a 21-23 per cent revenue growth this fiscal, says a report.
Strong same-store sales, new store launches and higher contribution from online channels will sew a 21-23 per cent revenue growth for apparel retailers this fiscal, or 500 percentage points over the pre-pandemic (fiscal 2020) levels, despite elevated inflation impacting discretionary demand, a Crisil report said on Wednesday. The agency expects large apparel retailers to grow faster at 25-30 per cent this fiscal, compared with 10-15 per cent by small and mid-sized players. Large players will also lead the improvements in operating margins with 250-300 bps expansion.
However, the agency said though operating margins will improve by 175-200 bps to 7.75-8 per cent boosted by increase in scale leading to better fixed-cost absorption, price hikes, and greater share of private labels, higher input prices will cap margin by 50-70 bps below fiscal the 2020 level.
Among the key inputs, domestic cotton prices almost doubled between April 2020 and May 2022. Despite some moderation since June 2022, the prices are expected to remain elevated.
The report is based on a study of 46 apparel retailers- almost a third of the revenue of organised players, who net₹90,000 crore in annual sales- according to Naveen Vaidyanathan, a director at the agency.
The capex is set to rise over 30 per cent this fiscal because of the uptick in demand. Apart from store expansions, addition of warehousing space and investment towards brand acquisitions, a significant part of spending will be to augment tech platforms and online offerings.
The share of online channels in overall revenue of apparel retailers is expected to cross 15 per cent in FY23 from 5 per cent in FY20, according to Shounak Chakravarty, an associate director at the agency.