Apparel companies likely to lag retail peers for the June quarter

Higher inventory may lead to discounting, dent profitability

Apparel companies would likely be the worst hit among listed retailers in the June quarter, pegged back by falling footfall and higher inventory. Sales updates, so far, indicate steady growth trends for staples, even as discretionary segments continue to lag.

While the staple category could post growth even on a two-year basis (low base last year), recovery levels for apparel makers are in the 25-45 per cent range as compared to the Q1FY20 levels.

Nihal Mahesh Jham and Abneesh Roy of Edelweiss Research say: “Apparel retailers will again see the biggest impact across discretionary categories due to the second wave.” Unlike quick-service restaurants, e-commerce for apparel companies remains an evolving channel and also with restrictions on delivery of non-essentials, this channel will likely see limited growth, they add.

Greater restrictions in malls after the start of the second wave and limited operations could lead to fashion retailers, such as Trent, Aditya Birla Fashion and Retail (ABFRL), V-Mart Retail, and Shoppers Stop, post a sequential revenue decline ranging from 50-75 per cent. Sales picked up only towards the second half of June, though not enough to offset the decline in the first two months of the quarter.

Weak sales also weighed on the profitability of fashion retailers. Analysts led by Abhijeet Kundu of Antique Stock Broking believe the loss of sales and unabsorbed high fixed cost would lead to lack of operating leverage and in turn result in negative operating profit. Losses at the operating level ranged from Rs 43 crore for Trent to Rs 233 crore for ABFRL.The key risk for the sector, according to Edelweiss Research, is heightened discounting going ahead, given the higher inventory for these companies.

Among the key players, while Trent would likely post a strong recovery led by Zudio, Page Industries might not gain as much as it had in the March quarter, given that operations were closed for a significant period during the quarter. Demand trends for casual, leisure and kids wear, however, continued to remain strong. 

Trent and V-Mart are among the top picks in the sector.