V2 Retail Limited (V2RETAIL) Earnings Call Transcript & Summary

So more -- Ankit, more than the things that we are doing, I think it all depends on the execution of it, because 10 of our competitors might be doing the same thing. But it all depends on who implements it better or who executes it better, because everyone will say we want to improve the product offering or we want to give the best price. But it all depends at like what level of execution or what level of planning and product development or what level of quality improvement have you done to the product. So if I tell you the 5 basic things that works in retail, all of my competitors might say they're doing the same thing. But it all depends on, I would say, how well we are able to implement it. And we have -- like till COVID happened, we were seeing a very good run rate and we were seeing a growth number from early 2019 to only 2020, but COVID happened. So we are very hopeful that we'll be able to continue to trend when the sales normalize, and we should see good numbers. Because again, we are focusing on economy value and because our target customer is such in Tier 2 and Tier 3. So we have reduced the contribution of premium, super premium, which has also reduced the percentage of debt stock. And that's why our gross margins have also increased. So I think all the indications are good. It's just we just -- like Q3 also is better than our expectations. So I think FY '22, we should be able to grow from a good base that we have been able to create.

Great to hear all these things, Akash, and all the best to you. And we just expect that you achieve your numbers irrespective of the macro environment and irrespective of the competitive landscape.

Thank you.

The next question is from the line of V.P. Rajesh from Banyan Capital.

Akash, could you give some color on the [indiscernible] and [indiscernible].

This is the operator. I'm sorry to interrupt. Mr Rajesh, your voice is breaking.

Is it better now?

No. It's not. I can't understand what you're saying.

Okay. Is it better now? Yes. Can you hear me okay now?

Yes. It's better.

Yes. It's better.

Okay. I was just asking that if you can comment on the trends you are seeing during the festive seasons over the last, let's say, 4 to 6 weeks.

Yes. So as I said earlier, in October, we saw our sales almost 75% of last year. And in November, we are again seeing a number of almost 85% of last year. So I think Q3 should be around 80%, 85% of last year if December goes well, if we are -- if it continues the same trend that we're seeing now. We are seeing the footfall coming back to the stores and sales normalizing. So if December continues to be at the same trend that we're seeing now, Q3 should be at least 85% of last year.

Okay. And then there was another inventory write-down in Q3. So could you just give -- sorry, Q2. Could you give some color on that?

So it's not an inventory write-down. It's an extra provision that we have taken. Because our stores were shut for almost 4 months, and the inventory that is kept at store, we believe that it won't be able to sell at full price. So we took that extra provision in terms of, you can say, a COVID impact because a lot of that inventory will have to sell at a particular discount. So we took an extra provision of INR 5 crores in addition to the 1% that we take, usually.

The next question is from the line of Varun Singh from IDBI Capital.

Akash, just wanted to understand regarding this convenience driven shopping, which is -- which has picked up very, very significantly after COVID. So now that almost all the companies, including Google, Amazon, Facebook, they have started -- they have already rolled out this vernacular language, so now people can order even in Hindi or Diwali or on different regional languages. At the same time, we are seeing a very obvious trend that even globally as well as in India, all apparel retailing companies are becoming obsessive about omnichannel. So they are trying to tie or they are saying that they will treat all their store as a distribution center, and hence, the distribution timing will be shorter for customers, so therefore trying to supply even higher convenience, so cutting short the supply chain of distribution. So -- and also, you mentioned that in V2 also, we are trying to target this omnichannel stuff. But if you can throw some light in terms of the set of customers that we are targeting. I understand that the lower end of population might not be too much credit card ready. But at the same time, we are seeing so much of Google, UPI-driven revolution which is being created. So you don't even need to have a credit card or anything else. A simple bank account, debit card should be more than enough. And even cash on delivery also has been provided to customers. So I mean how do you look up to this opportunity as such? Do you think that for your set of customer, it is not so relevant or you are also trying to be too aggressive and obsessive about omnichannel play?

No. So you're right about vernacular languages, and we are also midst of developing our own app, which will support multiple languages and also voice search, because voice search is going to be the next big thing. And as you said, omnichannel is going to give us 2 advantages. It also reduces the lead time of the product reaching the customer as well as it reduces the logistics cost. So that increases the profitability and the cost of acquiring the good for the customer. So we will be launching the omnichannel -- like currently, we are fulfilling all our online orders from our central warehouse. But we have started a pilot in a few of our stores for our omni-channel capability. And I think from Q4 onwards, we will have all our store inventory also live on our e-commerce platform. So yes, we are betting on it, and we want to be present in the space because we want to be a product company. And as long as our product is selling whether offline or online, it's just an additional channel of our -- for sales for us. So we are focusing on omnichannel, focusing on our own website, focusing on making our own app. And as I said, going forward, we want our online sales to contribute almost 10% of our sales.

Of course, definitely. But Akash, if you can throw some light in terms of if you are shifting the point of distribution from a central warehouse to store level, then that will demand a different kind of cost structure altogether. So I mean if you can throw some light on that front, that how are you -- I mean how should that look like for us as a company instead of asking some third party to do sell-out for us? We will have to build that entire distribution part of the product. So how are you looking up to that part?

The costs won't really change for us a lot because, currently, also in all our stores, we work on a store warehouse model. So in the store itself, we have a store warehouse, and we have a store display area. So we have our whole warehouse team at each of our stores. So in the same hierarchy, only we are planning to integrate the e-commerce omni-channel orders. And when the omnichannel orders increase multifolds, then obviously, the sales that we are getting from the omnichannel orders will justify the additional cost. So like what...

No. I mean what I wanted to understand is you will have to set a different team altogether to cater to this new stream of demand, which is coming to you. So there must be a different person who will be going to deliver stock to customers and a different person who will need to take a stock that -- where are we getting orders from.

The last mile delivery is taken care of by logistic partners. So we have tied up with multiple logistics partners. So the last mile delivery is taken care by them. And what you're saying about stock and order fulfillment and everything is done by technology. So as I said, it all depends on the number of orders. And if the number of orders are coming in huge volumes, then obviously, the additional cost will be justified by the added sales because the sale of that particular store would increase. So I don't think -- I don't see it as a challenge. We would start omnichannel, and we would increase the operational capability according to the volumes that we get, because there is no additional activity. There's just activity of packing the order and sending it to the customer. So the last mile delivery is taken care of by the logistic partner and all the other costs of delivery.

And our -- I mean this system of network will be much more fast, efficient compared to what Flipkart of the world is already doing. I mean a central distribution network versus 100% decentralized model wherein all our stores are being treated as a distribution center. So what you're reading on that, I mean, will be the -- in terms of cost, more competitive than Flipkart or Amazon kind of companies?

So I wouldn't comment on the comparison between Flipkart and us because they're also doing huge volumes, and they're getting benefits from economy of scale. And they also have a decentralized model where they have regional warehouses and hub-and-spoke models. But it will definitely be much lower than the cost that we are incurring today. We are fulfilling it directly from the warehouse. So our costs will definitely reduce if we use the store distribution model to fulfill the orders.

Sure. That's very helpful. And just one last question, Akash. On the -- I mean with regards to our mainstream business, I mean how do you draw the strategic canvass for our business? I mean how -- do you think that the customer should look -- or if I put it the other way around, when we talk to other apparel retailing companies and are asking them that what kind of rights to win are you creating in your categories, why do you think that customers would come to you? One common reply that we get from almost every -- 100% of them is, is everyone says that we are different. The customer comes to us for a better -- they love our design or they -- so there's a point of difference that they're trying to differentiate their product portfolio. And other than this, I mean, I could not find any other great difference in terms of price, value equation, et cetera, that companies are trying to offer. Obviously I mean a company, which has got higher costs, so they have to live with the relatively inferior quality products with high price, et cetera, et cetera. But otherwise, we see that the differentiation is in the merchandise that is being offered to customers. But in case of V2 retail or VMart and in -- or this low ASP segment, how do you draw the strategy canvass for our company, V2 Retail? I mean for next -- after 10 years, after 20 years, how to -- how do you see this company evolving?

So if you talk about the next 10 years, we want to be a 100% private label company. So we want to promote our private labels, and all the products in our stores will be in our private label. And second, we want to work on a cost to MRP multiple of 1.65 to 1.7, which is, I think, lowest across any industry in terms of fashion. So like you said, if 4 people are working on a similar margin structure, then the major difference that you -- differentiation that you can create with your competitors by offering a different merchandise or some sort of product differentiation. Because the -- ultimately, no matter if you talk about visual merchandising, if you talk about customer experience, if you talk about loyalty program, I think the biggest advantage we have to give is to the product. So when you're saying that most of the companies say that our product is different, so that is what will actually create a competitive advantage where we can say maybe in 5 to 10 years that we are better than -- at least 30% to 40% better than any of our closest competitors. So the major owners of that goes to product and the merchandise offering, which also includes getting the right product available at the right time. So that also includes the supply chain of it, the timing of it, and obviously, quality, color, design. So basically...

Excuse me, this is the operator. Participants, the line for the management has dropped. Please stay connected while we reconnect. Ladies and gentlemen, thank you for patiently waiting. The line is reconnected. Sir, you may go ahead.

Yes. So I didn't -- I don't know where I dropped. So I was answering the last question, right, about the next 10 years, the direction of the brand.

Right. Right.

Yes. So basically, I was saying we are focusing on the products. The whole owners of creating that competitive advantages goes on the product. So the product includes quality, color, design, and it includes a robust supply chain structure about -- which is about getting the right product at the right place at the right time. And it's all about the ballooning India's middle class. So everyone knows the latest fashion now because of Internet penetration, and everyone aspires to look good. So we want to be a brand where anyone thinks that fashion is affordable to them now. So it's not a big dent on their pocket to look good. So we want to relate to the consumer in such a way that he knows that if he goes to V2, he can get -- he can look good. He can get the latest fashion, and he can get it at the best price possible like anywhere in the country. So you can say what Primark does in Europe. We want to replicate that model in India. So you can see that is the brand strategy going forward.

All the best. And also wish a very happy Diwali to the entire team.

The next question is from the line of Manan Shah from Moneybee.

Sir, could you just help us how has the employee headcount moved? And should this rationalize now? Or should it come back to our previous levels?

Are you talking about employee costs?

Yes. Employee headcount and employee cost, yes.

I think it should come back to the pre COVID levels. So our front-end employee cost is around INR 35 per square feet. And like the headcount will also come back to normal because we did lay off a few people because we were not getting the sales number that we used to get pre-COVID. But now as our sales are normalizing, we -- the hierarchy is also normalizing, and we are hiring people again, and the employee cost will go back to pre-COVID numbers.

Okay. Okay. And my next question is on our own manufacturing. You mentioned you want to scale it up to around 20%. So how does this benefit the business as a whole that is an outsourcing it? And how does -- wouldn't this like put strain on our working capital requirements?

So like I said, it is giving us a cost benefit of around 10%. Even before we started our manufacturing unit, we used to outsource a lot of our production to job workers. And the kind of cost that we are seeing now is still much better than what we used to achieve by outsourcing to them. So you can say this is a model unit or a model factory to achieve the maximum efficiency so that in future, when we are dealing with other factories, we can show them the kind of productivity and the kind of costing that we are getting to achieve better costing.

So we will not be investing more in this own manufacturing, right?

Right now, the capital of INR 15 crores should be enough.

Okay. Okay. And how are we driving traffic to our online website? Like are we giving any discounts or something? Like how are we trying to increase the traffic on the website? And is our website online and all the cities where we have a store? Or like if you can give some percentage of that we are present in 30%, 40%, 50%, 60% of cities where we are present.

So we are present in all the cities or most of the pin codes we are delivering already for our online website. And the orders that we're getting from our city stores is around 15%, 20%. So the orders that we get from the same city where we are already present at stores is almost 50% to 20% of our total online business. And the traffic that we are driving to our website is a combination of digital marketing, that is ads done on Google, Facebook, as well as some ATL, BTL ads that we go do for our off-line stores. So we put the online ad with it because it's the benefit of omni-channel that we can give same communication for both the channels. So that's how we are driving the traffic currently. But we are seeing a lot of repeat customers. So at least almost 30%, 35% of our sold sales online is from our repeat customers. And we've got very good reviews and ratings for all the delivered products. So I think it's a good sign going forward.

And my last question was that is it possible for our company or rather this industry to operate at a lower inventory days like different leverage operates at around 60 days. So along with value fashion, is it possible fast fashion also to operate somewhere around 60 days of inventory?

That will only be possible if we are able to increase the per square feet sales to INR 1,100, INR 1,200 per square feet, because the capacity of inventory that we can keep in the store remains the same, whether you're doing a INR 700 square feet of sale or whether you're doing a INR 1,400 square feet of sales. So the only way we will be able to reduce -- further reduce inventories if we are able to increase the per square feet sales because then what we are able to do is we are able to do more turns of inventory in a particular year.

The next question is from the line of Uram Prakash, an investor.

Second time coming back because some questions, which I had -- in fact, I see that the sales of the company varies based on the season. So the Diwali, and for the rest of the season, I think it's not that good. That -- but it should -- but it's also not profitable. It's like if it's not Diwali, if it's off season, then you may not make that much of sales, but totally, the company can turn profitable there. Is there any strategy to handle that part of the business operations?

Sorry. I didn't understand your question.

See, your company's sales are -- I know the quarterly sales are only profitable during the seasonal Diwali season or Christmas or Dussehra. On rest of the seasons, it's not profitable, which is either 0 or making just negative or just breaking even. Is there any way, any strategy by which we can return profitable there also, offseason also?

But if you look at historically, Q1 is one of the best quarters for us because the main summer season and the wedding season happened during March, April, May, June. So Q1 and Q3 historically are very good for us. And Q2 and Q4 are usually breakeven quarters for us. So it all depends on the festive shift and when the festival happens.

So off-season also can become profitable is the question, because even if there is no festival, is there any way the company can turn profitable there because they're just breaking even?

Yes. So the only reason -- the only way we are able to turn profitable during off-season is to get higher sales that we are achieving right now. That is the only way we'll be able to achieve profitability.

Okay. And is there any strategy for that? Any planned strategy for that?

Yes. So in off-season, in a few of our stores where we have extra area, so we are introducing FMCG products as well as non-apps products. So that really helps us during the off-season when the apparel itself can't give us enough footfalls to get a breakeven. So we are implementing those kind of strategies to tackle with the lower sales during off-seasons.

Okay. Okay. And is there a long-term strategy that like this is how we're trying to tackle in the long future, also in off-season, we always do this. So we can have [indiscernible] kind of pillar than what we're already selling in which -- is that a long-term strategy?

But as I said, like if we get a SSG, single-digit high number, then during the Q2 and Q4 also, we can see a little bit of EBITDA. So it's all about, yes, getting increase in sales.

The next question is from the line of Vivek Bansal from FRL.

Akash, this is Vivek. So as you -- can you hear me?

Yes. I can hear you.

Yes. So as you mentioned that we will be opening around 20, 25 stores in the next 1.5 years. So what would be the CapEx plan for them? So we are planning to fund it through internal accruals or we want to take on some more leverage for that?

No. We will be [indiscernible] internal accruals. So CapEx for each store is around INR 1.50 crores to INR 2 crores, which includes the inventory also. So I think it will be easily funded with our internal accruals and the EBITDA that we'll be generating next year.

So how do you see the debt position moving over the next 1, 1.5 years?

So even in Q2, I think the debt was only the INR 7 crores that we had used from our CC limit, which is also unutilized now. So we are 0 debt right now. And going forward also, I think in the 1, 1.5 years, we'll be able to fund everything from our internal accruals. So we won't need any debt.

And to move to a 0 debt position in the balance sheet?

Yes.

Okay. A couple of more questions. Like I was just looking at the investor presentation. So what would be the shrinkage and damage percentage that we have incurred in the current year as well?

So the physical accounting is still going on because in the first quarter, we weren't able to do the physical accounting because of the lockdown restrictions. But historically, we have always taken a provision of 1% for shrinkages and damages. And whenever we get the physical verification done, it comes to around 0.8%, 0.9%, so which is well within the provision that we already account for in our results.

Yes. And do you expect a similar trend of 0.8% to 1% for this year as well?

Yes.

Okay. And one last question, Akash. What would be our sales mix from the non-apparel products, like [indiscernible] and the food?

So currently, it's only 6%, but it might increase to 10% as we are introducing a lot of new categories and a few of our stores.

So we are introducing across all the stores or we have selected some stores?

We have selected some stores, which has extra area and where there is a demand for such products.

The next question is from the line of Anish Jobalia from Banyan Capital Advisors.

Yes. Our payables have moved down by around by INR 30-odd crores. So what is our strategy is going to be forward in terms of how we present the payments of our vendors so that they are more happy with us and give us more payable terms and more better products or should we work back on the earlier payment levels going forward?

Yes. So we had some extra cash on our books, and we wanted to help our vendors during these challenging times. So we did a lot of prepayment of around INR 30 crores, INR 40 crores of creditors. Because, as you said, to be on their good book and to get favorable conditions in the future and also get uninterrupted supply from them going forward. So I think we wanted to help them in a good way, and we paid a lot of them off. And that's why you see a reduce in creditor. But on an average, the average credit base for us is almost 45 days.

So after COVID, is this a new normal or you again go back to pre COVID levels? I mean the trend is that is seen in the industry is that people are looking to pay their vendors more faster so that they get a loyal vendor base, which I think is one of the areas one can develop a competitive advantage. So I just wanted to understand what is going to be a strategy in terms of developing a strong vendor network going forward. This could have been one, but anything else that you want to add.

So I think we are already one of the best [ pay masters ] in our industry. And I think our average paying days of 45 days is very good. And we are looking to continue that going forward.

Okay. And in terms of cash levels, we have also come down to like INR 3-odd crores. So do we -- are you sure -- I mean do we need to take any debt to fund our existing operations, really not future CapEx, but going in H2 to become positive cash flow from operations?

No. We won't be able to -- we won't need any debt because the rest of the half of the year will be EBITDA positive. And it will cover the EBITDA negative that we had in the first half of the year. So I think that should be enough to -- for the operational cash flow requirement. And the EBITDA that we generate next year will be enough for the expansion plans that we have. So there will be no requirement of that.

Thank you. Ladies and gentlemen, that was the last question. I now hand the conference over to Mr. Akash Agarwal for closing comments.

Thank you, everyone, for joining the call. I hope we've been able to answer your queries. And I just want to make a clarification about FY '22. I said the target per square feet sales that we are targeting is around INR 750 per square feet, which will give us an EBITDA margin of about 9% to 10%. And I think I said 11% to 12%, but it's 9% to 10%. And for any other information, we request you to get in touch with Marathon Capital, our Investor Relations Adviser. Thank you, and wish you guys a happy Diwali, stay safe and stay healthy. Thank you.

Thank you very much, sir. Ladies and gentlemen, on behalf of V2 Retail Limited, that concludes this conference. We thank you all for joining us. And you may now disconnect your lines.