Lifestyle fashion retailers to witness 35-42 percent decline in revenues in FY21 : Report
By Retail4Growth Team | October 08, 2020
The food and grocery (F&G) retailers, however, are expected to report 3-7 percent revenue growth in FY2021, according to rating agency ICRA
The coronavirus outbreak has adversely impacted the credit profile of the Indian retail industry. As the consumers deferred their discretionary spends, amid the shutdown of malls across the country as well as closure of non-essential stores across most states in the country, the revenues and profitability of the Indian retail industry were severely impacted in Q1 FY2021.
According to rating agency ICRA, value and lifestyle fashion retailers are expected to witness 35-42 percent decline in revenues in FY21, with an expected decline in their operating profit margin (OPM) by 300-500 bps. Accordingly, it has assigned a ‘Negative’ credit outlook on the value and lifestyle fashion retailers.
According to the agency, given the pronounced revenue decline, the fashion retailers will witness a material weakening in their credit profile in FY2021, though some of the retailers have strong liquidity and/or financial support from a strong parentage.
The food and grocery (F&G) retailers are expected to report 3-7 percent revenue growth in FY2021, with increased proportion of food and staple products (vis-a-vis general merchandise) in their revenue mix, it said.
While this would weaken their gross margins on a Y-o-Y basis, no material weakening in the credit metrics of F&G retailers is expected, ICRA said.
Sakshi Suneja, Assistant Vice President, ICRA, said: “Value and lifestyle fashion retailers reported a whopping 81 per cent Y-o-Y revenue decline in Q1 FY2021, adversely impacted by the lockdown during the first 1.5 months of Q1 FY2021.
“Revenues in Q2 FY2021, though improved sequentially, are substantially lower on a Y-o-Y basis, in the backdrop of local lockdowns and restrictions. Meaningful ramp up in sales is expected from Q3 FY2021 onwards, led by increased demand during the festive season and substantial easing of restrictions under the new unlock guidelines with effect from September 1, 2020.”
Given the high operating leverage of the retail business and against the backdrop of sharp revenue decline, most of the fashion retailers invoked the force majeure clauses in their rental agreements to save on the rental costs during the period of lockdown. These entities are also negotiating their rental agreements with the landlords to convert their fixed rental charges into variable upon commercialisation of operations for FY2021.
To conserve cash and optimise working capital, most retailers have restricted fresh inventory purchase during April to October as they are looking to carry forward their spring-summer inventory till the autumn season.
Nonetheless, given the expected pronounced revenue decline and changing consumption patterns (with increased demand for casual wear), the OPM of retailers like Aditya Birla Fashion, Future Lifestyle Fashions, Shoppers Stop Limited, Trent Limited is expected to weaken by 300-500 bps in FY2021.
The industry also remains exposed to risk of inventory write-offs given the overall slowdown in demand, especially for formal wear segment.
ICRA expects the F&G retailers to witness a revenue growth of 3-7 percent in FY2021. The share of non-food categories in overall revenue mix is, however, expected to remain lower on Y-o-Y basis and constrained by the slowdown in discretionary spends.