EUR 120.00 For Business Accounts Only

MOSL: RETAIL-Control the controllable; Survival of the fittest

With the Retail sector being at the forefront in the current COVID-19 crisis, we foresee an impact on retailers not just during the lockdown but much after, given the prolonged weakness in spending. In this report, we discuss the potential areas of impact on retailers, likely mitigating factors, and how to think about stocks post a 50% correction from yearly highs.

Cost of retailing to drop, but by how much?
Most apparel retailers generate gross margins of 30–50%, implying an average cost of retailing at 30–40%. In an ideal scenario, when sales are at a standstill, the above-mentioned cost of retailing should ideally flow to the bottom line. However, our channel checks and management discussion indicate half this cost, 15–20pp, could be saved by cutting marketing/advertising activity and from variable rental cost and savings from closed stores. Furthermore, even rental cost is expected to see some waiver given the negotiations underway, as per our channel checks. Hence, the cost of retailing can be further reduced by 5–7pp, in effect reducing cash burn to 10–15% of revenue during lockdown. Grocery retailers such as DMart incur barely 6–7% cost of retailing (GM 15% and EBITDA 8%), given their ownership model, high throughput, and limited marketing cost. This too should reduce by 50–60% on account of stores being closed (50%) and SG&A savings.