Rating agency ICRA projects that the operating profit margin (OPM) for fashion retailers will remain in the range of 13-14% for FY2025, despite an anticipated revenue increase of 14-15%. This outlook is attributed to ongoing inflationary pressures and a slowdown in discretionary spending, necessitating high advertising and promotion expenses to drive sales growth.
According to ICRA’s latest analysis, fashion retailers experienced an 18% year-on-year sales growth in Q1 FY2025, fuelled by store network expansion and new product category introductions. However, the premium segment saw a contraction of approximately 3% in average sales per square foot, while the value fashion segment has shown signs of recovery, reaching pre-pandemic sales levels for the first time in Q1 FY2025.
The OPM has remained flat year-on-year, reflecting increased A&P expenses linked to new store openings and product categories. ICRA expects marginal sequential sales growth in Q2 FY2025, particularly as the festive season transitions to Q3 this year.
Commenting on the trends, Sakshi Suneja, Vice President & Sector Head – Corporate Ratings, ICRA, said “The discount levels have remained limited since Q2 FY2024 as players focus on protecting their gross margins. Retailers, however, continue to spend aggressively on advertisement and promotions, especially with the festive season around the corner. Further, retailers continue to invest substantially to ramp up their presence in the new brands and categories, including those in ethnic wear, beauty, and value fashion, among others, which have been acquired/launched recently. Consequently, the OPM of ICRA’s sample set of companies is expected to remain range-bound in FY2025 and will trail the pre-pandemic level by around 310 bps, despite moderate revenue growth.”
Despite the profit margin challenges, optimism remains for the long-term demand prospects within India’s retail sector, attributed to low penetration levels in the organized market. Retailers are planning a 20% increase in capital expenditure towards store additions, to Rs.2,200-2,300 crore in FY2025, with a focus on tier-III and tier-IV cities. Online sales, which accounted for around 7% of overall revenues in FY2024, are expected to grow to 10% in the medium term.
Elaborating further on the retailers’ plans to capture the unorganised segment, Suneja said “There has been a notable increase in competition in the value fashion segment over the last two years, with several large, organised players introducing new value fashion brands at low average selling prices (below Rs. 500). Retailers are also aiming to increase the share of private labels within their revenue mix and are passing on the benefits of higher gross margins in the form of lower prices to woo customers at the lower end of the pyramid.”
Overall, ICRA anticipates the credit profiles of fashion retailers to remain stable in FY2025, with total debt to operating profit before depreciation, interest, taxes, and amortization (OPBDITA) at approximately 2.2 times and an interest coverage ratio of three times.
About ICRA Limited
ICRA Limited was set up in 1991 by leading financial/investment institutions, commercial banks and financial services companies as an independent and professional investment Information and Credit Rating Agency. Today, ICRA and its subsidiaries together form the ICRA Group of Companies (Group ICRA). ICRA is a Public Limited Company, with its shares listed on the Bombay Stock Exchange and the National Stock Exchange. The International Credit Rating Agency Moody’s Investors Service is ICRA’s largest shareholder.
