Nupur Anand, Daily News & Analysis (DNA)
The sector has been upbeat since the government gave its go-ahead last month to 51% foreign direct investment (FDI) in multi-brand retail and 100% FDI in single-brand retail.
Retail stocks have gained anywhere between 7% and 36% in the past three weeks.
However, analysts believe poor earnings will poop the party.
Brokerage CLSA said in a note earlier this week that September quarter earnings will remain tepid for the sector with players like Shoppers Stop and Pantaloon expected to report up to 43-74% decline in profitability.
The key worry is same store sales growth (SSSG), which refers to sales logged by a retailer’s existing stores during a certain period vis-a-vis the corresponding period a year ago. In short, therefore, the reference is to stores that have been open for at least a year.
According to CLSA, SSSG has been hovering in low single digits
for leading formats and is even negative for some.
Other experts corroborate the claim.
Devangshu Dutta, CEO of retail consultancy firm Third Eyesight, in fact, feels any huge improvement in same store sales growth is unlikely. “The business is still under pressure, margins continue to remain thin and it is unlikely that the festive season will be able to fuel growth for the retailers.”
Sales growth for the 14 listed retail players has slowed from
23% in the September 2011 quarter to 10% by the June 2012 quarter.
For a retailer, a healthy SSSG in the current economic scenario would be 14-15%, said Arvind Singhal of Technopak.
But going by analysts, most retailers won’t reach this figure in the coming 2-3 quarters.
Blame it on inflation and dampened consumer spirits.
An extended period of discount sales this year has also nibbled on margins, bringing down overall profitability even though volumes have improved, Dutta pointed out.
This is likely to reflect in the retailers’ balance sheets
To be sure, separate consumer surveys by BluFin and Assocham have found that consumer sentiment continues to remain subdued and is unlikely to improve in a hurry.
Also, in August, rating agency Fitch had revised the outlook for the retail sector to negative from stable for the second half of this fiscal.
In the midst of all this, a slowing SSSG could wreak havoc on retailers’ bottomlines, to put in mildly.