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Festive fervour, early end of season sales aid Q3 revenue growth for retail sector

ICICIdirect Research 24 Feb 2023 DISCLAIMER

What’s Buzzing 

Retail sector companies witnessed healthy revenue growth momentum in October 2022 driven by festive season but the momentum waned post the festive season. Companies witnessed deceleration in revenue growth in November and December. Some companies resorted to preponing of the end of season sales (EoSS) to boost revenues. 


The industry witnessed heightened competitive activity with increased discounting in certain categories like innerwear and kitchen appliances. Further, mass category products sales were negatively impacted by higher price points owing to price hikes taken by companies in earlier quarters and higher inflation, which impacted the purchasing power of mass category consumers. To boost revenue growth, some companies have made price corrections in Q3FY23 with easing of raw material costs. Trent continued to be the outperformer with sales increasing 61% YoY to Rs 2171 crore. On a three-year CAGR basis, revenue growth was at an impressive 36%, the highest among lifestyle retailers. Other discretionary categories like luggage (VIP Industries) and jewellery (Titan) also reported steady traction. Despite inflationary pressure and price hikes, discretionary consumption stayed strong at premium-end (ABFRL, Shoppers Stop, Titan continued to be insulated to an extent). Inflationary stress was more acute at lower price point categories as seen in Relaxo’s Q3FY23 performance (volume de-growth of 9%) and D-Mart’s GM and apparel segment struggling to reach pre-Covid levels. On a favourable base, our retail coverage universe reported revenue growth of 18% YoY with impressive three-year CAGR of 17%. We note that while apparel players saw pressure on gross margins (owing to higher competitive intensity and increased discounting), EBITDA margins were also under pressure owing to increased marketing spends and higher opex cost. Overall EBITDA margins declined 274 bps YoY to 11.6% (pre-Covid level: 13.4%). Store addition pace remained steady in Q3FY23 after accelerated store addition in Q2FY23. 

Our Perspective 

Despite a challenging environment, retailers continued calibrated expansion of their store network with the opening of four D-Mart stores, 21 Pantaloons, 15 V-Mart, 40 Zudio, eight Tanishq and 14 Mia Jewellery stores. With softening of key raw material prices, companies like Relaxo and V-Mart have taken price corrections that should enable them to gradually recover lost volumes. Stock prices of retail companies have corrected significantly from their recent peak to factor in the softer margin profile in Q3FY23. We believe that softening of margin profile is transitionary and over the longer term the sector will continue to witness strong sustained growth in revenues and gradual improvement in margin profile, which would enable retail companies to maintain premium valuation multiples, going ahead.

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