Arvind Fashions Limited has informed the Exchange about Transcript of conference call arranged by the company with analysts and investors on Wednesday, February 14, 2024 for post announcement of Finan...
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February 21, 2024
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Subject: Earning call Transcript with Analysts and Investors for the quarter ended December 31,
2023.
Pursuant to Regulation 30 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, please refer below link of transcript of conference call arranged by the company with analysts and investors on Wednesday, February 14, 2024 for post announcement of Financial Results for the third quarter and nine months ended December 31, 2024.
On the website of the company:
Path: https://www.arvindfashions.com/overview/
Title: Earnings Call Transcript Q3 FY-24
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Thanking you,
Yours faithfully,
For Arvind Fashions Limited
Lipi Jha Company Secretary
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Q3 FY2024 Earnings Call Transcript – Feb 14, 2024
CORPORATE PARTICIPANTS
• Kulin Lalbhai – Vice Chairman & Non-Executive Director
• Shailesh Chaturvedi – Managing Director & CEO
• Girdhar Chitlangia – Chief Financial Officer
• Ankit Arora – Head, Investor Relations and Treasury
Moderator:
Ladies and gentlemen, good day, and welcome to Arvind Fashions Limited
Q3 FY24 Earnings Conference Call. As a reminder, all participant lines will
be in listen-only mode and there will be an opportunity for you to ask
questions after the presentation concludes. Should you need assistance
during the conference call, please signal an operator by pressing * then 0
on your touchtone phone. Please note that this conference is being
recorded. I now hand the conference over to Mr. Ankit Arora – Head,
Investor Relations & Treasury at Arvind Fashions Limited. Thank you, and
over to you, sir.
Ankit Arora:
Thanks Michelle. Hello and welcome everyone and thank you for joining us
on Arvind Fashions Limited earnings conference call for the third quarter
and nine months ended Dec 31, 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 third 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 call today may be forward-looking in nature and
must be viewed in conjunction with risks and uncertainties we face. A
detailed statement of these risks is available in this quarter’s earnings
presentation. The company does not undertake to update these forward-
looking statements publicly. With that said, I would now turn the call over
to Kulin to share his views. Thank you and over to you Kulin.
Kulin Lalbhai:
Thanks, Ankit. A very good afternoon to you all. Thank you for joining us
today for the Q3 Results.
AFL continues on its journey of profitable growth, even though the overall
demand environment continues to stay subdued. We grew our sales by 5%,
which shows the resilience of our business model and the strength of our
five marquee brands. The highlight of the quarter was the 150-basis point
lift in our EBITDA margin, even after we invested 130 basis points higher in
marketing costs. This was made possible due to better gross margin, lower
discounting, and tight control on expenses. We continue to strengthen the
balance sheet with a reduction in gross working capital of 5 days in Quarter
3. This quarter's growth was largely driven by the retail and MBO channels.
Our growth was impacted due to a de-growth in our online B2B channel.
Our growth in the offline channels for the year to date remains at double
digits. As a strategy, we are pivoting our online business towards the
marketplace model, where we hold the stock and have full control over
pricing and visibility. In doing this pivot, we have a one-time de-stocking of
our B2B online channel, which affects our primary billing. While this affects
short-term revenue, it lays the foundation for a healthy online channel.
Our B2C online channel, on the other hand, has almost doubled, leading to
strong tertiary consumer sales growth in the online channel. The negative
impact on revenue growth for the online channel may persist for another
quarter or so, after which the channel will revert to normal growth rates.
While the environment continues to remain soft, we remain confident of
the inherent strength of our brands and the growth drivers that we have
put in place to scale up our business. We will continue to stay focused on
our path of profitable growth and expect to further expand our margins
and significantly improve the bottom-line in the medium term.
I would like to now hand it over to Shailesh to take us through the specifics
and more details about our financial performance.
Shailesh Chaturvedi: Thank you, Kulin. Good afternoon, Girdhar and Ankit here, and good
afternoon everyone else on this call.
With NSV of Rs. 1,125 crores and EBITDA of Rs. 150 crores in Q3, AFL has
registered revenue of Rs. 3,165 crores in 9 months of this financial year and
EBITDA of nearly Rs. 400 crores. Revenue growth is 5% in Q3 with a 2-year
CAGR of 12% growth in NSV. EBITDA growth in Q3 is 18% and 2-year CAGR
growth in EBITDA is 21%.
The quarter had started with trading for Diwali festival, but that got
impacted by Cricket World Cup, seven-odd weekends featuring India
Cricket matches saw like-to-like decline resulting in overall flat like-to-like
growth during Diwali festival period. The industry followed it up with an
early end of season in mid-December to liquidate inventory. Since at AFL,
inventory is managed tightly, we registered the temptation of participating
in this early EOSS, which helped with lower discounting by 1% in Q3 over
last year Q3. With strength of our brands in seasonal winterwear products
and continued casualization favoring our brands, offline channels have
grown double digits in this YTD as well as in this quarter.
The performance of the retail channel is especially salient, where we are on
course to meet plan of our square foot expansion. The margin from the
retail channel has also increased because of lower discounting, especially in
our key brand USPA where discounting is down sharply. MBO channel has
also grown more than 15% with a healthy margin. This offline growth of
double digits is driving EBITDA gains. Online B2C has also doubled in
revenue this year through various efforts including buildup of exciting
online exclusive collections, healthier stock levels, and required marketing
support.
Besides the impact of India Cricket during Diwali, we also saw lower
business from online B2B wholesale, which has declined sharply this year
because of our strategy to de-stock this channel for healthy and controlled
consumer experience with tighter control on discounting, as explained by
Kulin earlier. AFL growth is in double digits, even in these muted market
conditions, but for the sharp decline in B2B online channels, linked to de-
stocking there. Our growth will continue with investment behind growth
drivers like store expansion, premiumization, whole-hearted marketing
investment, and development of adjacent categories. Once markets
improve, we are keen to see growth moving towards 10% to 12% and even
15% if things go right.
Our key brand, USPA, saw a very healthy business in this quarter with
reduction in discounting, growth in kids business of nearly 20%, large
investment in marketing through highly visible legends campaign, and
opening up two iconic large-size flagship stores like the one in Goa and
Jayanagar High Street in Bangalore. The quarter saw healthy growth in
EBITDA for USPA.
Most channels grew well for Arrow also, and we further invested into
marketing campaign with Hrithik Roshan. We saw emerging leadership of
Arrow in key categories, including blazers, formal shirts, formal trousers,
and through youthful Arrow NewYork line. The quarter also saw a rollout of
more stores with a new retail identity in Arrow, for example, at Mall of Asia
Store of Arrow in Bangalore.
Flying Machine refresh is going on and efforts are underway to grow this
subscale brand through distribution expansion and product update for
higher sales and better profitability. Key channels like value department
Stores and MBO Channel have shown enthusiasm already for this new
avatar of FM and this brand refresh for FM will be continuing during 2024.
The premium portfolio of Tommy Hilfiger and Calvin Klein continue to
outperform with very healthy growth and margin profile. These brands
continue to set benchmarks in the industry on key retail KPIs. Our revenue
growth could have been higher if we had participated in early EOSS, but we
made a choice of focusing on profitability and discount reduction, given our
tight control on inventory. We also made a choice of increasing marketing
investment by 130 basis points in order to support growth and keep our
brands top of mind. We chose investment in marketing over investment
into discounting.
Our decisive focus remains on profitable growth through sell-thru
improvements, full price like-to-like growth and reduction and discounting,
all leading to an increase in GP and better EBITDA. EBITDA has grown value
by 18%, an increase of nearly 150 basis points with EBITDA margin of 13.3%
in Q3. EBITDA has grown due to the efficiency in sourcing, lower
discounting and better channel mix. We continue our sharp focus on
balance sheet de-leverage, ensuring price control on working capital which
saw a further five days reduction in GWC with gains coming from reduction
in debtor days. We saw a reduction of inventory value as market consumed
inventory in festival time, and stock turns remain close to guidance of 4x. In
these muted market conditions, we count our blessings through double
digit revenue growth in offline channel, doubling of online B2C business,
EBITDA growth of 18%, positive like-to-like growth in retail, reduction in
discounting, and further tightening of working capital resulting in ROCE of
higher than 15%.
Ankit Arora:
Thanks, Shailesh. We can now open it up for Q&A.
Moderator:
Thank you very much, sir. We will now begin the question-and-answer
session. The first question is from the line of Priyank Chheda from Vallum
Capital. Please go ahead.
Priyank Chheda: My first question is on how should we view the two contrasting data
points, one on the SSG for our retail network which is muted at 2% while
our wholesale MBO channel has grown at 15%. How should we use these
two contrasting data points is the first question? And to the adjacent
question on the same, is the strategic decision to do away with higher
discount to our customer, are we compromising one of our customer
loyalty who is still now being habituated to buy at a discounted price? So,
these are the two questions on the strategic part.
Shailesh Chaturvedi: I just want to address the discounting bit. See our mantra has been
profitable growth and anything we do we have to look at in the light of
growth in EBITDA of close to 18% and we have been managing our
inventory very tightly. So, always the question is on how we get the best
realization for that inventory we are holding. And if you look at our 2% like-
to-like growth in the market, one is yes, markets are muted. It got really
impacted by the cricket in Diwali festival and those are big days of retail.
And that is why, when I look at the industry number, our numbers are
probably on the sort of better side and it could have been higher if the
Diwali was not impacted, also the EOSS decision impacted, but we believe
that this 2% has come on the back of last quarter where we had grown 9%
like-to-like and previous year, same quarter we had grown by 12%. So, you
will see in that context that on that 12% like-to-like we have grown further
2% and we have been continuously growing at a healthy pitch. Discounting
is something we want to avoid as much as possible because it goes against
our business rhythm because we need to do a certain number of weeks of
discounting and the new season has to come at a particular time. So,
anything earlier breaks that rhythm and we lose margin. So, we are very
clear that we don’t want to discount and our brand we have invested very
heavily, our investment has gone up by 130 basis points in marketing, our
brands are very salient, our sell-thru’s are fairly healthy, industry leading.
So, we didn't see the need to discount earlier and we believe amongst our
consumers, our equity is very strong, we are very top of the mind, our full
price sell-through, our EBITDA growth, our realization, premiumization, a
lot of indicators give us the confidence not to take shortcuts and focus on
the long-term profitable growth. As far as the MBO channel is concerned, it
is the like-to-like and the full price sales are very similar, MBO also has
grown at 15% because of large distribution expansion. So, it is a multiplying
factor of new distribution as well as the like-to-like growth in those
channels. And also, EBO, our sales density are much higher. On that base,
further increase becomes a little difficult. In MBO channel, we will be
increasing our sales density. As we go along also, large expansion is
happening which is resulting into the 15% growth. Tertiary growth if you
look at MBO, they are also similar healthy, but sales density wise EBOs are
higher than MBO and MBO will also catch up with higher growth there.
Priyank Chheda:
And it is very clear on the strategic decision that we have taken to clean up
the online B2B channel, which is clearly visible with the lower sales, so is a
large clean up done or is there something more to come up which we
should read because it is one of the significant sales contributor to the
whole of the revenues which is online B2B?
Shailesh Chaturvedi: It is a kind of courage to do the right thing. We believe that online should
be played through a marketplace model as explained by Kulin earlier. And
we are building that business very aggressively through the marketplace,
through our own website, through only linkages. And that business
fortunately is really growing, it is doubled in the Q3 this year, the B2C part.
As far as B2B is concerned, since COVID did, that business had grown and
now we believe the time has come to de-scale, de-stock that business, but
consumer sales on B2B are still healthy. In fact, in Q3, even in B2B, where
our primaries are down significantly because of de-stocking, our consumer
sales are in double digit growth. So, we are very careful about growing the
online channel. We are committed to that. Just that we believe it is better
done through our own marketplace, through our own control on pricing
and discounting, and through our own assortment that we believe in, and
we can do a better job also. So, B2B is a short-term issue, in long term, we
are looking at how we grow the tertiary sale with online channel and we
may have one more quarter at best two more quarters of pain with B2B
wholesale, but it will actually move towards B2C growth and our channel
partners and we both are all aligned on this and we will grow the tertiary
sales of our brand on online space also.
Priyank Chheda:
And just a last question on a very broader portfolio perspective, which is all
now clean power brands with more than Rs. 4,000 crores of sales, right,
how should we view in terms of what should be a sustainable SSG if you
can break down with ASP or a mix change plus a volume growth for a
sustainable SSG we should view? And as well as if you can touch up upon,
there is a portfolio like CK, Tommy, USPA which has a very industry leading
retail KPI, so which are the areas that we would have to work on for our
other two brands in the coming years which you can highlight also on that
part?
Shailesh Chaturvedi: See, if you look at the last couple of seasons, we have been delivering
really the industry leading like-to-like growth. I mentioned last quarter we
had 9% in muted conditions. Previous year in Q3, we were at 12%. Last
year in Q4, we were 18%. We have really pushed the same store growth
agenda in full price season quite aggressively and markets are dull and
when a big season like Diwali gets impacted by cricket, then the retail
numbers in that month impacts the overall numbers, but we are very
committed and we are seeing that between 5% and 7% should be our
target. Actually, last 2 years we have been growing at a much faster pace
than that. This quarter we are 2%, but we have seen industry is flat or
maybe slightly negative. So, we continue to put the rigor in retail for same
store growth - right from the whole storytelling that we do, the way we do
the layout of our store, the way we train the staff, the way our visual
merchandising happens, how the whole science of category wise
assortment happens, the marketing support, consumer offer, so a lot of
efforts are going behind it, we just wish the market improves a little bit and
then that 5% to 7% like-to-like growth is possible. Also, I would say that this
could be the base expectation from big brand and smaller brand, it could
be even higher like-to-like growth because they may have lower sales
density. So, a brand like U.S. Polo may be close to Rs. 2,000 crore, but the
market size is very large. So, there is no need for us to worry about future
growth. This brand can continue to grow at a rapid pace from here
onwards and we will continue to open larger store. We will continue to
invest wholeheartedly behind marketing to keep the brand salient and all
other category, if you really look at the science of like-to-like, it is about
walk-ins into conversion into market size. So, the walk-in, if we keep the
brand salient, and the store experience good through word of mouth, walk-
in keeps happening. As far as conversion is concerned, the store layout and
the consumer walk-in and category assortment, adjacent category
expansion, earlier, they were not buying underwear, maybe they are
buying underwear now, earlier they were not buying footwear, they are
buying footwear now, or tomorrow, women's wear. So, we continue to
meet all the usage occasions of a consumer and also the age groups of the
consumer so that we can convert the consumer at a percentage which is
higher than the industry and then all these efforts also help the market size
that not just a T-shirt in U.S. Polo, they may buy jeans also, they may buy
underwear also, they may buy footwear also. So, all the science behind the
walk-in into conversion into basket size, we are really working really hard
towards driving all the aspects of retail science and we want to continue to
grow better than industry as far as the same store growth is concerned.
Priyank Chheda:
And just on the key retail KPIs, versus the stronger brands, versus the two
other brands like Arrow and FM, where is the further work and energy
required to be done in coming two years?
Shailesh Chaturvedi: See, what happens is a weaker brand may have a lower sales density,
sales per square foot per month or year, and it could have a higher
discounting. Those are the two things broadly, there are many more things,
but I am just saying the walk-ins could also be lower in weaker brand
compared to a larger brand. So, those things, we need to just push the
agenda on sales density as well as on reduction of discounting and it is
done through many things like new store identity, new product category,
better product. So, like I said, we look at all the signs of it and in weaker
brand we need to push the SSPD higher and reduce the discounting.
Moderator:
Thank you. The next question is from the line of Varun Singh from ICICI
Securities. Please go ahead.
Varun Singh:
Sir, my first question is that like we have got just five brands, which we call
as power brands, and maybe promoted Calvin Klein from emerging to
power. So, like how are you thinking about capital allocation among these
five brands to drive growth?
Shailesh Chaturvedi: So, I think what you are seeing the adjusted portfolio is the result of a
capital allocation strategy that we have shut down many businesses to
focus on few marquee brands and these are the brands that we all believe
in and we are going to invest wholeheartedly behind each of these five
brands or whatever it takes to build and we have the required financial sort
of strength to push the agenda. So, now, since we have five power brands,
each one is very uniquely placed. So, if you look at Tommy, CK is in certain
segment, US Polo is in a different segment, and Flying Machine and Arrow
are also very uniquely placed. So, we have a very differentiated five brands,
and there is nothing which is stopping us investing wholeheartedly beyond
each one of these five brands. So, we have done the capital allocation
strategy, and that is how we have reached this short list of highly focused,
decisively focused five brands. And now we will invest wholeheartedly
whatever it takes to build these brands and revitalize the growth of these
businesses.
Varun Singh:
Sir, my question is more related to the marketing spends to drive growth
and so how are you, for example, going to make a decision with regards to
drive growth, maybe whatever kitty that we have given the overall
consolidated revenue, or you want to drive it as an individual P&L driven
investment into each of the brands?
Shailesh Chaturvedi: If you see investment in marketing used to be in 3.5% of NSV in that zone,
now we are up to about 4% and that increase has happened across the
brands, now the base of each brand is different. For U.S. Polo, 4% plus will
mean lot more crores given the scale and size of that brand and Flying
Machine, which is subscale, will need a higher percentage of NSV even with
a lower crores of spend behind marketing. So, that is the decision we take
because there is a minimum threshold of marketing required to make an
impact and that is what we will do. Now, if I have to say if I am left with
only Rs. 1 and this Rs. 1 has to go to one brand, then we would put behind
U.S. Polo because at the end of it, U.S. Polo is our marquee brand, and it is
very important for AFL. And this is where, if there is an unlikely situation
where to make a decision among these five brands, then I would make that
decision in favor of U.S. Polo, but I don't see a need to reach that stage. We
will invest behind marketing, and we have increased 130 basis points in this
quarter during muted market condition, because we believe it is important
to keep these brands salient and grow these brands through higher
marketing investments.
Varun Singh:
Sir, my second question is on the large size stores that you made a
mention, given that retail is incrementally becoming more important
channel, and it is likely to become even more important going forward,
given that the only maybe linear growth which is more under our control.
So, given that context and given our aspirations of adding, maybe if not all,
maximum franchisee owned, franchisee operated stores, I understand the
customer experience in large size stores is superior, we have more real
estate available to maybe put more categories that we are venturing out,
but still having said that large size stores also create, I mean, it comes with
the baggage or the obligations of higher rental, higher capex requirement
and as a consequence, the necessity of the business are to be dependent
on customer footfall. I mean, it cuts both way, right? If it goes right, we
enjoy more, we will benefit, if it goes wrong, the downside is also
incrementally much higher. So, what is the need for going for a larger size
stores other than, the more real estate and category with that we need to
put that as a reasoning. And in this context, if you can give some
competitive successful examples, if not from India, maybe even globally is
also fine?
Shailesh Chaturvedi: See, we are looking at only a certain number of large size stores. We are
not saying that every store will be large size store. So, take U.S. Polo, our
current visibility is that we want to open the next 10 large size, these 4,000
plus kind of square feet stores, and these have been identified in a very key
location where, as a brand, we want to make a statement, and it is a very
competitive decision, and also we want the brand to remain top of mind in
the key location in the country and it is a long term asset that we are
building. So, it will be very carefully modeled. We already done last two
years a lot of stores model that are large scale and we have seen good
result and now we are rolling out. So, rarely we do something where we
have not modeled and seen the success and then based on those success
parameters we take open. So, we will open only a certain number of stores
and it becomes very important for image and for like you rightly said about
the categories of women and kids and adjacent category etc. are coming in.
So, whole lifestyle of the brand can be displayed in these chosen few
lifestyle stores, which are also on franchisee system, FOFO, where we have
like-minded partners who are building that business, and we have good
experience of running large scale among our portfolio of five brands. So,
we are very confident about that strategy. Also, we link these stores with
Omni connectivity, so we get online visibility also. So, we go out of the way
to push all our categories and make sure the sales density is comparable to
our slightly smaller store, so that the stores remain profitable. And
whatever we have seen till now of large-scale stores, they are fairly
profitable stores and they are in key locations and with high sales density.
So, we are rolling out, we believe in that strategy, but not all stores will be
large, there will be limited number of very well-chosen stores like that.
Varun Singh:
In that context, like how many stores we would have closed in the current
year? And the reason that I am asking is also, for example, last quarter, you
highlighted or maybe guided that U.S. Polo stores may be larger size from
the current 1500-2000 square feet model. Therefore, I was having this
maybe if not concerned, seeking to understand that if not larger than 2000
means maybe 3000. So, when you say 200 more store addition going
forward, if not in FY24, so a bulk of it would be a 2000 square feet and like
as you mentioned ten stores in U.S. Polo of 4000. So, I mean, in this
scheme of thing, basically how is your store evolution strategy? That is my
last question.
Shailesh Chaturvedi: You rightly said, this is a store evolution, I give you an example that in
Indiranagar High Street in Bangalore, we had a store of a certain size and
then we decided to make a bigger store. So, we had to shut down the old
store. So, let us not look at it as shutting down a store, it’s more as a
relocation of the store to a bigger and more prominent location. We have
done exactly the same in Goa also. And we keep doing this across our
brands. So, this right word that you use is the evolution of the retailing
standard as more and more categories come. And we have added Denim as
a big category. We are adding women, we have added kids, we have added
footwear, we added innerwear, and belts and wallet, and the need for
square foot in brand like U.S. Polo is increasing. Same is for Arrow and
Flying Machine and Tommy and CK. So, we are increasing the size and for
that, sometimes we have to shut down the previous store as we find the
new store. So, it is not so much as a store closure strategy, it is more as a
relocating, evolution of the store to a better, bigger store with higher
revenue and hopefully higher profit also. And that is done in a case-to-case
basis. I can't give you a number. We continue to look for, right now maybe
we are looking at 15 locations in the country where we want to open
bigger store for U.S. Polo alone and as we find something, then we shut the
old store and when we open the new store, then evolution happens.
Varun Singh:
Just one question if I may squeeze in, what is the revenue contribution
from non-apparel side of the business?
Shailesh Chaturvedi: Currently, that adjacent category, especially in U.S. Polo is now hitting
close to 15% of the revenue and it is growing very rapidly.
Moderator:
Thank you. The next question is from the line of Palash Kawale from
Nuvama Wealth. Please go ahead.
Palash Kawale:
Congratulations on the healthy expansion in margins. So, sir, my first
question is on gross margins only. So, do you think that gross margins that
you have achieved in the first 9 months are sustainable?
Girdhar Chitlangia: The gross margin that we have achieved in the first 9 months, we are
seeing that as of now, it is going to be on a sustainable basis because the
trend on the cotton prices continues. We have also maintained a very high
level of sell-throughs and a control on discounting. So, all these put
together will ensure that we will deliver sustainable base of gross margins.
Palash Kawale:
And my next question is, so opex for first 9 months has increased by
around 14% versus 5% increase in overall revenue. So, any brand which
you would like to point out which is responsible for this or any comment on
this?
Shailesh Chaturvedi: If you look at YTD, our capex is at Rs. 61 crores, this quarter was Rs. 26
crore so we are at an annualized rate of Rs. 80 to Rs. 85 crores of capex.
Now, the only place, our expansion plan is very asset light, so most of our
store expansion is on a FOFO basis with franchisee except that in Tommy
Hilfiger we have taken over close to 25 stores where accounting happened
in Quarter 3 and that is one change, there is no other major change that is
happening from capex. Ankit, do you want to add anything?
Ankit Arora:
Palash, I think your question also was on opex as well and maybe Shailesh
just added a bit of flavor on capex, we understood kind of that. You would
need to kind of also understand the piece around the channel mix change
playing a role here as to what we really said when you grow retail, the
franchisee commission expenses, which of course flow through the gross
margins and that is the reason which is where you are seeing a trend going
up. So, that also has a role to play in other expenses going up and of
course, you would have heard Shailesh speak at length about advertising
expenses being higher on a YTD basis also from a last year standpoint since
we have invested significantly in advertisement. There will be more than
about 100 basis points on the YTD level advertisement increase, which is
forming part of other expenses on opex, which is what the line item you
are seeing.
Palash Kawale:
And if only one question that I could squeeze in. So, you were like,
discussed focusing on margin expansion and return on capital, but what
would be those levels for margin and return on capital after that you can
see that now the focus would be on growth. Now you can push the pedal
there. So, what would be those levels?
Shailesh Chaturvedi: If you really see that the profitable growth of a brand is critical, and we
have been extremely tight on balance sheet. You will see on our inventory
days, on our debtor days, we have maintained the best hygiene possible.
So, when the working capital is tight and the brands hopefully will grow
much faster pace profitably, then it will generate free cash flow and that is
how we want to grow our ROCE. I think we have now crossed 15% and
medium term we are looking at a ROCE of more than 20%. That is the first
benchmark, and we believe that if we grow at the guidance that we have
given and the kind of margin expansion we are saying at least 100 basis
points every year in EBITDA. So, if you really do the math then we are
confident that in the medium run we will see about 20% ROCE.
Moderator:
Thank you. The next question is from the line of Sagar Parekh from One Up
Financial. Please go ahead.
Sagar Parekh:
Sir, the channel mix that you have given in the quarterly sales break up in
the presentation, if I look at retail, so last quarter I am assuming would also
have Sephora within the retail channel. Am I right in that?
Shailesh Chaturvedi: No, we have removed the Sephora data, it is like-to-like.
Sagar Parekh:
So, then like-to-like, the growth is 3%-4% only, which includes 2% L2L and
the rest would be new store additions?
Shailesh Chaturvedi: See, yes, I mean, also the annualization kicks in. So, the retail growth in
this quarter is 10%, double digit, and 2% is the like-to-like growth plus,
whatever you had stores opened more than 12 months, annualization of
that and then the new store that we opened all adds up to 10%.
Sagar Parekh:
And secondly, did I hear it correctly, you said U.S. Polo grew by 20% for this
quarter?
Shailesh Chaturvedi: No, I mean what I said is that the discounting has come down in U.S. Polo
and margins have been good. I didn't say 20% increase in U.S. Polo. What
we mentioned was adjacent category that Kidswear maybe you would have
heard somewhere the Kidswear, in my opening comment I mentioned that
the kids category had grown at 20%. I get it now. So, I think that was about
kids.
Sagar Parekh:
Just U.S. polo kids?
Shailesh Chaturvedi: Yes.
Sagar Parekh:
But you said 15% is the overall contribution of revenues from all adjacent
categories for all brands put together, like including Tommy?
Shailesh Chaturvedi: U.S. Polo is where the highest share of adjacent category happens, it is a
large business between among, innerwear, footwear, Kidswear, and on
that large scale of USPA, the adjacent categories are now more than 15% of
the revenue for U.S. Polo.
Sagar Parekh:
And how much is the debt number as of end of December after the
Sephora sale?
Shailesh Chaturvedi: Our net debt is now close to Rs. 225 crores.
Sagar Parekh:
So, then next year basically we can be like debt free, right, because you
have like Rs. 80-Rs. 85 crores of capex and you are talking about 100 bps
margin expansion, so next year the entire growth is all FOFO related
expansion largely, so basically your free cash flow will be very strong next
year, so then we can assume like full debt repayment by next year?
Shailesh Chaturvedi: That is our medium-term aspiration and we have mentioned earlier that
we have a desire in the medium term to be a debt-free company. Now, we
will see, we are generating some free cash flow even now this year. And we
don't have a major need for capex and that is why the profit is going into
free cash flow and we will see how it goes. It is also a function of how much
capital is required for growing the brand because that is the first agenda
that we want to grow our brand's profitability to their potential and then
whatever else surplus comes we surely use it to pay down our debt.
Whether it will become zero, I don't know. Ankit, you want to comment
further on the net debt where it will reach.
Girdhar Chitlangia: As Shailesh said, our aspiration is basically to be debt-free in the medium
term. Any surplus cash that we will generate obviously will be used to pare
off the debt.
Moderator:
Thank you. The next question is from the line of Abhijeet Kundu from
Antique Stock Broking. Please go ahead.
Abhijeet Kundu:
Congrats on good set of numbers. My first question was on the
discontinued businesses. You have said that the provision for royalty for Ed
Hardy and Aeropostale will accrue us profit because those losses will go
away, we have got Rs. 39 crores in this quarter. So, these brands are
dormant brands, or have we discontinued the sales?
Shailesh Chaturvedi: When the Sephora transaction happened, we had two brands which were
dormant and were not active, but we are paying royalty for them as per the
legal contract, which are the Ed Hardy and Aeropostale. So, we are not
doing any production or sale or business of that, but we had a certain legal
contract commitment. This was coming to close to Rs. 10-Rs. 12 crores a
year for next couple of years and this year, that figure was around Rs. 15-
20 crores. So, what we have done is that we have taken the present value
of these future royalty expenses plus some other expenses linked to these
brands and that we made the provision of Rs. 39 crores there.
Abhijeet Kundu:
So, technically, we are not selling these brands anymore, so no royalty has
to be paid, no expenses have to be paid, but these two brands are coming
for renewal in two years, right?
Ankit Arora:
So, Abhijeet, Ankit, let me just clarify that for your benefit. See these
brands were already made dormant because we were very decisively
allocating capital towards the five marquee brands, which is what Shailesh
has spoken at length. We were not investing behind these brands. So,
because there is no sale, but of course there is a minimum commitment on
royalty, which is what we have to pay, and we have mentioned this on the
call earlier as well in Q2. And so, the expense on account of that is what we
have made a provision netted off against the gain on the Sephora
transaction sale is what the number which is what you are looking at. So,
there is not going to be any further drag coming on the profitability of
these five marquee AFL brands going forward on account of this minimum
royalty commitment is what we had to pay for the next two years
pertaining to Ed Hardy and Aeropostale.
Abhijeet Kundu:
How should we account for it? So, say for FY24, the discontinued
operations, profit from discounted operations, so Sephora would be Rs. 74
crores only?
Ankit Arora:
Your estimation is correct. So, there is no NSV coming in from Ed Hardy and
Aeropostale. It was very marginal. So, the only NSV which is what was
coming in, which has been discontinued, is only Sephora. And your
estimation is broadly in line with the number, which is what you just
mentioned.
Abhijeet Kundu:
And my second question was, it has been asked earlier, but still two things
in that. One is the accelerated store expansion that you had talked about
200 stores through FOFO route, which will essentially more of EBOs. So, in
this, one is what would be the capex requirement, Rs. 85 crores is the
capex requirement that you are saying per year, one is that?
Shailesh Chaturvedi: Yes, annual. You are right.
Abhijeet Kundu:
Rs. 85 crores per annum
Shailesh Chaturvedi: Yes.
Abhijeet Kundu:
And second is that we are talking about the gross space addition, the net
space addition, how should we look at it? I know earlier also you said that it
is difficult to say that, but the color on what would be the net space
addition would help us to derive the overall sales growth because there
would be element of a same store sales growth and there would be
element of a store expansion which will play out over the next two years?
Shailesh Chaturvedi: I would put this gross addition, net addition into two parts. One is, there is
a regular business. In regular business, typically 3% to 4% of distribution
gets shut because those markets become not good or the store is not
viable, we make mistakes or something else happens. The market is very
dynamic and moving. So, that is a normal 3%-4% of your distribution. You
do clean up on an ongoing basis. That is a reality, some malls become
ineffective, some high streets become ineffective etc., that number
happens. So, what we track more than the number of store, because when
we shut, they are smaller store, maybe larger numbers, but we open larger,
bigger number of fewer stores. But I think that emphasis on square footage
internally, we look at how many square foot or what is the CAGR on square
foot that we are looking at. And that is the target we are looking at to grow
forward more than the store number. Store numbers are also important
and they indicate eventually the square foot expansion, but our internal
KPI is more and more on square foot expansion and the plus minus of the
store evolution, transfer, closure, etc., keep happening, but we are very
keen on adding a certain high quality square footage in our brands.
Abhijeet Kundu:
And what would be the targeted one? Like 10% of that 3%-4% will go off,
so 7% is the square foot addition?
Shailesh Chaturvedi: If you look at our square foot expansion, it is more like 1.75 lakh to 2 lakh.
It depends on the markets also. So, it is in that zone that we are targeting
right now.
Moderator:
Thank you. The next question is from the line of Niraj Mansingka from
White Pine Investment Management Private Limited. Please go ahead.
Niraj Mansingka:
Just two questions. One, what was the growth in the square footage on a Y-
o-Y basis?
Shailesh Chaturvedi: We have opened more than 120 stores. We can just check the number
and I can just confirm.
Ankit Arora:
We will have to just check the exact data. Niraj, I can settle back separately
on this.
Niraj Mansingka:
So, the reason I asked you is that what you said is more of a gross number
of opening of stores, right? And what is the net number of stores if you can
give that on a regular basis also, and now also it will be useful because that
shows how much you have actually added on a net basis rather than gross?
Shailesh Chaturvedi: We will take this as feedback, and we will ensure that data is made
available on a regular basis.
Niraj Mansingka: But what is the number for the quarter? How many stores you might have
added on the net basis?
Shailesh Chaturvedi: We added more than 20 stores in this quarter and more than 120 stores in
the year. That is the number we have currently.
Ankit Arora:
We added 31 stores on gross basis in Q3.
Niraj Mansingka: Please let us know the net store in future, so that will be more realistic way
to look at rather than the gross number. The second question is on revenue
growth. Can you share what is the revenue growth for each of these brands
like U.S. Polo Assn, Tommy?
Shailesh Chaturvedi: We don't share brand-wise data for a competitive reason and also, a lot of
our brands are licensed, so our global partners are also very sensitive to
that and industry also, our competitors also don't share. But we give
enough color so that we mention how the brands have done and how they
are doing. So, we have not given in the past a very specific brand-wise sales
number or EBITDA number.
Niraj Mansingka: But it can be from color on, which is the highest growing brand and how is
the lowest one, just wanted to have some color on that actually?
Shailesh Chaturvedi: The Tommy CK business has a very premium portfolio; they are growing
faster because, people say K-shaped recovery or premiumization is working
well right now. People are buying little more differentiated products. So,
last couple of quarters, we have seen a higher growth in premium
categories in Tommy Hilfiger and CK, and also the premium parts of Arrow
i.e. 1851 or premium parts of U.S. Polo also has grown well. And as far as
the lowest growth right now, FM is under a new refresh, and we are
waiting for a lot of piloting to happen in FM. Once we see the fruits of that
piloting we are doing, we will expand. So, right now, the growths are
lowest in FM and the highest in Tommy/CK.
Niraj Mansingka: And the last question, can you just share some color on what you are doing
so that you shared about refreshing the brand on FM, can you share what
you are doing and how you want to compete with other brands which have
taken over your market share over on that front?
Shailesh Chaturvedi: If you look at FM, it is a very strategic asset in our portfolio, it is owned by
us. We don't pay any royalty in that and it is our own brand, which we have
a partnership with the Flipkart group. And that partnership also gave us a
unique edge in online space, understanding of that space. So, when we
looked at the brand, we said, let’s refresh the brand. This was one of the
first Jeanswear brands, maybe the first Indian Jeans brand in country and
we have done refresh of CK, we have done refresh of Arrow, and then we
said now do it for Flying Machines. So, what we did is that we said that the
Flying Machine will be a brand which will be built on four pillars. One pillar
is Jeanswear. Now it is a very large market in India, especially in the MBO
channel, etc., a very large business happens in the Jeanswear, and FM is
the first authentic heritage Jeanswear brand, so we said that is the first
pillar. Second pillar is youthful, and you look at how India is a young
country, the Gen-Zs are becoming important, millennials continue to
remain important. So, we said, this is a brand where youthfulness, the
appeal to Gen-Z and millennials may be very important. Third, what we
said will be kind of a value proposition that will be attractively priced for
the product that we give, not the cheapest in that sense, but it will be
attractively priced. So, the third pillar that we have decided to focus in
Flying Machine was to focus on value proposition and the fourth was the
most emotional pillar that we said, in a young country where social media
is very important, we want to target online imagery of young customers
where they are nobody, but they should feel like somebody really hot. And
this expression of that fire emoji that people get, people crave for that
emoji coming as a reply to them on social media of the fire emoji. So, being
hot and the internal phrase we use is damn hot. And the fourth pillar will
be that it should look like a damn hot and it should solve the problem of
somebody towards his journey, as a machine will take it from an
anonymous person to somebody damn hot. So, those are the four pillars.
And in terms of execution, how we are doing it is that we first changed the
logo of the brand, we changed the font of the brand, we got a new
propeller, the new font, we got a new color scheme, we got a completely
new merchandise architecture which is targeted Gen-Z customer so that
the product also looks damn hot. We got a new retail identity developed
for Flying Machine that we opened in a Commercial Street, a high Street in
Bangalore around a year back. And now we are using this pillar of new
merchandise direction, the new retail identity, new ad campaign, which is
focusing on being damn hot, we are trying to excite the young customers,
Gen-Z plus millennials, so that they feel that they are damn hot when they
wear Flying Machine. Now, early journey we are testing a lot of these
things and what we have seen is that the MBO channel and the value
department store have already got very enthused by the new avatar of
Flying Machine. Also, we have renovated almost like 12 odd stores with a
new identity, and we have seen very like good like-to-like growth or
double-digit like-to-like growth in those stores. Still early days, we see a full
effort, another year to get everything right to build it, but that journey has
started and if you see our vision is also for Flying Machine to be a Rs. 1,000
crores brand, it will also have to have all the adjacent categories that we
talk about, and we are very keen that we will add three-four new adjacent
category in Flying Machine, and we will build distribution, we will build new
product category and expand through value department store and as well
as through our EBOs eventually. So, that journey has started.
Niraj Mansingka: And just, you said the 12 stores that you have renovated have seen very
high double-digit growth?
Shailesh Chaturvedi: Yes. Since you asked that specific question, because typically when you
are early stage, we want to keep quiet and keep doing the right thing and
once we see a model work, then we talk about it and expand it. So, it is a
very early stage of, we are seeing green shoots, but still, it is early days of
the recovery for Flying Machine.
Moderator:
Thank you. The next question is from the line of Jatin Sangwan from
Burman Capital. Please go ahead.
Jatin Sangwan:
I noticed that deprecation has increased Q-o-Q. I guess that was because of
the addition of Tommy Hilfiger and Calvin Klein on COCO model, so if you
could breakup deprecation by ROU assets and PPE, and the same for
interest, breakup on lease liability and interest due to borrowings?
Ankit Arora:
Jatin, Ankit here. So, just want to kind of clarify, interest is a very small
portion, quarter-on-quarter, it has increased only by about Rs. 2 crores,
which is generally on account of our IndAS adjustment because of our
COCO stores. Yes, your observation is absolutely right on the depreciation
side of it, it has increased by about Rs. 7 odd crores. There is a one-off in
the depreciation on account of COCO store conversion, which had
happened in PVH, which is what we have been speaking to you all about.
Since the entire documentation and lease signing of all those COCO
conversion stores got done in Q3 and hence there is a one-off charge and a
cumulative impact in Q3 to the extent of about Rs. 5 to Rs. 6 crores in this
quarter out of that Rs. 7 crores and this depreciation number will come
down by about Rs. 3 odd crores, Rs. 3 to Rs. 4 crores from Q4 onwards. So,
there is a one-off cumulative impact in depreciation on account of that.
Jatin Sangwan:
And if you could give the breakup also deprecation by ROU and similarly for
interest?
Ankit Arora:
So, interest on our borrowing usually is around Rs. 18 to Rs. 20 crores and
rest is on interest on lease liability and on depreciation the number is on
fixed assets is about Rs. 15 odd crores and the rest is deprecation on ROU
assets.
Jatin Sangwan:
And what is the gross debt number that we are carrying as of December
23?
Ankit Arora:
You asked about the gross debt number, right?
Jatin Sangwan:
Yes, gross debt number.
Ankit Arora:
So, that will be under Rs. 350 crores.
Jatin Sangwan:
And what was the similar number on September 23?
Ankit Arora:
I will have to just check that. Our net debt number was Rs. 476 crores as of
September. You can look at the reported balance sheet which is what
would have been part of the H2 financials.
Moderator:
Thank you. The next question is from the line of Ankit Kedia from Phillip
Capital. Please go ahead.
Ankit Kedia:
Sir, my first question is regarding the MBO, you mentioned that the tertiary
sales are in line with the retail like-to-like growth while we have reported
15% overall growth. So, just wanted to know how much are the MBO
counter additions in the quarter, Y-o-Y growth and over the next two years,
what is the aspiration for the MBO counter addition? And of the four
brands which we have, if U.S. Polo is the highest counter addition or Arrow,
what would be the other two brands like Flying Machine or the other brand
versus the leader? So, how much of the depth we can increase by and also
the width from the MBO channel?
Shailesh Chaturvedi: So, MBO is growing, in the Q3 is grown at more than 15%. Also, if I look at
the YTD data, also it has grown double digit. It is growing well now, it is a
function of, like I said earlier, expansion, annualization, and like-to-like
growth. Also, MBOs are working at a lower sales density than our EBO. EBO
have at much higher sales density. So, the growths are higher in MBOs
because there is a scope to increase the sales density and by putting our
own manpower to build more category assortment correctly, reducing
category, putting the right category. Also, our sourcing has been very
efficient, our OTIFs have been very efficient, so we have been launching
the season really on time among the best in the industry, so MBO channel
is benefiting from better sourcing and better supplies also from our side.
So, that is the growth picture, and if you see aspiration, again it is a very
large market and the market share of different brands or companies will be
still not that good and huge ability to grow and go to newer towns with the
MBO channel and like every other channel. So, I think there is a secular
growth possible in MBO channel and we will be very careful on hygiene and
that is very important for us that the inventory level at the MBO channel as
well as the debtor situation with the MBO channel, we are very careful,
watchful, and we are growing with very good hygiene. That is very
important in terms of our aspirations. As far as the scope is concerned, U.S.
Polo is leading brand. That is the first brand we take to a new city or to a
new counter or new MBO channel because the desire for that brand is very
high. It is a very large brand, country’s leading, probably the biggest men
casual brand in the country. Every MBO counter wants that brand first.
Tommy CK have a little more exclusive reach because that price point
doesn't work everywhere. So, that is a really careful expansion of Tommy
CK. Arrow and Flying Machine both show very good potential to grow the
MBO channel further. In the last two years, we have really expanded the
Arrow MBO channel significantly. As the model started working, we started
expanding. FM, we are doing that and the last number I remember in
spring-summer 24 and the fall-holiday 23, the previous season and the
current season, we are opening almost like 90 shopping shops in Flying
Machines between the two seasons and we will continue to expand as the
brand starts proving itself in the MBO counter and we continue to grow.
So, overall, I think it will grow at a healthy pace, but I think the important
thing is to maintain the hygiene of inventory and the collection.
Ankit Kedia:
Sir, specific number I was looking at the number of counters we are
present in MBO today and over the next two years what will be the counter
addition?
Shailesh Chaturvedi: I am sorry, I don't have specific data on that and like somebody
mentioned earlier on the store count these are the areas that I think we
will take this as a note of better information sharing with the investors. So,
this time please excuse me, we will come back with this kind of
information.
Ankit Kedia:
Sir, for last quarter also same feedback was shared with the team. Sir, my
second question is regarding discounting. Now if I go online on U.S. Polo or
the footwear brands and other brands, discounting is very high in online
channels. Obviously, you are moving away from online B2B, where the
discounting is higher. So, how much inventory is still in the system where if
a consumer goes online and sees the discounting, it remains high versus
the store where you are actually controlling the discounting. And over the
next two years, where do you want the online B2B business to be
positioned or reduce the inventory out there?
Shailesh Chaturvedi: So, if you look at our aspiration, we will want our B2C model with the
partnership with these portals that are key marketplaces, we want it to be
close to 75% of the overall online business. Currently, it is inching towards
50%. So, that is the scope to sort of convert the business towards more and
more B2C and our aspiration should be as high as possible, because then
we assort the product very scientifically and also we manage the
experience and the pricing and control the discounting. So, that is one part
of it. Now, as far as the current discounting on B2B portal is concerned, let
us look at two ways. One is that we are de-stocking, like Kulin mentioned
earlier and I also elaborated that we are very keen to de-stock, and the
consumer sales are growing, but we are reducing that stock level, and in a
couple of quarters where the de-stocking will get done and it will reach a
BAU level where the inventory should be. Also, I want to explain you that
fact that when the discounting happens the large part is what is known as
OSM, the old season merchandise which we pull back from our physical
stores and other distribution and online is a very efficient way of
liquidating OSM. What should we do in outlets, etc., so online one side is a
very efficient outlet model, and that model continues as OSM merchandise
and also we do some online exclusive merchandise that’s called SMU,
which B2B people pick up and sell. But a large part of that online exclusive
merchandise now we are doing in B2C with our own marketplace, and we
are building that business with our own control and our own sense on
pricing. So, that process is on, that strategy is being implemented and
initial primary billing hits we are taking, and I think in a couple of quarters
this will stabilize.
Ankit Kedia:
And sir, my last question is regarding U.S. Polo kids and footwear, we have
seen a very healthy growth in both these categories from a U.S. Polo side.
So, how many counters or how many EBOs today are both these categories
present? Or do you think there is scope to now linked only on consumer
demand or there is still penetration remaining for both these categories?
Shailesh Chaturvedi: Yes, so we started the journey of adding footwear to all the stores and
now majority of our U.S. Polo stores have the footwear and it accounts for
a healthy share of U.S. Polo stores and you will see neighboring key U.S.
Polo store where you will see footwear being present. As far as Kidswear is
concerned also opens up opportunity to open exclusive stores of Kidswear
in future, so we will look at that version also. Also, footwear is sold through
our own, we have a footwear chain where we do multi-brand stores. That
also pilot is happening, and we sell footwear through those stores also. So,
you see our expansion will happen and clearly that feedback on how many
stores is present etc., we will provide that information.
Moderator:
Thank you. The next question is from the line of Rajiv Bharati from DAM
Capital. Please go ahead.
Rajiv Bharati:
Sir, what part of this 120 gross additions are COCO stores?
Shailesh Chaturvedi: Very few. The number will be less than 20.
Rajiv Bharati:
And in terms of this depreciation increase, Y-o-Y, is it safe to assume that
bulk of this can be attributed to your COCO conversion on the TH side?
Shailesh Chaturvedi: And like Ankit just explained in previous question that accounting
happened in Q3 and that is why there is a one-off, Rs. 7 odd crores
depreciation compared to the Q2 has happened and now it has come down
by Rs. 3-Rs. 4 crores as this stabilizes. So, COCO, our expansion is based on
asset light model and in Tommy, particularly where we have taken over
almost like 25 stores and some new stores will open on a COCO basis
because the capital efficiency there and increase in ROCE. So, in Tommy,
we will continue to open the COCO Store, but other than that, they will be
only on very specific occasion, bulk of our retail expansion in other brands
will be on a FOFO basis.
Rajiv Bharati:
Because when I see the minority interest part, which is for your Tommy CK
piece, which is I think -2% decline, and if I adjust this depreciation
difference, it seems that you have grown 15%-20% profitability on Tommy
CK combined, is that number right?
Shailesh Chaturvedi: We are growing at something similar to what you are saying.
Moderator:
Thank you. Ladies and gentlemen, due to the paucity of time, that was the
last question for today. I would now like to hand the conference over to
Mr. Ankit Arora for closing comments. Over to you, sir.
Ankit Arora:
Thank you. I understand some of you may have a few unanswered
questions, but management had a paucity of time, so we will have to close
this call. Thank you everyone for joining us on the call today. If you have
any other follow-up or any more questions, we can take that separately
and I am always available to answer those. Thank you so much for your
time and have a lovely evening.
Moderator:
Thank you members of the management. Ladies and gentlemen, on behalf
of Arvind Fashions Limited, that concludes this conference. We thank you
for joining us and you may now disconnect your lines. Thank you.
Note: This is a transcription and may contain transcription errors. The transcript has been edited for clarity. The Company takes
no responsibility of such errors, although an effort has been made to ensure high level of accuracy.