Third Covid wave to trim fashion retailers’ revenues by 8% in FY22: ICRA

ICRA has a negative outlook on the fashion retail segment and expects it to revert to its pre-Covid level of sales by Q2 FY2023

   
Fashion retail store in the pandemic

Renewed restrictions on operating hours of malls, non-essential stores and curtailment of mobility amid the third Covid wave is expected to shave off 8 per cent of fashion retailer’s revenues in FY22.

According to rating agency ICRA, these retailers are expected to reclaim upto 70-72 per cent of their pre-pandemic revenues in FY2022 as against 78-80 per cent expected earlier.

“This is based on estimated 20 per cent decline in store-operating hours during the fourth quarter vis-a-vis rating agency’s earlier expectation, leading to a commensurate decline in Q4 revenues,” ICRA said.
Besides, the agency said that restrictions are expected to be limited to Q4FY22 and estimated to be around six to eight weeks.

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Strong rebound in sales is, however, expected upon lifting of restrictions, akin to that witnessed post the second wave, it said.

ICRA currently has a negative outlook on the segment and expects it to revert to its pre-Covid level of sales by Q2 FY2023, assuming the absence of any fresh wave of infections.

“Typically, January and February are the months of the end-of-season sales (EOSS), where retailers attempt to liquidate their (winter stock) inventory, prior to the launch of fresh Spring Summer collections. With restrictions on mobility, retailers face a great risk of inventory markdowns as they are expected to resort to higher levels of discounting to attract customers,” said Sakshi Suneja, Assistant Vice President and Sector Head, ICRA.

“While this, coupled with increased input costs (cotton yarn and manmade fibres), would impact their gross margins, rental negotiations and rationalisation of other discretionary spends are expected to somewhat limit the decline in operating profit margins (OPM). Inability to clear out excess stock could result in higher borrowings or depletion in cash balances for some retailers in Q4 FY2022.”

In addition, ICRA said that decline in revenues and profits is expected to be more pronounced for mall-based retailers, particularly those located in metros and tier-1 cities where the incidence of infections is higher.
“As seen during the first two waves, malls are among the last segments to witness easing of restrictions. Even after re-opening, the ramp-up in mall footfalls has been only gradual,” ICRA said.

“Entities with omni-channel (offline as well as online) presence are, however, better placed to tide over the third wave amid the restrictions on offline sales.”