V-Mart Retail Limited (VMART) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to V-Mart Retail Q1 FY '27 Earnings Conference Call hosted by IIFL Capital Services Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Sameer Gupta from IIFL Capital Services. Thank you, and over to you, sir.

Hi. Good evening, everyone, and thank you for joining today's earnings call with the management of V-Mart Retail. From the management side, we have Mr. Lalit Agarwal, Managing Director; and Mr. Anand Agarwal, CFO and CEO. Without taking more time, let me hand it over to the management. Over to you, sir.

Thank you. Good afternoon. Good afternoon, everyone. Thank you, IIFL Capital, Sameer, for hosting the call, and thank you for our investors and analysts for joining us today. So we definitely have started this new financial year on a better healthy note. More importantly, this particular quarter is another step for us in the forward direction for improving the quality and the consistency of our execution. We definitely are not only working on adding new stores, but definitely driving more sales from the existing ones with better products, customers or relevant fashion and the stronger performance in our zones, which are very important, along with the tighter discipline that we want to definitely adopt while operating the store. But anyway, let me just give you a little bit of what I'm seeing in the market. The sentiments in the Bharat definitely remains positive. I would not call it uniform across the markets. But yes, it is definitely looking very positive from our perspective as of now. There is sensitivity on the household budget, no doubt about there are definitely comparisons that people are doing in both prices as well as the quality. But yes, I think due to the war scenario, due to the crude oil prices due to all of these situation, we believe that there is an inflation which has kicked in for the consumers. There is upward revision of prices that we are seeing with multiple FMCG companies. And that definitely is getting now passed on to the consumers as well. And consumers are feeling the pinch. There is a sensitivity on that particular part. But still, we are seeing customers and consumers buying. Affordability is still very important. The value has to be visible and convincing. So that is very, very important. Otherwise, we don't see a consumption coming in. So the reasons for consumption are certainly going up, are increasing. And then we saw Adhik Maas, also in this particular quarter where we had expected the Adhik Maas, to be a little bad because in the past incidents, we have seen that Adhik Maas, usually do not -- is not by buying month. But yes, this year, we saw a little better Adhik Maas, and after and before that, weddings, festivals or even family functions or travel and the school holidays and these smaller celebrations are also now creating more occasions reasons for the customer to buy. And that is something which is becoming good. Consumption is definitely has been occasion-led and will always be younger family members, which we see the Gen Z, the younger audience. For them, it is also about the influencer or the influencing mechanism of the trend and the fashion, which is also coming out very strongly, both in smaller town as well and the larger towns. So I think the younger consumers definitely see the trends much faster, and they want that newness more frequently, which is becoming -- which is -- I think they are becoming more and more confident and they want to only wear what they want to wear. So that is what we are able to see from the younger audience, and that is what continues even in smaller towns. So that is a good news, which is driving consumption. Monsoon and the agriculture outlook definitely has been a little hazy. We are receiving multiple news in terms of lower monsoon, the El Niño effect and all of that. But as of now -- as of now, we have a little deficiency in the rain, maybe around 20%. But I think some part of that is getting covered. It started with 35%, 40%, but there is a lot of coverage which has happened in the month of July, in the later part of the month of July. So I think definitely, we are encouraged with the demand environment. But yes, we remain watchful because the impact of the monsoon or could be a little non-uniform because there could be states where we will see higher rains causing flood. There may be states where you see a little bit of deficiency, higher deficiency in monsoon, which we are already witnessing which could create a little deficiency in the demand pattern as well there. So overall, we believe the geopolitical situation definitely has been making us very watchful. And we believe there is -- we have seen that there is a lot of volatility in the raw material and the supply chain cost, which has and can influence the sentiment or even our pricing. So -- but yes, our approach remains very practical and very cautious, and that is what is driving our confidence as well. I think overall, we did grew overall our growth of 33% with 9% like-for-like growth has been there and which is what we would call is the 11th quarter in the consecutiveness where we are delivering the positive like-for-like growth. That is definitely coming with a lot of initiation internally, a lot of development internally. The important point for us is the combination behind these numbers. The growth is not dependent only on opening new stores. We have opened our new stores as well, but it is supported definitely by our sustained productivity and from our existing stores through better merchandise, sharper price architecture because we really worked very highly on what kind of price architecture should work, what kind of product line should work, improving the store execution, more disciplined expansion. The expansion has been very good. All the -- there's been a lot of discipline, which we have driven there. That definitely, this has given us more confidence in the quality of growth because the quality of growth this time has been very, very good. It has not been one-sided. We have seen definitely -- see, we'll have to really work more as we go to deeper into it, we see more opportunity coming out of it. So there's a lot of work to be done. We should not be judged -- we should not be judged from one quarter to another quarter, and that is what we have been always speaking about. But I think our focus will remain on maintaining this consistency rather than chasing short-term growth or driving a headline growth. So we at V-Mart has always been very clear on these things. But I think, yes, our major focus still continues to be on product, on our customer proposition. We definitely want to bring much more fresher fashion, with better newness, which we have reflected also in our days of inventory. Our days of inventory has been continuously reducing. So that gives us a very clear confidence as well. And that is also driving. Even the price laddering plays a very important part in our value delivery in our business. So that is also something that we have been very watchful of. We have been always looking at the very, very deeper into assortment, deeper into price points and how do we distinguish between customer demanding enough variety or demanding more depth, how do we avoid decluttering or overloading the stores with unproductive choices or so. So we are actually working on these areas, which is driving some better customer experiences as well. We are really working hard to improve our full price sell-throughs, reducing our dependence on the sales discounts or sales or end of season sales. That is something that we have been driving. That is also because of our healthier inventory cycle or that will drive inventory health inventory cycle as well. The objective is not simply to increase the gross margin, but our objective is to improve the rupee gross margin, absolute profitability, better throughput, faster fashion and healthier sell-through. So I think that is where we are really working hard on. You've seen these things coming out as a picture. And you will see that because even our inventory prudence is very, very hard and our shrinkages have grown because of that. So I think regional relevance is something that we have been also working on. We believe India is divided into so many states with so much of cultural mix. So that is also very important and preference as it changes state by state. And we are trying to derive and we are trying to really work hard on better analytics so that we are able to make a little more relevant assortment for our customer segment. And that is how we are integrating our AIPs and stuff. But on the other side, on the supply chain side, we are also trying to integrate with our designers, so the fabric need, the vendors and how do we integrate ideas that can move faster from trend identification to the stores, and that is where we are really working hard. For us, as a market, South India has been a very good market. Unlimited has continued to show very encouraging results. So that is something which has been a highlight of this quarter. We still believe new store is an important area. We -- our performance in the new store has been very encouraging, especially in Southern India. The new stores that we opened last year as well as this year has been giving us very good results. That supports our confidence in our site selection process and in relevance of our format and unserved market or underserved market. I think that is very important. So we will still have very disciplined expansion. We will evaluate every store, every opportunity through the quality of catchment, the rentals, the ROI, expected throughput. So all of those are very, very important. We do not want to take any decision, hasty decision, which we have to repent later on. And then we have seen the markets in our market. We've seen our competitors also, the competition taking such kind of activity, doing such kind of things. But at times, we also feel that we should also get swayed away with this thought process of opening a little more faster and more aggressively stores, but we still want to be very, very we want to be correct rather than repent later. But yes, we will -- we certainly believe, as we have done earlier also, selective refurbishment is also very important. And refurbishment also has really helped us a lot to become more relevant and become more charming in the market. So we have seen more rational regional players opening stores, customer expectation also rising. This is definitely both as for me, more retail stores bringing in opportunity as well as challenges in the market. Opportunity in terms of more consumers coming into the organized [ frame ] of mind, but challenge is always whenever there is a new store opening, there is some amount of experimentation, some amount of research that the customer will do on these things. But yes, for us, we believe the market is -- there's a lot of markets which are still to be served, underserved by organized retailers. So there is a long-term opportunity, which still remains very significant. For us, our omni channel drive, our LimeRoad direction remains very clear. The marketplace losses has been reduced. We have continued reducing that particular side. The team is really working hard to generate higher efficiency, better or greater financial and economic execution discipline. So we definitely are not pursuing revenue, but still our revenues have grown this year with our sustainable economics where we have reduced our losses. This is the first year. So we definitely are using the platform to build our online and offline capabilities together and understand the omni channel customer more deeply. So the LimeRoad team, their team's digital or analytical and technology capabilities are also contributing to the growth of wider organization. And as we believe the sales, we are reporting separately in the LimeRoad as a number, but ultimately, it is also affecting our V-Mart and the overall businesses or Unlimited business. The customer -- we are seeing customers increasingly moving from online discovery to offline and even offline to online. So there's both the sides that we are seeing is becoming increasingly present and is becoming very valuable. So we definitely are doing a lot on technology and AI. They are not separate projects for us, but very, very important to us. They are practical enablers and better -- for better retail decisions. We are using them. We are applying data and technology across a lot of areas, demand forecasting, design or [ location ] identification or even assortment planning or replenishment. So there are various things that we have been doing, we are doing and we are trying to do in a much better way, whether it is customer communication or CRM management or store productivity increments. A lot of areas are there where we are trying to work on this. Our aim is to definitely make the organization faster, more analytical and more responsive. So there's definitely a lot of work. We have also completed an important leadership transition. Anand has taken over the responsibility of the business also. He's the CEO in addition to his role. So the transition has really played out well, remains fully aligned. And I am closely involved in the overall direction of the performance and the long-term development of the company. So there's definitely a lot of work. The team has really grown up. I wish the parting CEO, Vineet very well for his future. And I would definitely like to thank our store team, merchandising, sourcing, our partners who has really worked hard, the entire digital technology teams who are really working with us. So I think they are very important to our success and our growth. And we will definitely continue. I'll pass on this with Anand and let Anand continue with the detailed explanation of the results in this respective quarter. Over to you, Anand.

Thank you, Lalit, and good evening, everybody. Let me take you through some of the key highlights from this quarter, and then we can open the session for questions. Quarter 1 has been a very strong broad-based growth quarter with overall revenues growing 23% year-on-year and the SSGs also growing 9%. Overall, this marks the 11th consecutive quarter of sustained growth, reflecting continued progress on planned merchandising and product upliftment, disciplined store expansion and also sharper operating controls with V-Mart actually delivering 8% same-store sales growth and Unlimited significantly outperforming with a 13% same-store sales growth. The continued execution of strategic projects around merchandising and operations through technology and process-led improvements continues to power us as we look forward to sustainable healthy growth and move ahead with healthy network expansion without diluting any productivity. When I look at the sales, the summer season started late in April. In fact, and May was also impacted by Adhik Maas, which Lalit also talked about. The wedding season, in fact, was also relatively shorter this year by 3 days versus last year. But despite this, the customer engagement remained healthy with footfalls up 39% and the memo count also up by 18% year-on-year. And the apparel ASPs also grew by 2%, reflecting better customer connect, which was led by product improvements and also improved operations. The Unlimited format in South India continued its strong momentum, delivering 33% revenue growth and 40% EBITDA growth for the quarter, with sales per square feet reaching INR 710 per square feet, which is also up 18% year-on-year. This performance reinforces our long-standing confidence in scaling the format further across the southern markets as the new stores opened in the last 1 to 2 years has started to deliver significantly better SPSF numbers than the acquired legacy stores. As we have been speaking about this for the last 4 years, it's just a matter of time where the new stores averages start to take over the old legacy store numbers, and we should see continued progress coming in from South India and Unlimited. Coming to margins. Gross margin for the quarter declined 80 bps to 34.5%, primarily on account of a mix change and regular provision on aged inventory, which, in fact, Lalit has also spoken about, where we are very stringent on how we handle our inventory. The inventory provisioning is as per our consistent policy, the benefits of which will get reflected in the upcoming quarters as the older inventory gets liquidated. Irrespective, the inventory productivity continued to improve with overall days of inventory, reducing by 8% year-on-year to 86 days. And in fact, the inventory per store also decreased by 5% to around INR 1.5 crores at quarter end. The inventory remains very healthy and should continue to get better as the sales productivity increases with similar inventory base, improving days of inventory and lowering working capital utilization even further. Moving on to expenses. Total expenses increased by 15%, well below the 23% revenue growth, providing a comfortable 150 bps operating leverage, which more than made up for the gross margin contraction. This was delivered through continued discipline on rent, manpower and other costs even as we scale the network. The LimeRoad Marketplace also continued to improve with losses reducing by 39% year-on-year and 7% quarter-on-quarter despite an 18% increase in NMVs. This is the first time in the last 8 quarters wherein we have seen a healthy increase in NMVs while simultaneously reducing the EBITDA loss, which has already come down to a very insignificant and manageable range. As a result of a healthy SSG and sustained operational efficiency, our pre-Ind AS EBITDA grew 36% year-on-year to INR 83 crores with margin expanding to 7.6% from 6.9%. On a reported basis, post-Ind AS EBITDA grew 27% year-on-year to INR 161 crores, with margins expanding by 50 bps to 14.8%, reflecting better cost absorption and productivity gains. This translated into a 39% year-on-year growth in PBT to INR 260 crores (sic) [ INR 26 ] and 41% year-on-year growth in PAT to INR 47 crores (sic) [ INR 19 ]. CapEx for the quarter stood at INR 38 crores, primarily towards store -- new store additions and selective refurbishments. The business generated positive cash flows of INR 76 crores. We continue to run an asset-light debt-free balance sheet with bank limits utilization down to near nil levels and continued 0 long-term debt. On the new store additions, we added 15 stores for this quarter and closed 1, taking our total network strength to 591 across 335 cities encompassing now 51 lakh square feet. Our expansion guidance for the year remains unchanged at 90 plus as we continue expansion with a healthy store pipeline in place. While remaining slightly aggressive on new store openings, we shall remain -- we shall still remain very disciplined on rentals, space productivity and profitability rather than focusing on only store count additions to ensure delivery of sustainable growth. On the upcoming quarter, while quarter 2 is a small quarter and with Durga Puja also shifting by 19 days, thereby falling into quarter 3, there should be a negative impact on both sales and margins for the quarter versus last year. This is purely a timing issue and should be recovered very well with good festive to festive growth in quarter 3. So that is all from my side. And I now request Sanya to open the house for questions.

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

My first question was on the gross margins. If you could elaborate on the mix change point that is it that certain price points or particular categories underperformed or outperformed during the quarter?

Yes. So I think gross margin -- because of the gross margin, there may not be a particular category mix change. Gross margin is largely an outcome of the price at which you buy versus the price at which you sell and schemes of promotions that you run during the year or the provisions that you do. But yes, there's a little bit of mix change in terms of the product lines. And as for the fashion need or the fashion trend, there are areas where we have worked a little more, which has resulted into a better ASP as well. The ASP is not an inflationary ASP. It is more related to the mix change of product lines. For example, like instead of one Kurta or one lower, you would sell more combination or sets, which could increase or we sell a little more combo products, which could increase the ASPs. So similarly, the mix change has resulted in those areas and those betterment.

Sure. And of the 80 basis points of compression, did both mix change and provision contribute equally? Or if you could share the breakdown please?

This is Anand this side. So it's not an equal proportion. It will vary from time to time, but the mix change is more from a customer perspective. We have not changed the stock mix deliberately to inflict gross margin change. It's just customer preference, which is happening from time to time, which is also dependent on how the festive changes, how the season changes, how the demand patterns change across regions. The provisioning is a very thought-out and a very long-standing more than 10-, 15-year-old consistent policy, which happens every quarter. So while the proportion may not exactly be the same, but not very significant difference between the two.

Sure. And the second question was on the conversion. What has driven the decline in conversion from mid-40s to 38%, 39-odd percent? Because even if I account for newer stores being added, the impact on conversion seems a little steep.

So we have seen this drop in conversion for some time now and at least for the last 1 or 2 years. So there are 2 reasons. One is there has definitely been some errors in the past wherein in terms of how we used to count the numbers in the past previous years. That is some small amount there. We pointed out that earlier as well. And the second also is that as we are seeing far greater competition in the market, we are seeing customers going across the market, moving on to more number of options available, checking out things which are available at nearby stores and then coming back to buy again. So which is basically increasing the number of the footfalls, but decreasing the number of memo account. But irrespective, the memo count has gone up by 18%, which is -- which remains a very healthy number.

Sure. Got it. And just last bit, if I may. How are we looking to pass the RM inflation? Or are there any price hikes which have already been undertaken?

So see, I mean, definitely, there has been an increase in the raw material prices. You cannot avoid it. I mean, what we forecast and what we analyzed the forward sales or the forward purchases that we are trying to anticipate, almost 80% of that purchase is largely impacted by crude. So there will be a crude impact, which will come into the picture and has come into the picture and already a part of the cost ecosystem. But yes, we are trying to deviate or we are trying to nullify the effect of by trying to create efficiencies and better productivity with our vendors and trying to change the mix and trying to change the filaments or the yarn mix in the product lines by some part. But still, there has been some increase in the prices. There will be some more increase. Some part of that is definitely getting passed into the product, but it is not going to be huge and which will impact the consumption of our consumers. So that is how we are being a little more cautious and vigilant on how do we pass it on.

Just to clarify, till now, there have been no changes in V-Mart's pricing, right? Going forward, you all would be taking the same to some extent.

I mean, going forward is all a mix of what you have bought and what you will buy or what you're buying today. So there is always a little bit of movement. What you're buying today is the orders that you have placed 4 months back. What you will be buying tomorrow is going to be something which is going to create more impact. The next question is from the line of Rahul Agarwal from IKIGAI Asset.

Sir, a few questions. Firstly, on the memo growth, very strong high double-digit growth last 4, 5 quarters. Could you split that between old and new stores? Is the trend similar? Or is it very different? That's the first question.

Memo growth from a new store is all new memo. So that is 100% growth, which is coming from new. But yes, the old stores, definitely, as we are seeing the like-for-like growth where we are seeing 9% like-for-like growth coming in, 3%, almost 2% to 3% coming out of ASP growth, which is increasing the ABS. Otherwise, everything is coming out from the memo growth. And the memo growth is coming definitely from larger inflow growth or customer footfall growth because we are also seeing a conversion being dropped a little bit. So we are seeing real memo growth coming out of the customers who are really coming back and wanting to buy from us.

Okay. So let's say, the stores which have opened over the last 12 months are seeing similar memo growth versus stores which are more than 12 months older. Is that fair?

Rahul, see, I can't -- you have to understand this piece. Stores which have not been operative in the last year and the same month, definitely had no memo. So the growth is 100% there. So we are not comparing those stores. We are comparing like-for-like memo growth here. Overall memo growth you are already seeing. So definitely, the month-on-month, we don't generally chase because it's a seasonality game. So month-on-month growth doesn't happen. It is like-for-like year-on-year.

Right.

But is largely coming from like-for-like.

Yes, I understood that. My bad. Just on the average transaction size, I mean, last 2 to 3 quarters, I think we've seen a revival. Now there is no more declining. Is that a sustainable trend going forward?

Yes. I mean, definitely, we want to keep that sustainable by increasing or bettering our services in the store, by bettering our product mixes and even improving on the product lines, which we believe are driving higher ASPs and are driving better or giving better product to the customer. So I think all of that is inclusive in the memo growth in the ABS growth. So the ticket size growth is certainly a better confidence increasing measure, wherein we are seeing some ASP growth because of mix change as well as we are seeing some UPT growth, which is the unit per transaction, which is also growing.

Got it, Lalit ji. And just lastly, on this 90-plus store number, this is a net number or the gross number?

I mean, definitely, it will be a gross number. When you're saying plus, it may go a little extended. But yes, we don't intend to close down a lot of stores. But yes, you may see 7 to 10 stores, 8 to 10 stores getting closed also this year.

Got it. And sorry, just the last thing on inventory. So of course, you've done a great job on optimizing that. Is there more to that number further? Or are we optimized now?

[Foreign Language] So let us keep working, not narrate too many things.

All right. Thank you so much, sir, and all the best and congratulations, Anand, for your integration and to Suraj as well. Thank you.

The next question is from the line of Sameer Gupta from IIFL Capital Services.

First of all, congrats on a good set of numbers. Sir, firstly, just wanted your color on these minimum wage hikes, which have been announced in some of the states. I believe UP is a big state for us and even Karnataka now with Unlimited, and we have seen a good quantum of minimum wage hikes announced there. One, how much of it is already there in this quarter number? I see an acceleration in employee cost increase. And how much of it is remaining to be factored in coming quarters?

Yes. I mean, definitely, minimum wages growth is both as an opportunity as well as the challenge. In terms of cost management and opportunity in terms of consumption enhancement. So we believe that opportunity should be larger in the longer term. But yes, in a shorter term, immediately, the minimum wages is impacting our salary bill and our wage bill. I think out of the 3 months, we have already taken in the wage bill of 2 months already included in this last quarter. Certainly, there has been a few more additions which are coming in. Karnataka still hangs in between whether it is acceptable or not accepted. But still, there will be an increase. And so we are trying to generate betterment through either efficiency or better sales. So we are trying to either create better efficiency out of the same employees or the lower employees that we have. And we are also trying to generate a little bit of more sales. So as a percentage of sales, the employee cost should not grow is our focus. So that is how we are trying to balance that out.

Got it, sir. Just a follow-up here on Karnataka. So one, has these been affected? Or is it under stay for the retail piece? And I believe the garment piece also, there has been some pause over there. But still if, let's say, the worst were to happen.

As of now, it has not been implemented. It is on stay.

On the retail side also, on your stores also?

Yes. Yes, yes.

Okay. Okay. And on the garmenting piece, sir, right now, so it was not included at all, but let's say, worst were to happen, what is the vendor exposure to Karnataka?