The global brokerage firm Phillip Capital in its Retail Q3FY23 result review report noted that the top 15 companies across various sectors, including apparel, footwear, innerwear, electronics, and grocery, witnessed a 22% YoY revenue growth, which came below their expectations.
The report said that Trent led the growth with a 61% increase due to the aggressive expansion of its Zudio stores. However, Relaxo Footwear experienced an 8% decline due to subdued demand in the mass segment.
On an LTL basis (excluding Nykaa and Electronics Mart India), the three-year revenue CAGR was 16%, with Trent, Campus Activewear, and D-Mart leading at 36%, 19%, and 19%, respectively. However, TCNS Clothing, Bata India, and Relaxo reported weak growth of 2%, 3%, and 4%, respectively. The festive period in October 2022 was moderate due to some of the festive days shifting to Q2FY23, said the brokerage.
The majority of November sales saw a slump as the wedding season kick-started only late in the month and wedding dates were lower than usual. To make matters worse, the winter season was delayed by 15–20 days in north India, it says.
The report also revealed that premium and luxury segments continued to outperform value in Q3FY23, and the occasion and work-wear categories gained traction, whereas athleisure and comfort wear showed sluggish growth.
Phillip Capital said, their channel checks suggest muted demand for winter wear on January 23. However, consumption is expected to pick up on February 23 due to higher-than-usual wedding dates and players are expecting the market to rebound in 1-2 quarters, it added.
Gross margins for the top 15 retail companies fell 132 basis points YoY compared to a drop of 288 basis points in Q3FY20 (excluding Nykaa, Campus, Go Fashion, Metro Brands, EMIL, and Vedant Fashions). But the rise in average selling prices (ASP) was driven by premiumization in Q3, as brands didn't hike prices.
Retailers operated with high-cost inventory due to lag in the system, despite input price correction/stabilization. Most players expect to flush out high-cost inventory by Q4FY23/Q1FY24.
“We believe that inventory levels remain elevated because Q3 FY23 sales were below expectations. While some players’ discounted sales mixes remained in line with historical trends, some extended or preponed EOSS to boost their toplines and release some working capital,” said Phillip Capital.
The aggregate EBITDA for the top 15 companies fell 0.3% YoY and margins decreased by 273 basis points, down 272 basis points compared to Q3FY20 for the 15 companies (excluding Nykaa, Go Fashion, Metro Brands, EMIL, and Vedant Fashions).
According to a report, other expenses such as rental costs for the top 15 retail companies increased by 32% YoY, three-year CAGR of 17% (excluding the above companies).
The increase in other expenses was attributed to higher marketing investments, offline store expansion/renovation, digital and omnichannel initiatives, higher rental concessions received at the base, and other inflation-sensitive overheads, the report said.
Despite a disappointing Q3 earnings, retailers are still committed to their expansion plans as the shift towards the organized sector remains intact, with ample opportunities for both offline and online penetration. The brokerage believes that store rationalisation is mostly complete, and improving store renovation and supply chain optimization can lead to better SSSG (same-store sales growth).
Trent and Shoppers Stop remain the brokerage's top picks in the retail sector, while Bata India and Aditya Birla Fashion & Retail are recommended as a buy due to favorable valuations. It has a neutral view of Avenue Supermarts, Page Industries, and V-Mart Retail.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.
