The second quarter earnings of retail chains will continue to be under pressure as discount sales and dipping consumer demand dent their margins.
Five analysts FE spoke to said earnings will rise by 10% and sales by 20%, but higher discounts will pull down operating margins 50 basis points to 33%. Volume growth will be muted despite a higher same store same sales growth. The 15% price hike in apparel in the first quarter continues to dampen the sentiment.
?Second quarter has been the worst in terms of inflationary pressures impacting discretionary spends,? Abneesh Roy analyst at domestic brokerage Edelweiss Securities wrote in quarterly earnings preview. ?In August, jewellery sales growth was muted on account of high gold prices.? Home retailing was also under pressure, he added.
Many retail chains spend heavily on promotions and prolonged their discount period by 7-10 days to push sales. Volume, growth, however, was limited with high inventory stocks.
Titan Industries tried to push sales by launching low price products which put their margins under pressure. ?Low priced products offered to disinterested customers added to margin pressures,? Roy of Edelweiss said.
Margins were further hit by rise in employee spend and rentals. The recent HC judgement to charge service tax on rentals added to retailers? concerns. ?Shoppers Stop and Titan expanded aggressively during the quarter in a bid to capture quality real estate space,? said analyst Amnish Aggarwal at domestic brokerage Motilal Oswal Securities wrote in in his report released on October 13. ?Margins for these players will be under pressure in Q2.?
According to IDFC Securities, Kishore Biyani?s Pantaloon Retail India is expected to grow at 20% riding on double digit same store sales growth. ?Margins, however, would contract on a quarterly basis due to discount driven sales,? says Nikhil Vora, MD, IDFC Securities. ?The profit after tax is poised to grow by 14.8%.?
Brokerages have downgraded Pantaloon?s earnings per share on account of high interest costs. The rising debt and low inventory returns are added concerns. ?Pantaloon has seen inventory increasing to 120 days due to lower sales and product price inflation,? said Aggarwal.
Shoppers Stop is expected to clock a 22% sales growth with a 27% rise in net profit. However, the company?s margins are slated to contract 30 basis points, with losses in hypermarket stores. ?Shopper Stop?s department business is doing well, but Hypercity is yet to stabilise and is funded mostly by debt and preferential capital,? Roy of Edelweiss wrote. ?Higher overheads on store openings are also likely to impact margins.?
Analysts expect a good quarter for Titan, riding on a 53% sales growth in its jewellery retail chain Tanishq. ?This growth will be led by a 35% increase in gold and diamond prices.?