Spencer's Retail Limited (SPENCERS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Spencer's Retail Limited Q2 FY '25 Earnings Conference Call hosted by Batlivala & Karani Securities India Private Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the call over to Mr. Akhil Parekh from Batlivala & Karani Securities India Private Limited. Thank you, and over to you, sir.

Thank you, Sejal. Good evening, everyone. I welcome you all to the Spencer's Retail's 2Q FY '25 conference call. From the management side, we have with us Mr. Anuj Singh, MD, CEO; Mr. Saket Sah, Group Head, IR and ESG reporting; Mr. Sandeep Banka, CFO; Mr. Pankaj Kedia, VP, IR; and Mr. Harshil Gathani, our Chief Manager. So without taking much time, I'll hand over the call to Anuj sir for his opening remarks, post which we'll open the floor for Q&A. Over to you, sir.

Thank you, Akhil, and good evening, everyone. Thank you for joining our quarter 2 earnings call. Before I start giving some more color on the numbers for Q2, the numbers were announced after our Board meeting around noontime. Just would like to preface with the context that this period, quarter 2, was one where we were executing the previously announced decision of ramping down of our operations in South and NCR, an exercise that involved 47 stores, a large employee base in the stores as well as a streamlined optimized workforce in the corporate office and the regional office. This large-scale exercise had to be managed without operational disruptions across the continuing regions, and I would like to acknowledge the tremendous work put in by the team in executing this in line with the agreed time frame. Further, quarter 2, as you would have also kind of noticed from all the earnings calls of a lot of other retail companies as well as FMCG, was a tepid trading environment. There were weak consumption trends, particularly in discretionary categories like nonfood FMCG, apparel and general merchandise, more pronounced in urban areas where we operate. We don't really operate in any rural areas. And a quarter where we saw continued channel share shift from modern trade kirana to quick commerce. In that context, I would call the Q2 performance at Spencer's as resilient and respectable and in line with the guidance given last quarter. If you look at it, the top line at a consolidated level degrew by 9.8%. Spencer's degrew by 11.3%, largely an impact of the closure of stores and ramping down of operations. Our margins were also impacted due to this one-off onetime activity of ramping down. At Spencer's, at a stand-alone level, our gross margins were lower by 448 basis points, largely due to rundown of inventory in stores which were earmarked for closure as well as lower other income, which was happening in both the continued and discontinued regions as a result of the lower scale of operations. However, our controllable operating costs, both at a store and corporate level, were lower than the comparable period last year, and this does not include the full flow-through of all the optimization, which has been done in the corporate office, which will only start coming through in quarter 3. So overall, at a consolidated level, our EBITDA, which is the post Ind AS, was at INR 16 crores for the quarter, which is roughly 4% of the sales versus the minus INR 4 crores in quarter 2 last year. The PBT for quarter 2 was minus INR 87 crores versus minus INR 70 crores in Q2 last year, largely on account of increased interest costs. Translated at a first half H1 level, the revenue degrowth is minus 6.8%, Spencer's degrowing by minus 8.3%, again, as an impact of the Q2 ramp down, whereas Nature's Basket on a H1 level is a plus 4% versus last year H1. Our gross margins were lower by 142 basis points at 19%, again, largely on account of quarter 2 Spencer's, where the Spencer's H1 margins are at 17.5%. Again, I'd like to reiterate this is one-off. And post the closure of stores when we operate in our continuing regions, this will come back to the 19% level, which Spencer's delivers. Nature's Basket was almost flat, a slight 10%, 10 bps reduction at 27.8%. Our operating costs for the first half were lower by INR 10 crores, and the EBITDA post Ind AS is at INR 46 crores versus INR 4 crores in H1 of last year. The PBT, slight reduction versus last year. We're at minus INR 131 crores PBT at a consolidated level for H1 versus minus INR 134 crores in H1. We strongly believe that we are on the right path to streamline the fundamental shape of the P&L, specifically at Spencer's, wherein we will operate in regions where we have demonstrable right to play and win. We're talking about mid-single-digit growth, mid-single-digit store EBITDA in the continuing regions. Our e-commerce propositions in this region is gaining traction. We are growing by 20% compared to last year same period, and our support organization costs as a result of all the optimization would also be in mid-single digits. So we are quite confident that this is the right direction which we're moving in. If I look at the Q2 results in the continuing regions of UP and East, it reinforces its confidence as we've grown by 4% quarter 2 as well as in H1 versus last year quarter 2 and H1. Our margins in this region are around the target 19% level, and our store EBITDA is in the 5% region, and our e-commerce is growing at a healthy 20%. So with all of this resetting which we have done and the one-offs, effective consumption momentum, which has set in, in quarter 3 and the evolution of our e-commerce proposition to a 30-minute delivery proposition, wherein we are revamping the entire tech stack for an enhanced UX/UI, we are expanding the footprint of stores from where we do our fulfillment. So today, as you know, we don't use dark stores, but we leverage our existing stores from where we do fulfillment of our e-commerce orders. We have enabled the back end, both in terms of technology and operations, to ensure that we can now start increasing the number of stores from where we fulfill, and this has a direct impact on reducing the delivery time. Today, for example, in a city like Kolkata, we have 42 stores. Our e-commerce fulfillment happens from 9 stores, and our average delivery time is 50, 55 minutes. With the improvement, with all the tech and operations back-end optimization which we have done, we are today doing our e-commerce fulfillment from 12 stores. And we see that going up to as high as 30 stores in Kolkata, which will not only allow us to service all the PIN codes in Kolkata, but will also allow us to reduce the delivery time to within 30 minutes, if not less than 30 minutes. So really for us, we are quite confident that quarter 3, with all the decisive actions of ramping down, focusing on a few geographies, focusing on e-commerce, will lead to strong results in quarter 3, and we strongly believe that we can achieve the operational profitability for the business, and when I say operational profitability, I'm talking about pre-Ind AS EBITDA level, as early as quarter 3 end this year. So that's a brief commentary on how Q2 went in line with all the actions which we had earlier announced and giving you a brief glimpse of what the outlook for quarter 3 is and what the shape is. We will also continue to look at measured expansion in the continuing regions. When I say measured expansion, we're talking about stores in regions of East and in UP. We've added 1 store for Spencer's in this quarter in Siliguri. We are adding on 2 more stores in Kolkata in the coming weeks. And we see going up to 3 to 4 more stores by the end of the year in Spencer's, and on Natures Basket, we're looking at 3 more stores. So totally, we are looking at 5 to 6 stores coming online as far as these focused geographies are [indiscernible]. So that's the overall commentary for quarter 2. I just hand over to our CFO, Sandeep, to just talk a little bit more about the onetime expenses and the impact on the P&L as a result of the closures which we did in quarter 2. Sandeep?

Hi. Good evening, everyone. Just to give more details about the recent closure cost of South and NCR, I'm just referring to the Note #6 of the financial statement. Pursuant to company's ongoing initiatives for improving operational performance and financial health, the management has initiated appropriate steps for opening stores in selected geographies and ramping down operation in South and NCR, where costs are higher, thereby adversely impacting overall margin at store level. Accordingly, the necessary accounting treatment and impact relating to the stores identified for closure has been considered in the current quarter, resulting into a net credit of INR 32.39 lakhs, which comprises a reversal of net liability on termination of lease contracts which is [ INR 57.54 crores ], that's a gain, and accelerated depreciation, dismantling costs which is INR 37.89 crores, and the provision against inventory and security deposits and other claims are INR 19.24 cores, which is an excellent basis. Adding to this, I'm just mentioning the sale done by the company in South and NCR region, where we are ramping down our stores, we had a loss of INR 25.87 crores. If I'm not considering this loss and I'm just taking the ongoing reason that's East and UP, my overall EBITDA would have been otherwise INR 7.5 crores. Handing over to Akhil for further questions.

[Operator Instructions] The first question is from the line of Akhil Parekh from Batlivala & Karani Securities.

My first question is the demand scenario. I mean, as Anuj sir has highlighted, right, we are seeing urban slowdown, and some of the FMCG players have already highlighted this. So what are some of the key patterns or observations that we are seeing at our Spencer's and Nature's Basket stores in terms of demand weakness? And are there any specific line of items where the growth has [indiscernible] out? And are there any items where you continue to see decent growth momentum? That will be my first question.

So that is a great question. Giving some more kind of commentary around that, you're absolutely right. While the overall consumption in Q2 has been a bit soft, if I were to break that down in terms of categories, like I mentioned, if you look at some of the discretionary categories when it comes to, let's say, FMCG beauty, when it comes to general merchandise and apparel, that saw, I would say, flat trends as far as Q2 is concerned. However, when you look at categories which are nondiscretionary, which are everyday consumption, when you look at staples, when you look at fresh bakery, these are all categories which have performed well for us. Further, if I look at this whole mix between the NOBs, which is the number of bills versus the average bill value, we see an interesting phenomena where our NOBs have grown. So it is not to say that we're getting lesser traffic. The NOBs has grown by 5%, but the AVVs have gone down, which probably supports the hypothesis that consumers are maybe down trading, both from a -- either from a price point or buying lower quantities, so wherein they would either buy a 10 kg, they might be buying 5 kg, or if they were buying a more expensive one, they're buying. So it's not a secular trend of degrowth everywhere. It is demarketed between categories. I think the discretionary categories have been impacted more. The nondiscretionary items, which are part of monthly household consumption basket, have remained strong. So we've seen staples for us have done well, fresh has done well, whereas some of the nondiscretionary categories have got impacted in quarter 2, which subsequently, as the festive quarter sets in, in quarter 3, we see a correction which sees a lot more nondiscretionary going up and discretionary remaining the same. So I think that's a bit of a trend. When it comes to Nature's Basket, Nature's Basket is slightly different. Our quarter 2, I would say, muted growth of 1% was largely due to a bit of external factors. There were heavy monsoons which had hit us and our operations in August and September in the West. We also had some delays in terms of shipments, et cetera. And we had an festive order, institutional order, which did not come through. So I think it's largely because of that. But fundamental consumer trends of consumption trends in Nature's Basket, given the nature of the categories there, is not something which is a cause for worry. I think the overall sentiment is more in terms of Spencer's where, yes, certain discretionary categories were a little bit more muted, whereas the nondiscretionary category did well. Yes. So I hope I've answered your question and give you some more.

Just an addition to this before I get back in queue. So would you be able to quantify what will be the growth in fresh items like bakery you have highlighted, right? So in nondiscretionary versus discretionary, if you can bifurcate if we have that number or at least some ballpark.

Yes, so I'll give you some thing. So look, first of all, I think in our continued operations, which is the region where we're continuing operations versus the operations where we have kind of ramped down, the sales -- the growth numbers are different. We were about 4% growth in continuing operations, whereas I won't give -- I mean, the number for the discontinued operation doesn't make sense. For our staples business and for our bakery fresh business, we have grown in mid-single digits, whereas the other nondiscretionary items have been flat. For our NOBs, which we said we've grown again mid-single-digit growth in number of bills, whereas our AVVs have dropped by 3% to 4%. So that's the quantification.

Okay. Okay. Great. And is this pattern is similar on the online channel as well, like what you are seeing in brick-and-mortar?

So I think online is very different because online is -- for us, it's coming off a small base. So our growth in NOB are much higher. But as you know, the AVVs tend to be slightly lower in online. And as we've expanded our number of orders, our AVVs have come down, but our AVVs on the online business are around INR 900. They used to be around INR 1,100 when we were on a smaller base. So online, definitely, given the nature of consumption, given the fact that there are orders, there are lesser quantity per bill, the AVVs tend to be lower. But I would say, not that we are at the same scale as some of the other big guys, but our AVVs are definitely higher than the industry AVVs. The industry AVV in quick commerce tends to be INR 500, INR 550. We are at around INR 900.

Sure, sir. This is helpful. Just a suggestion, if you can provide this parameters, right, in terms of number of bill cuts or number of orders and average bill value, at least if not quarterly, maybe annual basis. That will be really helpful.

Sure. Do join us quarterly. Ask us the question, we'll share the numbers. We'll get the numbers, but yes.

The next question is from the line of Parikshit Gupta from Fair Value Capital.

So I have a couple of questions. I will start with the balance sheet, please. I read the note in the results, which mentions that the group aims to fulfill obligations in the next 12 months along with the credit line availability and promoter capital. Can you please articulate the debt which is maturing in the next 12 months, please?

Can you ask your next question? We can respond together.

Sure. I just wanted to understand, are there any plans to raise any equity capital? And if yes, are there any debt covenants that restrict us from raising capital either through the debt or the equity market?

So your first question is what's the total debt and what is the debt which is maturing in the next 12 months, and your second question is plans to raise debt, and if there are any impediments in terms of any debt, right? These are your 2 questions?

Equity as well, please?

So my total debt as on 30th September is INR 896 crores on consol level, and the debt amount for maturing within 1 year to pay is INR 106 crores.

Yes. Okay. And just a follow-up on this, the company plans on servicing this current portion of debt along with the interest payments from internal accruals at this point?

Yes. See, Parikshit, Pankaj Kedia, this side. You are already aware that we sometime back announced in one of our Board meeting enabling resolution for raising capital. Since then, the Board is consciously evaluating the multiple options for us to raise capital. In the last couple of calls, if you recall, our MD Anuj has very clearly articulated that at the company level, we are deeply engaged in looking at a path of profitability, and in the last 1 year, multiple measures have been taken for us to ensure that the business is streamlined. We have closed down a reasonable number of stores. And the guidance for Q3, which Anuj just mentioned, where we are actually looking at path to EBITDA breakeven pre-Ind AS level, we believe that these are the major catalysts which will actually help us to come to a point where you would be able to raise capital of an appropriate amount at an appropriate valuation. But as and when we decide to do something specifically, you do understand that we have to first implement the stock exchanges. But I can only give you an assurance that the company is working towards that path. Beyond that, it would not be able to -- we will not be able to share any specific thing.

I understand. I have one more question on store operations, and then I will rejoin the queue. So you mentioned that in this quarter, you have already optimized the cost, which has resulted in about INR 15 per square feet of cost savings. Is there any further room to it? And just along with that, I understand that the sales per square foot has been marginally impacted.

Sorry, we lost you.

Can you repeat your query, Parikshit?

Yes. So the first part of the question is on the operating costs on a store level. I understand that you have already articulated savings of INR 15 per square feet in the current quarter's result. Is there more room to it? And second part of the question is to understand, is there any sales per square foot optimization activities being undertaken? Because I had the opportunity to visit a couple of stores in the Lucknow area, and there was a difference among different store sizes in terms of sales per square foot. Just this final question, please.

I think, again, I'll take that question. So I think on the opportunities for further store optimization, store cost optimization, I think I would say that a bulk of the heavy lifting has already been done, and that starts flowing in already in quarter 2. Having said that, what we are going to do is also look at it at a store profitability at a store level. And I think it's not good enough to look at an aggregate level and you say that we're at 5.5%, 6%. I think every store has to be in that zone, and therefore, if you're not getting the right level of [ FMC ], we'll look at it on a case-by-case basis in a store where there is further scope of, I would say, OpEx reduction. But let's remember that the levers available are limited in the sense that you can't do much with your rent. You can't do much with your utilities, so then ultimately it just boils down to staff and manpower. And there is a very fine line between going very thin on manpower and compromising your service levels. So I think that's something which we will be cognizant of. So I would say that I don't see too much more headroom for optimization of controllable OpEx at the store level, however, at the corporate and the support level, we've been doing a series of optimization. The last one was done in July '24, which means that what you're seeing as costs at the support level, they have not flown through in quarter 2 given the fact that you typically have 2, 3 months notice period. That will flow-through from quarter 3. So just to kind of give you a thing we had about 100-plus positions which were optimized -- headcount, which were optimized, the full impact of which will start coming in quarter 3, and just to give you, again, a number which I think I had mentioned in the last call also, our support costs, which is corporate overhead plus RODC marketing, last year for Spencer's were INR 172 crores, which is about 8%. With all the activities, which we are doing, this entire corporate overhead plus RODC marketing, we believe we'll be able to exit at a rate which will be closer to INR 114 crores, which is almost a INR 60 crore savings and comes down from an 8% of sales to closer to 6% of sales. So I think that's the play which you would see flowing through in quarter 3: the actions which have already been done in quarter 2, and the full flow-through will start happening from quarter 3 and quarter 4.

The next question is from the line of [ Chirag ] from SKP Securities.

So my question is, what is the road map for the next 5 years? And how will there be a turnaround?

Yes. That's it. That's the question? Okay. So look, I would say we are at that stage, and I think I've been consistently boring by repeating the same thing, the answer to this question. I think 5 years is too long a time frame for me to give you. And it is building, I think, for what we -- the task on hand is what we're going to do in the next 1 quarter, what we're going to do in the next 2 quarters. And in service of that, our first primary objective, which the management had committed to the Board and also communicated to all of you, our first primary objective is to get to a level of operational EBITDA or pre-Ind AS EBITDA breakeven. I think once we do that, that reinforces a lot of confidence in the model. The model P&L, which, again, I had mentioned last time, what we're looking at is a P&L which gives the 19% gross margin, where our store OpEx is in the region of 12%, so that you end up with 6%, 6.5% of store EBITDA, and your corporate overheads are in the region of 5%, 5.5% so that you get to 1% EBITDA. This is not the end state. This is where we want to get to. We had earlier, at the beginning of the year, we had given an 18- to 24-month time frame to reach that. We have significantly accelerated that time frame. We are quite confident that we will be able to achieve this by the end of quarter 4 exit of this year. And that will really set the base for us to build on where do we go from there. This will include clearly identifying further growth opportunities in the regions. It will also give us a good sense of the e-commerce growth, which we are able to drive at what profitability that comes. It will also give us more options in terms of looking at recapitalizing our balance sheet. And I think that would truly set the stage for giving a 3- to 5-year picture of how we can get to an EBITDA of 3% to 4%. If I start talking about in 5 years, I will deliver 4% EBITDA, you guys will not believe me because what we would want to see is how soon can we reach to an EBITDA breakeven. And that's the primary task, an objective which we have focused at. I'm pretty sure once we get there, we are not going to rest at that level. We will then look from building that stage. But from where we are today, last year, just to remind you, we were at minus 6% EBITDA. So I mean, let's get to the breakeven. Let's get to the 1%, and then we'll build a very robust 3-year pathway to getting to mid-single-digit EBITDA.

The next question is from the line of [ Ravi ] from Nuvama Wealth Management.

I have 4 questions. Why has depreciation gone up 2x on a year-on-year basis? Is there an accelerated depreciation of closure of stores here? And do we take this depreciation level to be the new number for all quarters of the year? Other question, you mentioned that Nature's Basket depreciate impact due to delay of consignment. How do you fundamentally derail from this? Is it possible to have more Indian merchandise in Nature's Basket? And what is the average order value on quick commerce business with Spencer's? And what is the percentage of business that now comes from quick commerce, and where can it go?

Okay. So 3 questions. One is around depreciation, the increase in depreciation and will that be the base for all quarters, the second question is on Nature's Basket, how can we have more Indian products and Indian supply chain to minimize potential disruptions due to import? And your third question is what is the AVV on our commerce business and what is the mix of our e-commerce business? Have I captured your 3 questions?

Yes, yes.

Okay. So on depreciation, I'll ask Sandeep, if you could just comment on that. It's a one-off increase, but maybe you can give [ more color ].

There is a onetime depreciation on account of stores closure in South and NCR region, INR 32 crores, which is an accelerated depreciation and considered into the books of account.

So going forward, the base is not going to be at INR 55 crores. It will be at the regular level of INR 20-odd crores. Now I think on your second question, how do we kind of insulate the supply chain from import vagaries for Nature's Basket, well, I think that's something which comes with the nature of the products which we stock, given the fact that Nature's Basket carries a gourmet range, a wide range of both international cuisine and international taste products manufactured in India, but also it has to have products which are imported. Now I think having said that, this is a pretty well-established supply chain in India, and we've been dealing with well-established suppliers who have the capability to supply to us. So this is -- we don't see this as a big risk in our supply chain. Yes, 1 or 2 odd incidents in a year happen, and the best way to mitigate this is to hold a decent level of inventories as well as these products. So I think this is -- I would not call it a continued risk factor, but as a one-off. But having said that, yes, we do balance the inventory between products sourced from India and what are imported products. But again, given the nature of the products, we do sell fruits which are both Indian fruits grown in India as well as we do sell high-quality imported fruits. We do have packaged goods, foods, which are international cuisine made in India, but we also do have imported products. So given the nature of the whole proposition, the products which we have, the clientele and the pricing, it will always have a component of imported products, and the supply chains for these are very well established. We don't expect major shocks or volatility in that. It was just a one-off impact which was there, and we will handle that. Your third question was on the AVVs on e-commerce. I thought I had kind of explained, but I'll again give color on that. So our AVVs on our e-commerce business are in the region of INR 900 per order, and again, like I said, our e-commerce proposition is a combination of slotted delivery, which is if your pack size is high, 20-plus items, then you go into a slotted delivery, which happens at given times of the day. And those AVVs are much higher. The AVVs on our slotted e-commerce proposition are upward of INR 1,500, and the express delivery format, which is our version of quick commerce, that is where we guarantee delivery within 60 minutes. There, the AVVs are in the region of INR 900 per order. Still higher than the industry average, but again, what has to be borne in mind is that, today, we're at a small base as far as number of orders are concerned. We do about 1.25 lakh orders a month, which is -- which used to be 75,000 orders a month in last year in the same quarter. But as -- like I said, the primary focus there on e-commerce is to really increase your orders, increase the frequency of orders from the same customers, increase the retention of customers. And with that, you would probably be at an AVV of anything above INR 650, INR 700 is a decent industry benchmark to be at. Because let's remember that this channel is not a channel which is planned month beginning, large basket filling. This is a top-up channel. An average consumer here shops upward of 10x a month, and therefore, the basket size will always be lower. So we will evolve into that. Right now, we are above industry benchmarks, but as we increase our base, as we increase our number of orders, this will come down. So I hope I've already -- I've answered all your questions on depreciation, Nature's Basket as well as AVV. Your question on e-commerce mix is, e-commerce, what we call, is out of store, which is a combination of e-commerce and phone delivery is at 15% of the overall business mix. And again, as given stated ambition is to get it to 20% plus, and the key driver for this would be, like I keep saying, is about further evolving our e-commerce proposition. As I mentioned, we are in the midst of doing all the necessary investments, upgrading our tech stack, looking at all back-end operations to get into an evolved e-commerce proposition for us. Today, our express delivery proposition in Kolkata, Lucknow and Banaras is within 60-minute proposition. With everything which we are doing, we are quite confident that by December mid, we will relaunch our express proposition to be within 30 minutes, which will be a big improvement and in line with what the market is demanding today. So that's a bit of color on the e-commerce piece, yes.

[Operator Instructions] The next question is from the line of [ Saranj Gupta ] from [ Swan Investments ].

Yes. Actually, I have a couple of questions and few of them were answered already. So one is that, as you mentioned that there is no more headroom to reduce the store cost in the future, so what is the current store cost for Spencer's and Nature's Basket, if you can give a more detail insight on that? And the second one is that now that we have gone through some stores closure, so what is the upcoming sustainable cost and the OpEx after store closures [indiscernible]?

So I think -- look, I'm not going to give you numbers in terms of OpEx per square feet, but I think what would suffice is that our guidance is -- like I said, is to get to a 12% operating cost at store which is broken into roughly 6% rental and 6% nonrental OpEx. So I think that's what it is. And we can -- we will not break this up further in terms of giving you SPSF, and therefore, OpEx per square feet. I think that's the rough number. Are we at that level? No. Are we going to get to that level soon? Yes, absolutely. That's what the [ design is ].

As there are no further questions from the participants, that concludes this conference. On behalf of Batlivala & Karani Securities India Private Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.