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Credit Rating Agency ICRA in its latest report has revised retail sector outlook to stable from negative. It said the retail sector is coming out of the woods and is expected to surpass its pre-pandemic levels of revenues and earnings in FY2023, following two years of sub-par financial performance. It stated retail firms in its sample set will see an increase in sales of 12-13% year over year in FY2023, which is a 5–6% increase above pre-pandemic levels. Their operational profit margins (OPMs), driven by the advantages of operating leverage, are anticipated to increase YoY by 150 bps to 8.2% (comparable to FY2020).

The report further said the level of discounting by the retail industry remained low during FY2021 and FY2022 (compared to FY2020) as retailers attempted to protect their gross margins against the backdrop of reduced sales. With footfalls and revenues surpassing the pre-pandemic levels in FY2023, it expects the level of discounting to go up as retailers compete to grab a higher share of the consumer’s wallet. Besides material costs, rental, employee costs, and selling/promotional expenses are the other key cost heads of a retail entity, typically accounting for 29-30% of its total cost.

ICRA said after the strict cost rationalization seen in FY2021, retailers largely rolled back the cuts on employee expenses and advertising expenses in FY2022. Retailers undertook rental negotiations in FY2022, following the sporadic restrictions on mobility. However, it said the extent of concessions received was markedly lower vis-a-vis FY2021. While these costs will rise further in FY2023, the OPM will expand as a result of healthy revenue growth and the benefits of economies of scale.