ARVINDFASNNSEQ2 FY2024November 11, 2023

Arvind Fashions Limited

9,894words

67turns

12analyst exchanges

1executives

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Management on call

Ankit Arora

Head,

Key numbers — 40 extracted

. In spite of tough market conditions and a shift in the festive calendar, we grew our sales by 7%, propelled by the retail and MBO channel. The significant improvement in bottom line has been dri

100 basis point

-energizing our brand through large investments in marketing, where our investments were around 100 basis points higher versus last year. We will continue to invest heavily behind our power brands in the years

INR 216 crore

closure of this quarter. The brand has been diverted to Reliance Retail at an enterprise value of INR 216 crores. With this move, we have completed our portfolio rationalization exercise. Our stated goal has b

ve like-to-like because of shift of festival dates to October. Overall, AFL delivered a healthy 9% like-to-like retail growth with fantastic overall sell-thru’s in spring-summer'23 season. With le

mer'23 season. With less number of full- price festival days, retail discounting went up by nearly 3%, but we saw very good sell- thru’s and managed the inventory levels very well with reduction in

25%

Tommy Hilfiger and Calvin Klein businesses. In USPA, adjacent categories are now more than 25% of revenue, and this business is growing very profitably in double digits. Both Tommy and Calvin

20%

s, including watches, kids wear, innerwear, small leather goods, etc. And this business is nearly 20% of retail business, is growing in high double digits. Based on success with these brands, we ha

150 basis point

5 marquee brands. Adjusting to other income in Q2, our EBITDA margin has expanded by more than 150 basis points in Q2 despite higher advertising and despite soft market conditions. H1 saw EBITDA margin expans

12%

ising and despite soft market conditions. H1 saw EBITDA margin expansion by 100 basis points to 12%, in line with our guidance. We continue to keep tight control on balance sheet items and Q2 saw a

49.5%

Overall, inventory freshness has remained strong, helping our gross profit, which has gone up to 49.5%, an increase of nearly 5% year-on-year because of efficiency and sourcing and higher share of ret

has remained strong, helping our gross profit, which has gone up to 49.5%, an increase of nearly 5% year-on-year because of efficiency and sourcing and higher share of retail channels. We are con

INR 476 crore

use almost the entire proceeds to reduce the debt. And as we speak, the end quarter net debt was INR 476 crores. And as of now, we might be around INR 260 crores to INR 270 crores of net debt. Moderator:

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Guidance — 20 items

Ankit Arora

opening

“He will be followed by Shailesh who will share insights into business highlights and financial performance.”

Kulin Lalbhai

opening

“Our focus on profitable growth will continue, and we expect margin improvements to continue in the quarters to come.”

Kulin Lalbhai

opening

“H1 saw EBITDA margin expansion by 100 basis points to 12%, in line with our guidance.”

Kulin Lalbhai

“So I mean, are we looking at now -- I mean advancing our debt reduction plan as to what would be our guidance be now in terms of becoming debt- free?”

Shreyans

“And we will hope to even in this uncertain market conditions, we hope that emerging brands continue to do really well the way have done in quarter 1 and as well as in quarter 2.”

Priyank

“My question would be since you have taken this strategic decision, when can we expect such strategic decisions for other few brands because we are now clear on our communication that we want to focus on the 5 core brands.”

Priyank

“When can we expect any such decisions which are other brands, which are yet continuing few losses for us?”

Ankit Kedia

“But if I look at medium term, we will feel confident of these channels.”

Ankit Kedia

“So some of full year guidance, which we used to have of 11% to 13% growth.”

Ankit Kedia

“Is it possible that will be toned down to high single-digit growth?”

Risks & concerns — 14 flagged

Since there was a sense of slowdown, we had prepared our response through various dynamic measures, including product innovation, higher investment in advertising and tight cost control.

— Kulin Lalbhai

And we will hope to even in this uncertain market conditions, we hope that emerging brands continue to do really well the way have done in quarter 1 and as well as in quarter 2.

— Shreyans

Polo, there is a decent growth in the current market condition in all the 3 brands and all the 3 brands got a little bit impacted because of the change of the festival calendar, and some of it will get captured in Q3, and some we'll have to fight the slowdown in the market condition.

— Shreyans

Now in the current market slowdown, Arrow has continued its growth, its grown high single digit in revenue.

— Priyank

What is the decline we are seeing in online and LFS channel because these 2 channels also account for more than 1/3 of your revenue.

— Ankit Kedia

And given that the other 2 channels have grown by 15%, clearly, these 2 channels would have seen a high single-digit decline in the system.

— Ankit Kedia

Shailesh Chaturvedi: Ankit, like we said, there is an impact of the festival calendar.

— Ankit Kedia

And because of those 2, you may see that there is a small decline.

— Ankit Kedia

Our like-to-like growth are very healthy, 9% in this quarter despite slowdown.

— Ankit Kedia

It's uncertain, but that's our sort of optimism cautiously.

— Ankit Kedia

In the short run, we will see because markets are very uncertain, and we are still looking at growth.

— Ankit Kedia

But I think we need to first achieve our first stage EBITDA margin in these uncertain times.

— Ritesh

Polo has done well given the slowdown in market and the calendar shift.

— Ritesh

And in this uncertain time, we are adequately placed.

— Ankit Kedia

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Q&A — 12 exchanges

Let me take that question. This is Kulin here. I think, as Shailesh was saying, Calvin Klein is driving the emerging brand revenue. In the case of Power Brands, one of the impacts this season is because of festive shift. So a lot of our wholesale bookings has moved a month. And that is why for our wholesale channel, quarter 2 has a slightly lower growth compared to quarter 2 of last year, where the festive impact was a positive impact in Q2 for the wholesale channel. So that's one of the reasons why Power Brands is having a lower revenue print compared to Emerging Brands. Himanshu Nayyar: Unde

Kulin Lalbhai

Shailesh is back. Go ahead. Shailesh Chaturvedi: We lost the line for a moment. The minority interest is largely linked to Tommy, CK business. And the Super Premium segment has done well. These brands are market leading brands and their profitability has gone up. So that's exactly the reason that you mentioned, Himanshu. Himanshu Nayyar: Okay. And final question would be on this transaction that we have done, exiting Sephora. I believe we would have already got in the consideration. So I mean, are we looking at now -- I mean advancing our debt reduction plan as to what would be our guidance be

Congratulations on a good set. So my first question is, from what we understand is Q1 and Q3 are retail heavy quarters, and Q2 and Q4 are wholesale heavy. And you also mentioned that there were some postponement in wholesale sales in Q2. So what I'm trying to understand is why have our other expenses gone up so much because since it is not a retail heavy quarter, we would have expected some gross margin benefit to flow through to your EBITDA. Shailesh Chaturvedi: See, if you look at the other expenses, they are in line with the retail channel. In this quarter, the retail channel has grown more

Shreyans

Okay. And my second question is, sir, when I look at your emerging brands. So obviously, we've done very well on the revenue bit. But just on the margin side, I wanted to understand, Q-o-Q, I think last quarter con call, you had mentioned that Aeropostale and Ed Hardy losses are mostly behind us now, and CK obviously is doing well. So margins should sustainably be at the levels that we saw in Q1. So I'm just trying to understand, Q-o-Q, we've seen some de-growth. So what is the reason for that? And how should we look at this number? Is it going to be that variable, 11% to 6% and then again, 6%

Congratulations team for the fantastic performance. My question is on Arrow, sir. If you can help us qualitatively, how has been the operational performance on Arrow. I reckon we have taken a lot of steps to improve the profitability over there. Are there some more strategic steps left for us to get this brand to double-digit EBITDA margins? Shailesh Chaturvedi: Let's look at Arrow in 2-3 parts. One is that during COVID, it became a loss-making brand. And we did a lot of effort post-COVID from change in merchandise to marketing with Hrithik, to new retail. And we made a lot of efforts to grow

Priyank

Got it. Very clear. And kudos to the team for taking a decision on Sephora. My question would be since you have taken this strategic decision, when can we expect such strategic decisions for other few brands because we are now clear on our communication that we want to focus on the 5 core brands. When can we expect any such decisions which are other brands, which are yet continuing few losses for us? Shailesh Chaturvedi: Let me say upfront, we are extremely focused in energizing these 5 brands and make them big-scale profitable brand. So we have no plan now for any further action on any of the

Sir, 3 questions from my side. First is we have seen good growth on retail and MBO channel. What is the decline we are seeing in online and LFS channel because these 2 channels also account for more than 1/3 of your revenue. And given that the other 2 channels have grown by 15%, clearly, these 2 channels would have seen a high single-digit decline in the system. Shailesh Chaturvedi: Ankit, like we said, there is an impact of the festival calendar. And in the couple of channels that you mentioned here that shift, like, for example, take online, a lot of big portals have shifted their tower even

Ankit Kedia

So if I have to add September and October together, and obviously, last year Diwali was also in October, now it's pushed through November, how has been the early trends in the market for October and early November, if you can help us understand that. Because a lot of the other retail companies are knocking off some softness, but even green shoots in the demand are leading to Diwali? Shailesh Chaturvedi: See, I can say that as we see the current, there are still many days to Diwali left and the peak – weekends are still ahead, weekdays ahead. But whatever the days that we follow, the business h

So some of full year guidance, which we used to have of 11% to 13% growth. Is it possible that will be toned down to high single-digit growth? Including Sephora because Sephora will not be there from November, but adjusting for Sephora? Shailesh Chaturvedi: See, no, we have a certain sales guidelines, 12% to 15% in medium term and is based on a certain set of growth drivers that we have. And I spoke extensively today also about adjacent category. Second growth driver is our store expansion. We opened 46 stores. And in the first half, we opened 91 stores. It's on track. Our like-to-like growth

Ankit Kedia

Shailesh, on your comment on store openings. If I look at last year, you opened 175 odd stores, but the net opening was only 5. This year also, we are talking of gross opening of 91 stores. Can you just help us what is the net store addition happening? And are the store closures behind us now? Or there is still rationalization happening of loss-making stores in the system? Shailesh Chaturvedi: At any point of time, in a physical world, there is always churning down of 3% to 4% of the stores, and that will continue at any point of time. It's sometimes higher, sometimes lower. So we are at a nor

Himanshu, Ankit here, just give you a little bit more details on that. So as Shailesh mentioned, the event has already happened because that was supposed to be done as of based on the financial performance as of March'22. Post that event, Flipkart, of course, has an option to convert those CCPS into equity. So that's with Flipkart. But from our side, as far as the question is concerned on the percentage number, that's the reason the classification also has changed from CCPS, which is part of other liabilities to equity, and that really defines the entire structure of the transaction. Himanshu

Ankit Arora

It's confidential based on the discussions with our partner. You will kind of get to know that number when they exercise that option available to them in a time period defined at their end. Shailesh Chaturvedi: It's a significant minority, that's what best I can hint it.

Congrats for the amazing set of results. My first question is around Aeropostale and Ed Hardy. So what was the absolute amount of loss that we incurred on Aeropostale and Ed Hardy? Until how much time will we keep incurring these losses? And what are our strategies to minimize these losses? Or are we also looking to sell these brands? Shailesh Chaturvedi: So from an operation point of view, Ed Hardy and Aeropostale are now silent brands in our portfolio. We're not producing any goods. We are not holding anything at our end. And like we have guided earlier in the investor call, that we have a c

Jatin Sangwan

Second question is on Sephora. What was the loss due to Sephora in this quarter? Shailesh Chaturvedi: It's a very minor insignificant number, not material number, I must say. We don't give brand-wise data, but it's not a very large number. Okay. So last year, we had around loss of INR20 crores for Sephora in FY'23. So that means Sephora is now close to breakeven, much closer to breakeven for us? So just to clarify, I think you are referring to 2 different numbers. You are referring to a PBT loss of last year versus EBITDA comparison. So that's not the right comparison for you to do. No, I'm as

First of all, congratulations on nice margin upliftment in this quarter. Just I have a couple of questions. So we decided to open like 200 FOFO stores this year. Can you give a brand-wise breakup, which brand will have most of the addition or that sort of? Shailesh Chaturvedi: Yes. The expansion is across the brands. The Power Brand, obviously have a larger number of stores because that's where like USPA leading men casual leader brand, we have a very large number of stores. So we open more stores, but it's across all the brands. And we can, Ritesh, share the details, and we got the feedback f

Ritesh

Okay. My next question is, what is – what would be our aspirational margin in Power Brand segment? Or should we consider this 13% or 13.2% as base case? Shailesh Chaturvedi: So let me split, Ritesh, this into 2 parts. Our first stage guidance was that we want to hit double-digit pre-IndAS EBITDA and grow EBITDA every year in the short term between 100 basis points to 150 basis points based on the market condition. Now as far as this step is concerned, we are now almost – we are close to 13% post-Ind AS EBITDA and the difference we've been talking about in the investor call. We are in very knoc

Congratulations on a good set of numbers in a tough time. So my first question is on this category and brand extension into women wear. So just wanted to pick your mind with regards to how are we thinking about the women wear segment or category given that this segment has a different set of nuances altogether right from product development to the way the product is sold at the channel level, etc. And also, I mean, what are our aspirations? I mean, broad aspirations into this very segment? That's my first question. Shailesh Chaturvedi: Varun, thanks for your good wishes. And as far as the wome

Varun Singh

Understood, sir. Very clear. But a second follow-up on this would be when we choose online as a platform to start this very line. So if you can give some insights with regards to the unit economics and especially on the cost of doing business online, compared to cost of doing the same business in the offline space, for example, we would have entered into a large format store, getting some shelf space out there and kind of venturing out or would have started to do this business. Some color on difference in the cost of doing business compared to a large format stores, which is also a broking met

My question is on standalone bit, which is INR 200 crores revenue. That is entirely Arrow wholesale, right? Is there anything else in that?

Ankit Arora

That's right, Rajiv. Yes. And in the base quarter, you had the footwear bit as well, the USPA footwear bit. So what is the clean number in the base quarter, let's say, like-for-like? I will have to just check that. U.S. Polo footwear is what we had moved effective January itself from Q4 of last year, so that's not anymore there in the reporting quarters going forward. Sure. And just an extension of this. So usually, Q2 and which is a wholesale heavy quarter, usually 30% of the entire business. That means this wholesale bit, the Arrow part itself is close to 650 crores kind of business, right?

Sir, a couple of follow-up questions from my side. Sir, what is the size of the U.S. Polo store today? And given that adjacencies are only increasing, and with kids wear, women wear assuming 1 year down the line, you want to open them in the store. Are we looking for a larger size stores, incrementally in U.S. Polo as we open the stores? Shailesh Chaturvedi: Ankit, you're absolutely right, the store size from 1,500 to 2,000 square feet, we are now taking it to a higher level, including you know, attempt at opening even larger, larger stores than that. So with so many new categories coming in p

Ankit Kedia

So from a unit economics, right? What the previous participant also asked, right? Do you see the throughput or the margins in these adjacencies higher to reciprocate the rentals which we pay for these larger stores? Shailesh Chaturvedi: So our adjacencies are very profitable. And in many cases, footwear and all are even more profitable and it's a large scale now almost close to INR 300 crores business. So that said, also, when you look at some offline retailing point of view, the beauty of the adjacent categories, they don't take too much of space. So footwear does a decent percentage of our r

Thank you, everyone, for joining us on the call today. I understand some of you may have follow-up questions. But in the interest of time, we'll have to close this call. If any of you have any further questions, please feel free to reach out to me separately, and I would be happy to take them offline. Thank you so much for joining on the call and look forward to interacting again next quarter and wish all of you a very happy and prosperous Diwali.

Management

Speaking time

Moderator

Ankit Arora

Ankit Kedia

Ritesh

Rajiv

Shreyans

Priyank

Jatin Sangwan

Varun Singh

Kulin Lalbhai

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Opening remarks

Ankit Arora

Thanks Arshiya. Hello and welcome everyone and thank you for joining us on Arvind Fashions Limited earnings conference call for the second quarter and half year ended Sep 30, 2023. I am joined here today by Mr. Kulin Lalbhai, Vice Chairman and Non-Executive Director, Mr. Shailesh Chaturvedi, MD and CEO and Mr. Girdhar Chitlangia, Chief Financial Officer. Please note that result press release and earnings presentation had been mailed across to you yesterday and these are also available on our website www.arvindfashions.com. I hope you had the opportunity to browse through the highlights of the performance. We will commence the call today with Kulin providing his key strategic thoughts on our second quarter’s performance. He will be followed by Shailesh who will share insights into business highlights and financial performance. At the end of management discussion we will have a Q&A session. Before we start, I would like to remind you that some of the statements made or discussed on this

Kulin Lalbhai

Thanks, Ankit. A very good afternoon to you all. Thanks so much for joining us for the Q2 results. Quarter 2 has been a strong quarter for AFL, where we have achieved our highest ever sales, EBITDA and profit after tax. In spite of tough market conditions and a shift in the festive calendar, we grew our sales by 7%, propelled by the retail and MBO channel. The significant improvement in bottom line has been driven by strong like-for- like sales, good full price sell-thru’s and improvement in our gross margin. Our working capital cycle continues to improve with a 10 days reduction in gross working capital days. In quarter 2, we focused on re-energizing our brand through large investments in marketing, where our investments were around 100 basis points higher versus last year. We will continue to invest heavily behind our power brands in the years to come. I would also like to inform you that AFL has divested its Sephora business post the closure of this quarter. The brand has been diver

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