Apparel retailers brace for tight Q1 as sales slump

Cost-cutting efforts unlikely to make up for revenue fall

After a weak March quarter (Q4), apparel retailers are expected to face the brunt of the lockdown in the June quarter, with revenues falling over 80 per cent as compared to the year-ago quarter. Unlike retailers, such as Avenue Supermarts, which get a majority of sales from groceries, apparel retailers have been operating with a minimal number of stores and are held back by ongoing restrictions.

With just one month of sales in the quarter, analysts at Antique Stock Broking believe that general trade and e-commerce gained market share at the expense of modern trade, as consumers avoided crowded places.

The June quarter also saw e- commerce majors launching sales, which dented t he revenue of retailers.

While retailers such as Aditya Birla Fashion Retail (ABFRL) and Shoppers Stop could see revenues fall by 75-80 per cent, the sales decline for Trent and V-mart Retail is pegged at 60-68 per cent. V-mart’s predominant presence in non-tier 1 locations, which are less impacted, is expected to help limit the revenue loss. Analysts expect value retailers to do better than branded and lifestyle players. Apparel retailers with presence in malls as compared to standalone and highstreet stores were impacted more, as they were allowed to open only in the fag end of the quarter.

For apparel retailers, the sharp decline in sales has coincided with a number of store additions in FY20, which can weigh on their performance.

To limit the impact on financials, companies have been looking at ways to cut costs by asking for a waiver or lower rentals for the duration of the lockdown.

Analysts expect rentals to come down by 20-40 per cent. Further, retailers have been bringing down the headcount as well as restructuring remuneration, which is expected to reflect partly in the June quarter with a full effect visible in the September quarter.

However, despite the cost reduction, analysts at Motilal Oswal Financials Services believe that the revenue impact would far outpace the cost reduction and most retailers are expected to post losses at the operating profit level.

While Shoppers Stop and Trent are expected to post operating losses to the tune of ~40-50 crore, ABFRL may post losses of ~147 crore, according to analysts at Edelweiss Research.

Given the negative operating leverage, which is more acute in the case of apparel retailers, investors should avoid these companies.