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Ladies and gentlemen, good day and welcome to Arvind Fashions Limited Q1 FY '22 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Ankit Arora, Head of Investor Relations and Treasury. Thank you. And over to you, sir.
Thanks, Ed. Hello. Welcome, everyone, and thank you for joining us on Arvind Fashions Limited earnings conference call for the first quarter ended June 30, 2021. I'm joined here today by Kulin Lalbhai, Non-Executive Director; Shailesh Chaturvedi, Managing Director and CEO; and Pramod Gupta, Chief Financial Officer of Arvind Fashions Limited. Please note that results, press release and earnings presentation have been mailed across to you earlier, and these shall also be available on our website www.arvindfashions.com. I hope you had the opportunity to browse through the highlights of the performance. We'll commence the call with Kulin providing his key thoughts about our strategy and financial performance for the quarter ended 30th June 2021. He will be followed by Shailesh, who will share his insights into our business performance and key priorities for us going ahead. At the end of the management discussion, we will have a Q&A session. Before we start, I would like to remind you that some of the statements made or discussed on this call today may be forward-looking in nature and must be viewed in conjunction with risks and uncertainties we face. A detailed statement of these risks is available in this quarter's earnings presentation. The company does not undertake to update these forward-looking statements publicly. With that said, I will now turn the call over to Kulin to share his views. Thank you, and over to you, Kulin.
Thanks, Ankit. A very good evening to you all. Thank you for joining us for our Q1 results.The last quarter has been a very challenging one due to the severity of the second COVID wave. The quarter saw widespread lockdowns and also was very challenging on the health front. We, as a company, did all that we could to ensure the safety of our employees through this difficult period. While the second wave was much bigger than the first wave, our business has been much more resilient and has performed far better this time around. This has been possible due to the corrections we have made the year before, strong cost measures that we have been able to bring in, the scale of our digital sales as well as the strength of our portfolio of brands. Sales for the quarter were significantly higher than the comparable quarter last year with more than 340% year-on-year growth. The reported EBITDA is better than the previous year even though we have booked lower future rental savings this year. Quarter 1 FY '21 included a INR 26 crore rental savings for [ whole ] future quarters. As against this, future rental savings considered in quarter 1 FY '22 is only INR 6 crores. Adjusted for that, the underlying improvement in the bottom line of the business is better than quarter 1 FY '21 by close to INR 30 crores.This quarter saw much stronger off-line sales compared to last year. The off-line recovery compared to pre-COVID stands at 30% vis-à-vis 5% in quarter 1 of last year. Sales growth was further driven by the online channel, which grew 4x year-on-year. Digital sales accounted for more than 60% of the total sales for quarter 1. This large sale of online revenues was made possible by the strong consumer pull of our brands on the digital platform; our rapidly scaling direct-to-consumer strategy; and the category expansion into new categories like comfort wear, footwear and women's wear. Our efforts on digital transformation should continue to bear fruit and ensure that our business is less vulnerable to demand shocks in the off-line side of the business.The overall recovery is gathering momentum, and the recovery was nearly 80% in July of this year, July '21. We expect business performance to significantly improve moving forward and expect our EBITDA post rental to be positive in quarter 2. Over the past few years, we had made significant progress in reducing the losses of our value format Unlimited. However, we faced the challenge of scaling up the business to create long-term value. In order to best realize value for our shareholders, we have decided to exit the value retail business by selling the Unlimited retail network to V-Mart. Through this transaction, we will realize 100% of the net asset value of the network, which includes the store fixtures and the inventory. Most of this value will be realized upfront for a cash consideration of close to INR 150 crores. We also expect to earn an additional INR 30 crores to INR 40 crores through an earn-out based on performance of the retail stores over the next few years. This transaction allows us to exit the value business in an orderly fashion and will lead to a reduction in overall debt and losses. We are very happy to have found the right home for the business as well as the employees that are a part of it.With this transaction, we have almost completed the strategic reset that we set out to achieve over the past 18 months. We expect the GAP business to fully transition out in quarter 2. While we cannot fully size the exit cost, we expect quarter 2 losses on the GAP business and overall discontinued businesses to be slightly lower than that of quarter 1. From quarter 3 onwards, no further losses will be reported under discontinued operations. A lot of efforts have gone into reducing cost this quarter. Our overall fixed costs were reduced by INR 70 crores compared to a comparable pre-COVID quarter. This large reduction in fixed cost has come from reduction in rental, optimizing supply chain costs and significantly reducing overhead and store running costs. The rental costs were reduced in line with the fall in sales, and we expect some savings on rentals in quarter 2 and quarter 3 as well. This cost focus has allowed us to minimize our cash losses for the quarter. With the exit from Unlimited, the cost base itself will be lower going forward, and we will continue to drive structural savings on the retained cost base of the business.In spite of a large drop in sales, we were able to manage our working capital efficiency and reduce gross working capital by over INR 30 crores as compared to March '21. We have been able to keep our inwards in line with the lower sales so that the overall working capital remains balanced as we move into quarter 2. As we enter the autumn/winter season, the fresh inwards will significantly enhance the overall freshness and support the business growth and better productivity. We continue to reduce our leverage quarter-on-quarter, and the gross debt at the end of quarter 1 stands at INR 913 crores. We have the following priorities for the current year: exit all noncore businesses by H1 of the current year, significantly scale up the focus brands through better productivity and by opening more than 150 stores for the year, continue a strong momentum on the digital side and exit the year with INR 1,000 crore annual run rate on digital sales, optimize inventory turns and freshness and take the overall inventory turns to greater than 4x, achieve a much stronger profitability in the second half of this year. We hope to achieve these milestones as long as we do not have a very large impact from any potential third wave in the future. With a focused portfolio of market-leading profitable brands, strong growth levers in both online and off-line channels, the exit of loss-making businesses, the leaner cost structure and a healthier and fresher inventory, we expect the business to see much better performance going forward. I would like to now hand it over to Shailesh Chaturvedi to talk about the brand level highlights, market recovery and plans moving forward.
Thanks, Kulin. Good evening, everyone. Shailesh here.While quarter 1 has been a COVID-impacted quarter, I'm happy to share that recovery has been faster post unlock this time around with nearly 2x recovery than last year. So for example, if a channel in a particular month last year had x percentage recovery, that recovery is 2x percentage. So if it was 30%, then it becomes 60%. So this time, recovery is much faster and double the percentage of last year. In July, we saw business recovery of 80%, and in power brands, this recovery was 90%. We are hoping that by September, right in time for festival season, recovery could be inching towards the near normal mark. Just to add that this recovery of 90% in power brands has been done without Maharashtra malls, Bombay and Pune malls opening. Once they open, we hope to reach near-normal mark very soon.We are encouraged by the fact that our power brands portfolio is very suitable -- very suitably placed for post-COVID work-from-home time where consumers are preferring our brands that have casual and relaxed appeal. But even onset of COVID wave 2 and subsequent lockdown required a focused work on cost control and cash flow management, our team did a fantastic job on inventory control, which otherwise tends to swell during such lockdown with very low revenues. We had built in sharper process on inventory buys last year, and that playbook came in handy in our response to second wave this year. We reduced inwards of inventory in line with reduced sales so that the inventory levels at end June were only marginally higher as compared to March '21 end, and they were sharply lower than June '20 by over INR 300 crores.Continuing our stronger focus on collections from the market, during this quarter, our debtors reduced by INR 77 crores over March '21. With inventory control and debtors management, our gross working capital reduced by INR 32 crores compared to March '21 even though there was a large drop in sales. Hence, our debt levels continue to show a declining trend as we have seen in last several quarters. Kulin did mention that we have been very focused on cost control, and the cost base itself will be lower going forward. At the channel level, I will also add that here that with the receipt of final call of rights issue of INR 94 crores in this quarter and with reduction in GWC of INR 32 crores, we've been able to fund COVID [ time ] losses in this quarter. At the channel level, we saw online scale up over 4x business over last year quarter 1, and it was 60% higher than the normal quarter, which was the quarter 1 of FY '20. This impressive growth in digital business has been enabled by strengthening of several capabilities at the back end. We connected additional 100-plus stores with only [ tech pack ], and now we have nearly 600 omni-enabled stores across the country. This has resulted in contribution of omnichannel increasing to mid-teens of store sales in this quarter.We also increased the number of D2C warehouses, helping us fulfill marketplace orders efficiently and quickly. In order to [ spend in ] marketplace business, we are now connected with all major portals, and that has significantly helped grow this business. We continue to support online business with several merchandise assortments that are exclusively made for online. Going forward, we wish to build further on our leadership position in online business and enable channel to drive growth and profitability significantly. Just to add a point, we increased this quarter revenue by additional INR 250 crores. Out of that additional INR 250 crores, we got INR 150 crores additional from the online channel. So a significant part of the growth has come through online channels. Overall, July saw 80% recovery in business with 90% recovery in our power brands. We are awaiting further opening in Maharashtra and Kerala, which is expected to drive higher recovery. With faster recovery this time, we are moving towards post rental EBITDA breakeven in Q2 with 6 high conviction brands.With divestment of Unlimited retail business, our focus on 6 high conviction brands is getting sharpened further. Our strategy is to unlock the full potential of these brands and drive profitable growth moving forward. With rapid recovery seen in market this time, we expect rest of the quarter to deliver healthy profitability, except for a fear of any potential third wave. With improvement in momentum in quarter 2 and the festival season thereafter, we look forward to significantly improve sales and profitability during H2 of this year FY '22. With that, we conclude our opening remarks and make it open for the questions.
[Operator Instructions] First question is from the line of Akshay Satija from Alpha Invesco.
Congratulations on a great set of numbers. Sir, what would be a release from the Unlimited business in terms of capital employed?
We have a visibility that we'll get close to INR 150 crore from sale of Unlimited, and this should happen until by early September.
Okay. And approximately, what capital employed would be released from GAP business? And how do we plan to use these funds? Will we be repaying our debt? Or will this be going into further growth expansion?
As far as GAP is concerned, we will plan our activities for quarter 2. So I'll -- we will wait, and we can confirm the exact details of the capital that will get released in quarter 2 in GAP, but Unlimited would be INR 150 crores of capital release.
So that would go towards debt reduction or further expansion?
Yes. I mean, surely, significant part of that will be to reduce our debt further, and part of that will be for funding of the growth.
Also, if you could give an approximate number in terms of GAP. Maybe what amount of capital employed is currently stuck in GAP? And we understand the number could be 20%, 30% here and there.
Can I take this question?
Yes.
Yes. So the total capital employed is about INR 70 crores, and we expect a good amount of that getting released in Q2 itself.
Okay. Okay. Sir, final question. If you could help us, what was the number of owned stores versus franchise? And how much of them were making money pre-COVID level? How much were loss-making stores and how much were making money pre-COVID?
See, in the wave first last year, we had corrected our store network very, very sharply, and most of the loss-making stores were already shut down last year. That cleaned up our base this year. We didn't need to close down too many stores. And if I remember, almost a small number, between 30 to 40 stores, is what we plan, which also happens on a regular basis in our life. So the number of stores that we shut down now was less. And our understanding is that post-COVID with the normalcy restoring, most of our store network will be profitable.
Okay. And how much would be our owned stores versus franchise? Yes, it's the same question. Yes, just asking what was the number of owned stores versus franchise?
See, our network is largely franchise network. And this year, expansion of close to 150 stores, most of them, I would say more than 130 stores, would be franchisee stores. So our network is becoming more and more franchise-led network, and it's an asset-light model. So Pramod, do you have an exact number? Somebody has an exact number on...
No, I don't have the exact number. We can take this question back and then [ pick and revert back to you ].
Yes. But I can tell you that our own -- our store network is largely franchisee-led and going forward will be -- I can use the word entirely franchisee-led. Like 95% of our store opening will be franchisee-led.
Next question is from the line of Nishit Rathi from CWC.
So as you mentioned, Q1 is generally when we see higher purchases before the festival, and this is second time in a row that we've pushed out our purchases. So just 2 questions on that. Does this in any way affect our ability to grow once the demand is back? And how does this affect our terms of trade with the vendors when things come back to normal? Would love to get your thoughts on that. I have a couple of follow-ups after that.
We are -- as we stand today, July, our goods were as per our plan what we wanted to bring in into our system and send to the market. So we are now on track after all the modification and improvisation we did in the inventory for quarter 1 COVID time. And for this quarter, I don't anticipate any issue with our ability to service the inventory to the market. We are extremely well poised on that, and we will be able to fill orders in time for the season ahead.
No. So Shailesh, the question here is we were doing things a little differently, let's say, 2 years back, and you're saying that we have changed the way we are doing it. So does that mean that going forward, we are going to become more just in time in terms of doing it? And -- or is there something else or it's older inventory that was stocked up that we're able to supply? I'm just trying to understand that, right?
So there are 2 parts to your question. One is on the discipline on how inventory is built, and second thing is on the response time agility, that's what you used, right, just in time. So what we did is that we -- in the last year in our playbook, we tightened the discipline, and we ensured that we were bringing it at the right time in the right quantities. So there are internal check and balance and discipline. Also, we played safe with the MBO channel because that channel used to throw up a lot of surprises on inventory because that's where the inventory is to get sort of left over our payment. So we reduced our reliance on the MBO channel. So all that brought in -- internal check and balances, the MBO -- less reliance on MBO channel, that brought in a lot of discipline in the way we buy. And that's a structural discipline that will help us going forward as long as we maintain and improve upon that. Second part is on the agility side. So we do a very large volume of production, and we have a partnership with back end with a lot of good vendors in India. And then we work with them on many methods to reduce the lead time with our production, and we will be able to get goods on time in season because of the reduced lead time that we are working on currently.
Sorry, just to follow up on that. So let's say if historically you used to do 2 drops, 3 drops a year, are you saying that you have reduced your order quantity and you will do multiple drops? You will do maybe 4, 5 drops? Is that a way the new supply chain is kind of geared up? Is my understanding correct? Or is that right?
Yes. So one thing is we bring in the goods right in time for the season launch. What is early in the season, we call it, drop 0. And then we have multiple drops or the collections coming every 2 months into the market that happens. And we are working with the vendors so that the lead time required for producing these goods in different multiple [ cuts ] also is reduced. Also, we are a leader, as Arvind as a group, on the flexible manufacturing. And there are a lot of new techniques of flexible manufacturing like digital printing or dry method of doing finishing on denim on 5-pocket jeans. So we have invested a lot on the flexible manufacturing where the lead times could be as low as 30 days what is a traditional 90 days to 100 days lead time. So there's a lot happening at the back end to be more agile and flexible.
That was very helpful. The second question is, look, if I understand it right, almost INR 60 crores of your sales in this quarter was D2C sales, right? So I just want to know what is driving the D2C sales? Is it because the stores are shut, you are getting more D2 sales from brands like U.S. Polo, which any which ways have very strong demand? Or is it primarily driven by brands like Flying Machine, which are -- Flying Machine and smaller brands, which are bound to be more online and which you intend to make it more online? So I would love to get some color there.
See, the online traction that we have seen is across the brands. It is definitely in U.S. Polo, surely in Flying Machine when we got into the special relationship with the Flipkart Group. It's in Tommy Hilfiger, Calvin Klein, across brands. Arrow online business has picked up in this quarter. So it is not specific to a brand. It's an overall drive. We are a leader in online business in the country. Our current rate is going to be INR 1,000 crore annual business going forward. So we have a large business, which is spread across all brands. And it is not just because of the COVID. And I mentioned that we have built a lot of capabilities at the back end to support our brands right from linking more stores. And those stores, 100-odd stores, that we've added now in this quarter are spread across all our brands, from Flying Machine to U.S. Polo to Arrow to every other brand.Also, we've linked up with portals like Myntra and the Ajio and the Amazon, and we are doing very large business with them. Our own website, NNNOW, is growing well. We have a lot of repeat customers in NNNOW.com. So through that and through other marketplaces, we are able to reach many customers. We've increased the inventory levels in our marketplace model so that we can service more, we can give a larger assortment to our customers. So if you really see the whole retailing of business on online through our own NNNOW.com and also through the marketplaces through all the portals and we also -- all that has gone up. And we have higher number of D2C warehouses so that we can fulfill faster, more efficiently.So it is a strategic and very structural capabilities that we are building that will help us even post-COVID. So for example, we mentioned that our omni business in this quarter was in mid-teens of the store business. So the entire store team is now getting used to servicing an omni order from the stores. So there are a lot of these structural changes that have happened that will help us to continue to grow on our leadership position in the digital and a large size of almost INR 1,000 crore plus even as the market recovers fully in the time beyond COVID. Kulin, you want to...
Yes, I just -- yes, I'll just come in here. Nishit, see, we are -- if you kind of [ distill ] this, there are 3 broad transformations that are going on in the digital strategy. One transformation is that this business used to be an old goods selling business, what you call [ OSM ], which used to be sold on discount largely online. The new model is to actually create products which are attuned to online, and they have much better sell-throughs, lower discounting and a much better cash conversion cycle. So one big transformation going on is that the business is moving from what used to be the old goods to what we call specially made units. So units made for the online channel with deep analytics and flexible supply chain. So that is one transformation going on.The second transformation is that this used to be a wholesale business where you used to sell it [ 2 quarters ] and then forget. And it's moving to a retail business, which is both our own .com, NNNOW.com, and what we call the marketplace model where we set up the listing and control the pricing, promotion and delivery of the products that we sell on third-party marketplaces like Myntra, Flipkart and Ajio. So in a sense, we are building muscle as a company to do direct retailing, and that is very powerful because you get customer connect. You get to control the quality and the way in which our product is sold. So we are every -- as we go on, right now it's in the mid-30s, but we expect our direct retailing to keep increasing, and that will make the business even more robust. And the third transformation is how do stores not just remain physical stores, but we digitize our stores. So as Shailesh was saying, we're in the mid-teens as the online contribution to store revenue. But as we keep connecting more and more marketplaces and building more and more omnichannel journeys, I think the store will also keep enabling the digital sales more and more. So I think these are all 3 of the transformations are at work, and that is why the online business is scaling up the way we are seeing.
Next question is from the line of Vaishnavi Mandhaniya from Anand Rathi.
What is our net debt as of the first quarter?
Pramod, do you want to take that?
We talked about -- Shailesh actually talked about this. Our debt is INR 913 crores at the end of first quarter.
This is the gross debt number?
Yes, gross debt. Net debt will be around INR 20 crores less than that. So it will be around INR 900 crores.
Okay. Got it. Also, on the online channel, right, in terms of the current run rate, right, that we have, what exactly is the profitability of the channel? And what exactly is our current run rate of quarterly sales in terms of online? And how do we see this moving forward with probably like stores opening up and off-line also picking up in the rest of the year?
Yes. So if you look at this quarter, we did nearly INR 200 crores online business in quarter 1. And even online business was impacted in the second half of April, and only in the first week of May, they started going back to the normal business in online. So this business also would have been slightly higher if online was not also impacted by the COVID lockdown and warehousing, et cetera. So this is our current rate. The way our order flow is currently, we are at a INR 1,000 crore annual run rate, and the growth is growing faster. And I told you that this quarter, we added INR 250 crore delta revenue for the company over last year same quarter. Out of that delta INR 250 crores, online delivered a delta of INR 150 crore [ what was ] the business in online was last year same quarter. So a large part of that growth has come from online channels.Now a lot of capabilities that we mentioned and then Kulin just recently just mentioned in the previous question, a lot of these capabilities are going forward. And our brands are also very suitably placed for the online business, all casual-ish, relaxed feel brands at different price points from Flying Machine, which is value to Calvin Klein is super premium, right? So we have brands of casual appeal at different price points and different product categories, and those categories are doing better on online channel for the kind of consumers who are coming and shopping there. So we are quite bullish. We are feeling that the business will continue to grow at a very good rate going forward, and even the profitability of this business is fairly good.
Actually, just coming in here, the profitability of the online channel is actually higher than that of the retail channel. It's historically been one of the most profitable channels. So it's kind of a strong profitability.
Next question is from the line of Dhruv Shah from Ambika Fincap.
Yes. This is Nishid Shah. My question is overall company's direction. If you look at the 2 categories which are relatively large in India, one is the innerwear category, the companies with significantly larger operations like Page Industries and all. What is our strategy in this area?
Yes, as far as the innerwear business is concerned, 2 years back, we put investment behind that business and set up a separate unit, separate team, dedicated team for innerwear. And that business has really scaled up both online and through the multi-brand innerwear store. We do that business largely with U.S. Polo, which is a very strong brand with that. And we've added in that, along with the innerwear, we've added some [ youth wear ], loungewear recently, which has also received very good feedback both off-line and online. Our plan now is to keep adding new categories on the innerwear. Also, we will going forward add innerwear in other brands.For example, Flying Machine. There is a requirement from the online, because it's a very online-first brand, to add innerwear to the Flying Machine also. In addition, we do very successful innerwear business in Calvin Klein. And if you see who's who of India, all the celebrities wear Calvin Klein innerwear, and they are the -- CK is one of strongest innerwear brand in the world. In addition, we have innerwear brand in Tommy Hilfiger also. So slowly, slowly, we'll see our innerwear portfolio is -- CK at the top end, Calvin -- Tommy below that, U.S. Polo is the largest innerwear business for us. There is a plan to add innerwear categories in Flying Machine. So overall, we will have a very large innerwear business in our brands.
Yes. And what about the beauty and fashion? You would have seen one of the companies going private -- public recently has got a valuation of more than INR 30,000 crores. And you have a tie-up with one of the best in the world brand platforms yet we are not able to capitalize on it. So could you elaborate what is our plan on this?
If I can come in here, see, on Sephora, one thing -- it is a very, very exciting format. I think there is no question about it. It's one of the world's most successful luxury cosmetic players. And in the Indian context also, the franchise has been very, very successful. The one thing, though, that one has to understand is that it is a super premium kind of price point and positioning where the average ASPs of the products are typically above INR 2,500. So there is a certain, of course, market for that product, and it is rapidly growing.So we are excited to be able to scale up that business. In fact, on the retail side, the productivity of Sephora in any mall that you will see Sephora is in by far the highest. We have a measure called PSFPD, which is the sales per square foot per day. And Sephora sets the benchmark of productivity in the country. But because of the mix, there is a certain set of malls in India which can't support the format of Sephora. And as the affluence goes up, we believe we will be able to keep opening more and more stores. So this year, we will open more than 6, 7 stores of Sephora. Even in the first quarter, the Sephora stores have really bounced back extremely well. So I think as far as physical retail is concerned, it's a very, very successful format, but it is going to be growing in line with the distribution. Now coming to online. Definitely, we see the opportunity to be bigger. Again, here, the price points are different. You mentioned another player. But in a sense, this -- Sephora plays in a slightly higher part of -- the prestige part of the market. And within that, we are definitely scaling up our digital presence significantly. We have been consistently growing, and we are going to -- what the lever for us there is to keep expanding the offering. In the next 12 to 18 months, there are more than 12 brands which we will be launching, exclusive luxury brands which will be coming into the country.So as the offering keeps growing, it will help us bring a step change. And also, we are working with the global team to see if we can bring in the Sephora store front on the digital side as well. Globally, it has done very well. We have to work to bring that alignment into India and to capitalize on that. So I think the opportunity for Sephora is exciting. We have to work within the segment that Sephora is in and really capitalize on it. So we are working with the partners to ensure that in the rapidly changing environment, Sephora continues to have its pride of place in the customer's mind.
Next question is from the line of Devanshu Bansal from Emkay Global Financial Services.
So online has seen robust traction for us. So just wanted to check if you could provide profitability comparison versus last year for this channel be it in terms of quantitative or qualitative terms. This is basically to understand whether the new D2C and own website initiatives that we are doing are helping us on the profitability front.
I can take that. As I mentioned, overall, profitability in digital is higher than that of physical. And between last year and this year, actually, the profitability is holding up. In fact, for our own .com also, it is a positive unit economic model with a healthy unit economics as we speak. And the wholesale part of it, obviously, is -- has always been strong on unit economics. So there is no deterioration in the channel level profitability in online between last year and this year.
Okay. Secondly, you indicated D2C own website is gaining traction and currently, if I heard it correctly, 30% of online sales. What is the steady state mix between B2B and D2C sales that you foresee down the line?
So just a little clarification. When we are saying direct to consumer, we are meaning it more direct to retail, which is our own .com, plus what we call marketplace where we control the sales process on even third party. So that put together is in the 30s. Right now, it looks like it will remain in this range for some time. As the market evolves, it is really tough to say whether direct to retail can significantly go up from this. But we are going to play both sides, the wholesale side and the direct retailing side, and ensure that both are maximized. And as the market evolves, we will be able to see how the split will change.
Sure. Lastly, any benefits out of preponement of end of season sales at major platforms like Myntra during this quarter?
Shailesh, you want to take that?
Yes. Yes. So if you really look at [ ERS ] and the events, they were a little later this year than last year. Almost -- typically, this was -- this year was in early July versus typically happens in June mid. So the big event in online world were later this year, and that's a call of the online portal, right? How -- but since the lot of places reopening has not happened, so they wanted to give some time and then they did it later. And we participate with the portal events because they pull in the customer. They do the marketing event. And we sort of work with them and partner them to get benefit from the traffic that they bring in through these special events. So it's not a -- it wasn't early this year. It was a couple of weeks behind, and that's something online players decide on their own. [ Our digital ] stores and the malls, et cetera, also the [ ESS ] calendar this year was slightly later than normal.
So the benefit should -- we should see a benefit of this in Q2 as well because of postponement of the sales? Or the B2B sales have already happened for [ these events ]?
So see, the discounted sale or the end-of-season sale happened in July this year, and the big days also happened. So we got the online business filling in June and in July, and this year -- this quarter results will cover and that's for the plan. There's no major change of the quarterly profitability as we speak.
Next question is from the line of Sagar Parekh from Deep Financial.
Firstly, with this Unlimited sale, what is the fixed cost base that will go away from our books?
Pramod, do you want to take that?
One second. The fixed cost base of Unlimited, I think if I'm not wrong, is around INR 100-odd crores, right?
I think the way to look at it, Pramod, should be to look at what kind of PBT losses on average go away. And of course, last year was a COVID-impacted year where, I think, the PBT losses of Unlimited were high at around INR 80 crores, INR 90 crores. But in even a normal year since the business had interest cost depreciation and was getting close to EBITDA breakeven, I think one can say that around INR 50 crores, INR 60 crores of the bottom line with -- would go away.
At PBT level, INR 50 crore, INR 60 crore hit in a normal year.
Yes, in a normal year.
Assuming EBITDA breakeven. So that was, I think, happening at around INR 650 crore kind of top line number at which you were possibly doing [ slightly lower ].
No, I think we had significantly reduced the breakeven point. So at a much lower revenue, we were breakeven. In fact, the second part of last year also we were broadly breakeven at a much, much lower revenue point. So you can take around INR 50 crores as a rate that would have gone away.
And my second question would be, what would be -- so now with the new -- everything -- all restructuring done, what would be the breakeven point for us now going forward? So in another way, what would be the fixed cost base for us going for the existing brands, continuing brands?
I think as of now, around INR 600-odd crore of revenues would be able [ to breakeven ].
Quarterly?
INR 600 crores per quarter, yes.
Sure. Okay. And any -- INR 600 crore, right?
Yes, between INR 600 crores to INR 700 crores depending on whether it's an [ ESS ] quarter or normal quarter.
Got it. And any plans for debt reduction in the current financial year? Or we should be broadly similar?
See, from the proceeds from the Unlimited, around INR 150 crores. A decent amount of that should go to reduce the debt further.
Okay. And so that is assuming that there would be -- the recovery happens. So if there is like a third wave and further lockdowns, then it could possibly go into loss funding as well, right? So...
See, if there's a third wave, then the whole calculation will change, right? I mean then focus will be on managing the wave than on debt reduction. But in case there is no third wave or it's not like a strong third wave, then we anticipate reduction in debt further...
Okay. So about INR 120 crore, INR 130 crore is the reasonable debt reduction estimate for -- by the end of...
And out of that INR 150 crore -- a good amount of that INR 150 crore should go into debt reduction if there's no third wave.
Okay. And for FY '22, do we still anticipate like cash profits from the internal accruals like to happen? Or it will possibly happen in FY '23 now?
You have to break it up between H1 and H2. I mean, as you know, Q1 is already there -- out there. And as we said, that our Q2 will be EBITDA positive and [ like will ] further improve from Q2 to H2. So we are pretty positive about what we should be able to do in H2, barring wave 3 with -- yes. But that's where I think we are. We should be looking at a much softer profitability next 2 -- after -- and Q2 [ sales and EBITDA breakeven ].
Okay. And working capital is sustainable at the current level, absolute number? Or with the sales growth, working capital absolute number should also increase?
I think the way to look at is to...
See, Pramod, on working capital, on the inventory side, we are on a major drive for improving our stock turns. So we have gone from -- this year, our budget is close to 4. And in the second half of the year, we should be reaching and crossing that mark. And our efforts would be to look at moving towards stock turn of 5 in the next year. And there's a lot of strategic action happening, and we -- as we do, we'll share it. Right now, we don't want to talk about future too much. But our entire focus -- and we are committed to take our stock turns to 5 for the next year. Now when you reach -- just imagine a situation where your stock turns are reaching 5 and you have -- let's say, assume no COVID very likely, and we have removed a large amount of loss-making businesses, so the result [indiscernible] 6 high conviction brands are throwing up decent amount of cash.So the cash coming from operation, stock turn going from 4 and then to potentially to 5, then you'll see that our ability to get cash out of our business will increase significantly going forward. And that will have its impact on debt, on working capital, on anything. So as the scale will go up, we will still add a lot more efficiency to our working capital as we go along because our stock turns are likely to go up. And our businesses, the remaining 6 brands that we want to focus hard on and invest behind and grow them profitably, then you will see our working capital needs will reduce significantly structurally.
Next question is from the line of Priyank Chheda from Standard Chartered Securities.
Sir, my question is with respect to gross margins. Now we are done with the portfolio restructuring, what can be a steady state gross margin that we can safely assume going ahead?
See, our gross margin for this quarter were close to 42%. Last quarter, quarter 4 of last year, was at 41%. And -- but then there is a seasonality because in the quarter 4 Jan-March period, you get the impact of the end of season, so the margins come down a little bit. And this quarter, despite COVID and despite all the issues linked to COVID, our gross margins have remained steady from that 41% to 42%. In a good time, in normal -- not even good time, in normal time with these 6 high conviction brands, our gross margin -- I'm not talking too forward. I'm saying in near term, should reach 45%. So that's our sort of thing.So we are at a level where 41% has gone 42%. Also, the online, we mentioned our profitability is fairly good. And this quarter, 60% of our revenues came from online channel. So we held on to the gross margin to 42%. And once the COVID impact reduces and the malls, et cetera, open and we do more full price business, then our gross margins are likely to reach 45%. I'm assuming no wave 3. I mean, everywhere, I have to put a caveat that don't assume that we [ don't name it ]. But if there is no third wave, I think 42% right now could be -- could go to 45%.
Sure. Sure. We understand that. I mean that was helpful. The other part of the question is on the expenses. Now the other participant also alluded. So I want to understand, at this current state with these 6 brands, our fixed cost can be -- the quarterly fixed cost, what has been reported in Q1, can we assume that this would be the fixed cost going ahead?
If you look at fixed cost as a percentage of NSV, then there's a lot of improvement possible because the top line will come back strongly if there's no wave 3 and [ season time ]. But if you look at the absolute number, as the business normalizes, then some of the costs will also normalize. But in terms of efficiency of our cost structure, we have a lot of structural savings that we received last year, more than INR 100 crores, and we rationalized many things on supply chain, on manpower and loss-making stores and the staff of that converting from owned stores to franchisee stores to work on an asset-light model.So a lot of effort has gone last year. And also, this quarter, from the March -- from the Jan-March base, we reduced our cost structure [ fixed ] by another INR 30 crores on rental, on employee costs and other things. So we are at a very efficient level right now, and a lot of these structural advantages will be going forward. But when the business grows and post-COVID top line is likely to swell very fast, then we'll have to support it with slightly absolute value fixed cost. But as a percentage of the NSV, we will remain very, very efficient because likely NSV growth should be higher than the likely increase in fix cost.
All right. All right. I understand that. And just to squeeze in further on the rental expenses, so now in the current quarter, it has been INR 30 crores that has been reported for Q1. Is that the -- and we have achieved significant savings versus previous quarter. Is that a permanent one? Or is that when the stores get opened, we are likely to see, again, slightly higher rental expenses also on that?
These are rental for COVID times and [ a lot of hard ] negotiations. But once -- the typical arrangement with a landlord is that when your business becomes close to 100%, then we'll have to pay the normal rent also. And they are a partner in the business, and it's a win-win for both of us. They have to survive. We have to survive. It's a partnership. So once the business becomes normal and then we start growing our 2019 numbers, our rent will also normalize.
I think quarter 4 was broadly a normalized rent. Maybe it was a little maybe 95% of what a normal rent would look like.
Next question is from the line of [ Suuri Deora ] from Paladin Capital.
I have a question on the margins. I'm not sure if you've already talked about it before on today's call. Apologize in advance. So on your Slide 10, the emerging brands are showing a higher loss this quarter versus the corresponding quarter last year despite a higher turnover. So I was wondering what that was due to.
Sorry, did you -- your question on emerging brands?
Yes. The losses -- EBITDA losses increased this year.
Yes, I get it. See, in the emerging brands, we have done a minor reclassification because now Sephora as the only -- earlier, we [ used to have ] 2 buckets. One was emerging brands. The other was the specialty retail. But in the specialty retail, we had GAP, Unlimited and Sephora. Now with GAP exit and the Unlimited exit, there's only Sephora left. So what we have done is that Sephora has been clubbed with emerging brands. And what has happened in this quarter in Sephora being a pure physical retail, very, very low online business, the losses are higher and that was -- you will see the losses in the emerging brands because of Sephora. Now I'll give you an example that 25% of Sephora business comes from Maharashtra, and the Maharashtra malls have not even opened today. So Bombay malls, Pune malls are still -- Sephora does really good business in these malls, and 25% of the national business comes from Maharashtra.And unfortunately, Maharashtra government has not done the unlock, and Sephora business has got impacted because of that. It's a temporary issue, and Sephora does well when the market will open up. When the Maharashtra open up, that 25% business opens up, the losses will reduce significantly. But in this quarter, because Sephora has got added to emerging brands cluster and because of the Maharashtra lockdown and also the overall lockdown in a pure -- largely pure retail business, COVID does impact significantly, we are not able to reduce all the fixed costs in the same proportion of the drop in the sales. So the losses that happened in Sephora has seen those losses, and that's why the emerging losses are looking higher right now.
No. But -- I'm sorry. If I compare Q1 FY '21, I'm assuming that the bucket is the same set of emerging brands in Q1 FY '21 and Q1 FY '22, but the sales [ have tripled ] and EBITDA [ has also tripled ] -- or the EBITDA loss [ has tripled ]. So [indiscernible] I understand that. But wouldn't that also apply to the same quarter last year?
Yes, also, there are the rent adjustments. So we discussed earlier that this year, the rent -- we have [ blocked -- there's ] only INR 6 crores versus INR 26 crores [ were booked ] last year. So some of those things are impacting the numbers right now.
Yes, last year, almost all of Q1, Sephora was -- the entire network was shut, and we were -- when we finalized the agreements with the mall, the rentals were broadly at only anywhere between 0% to 25% rev share. Right now, as Shailesh said, those rental savings which we have booked in are a little less, which amplifies the losses of Sephora.
Okay. And related question to this is that -- could you help us understand your long-term margin aspirations?
Sorry? I lost you, sorry. What margin...
Sorry. What are your long-term margin aspirations for the company as a whole?
I don't know how forward can we go in a call like this and talk about it.
Sir, just directionally, I mean, let's assume COVID is gone at the end of -- by now. But directionally, where do you think -- after the losses of Unlimited going away and all the noncore brands have been sold, what should we look to as a sort of margin aspiration for the group with all your -- with whatever changes you all have made?
Sure. See, if you look at our portfolio post-GAP, post-Unlimited, we have these 6 high conviction brands. We have fundamentally very well established a decent scale already, very inherently profitable brands. Once we get out of the COVID times, which -- and we get rid of the discontinued brands from second half of this year, what will emerge is a portfolio of very, very strong brands with fairly high potential for margin. And most of these brands in near term, if I could say like next 2 years, should be significantly close to double-digit EBITDA margin. And some of them, like the power brands, we have U.S. Polo, and U.S. Polo is very uniquely successful brand in India. There are very few brands like U.S. Polo. And that brand, with its own strong appeal and the likely scale and a lot of new category that they're adding, could have even a higher EBITDA margin.So our intent is to unlock the potential of these brands in the near term and reach this kind of margin that we are talking about. And you -- on that, you add the stock turns that we are talking about going from 4 this year, maybe to 5 next year. What it does to the ROCE could be very, very dramatically positive. But I don't want to go too much into the future forecasting in this call, so please don't take this comment seriously. I mean there is -- we still need to see whether wave 3 happens or not. We still need to close the discontinued brands in quarter 2. But I think the way we see H2 this year itself, things look dramatically encouraging. And if we can deliver on the plan that we are talking about on stock turns, et cetera, then both in terms of margin and on the return [indiscernible], we could be sitting on very, very good situation.
Okay. And last very small question is when -- if the country reopens, all the growth that you've been seeing from online sales, will some of that get cannibalized by off-line?
It's very interesting. If you really see the market share of any big brand in India, the size of the market is huge. And the way the online is penetrating into new zip codes, new consumers, the whole conversion from unorganized to organized, organized to upgraded, I mean, there is a lot of tailwind in our industry and we are able to execute. I think both can continue to grow significantly both online, which will grow shortly much at higher pace, and off-line, which also can grow through new categories through distribution to new towns and digital. So I don't know that we have reached a point where it's like a zero-sum game between the 2 channels and one will [indiscernible]. Of course, in COVID times, the percentage of online to this quarter was 61%. That percentage will not [indiscernible] on a secular basis, cross 20% mark. We could be somewhere in between 20% to 25% of our fast-growing top line. So while percentage will stabilize, but I think there is enough probability of both the channels growing side by side.
In fact, in quarter 1 itself, I think if COVID were not there, the absolute scale of the online business would have been even higher because during shutdown, the usage occasion of apparel goes down, so irrespective of channel. So I don't think quarter 1 absolute online business was due to off-line not being there or any level of cannibalization. So I, in fact, see moving forward the -- as Shailesh was saying, there is a structural reason why digital and also our brands are gaining traction in the online side. So I don't think there is any danger of business moving from online to off-line. Both are going to independently scale.
Next question is from the line of Deepak Poddar from Sapphire Capital.
Sir, I just wanted to understand like maybe from a 2-year perspective, do we aspire basically to reach pre-COVID kind of revenue level, INR 4,500 crores to INR 5,000 crores? So yes, any comments would be helpful.
I don't know how far can we predict and project the numbers and feel. But I would say, the second half of this year, without going too far, we would be, I think, clearly much higher than H2 of their pre-COVID year, which was FY '20. So even in very near term, we see we reaching -- that's on the continuing brand. And the way they can grow, then all the other top line that we will be losing through Unlimited sale or GAP sale, we could cover very soon. So there is enough growth in the system, and there are a lot of growth drivers which can take us to the scale and beyond. I mean we'll not be happy only with that part scale because we are adding digitalization. We are adding adjacent categories.So U.S. Polo now have kids. It has footwear. It has innerwear. Flying Machine, through its mobile first, online first mindset is adding a lot of new categories with Flipkart Group's partnership. So we are adding a lot of -- so we have digitalization. We have adjacent accessory category coming in that will drive the top line. Also, we are going in aggressively into smaller towns. And this year, our plan is -- we used to open around 100 stores a year. This year, despite COVID, we are still aiming to reach 150. We have 60 stores ready for opening in the next 60 to 70 days. So we still are sticking to a number of 150 stores opening this year.And these stores will not be pure vanilla off-line stores. They will be [ all omni-enable ] our footprint, digital footprint in smaller towns and not just Tier 2, 3, but even much smaller towns. We have a model called FMX in Flying Machine, which is for small towns. And our target is to reach towns with 50,000 to 2-lakh population towns. We have opened 50 stores in North, and our target is to reach 100 stores soon. We're still modeling it, and then potential of that FMX model alone will be very large, all digitally enabled physical. So if I just say, all these growth drivers, from digitalization to adjacent category to small town expansion [ through omni-enabled ], so we see a lot of opportunity for growing and revitalizing the growth of our top brands.
Understood. Understood. Understood. And you did mention that the second half of FY '22, adjusting for -- or the overcoming the sale that you have done second half of FY '20 -- versus second half FY '20, you can outperform, right?
Even last year second half, we did better than the second half of the FY '20 period. When unlock happens, like we see in July, our power brands are only at 90% recovery. Even though Maharashtra is not open, Kerala is not -- I mean, even with those closures, we are near normal. So our brands are very well placed for the times we live in: work from home, casual, relaxed. So we have a very strong portfolio which is very right for our times: casual jeans, open footwear, athleisure, innerwear, [ fit ]. So we are very confident that with these strong brands, all very profitable brands, we can grow rapidly.
Ladies and gentlemen, that was the last question due to time constraints. I now hand over the meeting to Mr. Ankit Arora for closing comments. Over to you, sir.
Thank you, everybody, for joining us on the call today. If any of you have more questions, please feel free to reach out to me, and I would be happy to answer them off-line. Thanks for your time today and look forward to interacting with you again next quarter.
Thanks for joining. Appreciate. Thank you.
Thank you. Bye-bye.
Thank you very much, members of management. Ladies and gentlemen, on behalf of Arvind Fashions Limited, that concludes today's conference call. Thank you all for joining us, and you may now disconnect your lines.
Thank you. Bye-bye.