Campus Activewear Limited (CAMPUS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Campus Activewear's Limited Q4 and FY '24 Earnings Conference Call. [Operator Instructions] Before we proceed on this call, let me remind you that the discussion may contain forward-looking statements that may involve known or unknown risks, uncertainties and other factors. It must be viewed in conjunction with our businesses that could cause future results, performance or achievements to differ significantly from what is expressed or implied by such forward-looking statements. The Campus Activewear's management team is represented by Mr. Nikhil Aggarwal, Whole-Time Director and CEO; and Mr. Sanjay Chhabra, CFO. I now hand the conference over to Mr. Nikhil Aggarwal, Whole-time Director and CEO, for his opening remarks. Thank you, and over to you, sir.

Thank you, Steve. Good evening, everyone. I thank you all for joining our quarter 4 and FY '24 earnings call today. As mentioned in our previous calls, we view FY '24 as a transitionary one. Campus Activewear experienced a robust resurgence in H2 FY '24 with a renewed emphasis on expanding its trade distribution network and introducing new products, including Campus OGs, NitroFly, Nitroboost and Air Capsule styles. The company effectively captured the attention and spending of consumers through strategic investments in branding and launch for new R&D-enabled products during H2 FY '24. Campus Activewear further widens its presence across India by inaugurating 66 new stores in the Western, Southern and Eastern regions, bringing the total number of exclusive brand outlet to 268 by the end of the year. In spite of a challenging economic macro, we stayed focused on fortifying our balance sheet strength. The company paid off debt amounting to INR 156.5 crores in FY '24, reaching a net debt-free status during the year. It gives me immense pleasure to share that Campus Activewear generated the highest ever net operating cash flow of INR 264.5 crores in FY '24. We also saw a notable reduction in our working capital cycle, cutting it down from 108 days in FY '23 to 79 days in FY '24, thanks to a decreased inventory levels and a deliberate effort to reduce the receivable days. Campus Activewear is dedicated to offering its consumers top-tier global designs and technology in sports and athleisure footwear. Our extensive range of products, variety of color options and commitment to affordability ensures that we meet the growing diverse needs of our consumers. We are committed to strengthening our brand identity by crafting compelling narratives, fostering deep connections with our target consumers. Our ongoing efforts to expand our product range are in line with our aspiration to establish ourselves as India's premier sports and athleisure footwear brand. With a robust balance sheet position, the management is determined to grow and enhance Campus Activewear's omnichannel presence, provide outstanding consumer experiences through innovative product offerings and enhance the customers Campus' recall value as the most preferred sports and athleisure brand amongst Indian households. We are geared to create a long-term value for stakeholders through our distinct integrated business model, combined with a strong balance sheet position. I will now hand it over to our CFO, Mr. Sanjay Chhabra, to take you through more details on the Q4 and FY '24 performance. Thank you. Over to you, Sanjay.

Thank you, Nikhil. Good evening, everyone. Thank you for joining us in our Q4 and FY '24 earnings call. Looking at the financial year '23, '24 and review, our operational revenue stood at INR 1,448 crores, lower by around 2.4% year-on-year, successfully navigating the disruption caused by O2O and B2B business channel. Most of the revenue loss from these channels were recovered by the marketplace business. The company sold approximately 22.2 million pairs in FY '24, lower by around 5.6% year-on-year. The average selling price increased by 3.4% from INR 631 to around INR 652 during the full year FY '24. The revenue mix between men and women and children categories stood at 80:20 during FY '24, a marginal shift from 81:19, reflecting our efforts to expand the women's category. Our EBITDA for the full year was at INR 215.3 crores. Turning to the balance sheet. As Nikhil mentioned, we have seen a significant decrease in the net debt from around INR 180 crores to around INR 24 crores as at end of FY '24. I'm happy to state that we have achieved a net debt-free status in FY '24. Our balance sheet remains strong, showcasing strong return ratios with on return on capital employed at around 19.2% and return on equity of around 14.9% as of 31st March '24. With that summary, I will now conclude my remarks and open the floor to the moderator for the Q&A. Thank you.

[Operator Instructions] The first question is from the line of Videesha Sheth from Ambit Capital.

My first question was on the overall demand landscape. So some of the consumer companies have been talking about some uptick in rural. So can you talk about the overall demand scenario including market share trends in each region for the quarter gone by and the current quarter? And in the same context as a follow-up, how are you thinking of premiumization and overall volume growth over the medium term? That would be my first question.

Nikhil here. Thanks for your question. So during the quarter, so we've seen increase in our North and West business by almost like a 10% increase year-on-year. And the other regions have sort of been flattish, like East and Central and South have more or less been flat. So therefore, we have seen definitely an uptick between these two territories. And this is where we called out last time as well, if you remember, the states of UP, Bihar and Maharashtra is where we were specifically focusing a lot of energy to revive those states. So I'm happy to share that, especially in these three states, we've seen a significant improvement by up to 20%, 14% and 10%, respectively. So rural demand, we have definitely seen our fair share of subdued demand over the year, especially in quarter 2 and some bit in quarter 3. But with our renowned focus -- renewed focus towards certain strategies that we have implemented, including portfolio optimization. So as of today, we basically launched a complete and very comprehensive portfolio of designs, catering from all price points, starting at INR 799, going up to as high as INR 2,999. So we have very good adequate number of designs in good throughput, in good volumes at each and every price point. So we have made sure that there is no gap in the portfolio, which is unaddressed. And we have definitely seen good momentum from that strategy coming in. Therefore, we are confident of -- fairly confident of navigating the rural demand as it has happened in quarter 4.

All right. Nikhil, just in that context, do you think the premiumization journey is getting a little delayed as we're focusing on addressing all the right pricing gaps?

So it could be slightly -- I mean, so see, we have premiumized a lot over the last 5 years by almost 5% to 6% ASP increase every year, average, right? So the company has premiumized significantly in the last 3, 4 years. Given how, I would say, the last 18 months have gone, and clearly, we have seen some stress towards premiumization as well, slight stress. So therefore, we've pivoted to the strategy of increasing our economical portfolio as well. That is from INR 899, basically up to INR 1,000, MRP. So that would definitely give us additional volume, and any margin there would be compensated by additional volume from -- and create operating leverage. Therefore, we have to navigate the macros as the demand -- as the scene commands. So we cannot run our strategy in silo. We have to understand the market dynamics, and they call today for a complete and comprehensive portfolio from the company side.

Got it. Got it. Fairly clear. And the second question was on our network. There seems to have been a drastic change in the MBO and distributor network. The retail reach has increased from 20,000 to 23,000-odd, whereas the distributor reach seems to have been rationalized from 400, 425 to 300. So can you explain what exactly happened over here?

So it's just part of the consolidation like we called out. We've been following up with various strategies in the distribution channel. And therefore, that has resulted definitely in some decent growth this quarter. So we've seen about 7.5% growth in terms of value in our trade channel in quarter 4. And this is primarily due to these 2 or 3 initiatives that we have quite aggressively run. So one is the consolidation of distributors, as you pointed out. So one is that. And the other is increase in the count of retailers, increase in the count of our own feet on street, our own sales force to give better coverage and better serviceability. Along with that, like I mentioned, we've given a full assortment of products at every single price point. And finally, we've also rationalized and optimized the schemes and incentives and made much better, I would say, distributor-friendly policies. So combined with all of these factors, we have seen a decent trend, a decent, I would say, growth in the distribution channel in quarter 4. So largely, that consolidation of distributors and increase in retail network is part of the strategy.

Okay. And this consolidation has it been pan-India or restricted to any specific region?

It's mostly pan India. It's across depending on the territory, yes.

The next question is from the line of Umang Mehta from Kotak Securities.

Nikhil, imports of footwear, we've seen a significant decline in the Jan to March period. Have you started to see any green shoots already?

No. So you're right. The imports have certainly declined, and this is the news also that we're getting from the channel. Because the BIS norms dictate that we need to upload the non-BIS inventory onto the portals by 1st of August this year and the government has given time till 1st of June 2025 to liquidate all non-BIS goods. Therefore, we believe that a lot of, I would say, importers did some loading of inventory early on. Therefore, we will see some bit of liquidation from their end over the year, maybe up till even June next year. But we've been not too really bothered about that because from our side, we have taken adequate measures to make sure that we are fully covered and on track with -- in terms of growth. So -- but as of now, to answer your question, we don't see any significant green shoots coming in from the stop of imports. They will certainly come, but maybe in the next 2 or 3 quarters.

Understood. And the second question was on your other expenses. We've seen a significant decline of around 17% on absolute basis despite a 4% volume growth. So was there any one-off or a provision reversal during the quarter?

This is Sanjay. I'll just like to take that question. Other expenses primarily are a subset of three big buckets. One is our factory overheads, plus freight and then the admin SG&A and also the advertisement and promotion spend. So you see a dip versus last year, it's a combination of, again, three things. The factory overheads have come down primarily. We have realigned our workforce based on the production requirement for this quarter. Last year same quarter, the production was higher and hence, our cost was high. This year, we recalibrated that cost. Number two, the -- we did do a front loading of A&P spends in Q3, which is in the season. So this year, in Q4, our A&P spends are lower by around INR 6 crores. However, on an H2 basis, these spends are higher versus last year. And also the third line, which is online commission, there we got certain rebates during the campaign period. It's a rebate from the platforms, and it was adequately offset to a sort of reduction in the ASP during that campaign period. So it's a line shift. However, on a full bucket basis, we have been able to control back-end cost. A&P is a phasing thing. And this online commission is driven by campaigns, specific campaigns.

Understood. Very clear. And just one clarification. So you mentioned trade distribution mix to be 56% in one of your slides. However, if we do that, then your trade distribution revenue goes beyond INR 800 crores. So I'm assuming that's a typo, right? Or is your understanding incorrect?

Could be in certain slides maybe, it's including net sales or dispatches. So that could be a sort of printing issue.

[Operator Instructions] The next question is from the line of Mehul Desai from JM Financial.

First, I wanted to understand if you could give -- I mean, you did allude to the fact that trade distribution has grown by 7.5% for the quarter. If you can give the same growth rate number for your D2C online as well as your D2C offline for the quarter?

Sure, Mehul. So Sanjay.

So Mehul, the D2C channel has shown sort of 6% degrowth for the quarter. Distribution has grown, but D2C has degrown. That's again primarily -- still we are sitting on some of the impact of B2B and O2O channel, which has degrown by around 55%, but marketplace has simultaneously grown by 32%. So by and large, it has -- it did offset. Net-net, our value growth is around 4.7% for the quarter.

And [indiscernible] and all the growth.

What is the D2C off-line channel growth, I mean for the quarter?

For D2C offline again it's more than 30%. So I mean, our COCOs and FOFOs have grown up by in the range of 30%, 35%, and large format stores have also grown 40% plus in the quarter.

Got it. And obviously now, how do you see -- I mean, if you could give some color on how the April, May month has panned out. Are you seeing the moving back to high single-digit kind of volume growth? And lastly, how do you see the gross margin and EBITDA margin trajectory for FY '25?

Mehul, as much as we'd like to answer this question, I hope you'll appreciate that we can't comment on any forward-looking statements. But certainly, we'll aspire to maintain and grow the business, certainly from here in terms of growth rate, and certainly maintain the margin profile as well. So we believe the company is definitely back on track with all the right initiatives in place, which are being -- you can see it from the balance sheet position, which is the best basically that we've ever seen in the history of the company. And from here on, we're just focusing largely on very fundamental 3 or 4 major initiatives across the company on which the entire, all the functions are aligned towards, right? So that we materialize them and deliver on growth. So we are fairly confident, but I would not like to comment in terms of numbers here, please.

And lastly, if you could give a reason for the gross margin compression on Y-o-Y and Q-o-Q basis?

Yes. Just to explain that there are a couple of factors, both -- I mean, common factors both for Q-o-Q and Y-o-Y. So as I mentioned that we see a -- in other expenses, there is a drop, which is primarily driven by lower online commission. During campaigns, we got certain rebates on online commission, and we did pass on a part of that through lower ASP for the D2C channel. That has resulted in around 1% lower gross margin. Apart from that, we have taken a onetime NRV hit of roughly INR 1.6 crores. So our comps have gone up to that extent, and that has also resulted in a drop of roughly 40 basis points. So that's roughly 1.5%, which is getting reflected both in quarter-on-quarter and Y-o-Y.

Sorry, this INR 1.6 crores, what was it?

It's an NRV hit, meaning that the net realizable value of some of our articles, over-aging inventory articles are lower versus the cost. So we have sold certain articles, subsequent -- in the subsequent period at a lower than the cost of production, and that has impacted the P&L by INR 1.6 crores.

The next question is from the line of Ankit Kedia from PhillipCapital.

Sir, could you please share what is the ASP difference in online versus trade channel? And are we seeing premiumization play out there? Because historic years, we have seen a strong premiumization in online and EBO channel.

Right. So there has been certain ASP increase in both the channels. We have definitely seen some bit in online as well. But like I shared earlier, we are focusing on a complete portfolio -- comprehensive portfolio strategy as of now going forward, right, because this is what the market demands. So there could be a slight dip in ASP. I mean, maybe the ASP won't grow at the same pace, but that would be more than offset in terms of the higher volumes that we'll be able to command and that will offset any loss in terms of ASP. So that's basically the strategy as of now going forward, Ankit.

So is it fair to assume that now the online channel is going to get the inventory after a few months of off-line launch of the comprehensive strategy you are doing? Or what is this strategy? How do you play that strategy? If you can just deep dive a little more on that.

Sure. So portfolio is specific to each channel. So we don't have a common portfolio anymore. There is no conflict, especially between the online and GTM -- between GT. So there is a complete segregation of portfolio across all price points between both the channels. EBO, however, it continues to carry common portfolio because this is company-owned stores, and we control all the merchandising there. And LFS again, is specific to -- they have a separate portfolio specific to their needs. So basically, we have a complete comprehensive portfolio across every single touch point today across all the channels, across all the price points and categories, including not just limited to shoes, but we've also increased the salience slightly towards more open as well during seasonal times, right, during the summers. So we need to give a higher portfolio in terms of sandals, slippers and school shoes as well. That's basically the strategy that complete full range across all price points and in decent volumes, right?

And given that the current inventory levels are healthy, do you think discounting in the market has got lower in the current season compared to the past by the retailers because the feedback we were getting in the market for past 2 quarters was that they were undercutting each other because your breath of retailers have increased, and some of them are usually selling the type single-digit margins. So now with the distributor consolidation happened and -- however, the retailer reach has increased. So on the ground, sort of the healthy portfolio, what has led to this kind of growth, which you spoke up in a couple of questions earlier.

No. So it's not related to I would say any sort of discounting. Discounting has become better, only it's gone lower at the ground level in terms of retailers mainly due to consolidation of distributors. So we have rationalized the margins. We have reassessed the schemes and incentives, and the way they have been designed is basically for a win-win situation, both from the company's perspective and the partner's perspective. So that's the way we are addressing this current issue at hand. And going forward as well, we will continue because the strategy has panned out really well, and we have seen growth coming in from this. We will continue to maintain it. I don't see any challenge in terms of discounting, like we've not gotten that feedback. It's lately become much better, especially after segregation of the online and off-line portfolio, we don't hear of over-discounting at the moment from the market.

The next question is from the line of Videesha Sheth from Ambit Capital.

Just one small clarification. When you said that there is no discounting in the channel anymore. I mean, does that also mean that the channel inventory is largely normalized at the moment?

No. What I meant is that the -- so a retailer in distribution business, they end up giving at least 10% to 12% average discounts across all geographies. So that is just like the average that we know of. And initially, when there used to be conflict, then the discounting became higher, when there was conflict between the online and off-line trade. So what I meant earlier in my earlier statement was that conflict has gone away. Therefore, the discounting has been normalized and have come back to the 10% levels in the distribution business at the retailer level. And therefore, keeping that in mind, we have rationalized and optimized the margin structure across the channel trade now to make sure that discounting does not increase again.

Okay. So where does the channel inventory stand as of today? Is it still elevated, or now it's largely normalized?

It's fairly in control. We don't see, barring maybe just 1 or 2 areas, which is not very concerning, we are fairly comfortable in terms of channel inventory at the moment.

[Operator Instructions] The next question is from the line of Tanmay Gupta from Motilal Oswal.

Sir, actually, our plan was to increase the channel mix from -- to 50-50 versus trade distribution and D2C. Now giving that trade distribution channel has been growing faster than D2C, how we look this mix to reach again to 50-50 level?

No, so we are definitely still very much on the same track in terms of 50-50 split. We are very happy with how the distribution channel has come up in quarter 4. And -- but that does not mean that online channels will not grow. It was just a transient thing this year where online sales got substituted between O2O and the marketplace, therefore -- but now that channel has also reached a level of stabilization in terms of that split that happened. And going forward, we will definitely see growth from the online channel as well, which would take us back towards 50-50 split.

Understood. And the advertisement level will continue to remain higher for that?