Arvind Fashions Ltd Q4 FY23 Earnings Conference Call Insights

Key highlights from Arvind Fashions Ltd (ARVINDFASN) Q4 FY23 Earnings Concall

Management Update:

• [00:04:29] ARVINDFASN said its gross working capital days were the lowest in its history and have gone down by 22 days over the last year.

Q&A Highlights:

• [00:10:26] Nishid Shah of Ambika Fincap asked for an update on the Sephora online initiative and its future prospects. Shailesh Chaturvedi MD said the situation with Sephora remains unchanged and it continues to be a prestigious offline business selling mortgage brands to women consumers. No new online initiative has been launched yet.

• [00:12:39] Nishid Shah of Ambika Fincap enquired about the expected growth rate over the next three years taking the company to almost $1 billion in size. Shailesh Chaturvedi MD said that the company’s current strategy is to continue growing its business at a 12-15% CAGR and there won’t be any change in strategy. ARVINDFASN plans to continue focusing on store expansion, building marketplace capability online, improving sell-through, and growing like-to-like growth of its stores.

• [00:15:39] Darshil Jhaveri at Crown Capital asked about further leverage expected in terms of margins with the addition of premium brands and the target margins range over the next 2-3 years. Shailesh Chaturvedi MD said the company plans to improve margins through operational efficiency and rigor on both the product and retail side, by improving full price sell-through, reducing discounting, and buying better. ARVINDFASN also plans to turn around the profitability of some brands and achieve double-digit EBITDA in power brands. The guidance is to grow EBITDA by at least 1.5-2% annually.

• [00:18:57] Darshil Jhaveri at Crown Capital queried about the current consumer sentiment and demand environment and how it may affect the company’s growth rate. Shailesh Chaturvedi MD clarified that despite soft market conditions, the company is confident in its ability to deliver competitive growth. It will focus on store expansion, building an online marketplace, improving like-to-like growth in stores, and growing adjacent categories.

• [00:21:42] Ankit Kedia from PhillipCapital asked if there has been any change in accounting with franchisee owners or wholesalers to reduce inventory. Shailesh Chaturvedi MD said that over the last 2-3 years, the company has gradually changed its model to maximize ROCE and capital conversion by moving from outright billing to a consignment model. This has resulted in faster cash collection and better management of merchandise assortment and full price sell-through.

• [00:26:26] Ankit Kedia from PhillipCapital enquired about the ballpark figures for channel-wise margins and how the mix is looking for online, MBO, and retail business. Shailesh Chaturvedi MD said the company has a diversified channel mix, with retail, department stores, trade, and online each accounting for a significant share. The company’s philosophy is to drive channels that provide the best consumer experience, product assortment, discounts, and delivery times.

• [00:28:40] Ankit Kedia from PhillipCapital asked how is the shift to omni and away from outright happening in the online space and how does it impact margins. Shailesh Chaturvedi MD said the company’s major strategy is to divert online demand for its brands to the marketplace model, which grew by 75% in the last quarter. ARVINDFASN is building this model strongly by scientifically managing inventory and creating exclusive and strong linkages with its stores on the omni side.

• [00:36:21] Pritesh Chheda from Lucky Investment asked about the impact of emerging brands on the company’s EBITDA. Shailesh Chaturvedi MD said the EBITDA of emerging brands has gone up from 2% to 5.9% this year, largely due to Calvin Klein. Sephora’s EBITDA margins have remained stable while1 discontinued brands like Ed Hardy, IZOD, and Aeropostale have a INR5-7 crore royalty hit for the next 1-2 years.

• [00:43:22] Shreyansh Jain from Swan Investments asked if it’s fair to assume that a 12-15% top line growth guidance would also result in a 10-12% growth in the other expenses. Shailesh Chaturvedi MD answered that in channels where commission is involved, such as mono brand stores and the marketplace, other expenses will increase in line with sales but at a slightly lower percentage.

• [00:47:28] Jatin Sangwan with Burman Capital enquired about the reason for the substantial increase in right of use assets from March ’22 and Sept. ’22 levels and if it will have any effect on the depreciation and interest component in FY24. The increase in right of use assets on the balance sheet is due to the opening of 39 new stores. Girdhar Kumar CFO said there is no increase in interest outgo on account of this and Ind AS accounting will have to happen for these newly leased properties.

• [00:49:35] Jatin Sangwan of Burman Capital asked about the reason for the 10% QoQ increase in employee expenses and the expected steady level of employee spends. Ankit Arora Head IR said that employee cost has gone up from INR237 crores to INR268 crores on a YonY basis and is expected to increase in line with inflation. A 10% increase in employee costs should be expected for FY24.

• [00:50:47] Ankit Kedia at PhillipCapital asked about the overall store opening guidance for next 2 years across brands. Shailesh Chaturvedi MD replied that store expansion is a key growth driver for the company’s brands and ARVINDFASN sees huge untapped potential to expand in big cities, suburbs, and smaller tier towns. The guidance is to open close to 200 stores in FY24, continuing the focus on store expansion and increasing share of revenue from the EBO channel.

• [00:53:05] Ankit Kedia at PhillipCapital enquired about the capex guidance for the expansion of 200 stores and how much debt can be paid down over the next 2 years with this expansion. Shailesh Chaturvedi MD said the company expects its capex for next year to be around INR100 crores, with a large part going towards refurbishing stores and upgrading IT systems. This is expected to be done with internal approvals and no further debt is expected to be taken on account of this.