Shoppers Stop Limited (SHOPERSTOP) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Shoppers Stop Limited Q2 FY '22 Earnings Conference Call hosted by Axis Capital Limited. I must remind you that the discussion on today's earnings call may include certain forward-looking statements and must be viewed, therefore, in conjunction with the risks that the company faces. Please restrict your questions to the quarter and yearly performance and the strategic questions only. Housekeeping questions can be dealt separately with the IR team. [Operator Instructions] Please note that this conference is being recorded. And I hand the conference over to Mr. Gaurav Jogani from Axis Capital. Thank you. And over to you, Mr. Jogani.

Thank you, Nirav. Good morning, everyone. On behalf of Axis Capital, it's my pleasure to welcome you all to Shoppers Stop FY '22 Earnings Conference Call. On the call, we have with us today, Mr. Venugopal Nair, MD and CEO; Mr. Karunakaran Mohanasundaram, CFO; and Mr. Jaiprakash Maheshwari, VP Finance and Accounts. I would now like to hand over the call to the management for their opening remarks, post which we can start the Q&A session. Thank you, and over to you, sir.

Thank you, Gaurav, and good morning, friends. Thanks for joining us today to discuss the Shoppers Stop financial results for the second quarter of the fiscal year 2022 that ended on the 30th of September. We had shared our Q2 results, the investor deck and the press release with you, and I hope you've had a chance to browse through the same. Today, I'll talk to you about the Q2 performance and, as always, give you an update on the progress on our strategic pillars and the way forward. To start off in the second quarter, we saw a strong rebound from the second wave of COVID-19, and the consumer confidence has rebounded sharply. Our GAAP sales was INR 709 crores, a growth of 117% over Q2 FY '21, with margins growing by 490 basis points and EBITDA by 386%. The reopening of stores and the recovery from disclosures in quarter 1 was varied through different states, and there was growth in sales in each of the 3 months of the quarter on a sequential basis. We've had a strong start to the festive season. And currently, we are nearly at the same level of sales as pre-COVID. This suggests that we are likely to have a strong comeback over Diwali and Christmas. Apart from the strong sales in stores, our sales through our digital channels continue to perform strongly and grew by 103% over FY '21 same quarter. I would also like to call out at the total level as a business. Now we had 6 consecutive quarters where our average bill value has been increasing. This is a clear indication of a higher level of engagement with our customers, and that they are spending more with us every time they visit us in our stores or online. On the operational costs, we continue to save versus FY '20. In the second quarter, we saved INR 62 crores. The savings have been on lease rentals, employee costs and admin and operating expenses. We managed our inventory efficiently, adopting the lessons learned from last year when the first wave hit. Our inventory has reduced by INR 82 crores compared to the same period last year. Again, this needs to be taken in the context that this is -- that sales being at a much higher level than last year. With strong sales and price control on costs, we reported an EBITDA of INR 138 crores as per GAAP financials and INR 1 crore as per the non-GAAP reporting. During the quarter, we invested INR 20 crores on OpEx in building our e-commerce and digital technology as we continue to transform ourselves into an omnichannel retailer. Apart from that, we also invested INR 35 crores across CapEx and OpEx in opening new stores and refurbishing our existing stores. In our store renovations, we have been focusing on improving productivity of the stores. And a good example of this is our store in [indiscernible], Hyderabad. In this store, we reduced the store area by 35%, and yet the sales have reached the same levels as pre-COVID, improving the profitability of the store significantly. We are also happy to state that during the quarter, we completed the sale of [ Crossword ] for INR 41.6 crores. So that's an overview in terms of our overall performance. If I now move on to strategic pillars, and I will talk to you about each of them in turn. We continue to make good progress in each of our strategic pillars, and we are very happy with the way we are progressing on it. Our first strategic pillar is First Citizen, our loyalty program, and this continues to grow strongly with 75% of our sales coming from them. We are growing our First Citizen Black Card customer enrollments, which is an annual subscription program, wherein our customers pays INR 4,500 for an annual membership to be a part of this program. Good customer visits us 3x more frequently than our average First Citizen customer, which leads to much higher annual expense. We migrated the First Citizen loyalty program to a new campaign management platform called GRAVTY last year. And in the second phase of this, this is now being leased with our data warehouse. This will give us the ability to engage with our customers in an even more targeted manner, improving our conversion and growing our overall sales through better engagement. On our second strategic pillar of omni, specifically then I'll come back to omnichannel in greater detail later. But just on First Citizen, our sales on omni from our First Citizen customers grew from 21% to 40%. As mentioned before, we are engaging with our First Citizen customers very closely. 33% of the customers who have shopped online have also shopped in store, and they spent 6x more than the average online customer. It just shows how much more engaged our First Citizen customers are when they are shopping both channels. And hence, our endeavor to continue to increase the share of First Citizen customers spending online even as we continue to attract new customers. Our unique service to our customers, personal shoppers, continues to be a strong offering for our customers, a differentiated offering that we give. Personal shoppers and sales stores through the personal shoppers has been consistent and contributed to 14% of our sales with an average ticket price of 2.8x higher than our normal. We also do styling festivals through our personal shoppers, both online and off-line. Our other services, such as White Glove, continues to contribute to our overall sales. All of this, helping to make the First Citizen customers, are loyal customer be special in our stores. Moving on to our second strategic pillar of private brands. Our strategy of growing our private plans in Apparel and Beauty is working well. Private brands contributed to 14% of our total business, which is being 18% in our online business. Bulk of our private brands are on apparel. And in apparel, private brands contributed to 19.4% of the total sales of apparel. The 9 brands that we have in apparel continue to grow faster than the company. We have invested in getting the price right for these power brands, and this has led to a volume growth of 59%. In the last call, I had mentioned to you about the launch of [ Inference ], our sleepwear brand. And this, I'm happy to report, has now jumped to be one of the top brands in our women's western wear. In Indian wear, our private brand sales now contributes to nearly half of the total sales of this category. In men's, we launched Bandeya. Again, this is something which I had shared with you at the last call. Bandeya is a range of men's ethnic wear, and this is now the biggest ethnic wear brand performance in our department stores. And finally, in kid swear, our private brand sales have been way ahead of all of the other categories growing by 162%. So to summarize, across all of apparel, our private brands continue to grow well, and we are pleased with the progress we are making. Moving on to our third pillar of beauty. And in beauty, we continue to build on our leadership in the offline space, and we are increasing the number of brands that we retail. In parallel, we are adding a lot more brands, which would be available only online with a great opportunity to have Shoppers Stop as a strong omnichannel player. We have added 19 brands in the second quarter and will be adding another 41 in the third quarter. We also continue to build our private brand Arcelia in DG. Just last week, we have launched 10 new perfumes across men's and women's, and we'll been launching 20 different varieties of deodorants in the next 4 weeks. We've launched accessories, sheet marks, and some of these are priced extremely attractively. Further, we will be launching over 200 variants of lipsticks and nail polishes in the Q4 of this financial year as we continue to grow Arcelia as our private brand. With makeovers now being allowed in stores, we are seeing higher customer footfalls for Beauty, and they are spending more time in the store. Makeup categories grew by 133% over the same period last year. We will be launching 3 new Beauty by Shoppers Stop stores in the next 12 weeks. These are stand-alone beauty stores and there will be destination for beauty specifically. And our plan is to open 10 to 15 of these stand-alone beauty stores over the next 12 months. Finally, moving to the fourth strategic pillar of omnichannel. And here, we continue to transform ourselves into an omnichannel retailer with shopperstop.com firmly established as a shopping destination for our customers. I must emphasize, every single store of Shoppers Stop and all of our stand-alone beauty stores are now linked with shoppersstop.com on a real-time basis, giving customers the choice of buying every product that we have in our stores, and it's available to our customers on shoppersstop.com at all times. Apart from that, we also have additional brands, which are available only on shoppersstop.com, expanding the range that is available for our customers even more. As a result of all of this, our digital sales was up 103%in on FY '21 and contributed to 8% of our total sales. We have strong unit economics on shoppersstop.com as also through management and on the Estée Lauder online sales that we do. As mentioned before, this is an area we are continuing to invest. And we are investing to improve the customer experience on our app, on market, on analytics and on insights, which will lead to higher conversion and sales. The first phase of this will be implemented in December of this year and the second phase in March '22. In order to further strengthen our omnichannel play, I am pleased to share that we have now 2 Board members joining us from pure marketplace and omnichannel background with good domestic and global exposure. [ Christine Casalis ] comes from John Lewis in the U.K., having extensive retail experience and a proven track record of identifying future consumer trends and delivering market-leading propositions across multiple product categories, including home, fashion, beauty, nursery and sports. I'm also pleased to welcome Arun Sirdeshmukh on to our Board. Arun has been associated with the fashion business in India for over 25 years and has built some of India's largest and strongest fashion brands and retail businesses, such as Reliance Trends, Amazon Fashion to name a few. Arun is presently leading the largest electronic vehicle 2-wheeler business as SVP and Global Business Head, Ola Electric and also as CEO of Ola Cars in India. Moving on to expansion. We have opened 2 beauty stores of Estée Lauder in the second quarter, and we also renovated 5 of our department stores. Our expansion program is back on track, and we plan to open 6 department stores and 3 beauty stores in the third quarter. Two of the department stores are fully ready and will be open as soon as the malls start trading over the next few weeks. For the next 2 years, our target is to open 10 to 12 department stores and 20 beauty stand-alone stores every year. Last but not the least, we have, most of our team, in place now. We have a very strong management team with extensive international and domestic experience with clear domain expertise in each of these areas. Having a clear plan, strong focus on our strategic pillars and the great management team puts us in a good place to take our business forward strongly. In summary, we've had a very strong and encouraging quarter. We are trending strongly into the festive period. Our strategy is working well, and the team that we have in place is well placed to deliver on our plans, capitalizing on the high loyalty and great trust our customers place on the Shoppers Stop brand. Thanks for listening, and we'll open to questions now.

[Operator Instructions]

Nirav, we already received probably 7 or 8 questions. What we thought, Venu and I will read the question and answer it and probably -- so that will avoid a similar questions from the analysts. So we will do that, and then probably we'll open to the questions. I mean we should not take more than 5 minutes to answer all these questions. Okay. So I'll quickly go through them. The first one was we are at 75% of Q2 FY '20 sales despite 87 operational days. Do we expect to cross 100% of Q3 FY '20 in Q3 FY '21? What do we expect to end FY '22 as a percentage of FY '20 sales? So on the first part, in terms of 87% of the -- regional stores being opened for 87% of the operational base. It is true that they were open. But as you all know, in the month of July, COVID was still up here and the number of hours that stores were operational were quite [indiscernible]. Add to that in a number of cities, the stores were not open during the weekend, which do tend to be a significant part of our sales. So hence, that 87% operational base is not directly comparable to the sales recovery of 75%. On the second part we are trending well. And as I mentioned, currently, our sales are close to FY '20 number for the first 2 periods, which gives us an indication of where we are progressing. Second question, please, can you throw light on the cost savings? Are they largely from rentals or other areas? Savings, again, I think I mentioned this in my initial savings from across various expenses, including employment, operation costs, electricity and service [indiscernible]. Third question, we have made investments in technology to help our digital presence. Are we happy with our current digital presence? Do we plan to spend more to ramp up our presence? We are progressing well, and we are continuing to invest to improve the experience that customers have on our app, on MarTech on analytics, on insights. And we believe all of this will help us to serve our customer better, engage with them at a more personal level, which should lead to higher conversion and sales. Are we happy with where we are? We are happy with the progress we are making, but we believe we will continue to improve and will continue to get better in this area. I'll move on to the next question, which is are we now comfortable with the inventory and net debt levels? Any further reduction optimization in the second half? Yes, net debt has reduced sequentially from INR 196 crores in the second quarter of FY '21 to INR 96 crores in the first quarter of FY '22 to INR 62 crores in the second quarter of FY '22. And we expect to be debt-free by the end of Q3. Next one, next question. Do we see any cause of concern as Reliance Retail has acquired stake in Manish Malhotra and Ritu Kumar, just as AB Apparel has done with [indiscernible]. I wouldn't talk about competition or what their strategy is, but what I can say is that if you look at the overall size of the market in India, only 29% of the total retail sales comes from the organized sector and the rest is in the unorganized sector. And over the years, this has been expanded. We continue to -- or we expect to continue to see this market -- organized market grow and expand. And I think there are years and years of growth yet to come in. And hence, there's enough place for a lot of players to be in there. What's important is your ability for us to engage with our customers, to reach out with our customers and delight them every time they engage with us. And that's what we are aiming to do. That's what we are doing. The next question is a similar way. A lot of layers are getting aggressive on the beauty and personal care category. How do you plan to maintain customer share of wallet and stay relevant? What I mentioned about the market in a few minutes back continue -- holds for this category as well. The one thing which is different and plays in our favor, usually in the beauty and personal care space, is the experience that a customer gets when they walk into the store. When it comes to beauty, makeovers and the ability to actually have services that they can use in the store is extremely vital. And this is something, which we have been doing and we have almost made it into a fine art over the last 15 years that we have been doing this. Our customer service associates in stores are extremely well paying, are highly trained, and they offer a very unique experience to our customers, which gives us a unique point of difference. We also have strong brand partnerships, which have been there for many years now. And using their brand partnerships, working with our brand partners, we are able to offer related ranges, which is a major play in the premium category that we work in. We also have our loyalty program, which gives us a single view of our customer, which again is a point of difference that we have and which has been built over the last 15 years. Also, the ability for our customers to cross shop across beauty and personal care, and they walk into our stores when they are buying accessories, watches, sunglasses, apparel, our brands, so on and so forth. And finally, the private brand that we are growing in the Beauty space, again, gives us an edge. And all of this, I believe, puts us in an extremely unique and strong position in the market. Moving on to the next point, which is on performance of private label and the steps to increase the sale. Private brand continues to grow, as I mentioned in my earlier comment. We are focusing on our 9 power brands. And the way we are focusing on this is by, firstly, getting the product right. We strongly believe that product is at the heart of everything that we do and getting the product right, offering fantastic quality, latest strength at absolutely selling prices is the most important thing. And that's what we have been working on, getting that product right, getting the price right. Further to that, having sharp demarcation of the brands, making sure that each brand is pleased to its core, offers a clear end use is -- each brand is for a specific lifestyle, and having clear focus on that makes that brand come alive. And finally, to grow our private brands. Apart from the existing power plants, we continue to look at white spaces and we will grow in that. The latest of that was intense in filter, which we did, Bandeya ethnic wear and also Infuse, which is our direct-to-customer online-only brand, which we have just got in. So that's the way we want to continue to progress on private brand, focusing on product, price, brand and white spaces. The last one that we have on the questions again to us was the progress on omnichannel initiatives. I think, I have covered that already, so I won't go into that again. Suffice to say that we make good progress on omnichannel. We are continue to grow the number of customers who are buying from us online. They are also talking -- they are also -- our First Citizen customers are engaging with us more online, and our investments into the [indiscernible] or the customer experience on the app on -- also on the MarTech [ portalization ] insights, all of this will help us to grow our business and we are truly omnichannel retailer, which is the transformation that we had embarked on a few quarters back, and we are continuing to do well. As I said, we are probably one of the very few retailers who have every single store of ours across department stores and the stand-alone duty stores. Every store is linked on a real-time basis to shoppersstop.com. Those are the questions that came to us. So we thought that we will answer that. [indiscernible], over to you, and we are happy to answer the questions from any other analysts or individual investors.

[Operator Instructions] The first question is from the line of Percy Panthaki from IIFL Securities.

Congrats on a good set of numbers. My question is on the margins. So despite a fairly good recovery, we are just about breakeven EBITDA on IndAS adjusted basis. And this also, I think, includes INR 28 crores of rental waiver. Am I right?

Yes.

Okay. So my question is that if I do a simple kind of math, where, let's say, I assume that the sales instead of being 25% down versus 2 years ago, supposing if it was sort of 0% versus 2 years ago. And on that incremental sales, I take, let's say, 40% gross margin and assume that gross profit flows through directly to the EBITDA line. And then I add back this INR 28 crores of rental, which will go away once things normalize. I get adjusted EBITDA margin of about 4.4%. So isn't that a fairly low margin? Wouldn't we have aspirations of doing higher? And if so, what will drive it from this 4.5% level to a higher level?

Firstly, thanks for the question, Percy. Karuna here. See, there are a number of agents assumptions that you have made. I'm not validating that. But see, Q2 is one of the lowest quarters for us. So normally, our average margin of 6 to 7 percentage is for the full year, considering a significantly higher margin for Q3. That's one. Second, the lease total reduction, what we're talking about, also includes some of the rental savings due to permanent closure of stores, which were last making in the previous year, but also includes that. Third, other than [indiscernible], while I agree the operating margins are 40percentage, but please do understand that for this quarter, because of some liquidation of the private brand, our margins are not as probably as it ought to be. So there are a number of other factors we have to consider for a particular quarter. It's not as probably are you equating, Percy. So if all goes well and if we are to be at the same level of, say, the last year with the cost savings, our EBITDA margin should be definitely higher than FY '20.

Okay. So what would you be internally targeting for margins for FY '23, assuming no third wave or anything?

Percy, normally, we don't give any future guidance. You are aware of that. But we are targeting a very aggressive increase compared to FY '20 for FY '23.

Right. And this quarter, apart from the rental waiver, in the costs below the gross margin, are there any savings, which are temporary in nature for this quarter?

No, Percy. In fact, for the last 6 quarters, we have been seeing that. Our savings on a like-for-like basis, we should be able to save INR 200 crores per annum. This quarter, specifically, we saved INR 62 crores. I agree, 30 to 35 -- probably 30 to 35 percentage from these renters. The other expenses, what we said, are permanent in nature. And I also want to reiterate, Percy, we have invested normally quite a significant amount, which we spoke during his speech. So we...

I didn't get you.

Sorry. Can you hear me?

Yes, I didn't get what you were saying. You invested in what?

We invested in omnichannel, plus we're also invested in stores refurbishing. So we have invested in those 2 items. So...

So that would come in the balance sheet, sir, or in the P&L?

No, e-com investments are all in P&L, Percy.

And they are not recurring investments, so to say.

Probably for this year, we will be investing it. Next year, it will be significantly lower.

Understood. Understood. Understood. And how much would be that e-commerce investments hitting the EBITDA this quarter?

Between say INR 10 crores to INR 15 crores totally, and so refurbishing would be another INR 5 crores to INR 6 crores.

Okay. Understood. Understood. And what I meant by savings with our temporary nature is what I meant is, let's say, right now, the travel would not have sort of returned completely to a normal. So supposing COVID goes away completely, wouldn't the travel costs naturally go up? And when your sort of sales goes up, wouldn't your advertisement cost also go up as a percentage of sales? It will go up in absolute terms. So I'm just wondering whether these items should be increased so as to not overstate the operating leverage when I'm doing your model.

Okay. Let me conclude that, Percy, our travel expenses are very, very small. I mean that doesn't constitute. Probably it will be 0.2 or 0.25 percentage, not more than that. And if you see our marketing expenses as a percentage to revenue, this quarter is higher than the FY '20 quarter. We are already investing in the marketing.

Okay. Okay. Very clear. Secondly, this digital asset sales that you have, 8%, that is across all types of e-commerce. What I wanted to understand is out of this 8%, how much is from your own assets that is your own website?

You mean Amazon and...

Yes, excluding the aggregator websites or the platforms. And if you look at only your own assets, how much would be the contribution of that for the total sales?

I'll take that, Percy. I think, overall, close to 75% of the sales in the last quarter came from our own app. And the balance will become Amazon and [indiscernible].

Okay. Okay. Understood. And last question, if I might. What would be the contribution of the Beauty segment that is not inside your Shopper Stop, but the other stores that you have, your Estée Lauder or MAC or CDR whatever. What is the contribution of those beauty stores to the top line and the EBITDA in a normal year?

So Percy, because it's sensitive data, we don't like to set it all. I can say they're reasonably healthy, and our mix has been quite better, Percy. So these are very, very sensitive data, and we cannot share in a public forum like this. I'm sorry about that.

Sure, sure, sure. No problem. But would you say that...

[indiscernible] to come back in the question queue for a follow-up.

Yes. No problem. My questions are done anyway.

[Operator Instructions] The next question is from the line of Shalini Gupta from Axis Securities.

I want one -- 2 questions, actually. So after [indiscernible], basically, what we clarify depreciation of interest expenses are going up. And we will say that they're going to be higher in the initial years, and they will reduce also as time goes by. So sir, my question is when do we start seeing that reduction?

Shalini, we have discussed in the past. See, our depreciation and interest includes normal depreciation as well as the lease centers, which [indiscernible] and debtors includes both depreciation and interest. Answering your question specifically, if I include -- if I see even the GAAP accounts, last year, we had deposition and finance cost of close to INR 110 crores. That will probably come to INR 85 crores, okay? So that reduction of INR 25 crores has already happened. And if you see only the non-GAAP depreciation, which is the actual deposition, that has also come down by INR 7 crores or INR 8 crores, which is last year. So overall, the depreciation needs coming down slightly.

Okay. Sir, my second question is that, first, I think [indiscernible] '21. We saw -- I mean, the government introduced some forward consumptions because in which we were able to take the savings on rental as in the other income line. So until when do you expect this to continue?

Shalini, please refer both our GAAP and non-GAAP accounts. In the GAAP accounts, we have considered it as another income. Whereas in the non-GAAP accounts, we have reduced the leased centers from the lease rental expense. So in the first 2 quarters, whatever reduction is coming, that's something that is reflected both in GAAP and non-GAAP accounts. We are negotiating with our landlord for the possible reduction in Q3, but it is a bit difficult because all the stores are opening. I mean the sales are also good. So way forward, our view is the rental reductions may not be significant as it was for Q1 and Q2.

Okay. And sir, my last question. With that, I'm just looking for [indiscernible] the presentation and compare the GAAP and non-GAAP financials with the EBITDA line to see that the gap is something like INR 137 crores. And there's a gap of about INR 20 crores on the revenue front. So would that be correct in the [indiscernible] the rating per quarter was something like INR 100 crores that was now?

Basically, lower than that. You are almost spot on. There are recent [indiscernible] we did in there between INR 90 crores to INR 95 crores for Q2, Shalini. And going forward, that will be slightly higher than INR 100 crores.

Okay. And yes, so I think you were talking about savings of INR 28 crores on rental. So basically, that those savings already in the profit and loss account.

Yes, you are right. It's already there. Q1 and Q2, you're right, Shalini.

[Operator Instructions] The next question is from the line of Ankit Kedia from PhillipCapital.

Sir, my question is regarding the revenue recovery. When you say in Q3, it could be close to Q3 FY '20 numbers. But if you look from the number of stores, the square feet, we will be significantly lower or pretty much [indiscernible] because you have closed stores, because [indiscernible]. So is it fair to assume that once Maharashtra comes to normal, given that now in the mall you need -- double vaccination are only allowed and recovery in full swing. So the like-for-like underlying growth could be significantly higher than the flat revenue, which you're guiding?

So Ankit, your point is very valid that we have closed some of our nonprofitable stores. And hence, the numbers that we would be looking at is not a true comparison on a total basis. However, the guidance that I was giving you or numbers that we did say we were talking on a like-for-like basis.

Understood. And sir, can you share the recovery outside Maharashtra because Maharashtra, would we say double-digit contribution and there are still restrictions which are getting lifted in Maharashtra now. So the underlying growth ex Maharashtra, if you can share some indication of that?

It varies by region quite significantly, Ankit, so to that extent, I mean, rather than giving you non-Maharashtra it still doesn't give a true picture. What I can say is that each of the regions are performing strongly, at least leading the way of over 100%.

Sure. Sir, my next question is regarding the beauty. In your opening statement you mentioned, you will be opening beauty stores by Shoppers Stop. Today, we have Arcelia, we have Estée Lauder group shopping shop, and EBOs. With this coming in, what would be the format of this new store if it is not Arcelia? And what kind of brands would we have in this store?

Thank you for that question. And I will elaborate on it. So these would be 2,000 to 2,500 square feet stores, stand-alone beauty stores, beauty by Shopper Stop is the name, that's the working name that we have given to it. And we expect to have 3 of them opened by December this year. The mix of brands here would vary, of course, depending on the cash flow and the mall or the cities that it is opening in. And based on that, it could -- I mean effectively, it will be in the premium when coming to the top end of market. That's the market that we would play in and working with the brand partners that we have and probably some new ones with whom also we are talking to. So our existing trends -- brand partners are the strong ones that we have and definitely be a part of it and a few new ones that we would continue to bring in, as I mentioned in my notes. I mean we have -- as I said, we have taken a plan to have 60 new brands over a 3-month period, and we are well on track on that. We launched 19 of them, we're launching another 41. And all of them -- all of this to make sure that we are bringing in more and more brands for our customers to choose from and equally bringing in strong brands at work with us. These independent beauty stores are an important part of our omni journey because what it does do is they give us the opportunity to go into a lot more markets. It gives us the opportunity to bring the best of our customer service and the diving -- so the earnings that we are -- our associates are able to offer and reach a far higher number of customers through these independent beauty stores. It gives us the legs to move much faster within the beauty space and expand and continue the lead that we have in physical stores on beauty.

Sure sir. And just a couple of questions for Karuna sir...

I'll request to come back in the question queue for a follow-up question.

Ankit, if you have any questions later, either [ GP ] or I will take that question from you. Thanks a lot. I am not sure...

The next question is from the line of Nihal Jham from Edelweiss Financial Service.

A couple of clarifications from my side. First, when you say that the festive period is already at recovering 100%, I'm guessing you're comparing it to the festive period pre-COVID. I mean that is how we are coming to this number. Just wondering if you could talk about it.

Sorry, Nihal, your voice is not clear, Nihal, hi. Can you -- are you asking -- are we comparing the festive period pre-COVID? You said something like that?

Yes. Am I audible now? I'm so sorry about that.

Yes. We are comparing the festive period pre-COVID. And when you say it's 100 percentage, it was pre-COVID festive period.

That is helpful. The second part, I just wanted to clarify. I think you mentioned that the share of private labels to the online sales was around 18%. Now would it be right to assume that all the sales of private labels or majority of them would be driven via our own app or website?

It would be through our own app and also through Amazon, which is the only marketplace that we have presented.

Okay. And just one last bit, if I may. On the cost part of it. Now as I noticed, you mentioned about the example of the Hyderabad store, where we optimize the store size. Is that mainly the main way in which the savings both on the employee and also on the OpEx side, as you mentioned, ex the rental part is coming in, that the optimization of the square feet is mainly the one that is driving this kind of saving? Or if there are any other initiatives, specifically on the other expense side that you want to highlight for better clarity?

Thanks, Nihal. That's a very good question. Let me clarify. We have 5 line items. One is the employee cost, lease rentals, electricity, advertisement and marketing and other operating expenses, which includes both stores and service office where we are. Other than lease rentals on marketing, which we -- all the other savings are permanent that has nothing to do with a reduction of space, yes, some savings will be there, but we largely optimized the cost when we did the exercise of FY '20. Our marketing cost, largely we follow the curve, and we're also investing in omnichannel, okay? Our lease rentals, I just clarify, there are onetime reductions, but there are also reductions due to the closure of stores.

Understood. Just on the other 3 items, any kind of examples about how these have been achieved just for better clarity, in case you want to share anything around it?

Of course, yes. See, in case of, let's say, store employees, we have optimized the staff in case of, say, the space in public shoppings we have surrendered some of these spaces. And like what benefit? I mean, one of the other reasons is we closed some of the loss-making stores. So these are some of the permanent savings I'm talking about, Nihal. Some of the examples, I mean, there are quite a few.

Understood. I'll take that offline. Wish you all the best.

The next question is from the line of Kaustubh Pawaskar from Sharekhan by BNP Paribas.

Can you please speak loudly?

Yes. Now it is better?

Yes, yes, relatively better.

Yes. Sir, my question is on the average ticket size, which you mentioned in your initial comments that -- you've seen a 6 consecutive quarter of improvement in the average ticket size. What is the current average ticket size, if you can give us a number? And what was during the pre-COVID level? And my second question to -- relative to the business. This improvement in the average ticket size is because of the increase in the number of items in the per person ticket? Or is it because of the improvement in the mix?

So the average ticket size currently is circa INR 4,000. It's just under INR 4,000. And the increase is because, I mean, it's again a combination of 2 factors, the significant one is that the fact that our customers are buying more items in every basket. And that has gone up and has been consistently going up. There is also an increase in the average selling price in some cases. So a combination of the 2.

Okay, sir. Perfect. And sir, my -- one question I have about the customer engagement, you were speaking about maybe for your First Citizen customers or customers who are already tied up to act. So can you just throw some more light there. How is it helping you to generate higher conversions?

I think there are a number of different things that we do on that. And probably, it would not be the right forum to go into a lot into each and every one of them. But if I were to give you some simple ways of engaging better, what we do and the fact that we have the ability to see what our customers are buying from us, both online and offline. And also comparing that to what customers have a similar persona. So we have our First Citizen customer base is splitting to customer personas. And based on the customer personas, we then create specific targeting that we do. We -- at a broad level, we have 8 personas that we work with, but then we go further and segment them into almost 40 different segments. And each of these segments then is based on what else customers like that do. We are able to offer them products or reach out to them whether it is through a basket of brands or through price or through a volume-based engagement. A number of things that we could do on that one, which we keep doing constantly. Specifically with our Black Card customers. So first it is in Black Card, which is our annual subscription program. And with -- for our Black Card customers, we have a very -- this is currently the trend of our First Citizen customers. It's the top trend. And it's 2% of our total member base contributing 5% of our sales. And for these First Citizen Black customers, what -- we do a very high level of engagement. So for example, the store manager is the personal shopper for this customer. For this customer, we do a monthly engagement activity, which are exclusive reasons open only to the First Citizen Black Customers, they have an accelerated point earnings capability and they are able to also have a first in the queue or jump to few of our stores when they are shopping with us. We also have special offers for them on a monthly basis. And what we ensure is that the value that they get out of this membership far outweighs the annual subscription that they pay. But the most important thing is that it is a customer who is engaged with us, who comes back to us and shops 3x more than our average customer, our average First Citizen customer. Our average First Citizen customer itself is coming back more than a non-First Citizen customer. And the First Citizen Black customer comes 3x more. And that's just an example. And the 3x is during the COVID period. Pre-COVID, it was even higher. So just one example of how we engage with our customers.

The next question is from the line of from Tejash Shah from Spark Capital Advisors.

Sir, you spoke about beauty space and beauty space is relatively under -- understood as underappreciated at least from our perspective. I just wanted to understand what is the size of opportunity that we are targeting here? And which all categories are pretty relevant to be part of this bucket and which are on the border line of personal care, counted as beauty. That's first. And second, if you can comment on competitive landscape because in the last 6 months alone, we have seen now Tata beauty and even Reliance is also launching a dedicated line there. Somebody like Myntra is also having a dedicated plan on beauty and personal care. So if you can comment on competitive landscape as well.

So let me first start with the market and then get down to specifics. So the total market size of Beauty and Personal Care is estimated to be INR 173,000 crores, of which online is 13%. So the rest of it is offline, INR 173,000 crores. Specialty retail, the market that we play in is around INR 12,000 crores, with online share being around 20%, 80% being offline. Our positioning is in the premium and masking space, as I mentioned earlier. The categories that we work on or the categories that we focus on is skincare, makeup, cosmetics, fragrances and accessories. So those are the ones that we are in. And the ones that are growing is clean and natural and men's grooming. Specifically, these are the 2 new categories that have come in, and these are the ones we are also getting into. Specifically, our private brand, Arcelia, I already mentioned about and through our private brand of Arcelia, we will be growing and completing the entire offer. So we launched Bath and Body in 2 quarters -- 3 quarters actually. And already within all those Bath and Body, Arcelia is now the third largest brand. We're launching fragrances, creams were launched last week, launching deodorants in the next 4 weeks. We also launched a whole range of accessories, a number of them being absolutely unique to us and not very players offering something like that. We are also -- then into Q4, we will be launching eyes, lips and completing the entire offer on makeup over the next 3 quarters. So that's on Arcelia and how we are dealing with that. We are also assisting product discovery for our customers through -- and that again, fuel the big purchases. And that's something which gives us and our business an advantage compared to a number of the other players because of the strong history and experience that we have in the beauty space.

Any comments on competitive landscape?

I mean I can't -- I'm not an expert on competition, I believe we won't be able to add any more than what you already know on competition. What I can answer and what I can tell you is about my business.

Sure. And sir, last but...

May I request you to come back in the queue, please.

Gaurav, we can see a number of like participants in the queue. Can we extend the call by another 15, 16 minutes, if you don't mind?

The next question is from the line of Prateik Poddar from [indiscernible] India.

Sir, when I look at your omni journey, right, and the journey for customers, the reviews on Play Store or app in general or even on Twitter, social media are not that encouraging. How should we think about this, I know it's a journey, but how do we see these small issues where the experience is not similar to marketplace at in terms of buying, selling, refunds, et cetera. When do we expect the streamlining of this? That's question #1. Second is, you talked about refurbishing stores and the moment you refurbished the sales are same as what they were pre this refurbishment, right? What is your refurbishment targets like all do you have in mind because clearly that improved the payback period? And lastly, you made a comment on doubling your sales over 5 years. I just wanted to know when do -- when does those 5 years start? Is it FY '21 or FY '20?

Okay. So let me take those 3 questions one at a time. The first one, I would actually contradict what you said. Our ratings on both the Play Store as well as on the iOS app has consistently been up, and this is something we track on a fortnightly basis. And we have seen consistent improvement. On iOS we always used to be high but on the Play Store we used to be low. And if I -- broadly, if I remember right, about a year back, our ratings were around 2.7, which has now jumped to almost 4.4 and is comparable with some of the others. Having said that, we are also conscious and appreciate that this is our journey and the experience on our app needs to improve, which is why there's significant investment, which we talked about for the INR 20 crores that we are -- we incurred in Q2 and will continue to incur over the next few quarters to improve that. And the investment going into improving the biggest investment and the biggest shift you would see is in the U.S., most of which comes through in December, and we led the second phase in March. Also on market, on the customer insights on analytics, all of which will help us to get a far better understanding of our customers which will help us to improve the conversion and grow our sales. And this is something which we have done. The first phase was to get a whole data warehouse where we've got all of our customer data, product data and the store data, all assembled together under -- in the one data warehouse that we have. That data [indiscernible] has now been completed, and we are building on that on the analytics inside. So [indiscernible] is the back-end, the other side is the front-end and the customer experience through the app. So that's something which will continue to improve. The second question was on store refurbishment. And store refurbishment is a -- I would say, business as usual in some ways. The difference is that we are being far more efficient with the way that we do it. And the fact that in Hyderabad, which I gave you as an example, we reduced almost 30% of this space. Now that's not something which we would do in every store. I mean this was a -- one particular example where we did that and the productivity went up. But even where we don't reduce the sales, what we do find is that when we refurbish the store, the sales of the like-for-like numbers do grow. And that's something which continue to do. We renovated 5 stores in the first half, and we plan to renovate another 4 stores in the second half. What we are also doing is to be -- doing the renovation in a far more efficient manner. So one of the other stores that we just did in Bangalore, it is circa 30,000 to 35,000 square feet store in Garuda Mall. And we did the entire refurbishment in 15 days, which again we -- in fact, the downtime is much lower. And this is something which we want to continue doing. And our teams have done a fabulous job and the project team in terms of being able to do that. So that's the second part. And obviously, as we do that, we are able to, a, grow the top line and help and also be efficient in terms of the investment that we make for the [indiscernible]. Your the third question was on -- just remind me what was your third question?

Aspiration to double your sales. Was it by FY '25 or '26?

So by FY -- let's say, 4 to 5 years and what we had taken in is that in the next 4 to 5 years, we will get there. That's what we would put in there.

So from FY '21 end or FY '22 end? That's what I guess my small question was. When should I consider 4 to 5 years from? Which year do you start? What is T0 for you?

When we had put this -- taken this target for ourselves, it was based on the FY '20 numbers. Now it would have -- it has got delayed by a year and slightly more because of COVID. And that's the way I would look at it.

The next question is from the line of Deepak Poddar from Supplier Capital Partners.

Just a clarification. You said in the last participant question that it's based on FY '20 as the base?

That's right, yes. You're talking of protocols of doubling the sales, right?

Yes.

Yes, that's right. FY '21 was COVID impacted.

Fair enough. And what's the margin level we are looking at? Like when we are looking at doubling the sales at that kind of level? Because the particular disadvantages also play out.

[indiscernible] guidance because it's a too longer period, we prefer not to give a guidance. So I think [indiscernible] has already said that we should be either close to high single digits or low double-digit EBITDA margins at that time. That's the overall guidance. We prefer to give it, but I'm sure you understand, 5 years is a long period.

Yes. Understood. And my last question is on your other income. Now we have seen a lot of volatility in the [indiscernible] maybe it might be because of the rental [indiscernible]. So I just wanted to understand, what's kind of sustainable level we are looking at once thing finalizes?

You are absolutely spot on. I think you are referring to other income in GAAP interest statement. Am I right?

Right

So it's primarily the lease rental reduction. If you see Page 116 and read with the Institute of [indiscernible] of India's latest guideline last year due to COVID restriction. What they have suggested is we may lease [indiscernible], we should take it as another income. And that's the reason we have taken as another income. Otherwise, our other income would be very, very nominal amount, Deepak.

Like INR 7 crore, INR 8 crore, INR 10 crores a quarter, right?

That's right. [indiscernible]. And what we also expect in pays on higher and other card income should go up once the business normalizes. So that income should start coming in. And then rental income reduction, which is largely what we have been included in Q2, will go away.

From third quarter onwards, right? That's what you mentioned because the waiver will go away from third quarter.

You are right. By and large, it will not be there. But still, we do -- we should be getting a small [indiscernible] waiver for Q3 also.

The next question is from the line of Aliasgar Shakir from Motilal Oswal.

My question is on this growth from the smaller-sized stores. Now I see we have mentioned that the 20 stores we are looking to add until FY '23 are kind of around 30,000 square feet store against an average of about 50,000 stores. It's something that we have spoken before as well that basically the smaller store will drive higher productivity. So just wanted to understand what is the experience we have seen in some of the stores we may have added and a smaller side? When are we adding this? Are they going deep into the existing cities? Or is the smaller store setup allowing us to go much wider in our space in terms of covering more cities? Yes. And just if you could give a little flavor about how the economics are. Is a smaller store helping you drive better economics? And just coming from the point of view that we were seeing footfalls in the existing store kind of plateauing or declining. So is there a smaller store giving you a little better economics when you go into smaller cities as well?

Thank you, Ali. So in terms of the smaller footprint, and it's smaller relative to where we were, but they are still middle [indiscernible] 25,000 to 30,000 square feet stores that we opened, which is one of the larger formats within the country. Where we have gone with these is twofold: one in some of the existing city -- I mean stores -- cities where we already have a large number of stores and then we go into some of the more secondary catchments within that city. It helps us to add to our portfolio, reach to customers better, but in a more efficient way. Secondly, and where the smaller stores are used more in the Tier 2 and Tier 3 cities. And the stores that we have opened, we have in Varanasi, we have in more recently in [indiscernible] and so on and so forth. There are a number of stores that we have opened, and we are very, very pleased with the productivity that we are getting from these stores. And the results that we get from them gives us encouragement to go much deeper. So if I look at the next 10 stores that we are planning to open, I think, 8 of the 10 or 7 of the 10 are in the Tier 2 cities and it is the new cities where we do not have been. But equally also -- In some places, it helps -- gives us the opportunity to open a second store. Like again, example I can give you is Seawoods in Vashi, where we already have a store in Inorbit Vashi, and we opened a second store in Seawoods, which was -- which is the tightest and the productivity numbers there -- from there was extremely encouraging. Also, what we do see is, of course, I mean, needless to say, as you would know, in the U.S. stores, the smaller stores had lesser CapEx and hence, a much faster payback and a far better productivity. And also last, but not the least, increasingly, we are also adopting a model where we have capital contribution to these stores from the landlords themselves. So that again helps our payback.

Got it. This is very helpful. So basically, I can now think that maybe because we are at a smaller store size hopefully, the kind of store addition pace will pick up quite significantly because that will allow you to probably go much more deeper into new cities that we had not seen in the last 5 years probably?

Absolutely. You are very right. And to put that in perspective, if you look at our trajectory from 2015 to 2020, it was very, very muted in the first 4 years. It was in the financial year 2019, '20 that we did add 12 stores. And that is the momentum that we now want to continue with. We had to hit the pause button because of COVID and because of the fact that a number of projects, which we were involved in had -- the work had got stalled or stopped. And they have now all restarted, and we are quite confident that we would open around 8 to 10 stores this financial year and continue at least 10 per year for the next 7 years and accelerate that depending on availability of properties. And this is just the department of large format stores I'm talking of, excluding the smaller format duty stores, which would be in addition to this.

Understood. And do we think there is any more rigid left in the existing portfolio of stores?

When you say rigid, you mean closures.

Correct. Any kind of closures?

See, I think again, closures is a norm that happens, and that's something which we review every 6 months. We review the performance of the stores. And based on performance of the stores, if the market has shifted, the catchment has shifted and it's not worthwhile. And we try and renovate stores after -- a certain period. And the new investment into that store, if we believe, will not be worthwhile, then we would take a call to either [indiscernible] or shut the store as a [indiscernible]. So I would just call it as ongoing business activity.

But I mean, generally, the pace we have seen probably slightly higher in the last couple of years probably. So that should come down, right?

Good point. I think largely the -- most of the corrections have happened. So it's very unlikely that you would see a similar rate to what we saw in the last 2 years. But I wouldn't rule out a few couple of them, depending on where required.

[Operator Instructions] The next question is from the line of Shivaji Mehta, an individual Investor.

So thank you all my questions have been answered.

[Operator Instructions] The next question is from the line of [indiscernible] Securities.

A couple of questions on the guidance that we've given of doubling sales over the next 4 to 5 years, taking FY '20 as a base. Now in order to achieve this, we would need to grow at roughly about 15% CAGR on FY '20 base, right? We are adding stores at the pace of roughly about 3 lakh square feet, which is 7%, 8% of the retail area. So which means that on a like-to-like basis, our stores would need to grow at least closer to double-digit range, right, on an SSG -- at a necessary level. Can you just help me with your thoughts on this?

So the growth [indiscernible] would come from more than just the opening of new stores. As you rightly pointed out, new stores are a part of it. Second is the improvement in the productivity of our existing stores. And what we have found in both private brands and beauty, the productivity tends to be very, very strong. The third factor is omnichannel and digital sales. And the digital sales would be in addition to what we get out of stores, and that's the way we would look at it on that the way we have planned for it. And fourth this is also the growth in beauty that we look to do. So the space increase is about 8%. The like-for-like improvement would be [indiscernible] a single digit to -- close to double digits online and digital sales in [indiscernible]. And finally, there are additional beauty stores, the new beauty stores that we are talking about.

Ladies and gentlemen, we'll take the last question from the line of Ankit Kedia from ClubCapral.

Sir, in your initial remarks, you gave an example of the Hyderabad stores where you had cut the size and the productivity was same, do you think that is possible in some of the existing stores as well to increase throughput and increase productivity?

There are a few stores where that is possible. I mean I wouldn't want to get into the detail of how many, where, et cetera, but that is definitely a possibility and that's something which we will explore every time we look at it. I mean every time we look at the refurbishing on existing store.

Right. And sir, second question is on the retention rate of a first citizen customers. While the revenue contribution is between the 70% and 80% bank on a quarterly basis. But what is the retention rate -- if you can highlight what percentage of customers actually shop in our customer base, that would be more interesting, actually. How do you look at that?

I think it's a very good question. And it is -- so firstly, our overall first citizen base is close to 8 million customers. At any point in time, we roughly have between 40% to 45% of them who are active with us and [indiscernible] being they found us, people who have shopped with us in the last 1 year. That number dropped in the last 1 year really because of COVID, as you would appreciate, but that tends to be the number. But also, what we do find is of the people who haven't shopped with us in the last 12 months, do come back to us. Some of them would come back after 18 months and so on and so forth. So that level of retention -- I mean the overall retention numbers tend to be very high. The second factor is, while the 75% does include a certain number of customers who come in and who have shopped with us during the quarter [indiscernible] enrolled and shopped during the quarter. So that's also part of the 75%, and that's quite healthy because the fact that we get new customers to enroll is very, very important. It's -- I mean, if I just take last quarter as an example, it was -- 63% was the absolutely new -- repeat customers, 12% out of the balance [indiscernible] out of the 75% were new enrollments who shopped during the quarter. And that tends to be broadly the sort of numbers that we see on a regular basis.

And my last question is with Karuna sir. Karuna, the gross margins, if I look at '19 and '20, have been in the 42% bank. Last 6 quarters, while due to COVID and provisioning has been around 38%. With increasing share of private label, when do you think we can go back to this 42% kind of a gross margin number?

Ankit -- you are referring the GAAP numbers, Ankit. I must not go by the GAAP numbers because GAAP numbers tend to fluctuate with the OR and SOR. You can see the non-GAAP numbers what we have given. Compared to last year, it was around about 36.8%, that has come to 35%. Two reasons: one, our e-com share has gone up because of which is our mix has completely -- there is an [indiscernible] mix. And second thing, there is a onetime we have some, what do we call, fix internally. We are working on the pipeline. These are the 2 reasons. Otherwise, our margins for Q2 is, by and large, after what we are in Q2 FY '20.

Ladies and gentlemen, that was the last question for today. I now hand the conference over to the management for closing comments.

Thank you, Gaurav. And I just want to once again thank everyone for taking time out and joining us for the call. I have -- I mean, I have already summarized the way forward and the way we are looking. And given that we are well past our time, I don't want to take any more of everyone's time. All I would like to say before we log off is to wish each and every one of you are very happy Diwali. And look forward to continue to see yourself and your friends and your family in our stores, both offline and online. Thank you very much.

Thank you very much. On behalf of Axis Capital Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.