V2 Retail Limited (V2RETAIL) Earnings Call Transcript & Summary

Our next question is from the line of Manan Shah from Moneybee Securities.

I wanted to know that once a new store is opened, how much time does it take for it to break even? And at what sales per store does it break even?

So if you -- like, operational level, breakeven happens from the first month itself. So our breakeven per square feet sale is only, I think INR 550 per square feet. So if we achieve that number, then the breakeven happens from the first month itself.

Okay. Okay. And you mentioned that our plan for next year to add another around 2 lakh square feet. So I wanted to know what sort of CapEx will be required? And what sort of working capital will this require? And would we be -- would it require for us to take any debt or short-term debt or anything on that side?

So to open 2 lakh square feet, we need about INR 20 crores of CapEx. And about INR 20 crores is needed for -- to invest in the inventory. So INR 40 crores is what is required to open 2 lakh square feet. And we don't need any additional capital for that. We will be able to do that when the EBITDA and the cash flow is generated to next year.

Our next question is from the line of Sameer Gupta from IIFL.

Just wanted to, sir, understand your strategy on your e-commerce business. So are we using the help of aggregators? Are we doing it via our own website? What is our right to win or USP that we offer via this channel in our stores? I understand that we give a typical shopping experience, one-stop shop, to a whole family's needs of apparel. But in e-commerce, that proposition is somewhere lost. So what exactly is our competitive edge here? And what is our strategy on a broad sense?

So I would just say 1 thing. The biggest competitive edge would be the product. So the price and the variety that we offer at that price range will be the game changer. So what we are relying on completely is our omnichannel business. So we want to deliver from our stores to actually save on the logistic cost. So that will be the whole business model for e-commerce. So we want to do as many store deliveries as we can and we will also make the store inventory life to the customer for same-day delivery. And for customers that are coming from cities where we don't have a store, we will ship directly from our warehouse. So -- and currently, we have our own website also, and we are listed on multiple marketplaces as well. So we are taking both approaches because we want to leverage our inventory in as many sales channels as we can.

Got it, sir. But just 1 follow-up on this. So when we list it on aggregators, what exactly does the consumer have to type to get a V2 Retail product? Is it like our private labels, then we are only restricted to our private labels and aggregators. Just trying to understand that aspect.

Yes. So it's our private labels and the brand. So if you do a brand search, then you'll get the product. But we are in top and making a brand page on multiple marketplaces. So maybe soon you see our V2 Retail brand page on marketplaces.

And can you disclose the breakup of sales from aggregators versus your own website?

No, we don't want to give that sales mix now. But I think going forward, it will have an equal share.

[Operator Instructions]. Next question is from the line of Sachin Kasera from Svan Investments.

Yes. If I look at the 9-month gross margin that you have reported, that is around 33.4% versus 29.1%. So 2 questions. On the INR 6 crores provision -- is this 33.4% is after a INR 6 crore provision?

Yes, that is after the INR 6 crore provision.

If we adjust for the provision of whichever we look at it, what explains this 450 basis point increase in gross margin. And next year, you're guiding for 30%, 31% gross margin. So any reason why you expect it to go down from what you reported in the first time?

So you're seeing this number, it is very skewed because this year we didn't have a full first and second quarter. So whatever sales you're seeing in the 9-month period happened in the third quarter. That's why this gross margin is so skewed. So again, if we have full first quarter and second quarter number, so the gross margin will normalize back to 31%, 32%.

Okay. My second question was the cost that you incurred below the gross margin. So there's a reduction of almost around INR 30 crores, INR 32 crores in the first 9 months.

Sorry. Since your voice is not clear, I'm not able to comprehend.

Is it better now?

Yes, it's better.

Yes. I'm saying, if I see your cost below gross profit, that's gone down by around INR 30 crores, INR 32 crores in the first 9 months. So how much of that is related to onetime sales because either you've got some concessions or the stores were closed, so you didn't have to pay salaries or you cut salaries. And secondly, is the Q3 number of INR 50 crores quarter that you have shown in the per square feet a more normal number that would look at going ahead?

I didn't understand your question. You're talking about expenses?

Yes, expenses below gross profit. So your staff cost and the other SG&A, which has gone down from roughly around INR 130 crores in 9 months FY '20 to around INR 98 crores in 9-month FY '21. So of this INR 32 crores sales, how much is permanent and how much was one-off because either the stores were shut, so we didn't have some cost or we now cut salaries or...

All of this was an impact because of COVID because we were not paying rents. We have got rent concession. We were paying a percentage of salary, so I think going forward, our cost expenses per square feet is going to stay at the same level of about INR 170 to INR 180 per square feet.

Okay. And Q3 reflects that broadly?

Sorry?

The Q3 numbers broadly reflect a new normal of INR 170, INR 180 per square feet.

Yes, yes, yes. Q3, the expenses are normalized.

Sure. Next question is on the debt figure. So if you could help us with what could be the debt and the cash and so maybe the gross debt and the cash and the net debt numbers, if you could share?

So INR 20 crores is the cash balance and about INR 11 crores is the debt.

So we have roughly around INR 9 crores of net cash.

Yes. Net cash, yes.

And as we end the year in low for more stores, do you think this net debt will go -- net cash will go down or how do you say this?

So it varies from month to month, but we have enough cash flows to fund our growth for the next whole year. So that shouldn't be a problem.

Our next question is from the line of Anil Jain from Equipassion Capital.

And congrats for the great numbers. I wanted to know if we have seasonability in the business. So what is the revenue split between the 4 quarters? Can you just ballpark figure?

Because the festival dates in India are not fixed, it depends on the Hindu calendar, it's very hard to judge the contribution. So if Durga Puja happens in October, then Q3 is the highest contributor. If Durga Puja happens in September, then Q1 is the -- sorry, Q2 is the -- Q1 is the highest contributor. So it all depends on the festivals. If Durga Puja is -- and Diwali and Holi and Eid, so it varies according to that.

Okay. And my second question is regarding the gross margins. We have in-house contribution also, in-house manufacturing contribution also. So what is the difference between the gross margin on the in-house management factory and overall company gross margins?

The gross margins are the same. As I said, the extra benefit of cost that we are getting, we're passing it on to the consumer. For example, if we were buying a shirt for INR 200, and now we are able to manufacture it at a lower price, so we are passing that benefit to the consumer and putting it at a lower MRP because we started manufacturing not to get higher gross margin, but we want to actually get a better edge over our competitors and pass it on to consumer.

We'll take our next question from the line of Kartik Keyan from Suyash Advisors.

So this is my first interaction. So excuse me if I'm asking you basic question. 2 things. One is, is there substantial scope for you to rationalize your store count because you seem to be spread across too many states? Does that become unbuildy from the point of view of managing the spread? And second part of the question would be, what is the scope for rent rationalization? I've seen from your presentation that you've been in the INR 45 range. Is there scope for you to rationalize on that count?

I think I'll answer your second question first. Going forward, our rent that we are is around INR 45, similar levels. So I don't think there's any scope for that. And because there's still demand in good markets and good areas and good locations, so I don't think that is coming down. And answering your first question, now we are only focusing on geographies where we are already very strong. And we have a good presence, and we have built a loyal customer base. Because then we get a lot of synergies in terms of marketing and transportation. So we are taking that approach, and we are trying to expand in geographies that we are already dense and performing well in and where we already have a better customer. So that's the approach for the future.

Right. And just to understand, the INR 800 per square feet revenue that you said is on an annualized average basis, right, for next year?

That is monthly average. That is a...

Monthly, monthly -- I meant monthly -- what I meant was spread across the 4 quarters adjusting for seasonality?

Yes, yes, yes.

We'll take our next question from the line of Ankit from Subhkam.

Akash, just a follow-up. Since last 3, 4 years, our sales per square feet had been coming down. Now we are expecting a bottom in that and also expecting the sales per square feet to again go through that first INR 800 and then INR 1,000. So what I want from you is that if you can highlight a few reasons that what went wrong and what were the reasons for this fall? And from those, what have you learned from the strength and how -- what corrective measures you are taking, which will help to take the sales per square feet as an upward trajectory?

So if I start listing down the reasons, I think it is going to take a long time. So I would just give you the 2, 3 biggest factors that I think led to decrease in the post COVID sales. So I would say first was earlier when we were achieving those numbers, there were a lot of cities where we were the only retailer present in that market or 1 of the 2 retailers that were present market. And when you look at it now, I don't think we even have like 2 stores, where we are the only 1 or we are 1 of the 2 retailers. So one is, obviously, the competition intensity, which changed drastically over the last 4 years, which is again coming down a little. And second, we also made a few wrong decisions where we started focusing on increasing our ASPs, and we started promoting more premium and super premium products, which we have already reversed, and we've seen a very good result of that, and we've seen a very positive impact of that. And ultimately, it all comes down to the product. So I think earlier without doing any differentiation also, we were able to get good sales because our competitors were not that strong, and there were not as many competitors as there are today, and the customers didn't have that many options. But now if we work on our product and assortment, I think we can easily -- the first target is to get INR 750 to INR 800, then slowly, gradually in the next 2 to 3 years, get to that INR 1,000 per square feet sales number.

No, Akash, in lot many earlier conference calls also, you mentioned that there are no entry barriers in our business. And the competition can come any time, and we have to be ready for that. So what I need to understand is that, okay, last few quarters was impacted by the COVID. But if you are expecting things to normalize in the coming quarters, we can see the competitors becoming aggressive again. So in that backdrop, how we have invested be rest assured that in spite of a higher competition, you people, what are you doing differently now that in spite of a higher competition, you'll be able to achieve your targets of high sales per square feet.

So typically, what we were doing till now was just a commodity business. We were just buying what the vendors were waiting for us and selling it. So we were just trading, basically. So now we have shifted that focus into creating a brand where entry barriers are less today because they can approach the same vendors and sell the same stuff. But ultimately, if I start my product development and I start selling exclusive designs, then there are entry barriers, right? Otherwise, even someone like Zara, they can get a competition any day. But Zara consumers know what they get in Zara, they don't get anywhere else. So that's why I said, it's all about competition. Now our complete focus is on product. So we want to offer such an assortment where anyone who enters the market and buys from the vendors and sells it cannot compete with us. And if they have a store next to us, we are at least 30% to 40% higher in terms of per square feet sales and profitability from them.

So for -- so to achieve this, your backward integration will help you? So by a design team will help you?

The backward integration will help product development. Backward integration definitely helps us with getting the product faster and getting the product cheaper. But what I told you, so backward integration contributes only 10% of the business right now. But when I talk about product development, I want product development to contribute 100% to the business. So product development is all about designs, assortment, colors, trends, accessories and new techniques. So whatever a good brand might be selling at INR 1,200, we want to sell the same thing at INR 300 or INR 400. So that is the target. So basically, we want to make fashion affordable to everyone in India. And because of urbanization, globalization and penetration of the Internet, people are getting more fashion conscious, and everybody wants to look good. So we want to destroy the mix that to look good, you need to spend a lot of money. So that's what we stand for, and that's what we're working towards because I don't think anyone in the industry works on a multiple of 1.65. I'm talking about a cost to MRP multiples. All the brands work for -- from a multiple of 2.5 to maybe 5. So we want to tell the customer that what you buy from a brand at 5x, you can buy the same stuff from us at 1.7x. So we want to do a volume business. We want to replicate what PRIMA has done in Europe. So that's the plan.

So basically, our -- the share of your private labels will increase the loss going forward, right?

Yes. So the plan is...

So what is it correctly?

Within 5 years, private label should contribute 100% of the sales.

What is it currently?

Currently, it's 30%. Because during COVID, we couldn't give a lot of planned orders. So that's why it came down a little. But I think in FY '22, it will again be back to at least 40% to 50%.

So just for my understanding, the increase in private label would be the key reason for a higher sales per square feet. Is it the right way to understand for me?

No. I don't think private label contribution actually contributes to higher per square feet sales. It doesn't matter. It's all about the product. So if you make a bad product in the private label, so that doesn't actually help you get better sales. And if you have a very good product that's not in your private label, so that will give you a higher sale. So private label is just to actually create that loyalty to a brand maybe and get the customer to relate to your brand better, but private label doesn't lead to higher per square feet sales or anything. It's the product, no matter which label. And obviously, going forward, when we focus on a private label, we start marketing, then we will start getting some organic sales on the private label, and we'll get some loyal customers. So that will really help us.

Sorry to harp on the same question, Akash. But just the 1 thing which I can understand is how are you going to differentiate it from others? I mean, the product development was always there in your company. So what differently you are doing this time? That's the only thing I need to understand.

So product development team, we have assembled the team, I think, 7 months back. So -- and it takes a lot of time because it's a completely new, you can say, it's also a new business altogether because we were buying the designs from our vendors earlier and now creating those designs, aligning the designer's thoughts to our customers' requirements. So I think private label contribution, as I told you -- sorry, product development contribution right now is only 12% to 13%. So just imagine, if you are getting better sales in those 12% to 30% articles, if we increase that contribution to 30%, 40%, 50%, that will have a wonders effect on the sales. So that's what I meant when -- so basically when our own designs contribute to about 50% of our sales, we'll be able to achieve the numbers that I'm talking about.

We'll take our next question from V.P. Rajesh from Banyan Capital.

Yes. Akash, I just wanted to confirm some of the numbers I heard. So for fiscal year '22, you are saying that you will do at least INR 750 per square foot per month. And about -- you'll start the year with 90 stores and you will have -- each store is around 12,000 square feet, right? So if I do the math, you will be north of INR 1,000 crores in revenue next year just from the current stores that you will start the year with. And plus you will expand by about 20%, as you said. Is that -- are those numbers correct?

Yes. So it all depends on when the stores open, but we will end this year at 10 lakh square feet. So 10 lakh square feet that gives a monthly average sale of INR 75 crores. So INR 75 crores annually, I don't think it's a INR 1,000 crore then. So I think there's something wrong with the calculation.

No. INR 75 crores in 12 will give you around INR 950 crores, let's say.

INR 900 crores.

Or INR 900 crores, right, yes. So but with the new -- what I'm saying is with the new stores as well, you will then potentially looking at a INR 1,000 crore of revenues in the calendar -- financial year '22?

Yes, that's right. Because you earlier said INR 1,000 crores from old store and then growth of 20%.

Yes. No, I was using -- yes, no, I was using 12,000 square foot per store, but maybe that number is a little off. But that's wonderful. So at 9% EBITDA margin on INR 1,000 crores, you'll be looking at INR 90-plus crore of EBITDA, right? So that's fantastic.

Yes.

Our next question is from the line of Pankaj Kumar, an individual investor.

My first question is this INR 1,000 crores roughly sales what we are looking for the next year, this is all through off-line? Or this includes online also?

So I think the INR 1,000 crore number is our target, including offline and online. As I said, online is still a very new territory for us, and we don't want to burn a lot of cash there. So we're still learning and experimenting. So we feel that we are able to build a very robust model where we are making a profitable online business. So maybe we'll increase the spend and get a higher sales there. But this INR 1,000 crores includes everything. It's a consolidated number.

I appreciate that. Going forward, what are your thoughts? Where is the market moving? Is the market moving towards online? Or it is just a passing phase and people will still continue to come to stores and buy -- do the buying?

So I think U.S. and China are the 2 most developed retail markets. And there also, online sales still only contribute, I think, 25% of the total sales. So I think off-line retail is always going to be there. And especially in the towns that we operate in because coming to a store is a whole experience for Tier 2, Tier 3 town people because that AC and there's -- it's like a shopping mall for them. So I think that's always going to be there, but we don't want to miss out on customers who want convenience and ease of deliveries at their doorsteps. So I think we want to cater to all customers because there's always going to be a mix of both customers who are comfortable buying online, who are comfortable buying offline and/or go omnichannel, who come to the store, get it delivered at the home or vice versa. So I think we want to be present both online and offline. And I read a research report also like brands who will be present online and off-line, both will always have a much better advantage than brands who are just off-line or who are just online. So there is no one path to take. I think you need to be present on both channels.

Okay. That brings me to my last part of the question. Now just to quote one example, like Reliance Retail is there with deep pockets and with JioMart. And from groceries, they have moved to this clothings also. Their participation in clothes sales is in very few stores as of now. But 1 year down the line, we see there would be many, many more stores and online sales with Facebook and WhatsApp and whatnot, what is your strategy to counter them?

So I think our strategy is not to focus on the competition much. Our strategy is always to focus on ourself because competition is always going to be there. So it's like if Reliance entered the industry, it doesn't mean that it wipes out the complete industry. So our focus is to be stronger. And our focus is to execute all the plans we have and get the best assortment available to the consumer at the best possible time and in the shortest possible time. So I think if we are able to achieve that, like even, like, whoever enters the market, we'll always have our own identity and have our own space. So there's nothing to worry about. Because as I said, the market is huge and it can easily accommodate a lot of big players.

I agree with you there. But then, it's a David versus Goliath fight. They have deep pockets, they can fight the competition for long. They can underprice the product. So your strategy on this part?

I don't really have an answer to that because I'll give you an example. Like, Zara is a 60-year-old brand, and Primark opened its stores, maybe 15, but Primark is doing better than Zara in a lot of cities now. And Zara had a much deeper pocket than Primark. So it's not just about deep pocket. It's about your brand, your execution, how you run the business, your operations, your supply chain. So don't think if anyone has a deep pocket and it's entering the same industry, we should think about that so much. We are strong on ourselves, and we have a good customer base because, like, Airtel is still surviving after Reliance entered with Jio, right? So they have their own market share.

As there are no further questions from the participants, I would now like to hand the floor back to Mr. Akash Agarwal for closing comments.

Thank you, everyone, for joining on our call. We hope we have been able to answer your queries. Stay safe. For any further information, we request you to get in touch with Marathon Capital, our Investor Relations adviser. Thank you.

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