Apparel retail stocks in focus on recovery gains led by easing of curbs

Double-digit growth and improving profitability to drive earnings in FY23

Led by Trent, which hit its lifetime-highs recently, apparel retailers gained between 10-36 per cent over the last three weeks. Given the network of physical stores, the stocks will be major beneficiaries of the unlock theme with most states doing aways with restrictions. With improving footfalls, analysts expect the sector to post double-digit growth in FY23.

This coupled improving margins on the back of higher volumes, cost rationalisation, higher private label sales and lower debt are triggers which are expected to sustain the rally.

After muted demand trends in the early part of the March quarter (Q4FY22) due to a fresh Covid wave, sales have seen a quick recovery especially in March. The improvement in the situation was led by easing restrictions, return to office trend and higher footfalls at malls.

For FY22, revenues of brick and mortar apparel retailers are expected to grow 20-25 per cent after declining 40 per cent in FY21 due to Covid-19. Though the unlock process and pent up demand have helped, market share gains, price hikes, expansion and omnichannel presence are other factors which have led to revenue expansion for listed retailers.

Says Jitendra Upadhyay, senior equity research analyst at Bonanza Portfolio, “After the sharp recovery, healthy performance from all segments in the sector is expected in Q4FY22. This will boost revenue to more than 60 to 65 per cent of the pre-pandemic level. Revenue is expected to record a healthy double-digit growth in FY23 as well, on sustained footfalls.”

Market share gains and higher contribution from non-physical stores were the key gains over the last two years and this could continue going ahead. Say Akhil Parek and Kevin Shah of Centrum Research, “During the pandemic many of the small retail outlets had to shut their operations which benefitted bigger, cash rich, branded retailers.” While the retailers have been aggressive in expanding their physical retail footprint, what could add to their revenue growth is the omnichannel presence with its share moving up from low single digit prior to the pandemic to high single digit now.

The other positive is improving profitability. Says Anuj Sethi, Senior Director, CRISIL Ratings, “Apparel retailers, which could barely break even last fiscal, should log operating margins of 5-7 per cent this fiscal (FY22) — compared with 9 per cent pre-pandemic — backed by improving operating leverage, continued cost rationalisation, and prudent inventory management.” Analysts expect companies to maintain this trend despite the expansion and reversal of certain expenditure such as employee costs, rentals and advertisements.

Crisil Ratings expects the sector to grow by 8-10 per cent in FY23 as well on sustained footfalls and waning impact of the pandemic though it will still be lower than the pre-pandemic level. The growth outlook (on a high base) bodes well for the  listed retail apparel pack which posted a 42-88 per cent y-o-y growth for 9MFY22. Higher revenue growth and margins translated into improved bottom lines; after posting losses in 9MFY21, listed retailers turned the corner this year (9MFY22).

Among companies in the listed space, while Page Industries benefited from the surge in demand for athleisure segment, there could be some moderation of the same going ahead. However, Bonanza Portfolio expects the company to outperform with growth coming from kids wear, athleisure and rural penetrations. The management remains optimistic about maintaining margins of 20-21 per cent.

Brokerages are also positive on Trent given its industry leading same store sales growth and operating profit margins. The company is undertaking an aggressive store expansion to capture a bigger share of the fast/value fashion pie through Westside, Zudio and Utsa. The improving trajectory of Star Bazaar coupled with better traction in Zara should also aid growth over the medium term, says Systematix Research.

For ABFRL, in addition to market share gains from popular brands such as  Louis Phillipe, Allen Solly, Van Heusen and Peter England the company is also gaining traction in ethnic wear (by partnering with major designers) and the athleisure/ sportswear segment with the acquisition of Reebok brand. The company is also foraying into the direct to consumer space and is developing a portfolio of digital brands across categories.

However, the recent rally has meant that current prices have exceeded the target prices of these companies barring ABFRL. Investors should await for a meaningful correction before taking exposure to the stocks which are trading at 50-100 times their FY24 earnings estimates.