Clothing retailers face higher cost risks in ’22

Investors in clothing retailers expect strong gains in 2021. Shares of Trent Ltd, Aditya Birla Fashion and Retail Ltd, V-Mart Retail Ltd and Shoppers Stop Ltd rose 45-65% last year. This compares to the 30% gain in the Nifty 500 index over the same time period.

While circumstances were tough, hopes of a strong recovery in demand once normalcy returned to high feelings for retail stocks. Businesses recorded a steady recovery in revenues during the September quarter.

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While this bodes well, 2022 will not be an easy year. The increase in cases of the Omicron coronavirus variant is an immediate threat to the pace of the recovery. Akhil Parekh, analyst at Centrum Broking Ltd, said: “At first glance there are three concerns at the start of 2022, the first being strong inflationary pressures. price increases taken. Parekh added: “The second concern is the potential restrictions / blockages due to Omicron. Third, the planned increases in the GST rate on textiles.” For now, the GST hike on textiles has been postponed.

Some analysts point out that recent channel checks and conversations with companies indicated that demand in December was a bit slower compared to October-November. Thus, when the results of the third fiscal quarter are announced, the comments of management would shed more light on the situation. Despite Omicron’s concerns, the overall demand outlook looks reasonably encouraging.

“Apparel retail companies could see a gradual recovery in demand entering CY22 amid growing concerns over Omicron. Most companies have strengthened their balance sheets in the year 20-21 thanks to a capital increase, a managed cost structure and good working capital, and are better placed to handle the current uncertainties, ”said the ICICI Securities Ltd analysts in a note to clients last month.

Store additions are expected to accelerate this year, and that’s what investors should watch out for. Additionally, it remains to be seen whether momentum in the online segment continues after the easing of covid restrictions.

Certainly, the strong rally in retail stocks in 2021 suggests that investors are taking into account a strong rebound in demand. But that could limit large increases in the short term. “Strong brands with good track records would continue to benefit from the shift from the unorganized to the organized,” Parekh said. Specifically, for V-Mart, the expected turnaround of Unlimited stores is a factor to watch. Trent’s growth plans and strong balance sheet hold him in good stead, although the stock’s valuations are expensive.Overall, the biggest risk retailers could face in 2022 is a recovery in demand. lower than expected.

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