End-Of-Season Sales Come Early. That's Good News For Shoppers, Not Retailers

Apparel retailers are sitting on a glut of unsold inventory as shoppers aren't buying clothes like they did a year ago. While that's bad news for the companies as the hit to profit margins could be dire, shoppers can expect serious bargains even as they cope with the stubborn inflation.

"Demand has been extremely sluggish since the middle of March," said Rahul Mehta, chief mentor, Clothing Manufacturers Association of India, which represents over 20,000 apparel makers and retailers in the country.

Most brands, he said, had anticipated a good summer season because last year was "pretty good" as consumers shrugged off fears of inflation and rushed to malls and stores to buy new clothes as Covid restrictions eased.

"But unfortunately, consumers have hit a pause on spending this year," he said. "And now, brands are stuck with high levels of inventory. To get rid of old stock and prepare for the upcoming festive as well as winter season, most retailers have preponed their end-of-season sales."

High inventory levels may delay a rebound, especially for mass apparel makers, said Jefferies, expecting recovery only during the October-March period. Page Industries Ltd., V-Mart Retail Ltd. and Aditya Birla Fashion and Retail Ltd. expect demand to remain muted till about September, before a recovery in the festive quarter.

"I don't think pricing alone is a factor," Ashish Dikshit, managing director, Aditya Birla Fashion and Retail had said during a post-earnings call in May.

"It appears that it is a more widespread sort of slowdown and there are many other macro factors beyond the textile price-value equation," according to him. In terms of outlook, Dikshit said, "Hard to put a number, but our sense is perhaps closer to the festive period we will start seeing the kind of buoyancy that we had seen in the pre-festive period last year."

Apparel and lifestyle retailer Cantabil Retail India Ltd. too started end-of-season sales in June. The company's whole-time director, Deepak Bansal also attributes rising interest rates and the need to save rather than spend on things that are non-essential as key reasons for the slowdown. Other than weak sentiments, he also sees the high base of last year as another dampener. "We see a year-on-year degrowth in April and May," he said.

In April last year, the company’s sales grew 38% over 2019 or the pre-Covid level while in May it grew 28%. "These are unusually high growth rates, so Q1 could see low growth," said Bansal.

Data shared by the Retailers Association of India showed that clothing sales grew at a meagre 4% and 9% in April and May respectively over last year.

The latest Ipsos-Refinitiv monthly survey lends more credence to the slowdown tale. Consumer confidence among urban Indians weakened in June by 2.6 percentage points, it showed.

Amit Adarkar, chief executive officer, Ipsos India, said that consumer sentiments have weakened for jobs, savings and investments for the future, personal finances and the economy.

"Demand for jobs continues to far outstrip supply and most companies are going slow with recruitment due to the global slowdown, because of a prolonged war and high inflation levels. Unfortunately, the Indian economy is not insulated and has been impacted," he said.

Online retailers like Ajio, Tata Cliq and Myntra were the first to kick off their end-of-season sales, last week. Others like Shoppers Stop and Pantaloons have joined the bandwagon later. Some, however, are yet to start.

Arvind Fashions, for instance, will start its sales from June 23.

CMAI's Mehta said that the main worry for companies is lagging cash flow.

Companies like Page Industries Ltd., Aditya Birla Fashion & Retail Ltd., V-Mart Retail Ltd., TCNS Clothing Co Ltd. and Shoppers Stop Ltd. echoed similar sentiments during their fourth quarter earnings call. All these firms, except Shoppers Stop, said that they were dealing with high inventory on account of lower-than-expected demand, crimping their working capital.

"The elevated inventory could see higher discounting and thus weaker margins in the first half of FY24, particularly for the innerwear players," said Abneesh Roy, executive director, Nuvama Institutional Equities.

Mehta estimates that the orders placed by companies for the upcoming festive season has gone down by 25-30%. "This doesn't necessarily mean lower sales are expected, but that companies are placing lower orders keeping into account the existing inventory and cashflow position."

While there isn't too much of a change in terms of styles that are sold in south and west India, the northern part of the country sees a complete revamp of the inventory due to extreme weather conditions. "Even in regular products like shirts, the short-sleeves are replaced with long ones.

So, typically, north requires a much stronger disposal of summer goods," said CMAI's Mehta. "However, it has now become an industry practice to have a uniform discount strategy in stores across the country. So, they often use e-commerce platforms to dispose the unsold clothes."

He said that the end-of-season sales are gradually losing charm because of the year-long offers from brands in the e-commerce platforms.

"Brands mostly sell unsold merchandise online rather than fresh stocks. So, they are able to give discounts throughout the year. Most brands sell half of the goods at regular prices while unfortunately, the remaining is sold through offers, either offline or online, which is increasingly becoming a disposal channel for most brands.

Sakshi Suneja, vice-president and sector head of corporate ratings at ICRA expects demand pressures to persist till the first half of FY24, with the sector projected to show improvement only with the onset of the festive season. "This, coupled with regular network expansion, will translate into an estimated 10% revenue growth for FY24, far from a stellar 51% growth reported last fiscal," she said.

Their operating profit margins are also expected to decline by 100 basis points to 5.7% in the ongoing fiscal given the demand softening, continued high advertisement and promotion expenses.

Suneja said that the slowdown is more pronounced in the value fashion segment, where the average sales per sq. ft. still remains lower than pre-pandemic levels and has been witnessing a sequential decline since Q3 FY23. The premium segment, after having remained resilient till December last year, has also started showing signs of demand slowdown with average sales per sq. ft. remaining below the pre-Covid levels during the January-March period.