Q4 Earnings Preview: Pain Persists For Retailers, Restaurant Chains As Inflation Crimps Spending

Apparel retailers to quick service restaurants are expected to end fiscal 2023 with unusually weak sales.

Revenue growth for companies in the retail sector may appear optically higher on a weak base due to Omicron-related impact, analysts said in their fourth-quarter earnings preview. That's because shoppers actually cut back on spending amid persistently high inflation.

In addition, the post-festive lull in demand during the third quarter extended to the January-March period and companies continued to invest in store additions.

"Our estimated Q4 revenue growth of 22% year-on-year is higher than Q3’s 20% due to a weak base," said Nuvama Institutional Equities. Demand, which was muted in the second half of Q3 FY23 (post-festive), "continues to be so", weighed down by sluggish consumer demand.

Demand moderation in urban markets is expected to impact quick service restaurant chains and apparel categories the most, while paints, luggage and jewellery should see resilient growth, according to Systematix Institutional Equities.

Within apparel, value fashion continues to be the most impacted with softer performance expected from V-Mart Retail Ltd. and ABFRL's Pantaloons Fashion & Retail Ltd., analysts said.

Avenue Supermarts Ltd., the operator of D-Mart hypermarket chains, has indicated a revenue growth of 20% in Q4.

The revenue growth is "decent", but per-store revenue growth remains modest at 4%, Jefferies noted. Its margins could also see a slight year-on-year dip, due to lower gross margin and higher overhead," the brokerage said.

For metro and tier-1 focused apparel retailers as well, demand weakness has accelerated. Demand for innerwear maker Page Industries Ltd. continues to be weak. However, Trent is likely to outperform, led by Zudio store additions.

"Trent, over the last few quarters, has been reporting industry best revenue growth, driven by healthy store additions and recovery in same store sales growth for Westside and and robust store addition trajectory for Zudio," ICICI Securities said.

It expects the Tata Group firm to report 61% year-on-year revenue growth. Profitability, however, could be under pressure owing to higher opex and pricing pressure. "Owing to aggressive store additions, we expect opex to have increased by 48% YoY. Hence, we expect EBITDA margins to fall 75 bps YoY to 12.1%," the brokerage said.

The QSR segment is expected to see weakness in growth as discretionary demand is decelerating, according to analysts.

"Delivery has been under pressure during the last 2-3 quarters and we expect a similar trend in Q4 too," said HDFC Securities. "Dine-in has outpaced delivery during the same period and that divergence is expected to sustain in Q4 as well. However, we expect pressure on average daily sales and same-store sales growth for most brands, as overall discretionary demand has seen deceleration," the brokerage said.

Citing channel checks, it said the demand pressure is more acute in tier-2 cities and beyond, even as companies are aggressively expanding store network.

The brokerage expects QSR companies to report 14% revenue growth in the fourth quarter, over the previous year, primarily driven by store addition.

Jefferies expects the QSR chains' EBITDA margins to decline due to weaker store economics. As demand remains weak due to inflation and muted consumer sentiment, same store sales growth is seeing a decline, despite which Jubilant FoodWorks Ltd. and Devyani International Ltd. are continuing store additions, which in turn, are driving revenue growth, the brokerage said.

Margins also continue to be under pressure for pizza players in the wake of inflation in cheese price. "There is some easing in raw materials (eg., cheese), which would show up in improved gross margins, but would not see a flow-through to brand margins, given muted demand," said Nuvama.

Westlife Foodworld Ltd. is likely to outperform peers, analysts said.

On the margin front, it is relatively better placed as price of palm oil — a key raw material — has corrected by 35%, according to Emkay Global Financial Services Ltd.

However, Emkay Global expects Titan Co. to buck the trend, delivering relatively stronger results. Titan is likely to benefit from the shift in wedding season to Q4 FY23. Despite a sharp surge in gold prices during the quarter, Titan's jewellery space recorded healthy growth of 23% YoY, according to its quarterly business update. It has also reported more than 40% growth in the watches and wearable segment over the previous year.

The business environment continues to be challenging, with demand in the mass category footwear remaining sluggish, owing to inflationary pressure.

ICICI Direct expects Bata Shoe Company Pvt. to post a revenue growth of 11%, driven by wedding demand and increase in sales of premium products.

Sneaker category (20% of sales) is expected to continue to outperform formal category. ICICI also expects EBITDA margins to decline 160 basis points to 22.8% over the previous year, owing to higher operating expenses such as increased spending on marketing and technology enhancement.

Nykaa is likely to see a strong 32% growth in beauty and personal care revenue, even as fashion lags at 18-19%, its quarterly update showed.

BPC gross margin and operating leverage should drive margins higher year-on-year, according to Jefferies.

The brokerage also expects the non-listed Reliance Retail Ltd. to report a 32% year-on-year growth in core retail revenues, on account of area additions, despite lower throughput.

"Margins to marginally expand YoY on better mix and operating leverage, but may see a sequential moderation due to seasonality," it said.