Retail companies Q2 growth to be driven by pricing

Wednesday, 13 July 2011
Retail companies Q2 growth to be driven by pricingDespite odds, Indian retail growth story continues for major retailers like Pantaloon and Shoppers Stop. They are likely to report sales growth of 12 to 16 per cent in the quarter ended June. Their performance is certainly better than what they did a year earlier. However, experts say, this growth is expected to be driven more by pricing than by volumes. In general, retail companies took a price increase of about 20 per cent to set off the impact of higher raw material costs and excise duty on branded apparel. Inventory too has gone up for most apparel makers during the quarter, which suggests that volume growth may have been affected. It also suggests that demand may not have been very strong during this period. While the expected double-digit revenue growth looks decent, the situation may not be that bright as far as profitability is concerned. Operating profit margins may remain flat or decline slightly due to the cost inflation say analysts.

Retail companies Q2 growth to be driven by pricingTake Shoppers Stop for example, it shut down a loss-making high-end fashion chain, turned around home-solutions chain, increased stake in its budding hypermarket chain, while recording a sharp growth in sales from those stores which have been in existence for at least a year. The chain has charted a steady pace of store expansion, as has been its norm over the years, even as peers vacillated between aggressive and slow expansion. Shoppers Stop saw same-store sales growth move sharply up to 17 per cent, from the 3.5 per cent last year. Customer footfalls also showed a marked improvement of 33 per cent in FY ’11 over FY ’10. Standalone revenues grew 23 per cent. Partly such high growth may be attributed to a low base, since FY ’10 was a year of recovery a few factors suggest that good growth is still in the offing for the group.

Similarly, Pantaloons revenue could grow 20-27 per cent in the quarter. Month-long promotional Great Indian Shopping Festival will boost Pantaloon Retail’s sales. Same-store sales growth at Pantaloon Retail’s home and electronics retailing businesses will be under pressure due to slow off take of products like air conditioners (due to soft summer).

It may be noted that since the beginning of this fiscal, both Pantaloon and Shoppers Stop stocks have outperformed the BSE-500 Index of the Bombay Stock Exchange considerably. One of the key reasons is news reports suggesting that the union cabinet might clear the proposal to allow FDI in multi-brand retail next month. Shoppers Stop’s stock has delivered excellent returns to investors since the last fiscal. In fiscal 2011 the stock rose by 73 per cent and further increased by 35 per cent so far in this fiscal. Pantaloon stock had declined by one-third in FY11, but has increased by 22 per cent since the beginning of this fiscal. That’s because analysts expect Pantaloon to be the key beneficiary if FDI is allowed in multi-brand retails on account of its organizational structure. Indeed continuing inflation is likely to have an impact on volumes, however in a few months; things could look up as consumers slowly adjust to higher prices. And since cotton prices have softened, it should offer some comfort going ahead.

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