Led by festival season, revenue of apparel retailers to grow 7-8% in FY24

The revenue density, calculated as revenue per square feet, is, however, expected to remain below the pre-pandemic level: CRISIL

The revenue of brick-and-mortar apparel retailers is likely to grow 7-8 per cent this year, primarily owing to the festive season and marriage season, ratings agency CRISIL said on Wednesday. The revenue density, calculated as revenue per square foot, is, however, expected to remain below the pre-pandemic level.

CRISIL, in a release based on the analysis of 39 retailers, said that the sector's growth in the medium term will be helped by store expansion, including in tier 2 and 3 cities. The pace of store area addition will normalise to the pre-pandemic level of 2.2 million square feet in 2023-24 (FY24). In FY23, this was 3.7 million sq ft.

"This, and steady accrual will limit reliance on external debt and keep credit risk profiles 'Stable'," it said.

"While store expansion in metros and Tier I cities will continue, retailers are also expanding to Tier 2/3 cities, which will be relatively smaller-sized outlets. Hence, the pace of area addition will normalise to pre-pandemic levels this year," CRISIL added.

The operating margins of these retailers are expected to be around 8 per cent in FY24, as improving the product mix in favour of the premium segment and lower input costs offset the impact of higher marketing spends.

"Demand from the premium segment is rising gradually with consumers increasingly preferring branded garments, driven by a return to office and buoyant corporate activity. This is helping offset muted-to-low demand from the economy and value segments because of changes in discretionary purchasing decisions, including due to rise in food inflation, in the recent past," said Anuj Sethi, senior director at CRISIL Ratings.

"With continuous store expansion and the onset of the festive and wedding season, demand should improve materially in the third quarter and a part of the fourth quarter, supporting revenue growth."

Moreover, the revenue density at Rs 10,898 per sq ft in FY24 will be below the pre-pandemic level of Rs 11,659 per sq ft in FY18 and Rs 11,382 per sq ft in FY19. It has stayed below those levels since FY21, when the pandemic hit. Last year, in FY22, it was Rs 8,329 per sq ft due to a sudden jump in the number of stores. It will likely stay below the pre-pandemic levels in the next two years.

CRISIL added that the share of online sales in overall revenue, which doubled to 8 per cent last year from pre-pandemic levels, is expected to stabilise as consumers mix online and physical shopping.

Regarding capital expenditure in the sector, CRISIL said that store expansion and investments in technology platforms will keep the cap at the last year's level of Rs 2,000 crore.

"While the capex will be partly debt funded, stable cash flows will ensure debt metrics remain adequate, lending stability to credit profiles. We expect interest coverage and total debt/EBITDA (earnings before interest, taxes, depreciation, and amortisation) ratios of CRISIL Ratings rated apparel retailers to remain in line with the previous year's level of 8 times and 1.5 times, respectively," said Shounak Chakravarty, associate director at CRISIL Ratings.