Arvind Fashions Limited (ARVINDFASN) Earnings Call Transcript & Summary

Sure, that's a great question. Thank you so much. So I think at a very broad level, I will say that our consumer demand overall holds stable for our portfolio, and you can see that in our numbers, right? We've grown at overall at a portfolio level at about 15.5%. When I go back, step back to the work that we did in our -- over the period of 2 quarters and to build out what the consumer demand landscape looks like where the opportunities are, the one thing that I will point is that the larger direction that it points to is that the uptick or overall of the casual lifestyle category is really fast. And what we're seeing is that our brands are very well positioned in that space. So when you look at our brand with Flying Machine sitting within -- as we are repivoting it to our more Gen Z denim oriented unisex brand, which is catering to both men and women, it takes us to a consumer segment, which is growing really fast and again, in the casual lifestyle space. U.S. Polo is actually really well positioned as a large tenfold brand, which is now sort of catering to, on one hand, at a very deep level of casual lifestyle with its polos and shirts that actually caters more towards the casual work as well at the same time, towards a socializing moment also. So there, I think U.S. Polo actually serves really well across the portfolio. On top of that, from a pricing point of view and premiumization point of view sits Tommy, Tommy Hilfiger. And there, again, a portfolio of casual lifestyle products, which is both the polo shirt and bottom wear. It continues to do really well. And then on top of that is the CK portfolio. Calvin Klein is again catering to a much younger audience, which is more from a high net worth point of view. So this is consumer sitting above a household income of INR 50 lakhs and above. Now when I look at all of this, right, what our consumer work is pointing to is that our brands are actually uniquely positioned and sitting in very, very sharp segment with a pretty deep penetration and an ability to actually keep taking on market share, right? So this is allowing us to actually drive much faster growth, both in online and off-line. And this is fueling what you're seeing overall from a gross momentum point of view. So that's this part of the portfolio. Our other categories like footwear, et cetera, given the kind of potential U.S. Polo as a brand has and the halo it has, U.S. Polo footwear actually caters to the on-trend sneaker culture also and that we are continuing to see -- do really well in this all day comfort category of footwear products also. And lastly, coming to workwear, we are actually working and pivoting Arrow towards more catering to the modern professional of today. And as that brand with its strength of product innovation that it has continued to have for many decades now, we believe that Arrow is actually well poised to take on the workwear category, which is more evolving towards what the modern professional sees, right? So I would say that all in all, our portfolio is actually sitting at the center of where the future demand lies. And we are expecting that this will continue to clock sort of the mid double-digit growth for us.

Okay. Got it. My second question will be around something that you mentioned last time that for the U.S. Polo specifically, we have been opening higher sized stores, we want to showcase our product portfolio in a better way. Just wanted to check how has been the consumer response there? Are we seeing a better support? How is then the consumer feedback for those higher sized stores?

So I think U.S. Polo, the journey of U.S. Polo will continue to be what we spoke about last time as well that we will continue to increase the store square feet and upsize our stores. So as we go through renovation and as we go through upsizing, we do believe that the potential for U.S. Polo only is going to keep increasing because like you rightly pointed out, last time, we did talk about the fact that for us now, we're in a place where we believe we need more space to be able to do justice to the brand in terms of bringing the brand to life in its entirety, right? And with all the other expansions, the kind of denim portfolio that it carries, the shirts and the polos also what we have in U.S. Polo Sport, right? So beyond that, we have categories like innerwear, et cetera, also. So as we look at this, we do want to keep expanding and keep driving upsizing. Now the stores that we have opened, which are larger in size, continue to clock the SSPD in the same zone as the [indiscernible] earlier, which means with every increase in square footage, we are able to actually scale revenue much faster. So our entire endeavor is to now make sure that we are able to upsize these stores. I hope that answers your question.

Yes, that's encouraging. One last question, if I may squeeze in. Over the last 2 years, what we have been seeing is that all the brands are starting EOSS a bit early. Any take on the competitive intensity because demand has been pretty much rough? We have been doing good. But since the last 2 years, I'm seeing that the EOSS has been starting a bit early. Any take on the competition?

I mean I can't comment on why they are driving EOSS early. We are also seeing some mid-market sort of mid-season discounting, et cetera, as well. But what I will also highlight is the fact that overall growth for our brands has been actually pretty strong in terms of the secondary sales, even if we were to look at department stores and MBOs as well, right? And the like-for-like numbers for our retail are in front of you. So when I look at it for us, I can only comment on the fact that for us, EOSS is only relevant in the few weeks that we believe are required from a liquidation point of view. We obviously don't partake into these based on what some of the competition moves are. At the end of the day, these are decisions that brands take based on what their liquidation requirements are. So overall, for us, we have continued to clock a very solid growth, both in our department stores and MBOs. And that's actually an indicator of the fact that we are not only gaining market share but also doing much better than the other parts of the portfolio that these platforms have.

We have our next question from the line of [indiscernible] from [indiscernible] Securities.

Yes. Great set of numbers. I just want a bit of understanding with regards to both our brands, Flying Machine and Arrow. So Flying Machine, you guys have managed to turn it around pretty well last 2, 3 quarters. So on the ground, what is really driving the EBITDA? We have managed to do a lot of product levels in this. Are we going aggressive on the store side? So that's my first question. And secondly, on Arrow, what will be the outlook for next 2, 3 years?

So thanks for asking that. I'll go talk about both the brands one by one. So as you pointed out, Flying Machine has been on a journey where we've kind of looked at the brand, I was speaking about the consumer demand landscape some time back. And what we've identified is a very unique positioning for Flying Machine. We also have understood the fact that the equity, the brand equity and the strength of this equity is actually quite solid. So as we've kind of gone through over the last quarters, we've also -- we've gone in and sharply repositioned the brand as a denim oriented brand, which is focusing on the youth consumer, bringing more on-trend products to the market and at the same time, catering to both men and women, right? And that is the direction of -- for this brand. In terms of product range, we have brought in a more revised line and that new product range, which is catering to this consumer, catering towards this pivot that I just spoke of. again, going back to its core and its core equity of denim is showing really solid green shoots. And you can also see that we went in and took our take back of Flying Machine as well. And ever since we've been able to also scale it on digital platform and upcoming H2, we'll also see the launch of the dotcom as well. So the point I'm trying to make is that sharp positioning of the brand, rightsize product portfolio pivoted towards the positioning of the brand. At the same time, launching it across platforms, which are relevant to that consumer. And for this consumer, the digital platform is critical. As we do that, we will start actually investing behind Flying Machine in terms of from a brand marketing point of view. Again, content that is relevant from this consumer profile point of view, right. And all in all, we believe that this will continue to hit home. We are quite bullish about the brand and definitely seeing positive double-digit traction over there. So that's on Flying Machine. Sorry?

Yes. On a store network, how will it -- is it looking like now on -- how many EBOs would it have now, Flying Machine?

So look, in terms of the size of total portfolio, obviously, our largest portfolio of stores is U.S. Polo and the next is Arrow. And Flying Machine is, in that journey, is smaller than the two. So there is a significant headroom of growth for Flying Machine. But the position we have taken is that we will be opening Flying Machine stores where it is relevant and to begin with, start with expanding and probably putting the right-size boxes with the right retail identity where the consumer profile is there. So we have this concept of center of culture. And for this brand for Flying Machine, we want to make sure that we are opening stores in the heart. And I'll give you an example. A classic example would be a more youth oriented, university oriented profile to kind of get the brand more grounded and going. So there is a direction on retail that we will take. Flying Machine does have a certain fleet. And we will be kind of going through and sifting through this fleet as well and ensuring that we are growing this fleet, relooking at the identity, et cetera, right? So there is a journey to be had on Flying Machine.

Right. And what would be the outlook for Arrow, as I asked, both on a growth and margin point of view?

So Arrow for us is another -- a very, very unique brand in our portfolio. Like I said earlier, we have a portfolio of very strong casual wear brands, which sit across price points, across consumer profiles, right? The one brand that caters to the consumer, which is to the modern professional of today in our portfolio is Arrow. And this brand is going through that pivot. If you look at Arrow from a wholesale business point of view, it continues to deliver. Now our focus is to continue to drive and strengthen it from a direct channel point of view. So what you will see is more focused on right store formats, driving renovations, ensuring that we have the right product proposition and merchandising mix at retail. And once we are kind of satisfied with that, you will see us start pushing towards marketing at that point in time, right. At this point in time, we are continuing to drive Arrow towards efficiency. And so that will be the key driver, which will also -- another focus is to make sure that we start pushing it towards from a profitability point of view as well.

Right. And I had just one more question. What would be the right way to look at the business as a whole like PAT level? Because I understand post-Ind AS accounting tends to compress a lot of our profits by front loading our lease rental costs, right? So second, can we see a bit more expansion on the -- our bottom line, especially since we have been doing very good on EBITDA level?

So it's about 4% to 5% depending on which quarter you are looking. The difference between pre and posts will be between 4% to 5%.

And Q1 tends to be a bit compressed, right, compared to others?

Yes. I mean traditionally, Q1 is a bit compressed for this business, this kind of business.

[Operator Instructions] We have our next question from the line of [indiscernible] PhillipCapital.

Congratulations on a good set of numbers. I actually wanted to understand about the store addition. So the net store addition that was, I think, around 4 to 5 stores in this quarter. So which kind of stores are we focusing on? And what are the reasons? Like, are we planning to in Tier 1 or Tier 2 or Tier 3 cities? What is the strategy behind that?

Sure. So I think overall, as we quoted earlier as well, we continue to drive store additions, and we are looking at an overall -- from an annual point of view, we're looking at 1.5 lakh net square feet addition this year. And we are -- from a sheer management of the portfolio point of view, the way we look at store additions. At the same time, we look at about a 5-odd percent closing based on which are the catchment, things that are not working or is the demand shifting, et cetera, right? So that's a journey of general retail. Now in terms of where we are opening our stores, we actually -- all our brands are actually at a very different point in their journey. U.S. Polo has the largest network, and it is actually deeply penetrated over about 150 cities. And we will continue to drive U.S. Polo more from an expansion in the same catchment, but at the same time, upsizing the stores. We are also continuing to see all demand catchments that come up, which are relevant, and we expand the brand accordingly. The way we will look at Flying Machine, as I had mentioned in the earlier question, is that we want to make sure that it is at the center of culture with the right consumer profile. And this is a portfolio that we will again keep driving from a Tier 1 point of view, but at the same time, ensuring that within those cities as well, we are continuing to drive into catchments which are relevant to the consumer, right? Now same way, I think for Arrow, we will -- Arrow's again present in more than about 80, 90 cities. And again, this brand has a potential to grow further. We are also relooking at the box size and upsizing as well. Tommy and CK both are on a premium end of the brand, and we look at only the top end of the malls, which is the Grade A malls is where we look for these brands to go. Now as you can see with this, the point I'm trying to make is that Tier 2, Tier 3, obviously, we will cater to the cities to your question with the right store profile and ensuring that our relevant brands are over there. But having said that, I want to also highlight the fact that there are parts of the market, which have demand for our brands, and we end up accessing that demand through our direct-to-consumer channels, which are both our marketplace and the new dotcom that we are going to launch, right? And with this, it allows us to give consumers the access to our brand, right? So that's why we have a very holistic channel strategy. Our MBOs also continue to drive that demand in places where we believe that we don't want to expand with our store networks. Does that answer your question?

Just a follow-up on that. So the store closures that we have, gross addition of [ 23 ] and the net [indiscernible].

Sorry to interrupt you, [ Rutu. ] We can't hear you. Your voice is breaking.

Can you hear me now?

Yes.

Yes. So I was asking that the store that we closed in this quarter, is it mainly because of the low performing store? Or did we upgrade the store and that's why it's the closing and addition of the store is that way?

Yes. So it is generally going to be a mix of both. And as the country evolves, the one thing we've seen, and this is a standard retail journey, right, that there are demand catchments that start and then they thrive. And then there are some parts which start showing maybe an average of subpar potential. We do believe it is important to prune that more from a health of the fleet point of view. So we always keep monitoring how the demand shifts, right? And hence, you will always see a 5 percentage closure. Now it's a matter of timing for this quarter. Like I said, I think for us, the full fiscal year, we are looking to expand by about 1.5 lakh net square feet.

We have our next question from the line of Devanshu Bansal from Emkay Global.

Amisha, congratulations on a great set of numbers. I wanted to understand, you have sort of talked about your brand positioning being at points where the consumer demand is very robust. But as an industry, we're also seeing that segments like fast fashion and youth fashion are sort of gaining very strong momentum across the country. So I wanted to check what is your thought process on these emerging spaces. And whether you would also, at some point in time, play in these segments?

So I think for us, when you look at our brands and what define our brands is the legacy of these brands, the strength and the core positioning of the brand. And I would like to parse out this thought process of fast fashion a little bit because as a brand, the couple of things that we look to drive is what is relevant to the consumer and making sure that, that is available to the consumer at the right time. And then the 2 things we will ensure we drive is being on trend. But at the same time, the one effort that is ongoing for us is to make sure that we are getting closer to market. And that is a journey for us, both from an overall brand portfolio point of view. We want to make sure that we are running our lines more closer to market to ensure that we're able to capture demand correctly, right? So if the silhouettes are shifting, if the patterns are shifting, if there is a slight shift, for example, linen is in huge demand. And we made sure that, that is available to our consumers across our brands with the right product and a really great quality product, right? So some of these things we capture demand more from a closer to market point of view, and that is how we will continue to cater to the market. And the reason I'm not going to call this fast fashion is because fast fashion also alludes to having extremely high fashion side of the portfolio, which actually stays for a very short period of time, which is less about our brand and our brand positioning, but more capturing a certain silhouette. So I would want us to kind of have this part very clear from a brand point of view. We want to make sure that we are holding in and centralizing from a product innovation point of view, ensuring that we are capturing the DNA of the brand at the same time, the demand that is available in the market. And as we do that, our overall from a supply chain point of view, we are looking at building closer to market lines, and that is to make sure that we are more closer to the consumer demand. So hopefully, that answers your question.

Yes, it does, Amisha, a small follow-up on this. So are we largely closer to where we want to sort of be in terms of being closer to the market? Or it will take some time for investments in terms of supply chain to get closer to that?

So I think this will be a journey for us, right? We have some -- the industry used to run on a very long lead cycle in terms of inventory, and this is going to be a journey. The 2 journeys that we have taken on to get closer to demand. One is to drive our D2C business. So if you look at it, our shift towards D2C is to ensure that we are much closer to understanding the demand, sensing the demand and movement on -- from a trend point of view, that's one thing we're doing. The second thing in line that we're doing is getting more closer to market drops, and each of our brands are actually at a very different place in terms of this journey. This will be an ongoing journey, and this should, over a period of time, bring inventory efficiencies as well for us.

Understood. Another booking thing I wanted to understand, though, you have explained it. But the channel mix also has a contribution of better gross margin for you because if that's leading to higher inventory, it must be benefiting you from a gross margin perspective, right? So is that also a contributor in your gain?

Yes. A changing channel mix towards retail and online B2C yields a higher gross margin.

Okay. And lastly, sir, obviously, at EBITDA level, your growth is very strong. So I wanted to understand what led to this fall in other income? And how do you see this sort of panning out in the coming 2, 3 quarters?

Devanshu, last year first quarter, there was quite a number of COCO stores, which are closed. And there was a gain in the unwinding of the Ind AS 116 transaction accounting. Going ahead, we believe that whatever closure will be a balanced mix of stores, and we don't seem to be seeing any adverse spikes in other income. So it is largely going to be stable around INR 7 crores, INR 8 crores, what we reported this time.

We have our next question from the line of Ashutosh Joytiraditya from ICICI Securities.

So firstly, Amisha and team, I would like to congratulate the team for the great work that they have done for [indiscernible] I have visited the store and the kind of assortment, the visibility and everything, it was like done in a great level and really great work by the team there. So congratulations on that one. My first question is on the freshness part. So the management has been highlighting this, I think, for the last 2, 3 quarters that the freshness has been at the peak level. I just wanted to understand what at the back end has basically driven this kind of, what changes have been made specifically on the supply chain side?

So I think largely freshness is also indicating to the fact that we are getting season sell-throughs the way we want them to, right? And the fact that our inventory freshness is at an all-time high is indicating that our ability to sell out the products that we are bringing in, stuff that we are bringing in from an agility and supply chain point of view, closer to time is helping. At the same time, we are able to liquidate inventory and we are able to liquidate our old season inventory in time as well. And this is an ongoing journey, and I think we will be on this journey for some time.

Okay. Okay. Understood. So my next question, so I think [indiscernible] briefly touched on this other income part. But my question is more on the minority interest. So the kind of PAT suppression on certain fees can be attributed to the increase in minority and trust also. So that's suggesting that there has been the profit growth has been disproportionately concentrated towards the PVH JV, and not that much to our own 100% owned brands. So how should we see this going ahead? And can we expect any significant improvement there on that front?

You see, I think if you're looking at minority interest as compared to last year quarter 1, last year, quarter 1, there used to be a Flying Machine minority interest also, which is not there this time. So what you see now is the early PVH brand share of the minority interest. Secondly, Q1 usually, as I spoke earlier on the call also, is not so -- is an average quarter for us. And as we see progress into the year because of the festive season, the Diwali, the winter, our Q3 and Q4 results are pretty good in terms of how the business performs. So going ahead to answer your question, you will see that there will be an improvement in the minority interest. I mean, of course, the performance of PVH, which will lead to a higher minority interest.

Okay. And just an extension to that on the P&L itself. So this higher expenses, the staff and the other expenses. I think the management has already highlighted that is mostly because of the wage hike and the other operational inflation that has happened. So just wanted to understand like how much of the cost increase would be like front loaded investment on our newer stores and how much of it will be the structural inflation as well?

So I think if you were to look at it overall, we have also mentioned earlier that we continue to invest in marketing, and our EBITDA is post 50 bps investment in marketing, right? And that is one part of it. Overall, our costs have largely been in line with our channel expansion. The one thing that I did speak of earlier as well is that as we're trying to put through some of these areas of future throughput, we have invested behind people and resources towards our growth drivers. So that's also one more of the investment. But all in all, if you see our overall EBITDA performance, GP to EBITDA is pretty much showing that our costs have been maintained, and it's only the higher investment in marketing of about 50 basis points. I also want to highlight that we've expanded margins by about 200 basis points over the last 2 years with a sharp focus on costs and other efficiencies as well, right? So the way I look at it is as we expand and scale with double-digit growth, we will continue to see operating leverage overall in the business.

Okay. And on the inventory. So we have seen increase in the inventory, and that is like mostly because of the earlu, which we have done. My question is that what if the consumer demand in the second half of the fiscal tends to soften, which I think that is a concern which you have also highlighted. So can we run a risk of impacting the [ FCF ] there? And if that is the case, and what would be the possible measures we should take to mitigate this?

So at this point in time, the way -- and as you look at our performance, both from an online, off-line point of view and also our secondary sales across the board, our demand has been holding. Our brands are actually hitting out of the park compared to competitive brand also in multi-brand environments, right? So at this point in time, we don't see a slowdown in terms of -- or a major shift the way you are describing in terms of demand, right? Now as I've also mentioned earlier that we are watching the space. And if we see inflationary pressure, both from a COGS and a cost point of view, we will make sure that we drive much tighter cost controls, and that's already something that we are looking at. And if required and only if required, we might look at a pricing action. But at this point in time, like I said, it's just a watch item for us.

Okay. And one last question, ma'am. Also on this AI bit, is it possible to highlight a few of the tangible impacts, which we can see from the AI implementation on the operational efficiencies or maybe the SG&A side, if you can highlight over the medium term?

So as we -- I mean, at this point in time, we are investing and we are starting to see early results. Like I said, I think one initial read is in terms of the way our analytics is driving from a discounting point of view. Now this is going to be an online journey for us, both from -- actually both online and off-line, and our investments in analytics, technology and AI are going to continue, right? Like I mentioned in my opening remarks also, very early days, early results. As we go, we have our sort of charters planned out some of the things that we want to drive. So as things go, we will see how we can kind of share some of that.

Due to time constraint, this would be the last question. And I now hand the conference over to Mr. Girdhar Chitlangia for closing comments. Over to you, sir.

Thanks, Manav. Thank you, everybody, for joining us on the call today. If you have any more questions, please feel free to reach out to me and happy to take them offline. Thank you so much. Have a good day.

Thank you, sir. On behalf of Arvind Fashions Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.