Release Date: February 14, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Arvind Fashions Ltd (BOM:542484, Financial) achieved a 5% sales growth in Q3 FY24, demonstrating resilience despite a subdued demand environment.
- The company saw a 150-basis point improvement in EBITDA margin, even with a 130 basis point increase in marketing costs.
- Offline channels, particularly retail and MBO, showed double-digit growth, driving overall revenue and EBITDA gains.
- The B2C online channel nearly doubled in revenue, indicating strong consumer sales growth.
- The company reduced its gross working capital by five days, reflecting improved balance sheet management.
Negative Points
- The online B2B channel experienced a significant de-growth, impacting overall revenue growth.
- The Diwali festival sales were negatively affected by the Cricket World Cup, leading to flat like-to-like growth during the period.
- The company had to participate in an early end-of-season sale to liquidate inventory, which could indicate inventory management challenges.
- There was a noticeable increase in operating expenses, rising by 14% compared to a 5% increase in revenue.
- The company is still in the process of de-stocking its online B2B channel, which may continue to affect short-term revenue.
Q & A Highlights
Q: How should we view the two contrasting data points of SSG for our retail network, which is muted at 2%, while our wholesale MBO channel has grown at 15%? Are we compromising customer loyalty by reducing discounts?
A: Our focus is on profitable growth. The 2% SSG is impacted by muted markets and events like the Cricket World Cup during Diwali. Despite this, our numbers are better than the industry average. We avoid discounting to maintain business rhythm and margins. MBO channel growth is driven by distribution expansion and higher sales density.
Q: Is the clean-up of the online B2B channel complete, or is there more to come?
A: The clean-up is ongoing, and we expect it to take another quarter or two. We are pivoting towards a marketplace model for better control over pricing and discounting. While this affects short-term revenue, it will lead to healthier long-term growth.
Q: What should be the sustainable SSG for our portfolio, and what areas need improvement for brands like Arrow and Flying Machine?
A: We target a 5%-7% SSG, with potential for higher growth in smaller brands. Key areas for improvement include increasing sales density and reducing discounting. We focus on retail science, including store layout, category assortment, and marketing support.
Q: How are you thinking about capital allocation among the five power brands to drive growth?
A: We have decisively focused on five marquee brands and will invest wholeheartedly behind each. Marketing spend has increased to 4% of NSV. If forced to prioritize, US Polo would receive the most investment due to its significance.
Q: What is the rationale behind opening large-size stores despite higher costs and risks?
A: Large-size stores are limited to key locations for brand visibility and category expansion. These stores are carefully modeled and have shown good results. They also support Omni connectivity and higher sales density.
Q: What is the revenue contribution from non-apparel categories?
A: Non-apparel categories, especially in US Polo, contribute around 15% of revenue and are growing rapidly.
Q: Are the gross margins achieved in the first nine months sustainable?
A: Yes, the gross margins are sustainable due to stable cotton prices, high sell-through rates, and controlled discounting.
Q: What is the strategy for Flying Machine's brand refresh?
A: Flying Machine's refresh focuses on four pillars: jeanswear, youthfulness, value proposition, and a "damn hot" image. We have updated the logo, merchandise, and retail identity. Early results show double-digit growth in renovated stores.
Q: What is the current debt level, and can we expect to be debt-free next year?
A: The net debt is around INR225 crores. Our medium-term aspiration is to be debt-free, depending on capital requirements for brand growth and free cash flow generation.
Q: How many stores were added on a net basis this quarter?
A: We added more than 20 stores net this quarter and over 120 stores this year. We will provide more detailed data on net store additions in the future.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
