Apparel brand and retail companies are likely to report lower than usual revenues in June to September quarter mainly due to supply chain issues on account of goods and services tax (GST).

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Ankur Bisen, senior vice-president - retail and consumer products division, Technopak -- a consulting firm, said there are two reasons why this could be happening. "First is the internal supply chain alignment of companies operating in this space as per the new GST regime. While companies on their own may have been prepared their vendors may not have been ready in terms of supplying on time when the migration happened and their systems may not have been aligned to the requirement of the companies. That's one reason, which I think may contribute to lower sales," said Bisen adding that a disruption of even a couple of weeks in a 12 week quarter is good enough a time frame to impact sales/ revenues.

Secondly, the September quarter was odd as both 'Shraddh' and Navratri/Durga Puja happened in the same month. "Festive buying pattern was a bit erratic this shopping season in some geographies as people don't prefer buying aspirational products in this period," said Bisen adding that there are feelers already in the market of a lower revenue growth in second quarter of fiscal 2018.

While festivities made July to September a strong business quarter, rollout of GST also meant that a lot of companies were forced to go on a stock clearance mode. "While this would have led to higher volumes but value wise it would be much lower," said Bisen.

Echoing the sentiments are Krupal Maniar and Dharmesh Shah, research analysts at ICICI Securities Ltd, said in a report that brands and retail (B&R) companies are expected to report lower revenue growth in a seasonally strong quarter. Also, margins for companies are likely to be impacted by one-time cost on inventory due to GST.

"Companies operating in this space are expected to report a revenue growth of 11% year on year (yoy) during the July to September quarter of fiscal 2018. Operating profit i.e. earnings before interest, depreciation, tax and amortisation (Ebitda) is likely to increase 7% in the same period for pure B&R companies being looked at," the analysts said in the report.

Executives from Aditya Birla Fashion and Retail Ltd (ABFRL), Arvind Lifestyle and Trent Ltd did not respond to DNA Money queries seeking details.

On market response during the July to September months versus the same period last year, Rakesh Biyani, joint managing director, Future Retail, said, "In our value businesses, we have had a strong response and have been able to achieve good growth both in the early part of the festive season all the way up to Dassehra that ended in September."

As for Future Retail's lifestyle business, while the festive season started off reasonably well, the preponing of certain sales have had some impact on the top line in the earlier part of the quarter. "The second half of the quarter was much better and the initial period of October has been reasonable as well. Unfortunately, the extended monsoon is definitely having some impact on business. Diwali is early this time around and it's still raining so it's a bit challenging but otherwise things have been quite good in general," said Biyani.

With the second quarter results season currently on, the I-Sec analysts said that management commentary on consumer sentiment, same-store sales growth, the impact of GST, recovery in trade channel, margin outlook will be key factors to watch. "We recommend investing in the space with a three to four years horizon as companies attain scale by expanding distribution network and improve margins, cash flows and return ratios," the analysts said, adding that Arvind and FLFL are their top picks.

SLOW SALES

  • Revenues are set to grow a slow 11% at apparel retail firms in July to September  
  • Operating profit is liekly to increase 7% during second quarter