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[Audio Gap] everyone, and thank you for joining us on Arvind Fashions Limited earnings conference call for the third quarter and 9 months ended December 31, 2019. I'm joined here today by Kulin Lalbhai, non-Executive Director; Shailesh, Managing Director and CEO; and Pramod Gupta, Chief Financial Officer of Arvind Fashions Limited. Please note that results, press release and earnings presentation had been mailed across to you earlier, and these are also available on our website, www.arvindfashions.com. I hope you had an opportunity to browse through the highlights of the performance. We'll commence the call with Kulin providing his key thoughts about the strategy and financial performance for the third quarter ended December 31, 2019. At the end of the management discussion, we'll 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 the 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 completely. With that said, I would now turn the call over to Kulin to share his views. Thank you.
Thanks, Ankit. Dear all, thank you for being on the call. I would like to start by taking you through the Q3 performance. While market conditions remain challenging, we have been able to broadly execute on our plan of balancing primary sales with secondary sales for our power brands, scale up new categories and specialty retail operations, and restructure the operations of unlimited and emerging brands. You would have noticed that power brands have a negative sales growth of 9%. Actually, the underlying secondary sales have been amongst the highest that we have seen in the last several quarters. We have had good traction in retail sales of our power brands with an LTL of 7.6% and an overall growth of 10%. Power brands other than Arrow saw a marginal growth despite corrections in the primary billing channels. However, we took a sharp correction in Arrow, as we had indicated earlier in Q2, in the wholesale channels and institutional sales, which led to the overall negative growth. We also saw strong sales in new categories like innerwear and footwear, with 30% and 60% growth, respectively. We opened 50 stores across the power brand, and expect new store opening momentum to continue in the quarters to come. Our turnaround efforts in Arrow are showing promise. And we have seen a sequential improvement in the overall profitability of power brands in Q3. Coming to our specialty retail business, both GAP and Sephora are showing strong traction with an LTL of 8% and overall growth of greater than 25%. This has also led to good improvement in profitability. We continue to focus on restructuring our unlimited business. This includes shutting down unprofitable stores, correcting costs and improving our customer proposition. Our Emerging Brands business has been completely moved to a secondary sales based model with strong cash flows and efficiency in capital employed. With this in mind, we have exited billing channels which have long lead times, renegotiated our royalty agreements and closed down unprofitable stores. This has led to onetime costs in Q3, and we'll also have some onetime costs in Q4, but at a lower level than Q3. We have been able to significantly reduce working capital as compared to September 2019. Our inventory has reduced by INR 130 crores, and there is a INR 20 crore [ rent ] reduction in [ letters ] as well. If we compare to December 2018 levels, while inventory is higher by INR 100 crores as we have preponed our purchases for [ FS ] '20 for an early season launch, there is a reduction of a similar amount in receivables as our efforts to control sales in long lead time channels is yielding [ real ] results. We expect that we will further reduce the inventory and receivables by close to INR 150 crores compared to December quarter end, by March. With a large part of the correction behind us, we look forward to a better Q4. For our power brands other than Arrow, we expect to get close to double-digit EBITDA and mid-single-digit growth as our primary and secondary sales get aligned. We also expect a much better sequential performance in Arrow. Our new categories in specialty retail will continue their current momentum. Emerging brand losses are expected to come down from Q3 levels, and we will complete all the restructuring of the emerging brand portfolio as we exit Q4. As we look towards the next year, we are excited about the potential of our strong brand portfolio. Our strategy of focusing on key scalable brands will allow us to invest strongly behind high conviction bets and drive a high operating leverage and return on capital employed. We expect to deliver double-digit growth in our power brands, and also achieve close to a double-digit EBITDA margin. We will continue to scale up new concepts like Sephora, Calvin Klein, innerwear and GAP, and these businesses will drive strong revenue growth with a much improved bottom line. Having restructured our Unlimited and our emerging brand portfolio, we expect losses from these segments to significantly reduce. As you are aware, the company is raising INR 300 crores by way of rights issue. We expect SEBI approvals within the next week and expect to launch the issue in early March. We are deeply focused on deleveraging. With the capital infusion from the rights issue, improved profitability of our operations, significant improvement in our working capital and a range of other initiatives, we expect our overall debt to reduce by 40% to 50% in the next year. With that, let me end my opening remarks and open up the line for questions.
[Operator Instructions] The first question is from the line of Sagar Parekh from One Up Finance.
So firstly, can I have the debt number as of December 2019?
The debt is close to INR 1,200 crores as we end -- it's INR 1,130 crores to be exact, as we end the December quarter.
So the debt has not reduced sequentially in spite of INR 150 crore reduction, sequentially, in working capital.
Yes. For this quarter, most of the relief have gone towards also paying down creditors. We have been reducing our [ invert ]. So the creditor amount has also gone down. As we also further keep releasing cash, I mean gross creditors coming down -- sorry, as we reduce our working capital of INR 150 crores in Q4, most of that also will go towards paying down our creditors. But once the proceeds from the rights issue will come next year. And in Q1, we will see improvement in working capital. That's when you will start seeing the debt come down.
So when you say 40% to 50% lower debt for next year, so on what base, on this current base of INR 1,100 crores?
Yes. We are talking about a INR 500 crore -- close to INR 500 crore reduction in debt.
So INR 300 crores will come from rights and the remaining INR 200 crores will have to come from working capital, right?
Correct. So as we cut inverts and go through our plans of having better sell through, there is a little bit of a lag impact in when it will start showing up. So we are expecting that sort of impact to come from Q1.
Okay. And on your power brand side, you think the Arrow will continue to face challenges going forward? Or do you think bulk of the challenges with respect to Arrow is over now?
No. We are actually very confident in Arrow's performance going forward. This was a onetime correction as we were balancing primary and secondary. But as we move on, we are seeing exciting growth in Arrow. There are multiple initiatives that the company has taken on in Arrow. We have really upgraded and premiumized our product offering. We are upgrading all our top stores, the 50 to 70 top stores are all getting upgraded as we speak. A very exciting marketing campaign is going to break out in April. And the whole correction of the billing channel is complete. So we are expecting very strong performance in Arrow going forward. It has already sequentially improved in Q3 versus Q2. And Q4 will be much stronger than Q3 as well.
Okay. So next year, your power brands can show double-digit top line growth with -- what kind of margins can we expect in power brands?
We expecting close to double digit EBITDA, but definitely double-digit growth in power brands in the next fiscal.
Fair enough. And on your -- on Limited, how many stores are we at right now?
We have 80 continuing stores that we are going to have post the restructuring that we have gone through.
So restructuring is completely over, right, in terms of store closures? Or still, there is some...
There are some still stores which are closing as we speak in quarter 4. And we are [ cutting ] down the inventory also as we have shut down those stores. So as we exit Q4, this will be complete.
So then those 80 stores will have, what kind of -- I mean top line or top line as well as margins at store level?
See, we are -- our stable kind of continuing base of stores have just about a double-digit store level CBA. So the network which is remaining has that kind of CBA profile.
But that will not be enough to bring the entire Unlimited in black, right, because you'll have a...
Yes. So we have significantly cut down the cost level also of this format. So our fixed costs have come down significantly. And we are also expecting -- as our price/value proposition improves, we are expecting LTL improvements to come in. So we believe at the current scale of 80 stores [ the sell scaled ] business can move towards breakeven. It can cover its costs.
Okay. And we were also talking about online channel for unlimited, how has that progressed?
That is scaling up very, very well. We are selling online, both through the marketplace model and through the outright sales model. We have reached strong growth there where close to 200,000 units are sold every month. So it's a run rate of almost INR 6 crores every month, which we have already reached, and we are expecting that to further improve next year.
This will be Unlimited, right?
This is just the Unlimited online.
Correct. Okay. And overall, Unlimited, in terms of top line, how would it look like for FY '20 base? I mean, just to get some sense on margins as well as overall top line. How would you look at Unlimited for this year?
As we exit the year, we'll be close to a INR 550 crore, top line number.
And gross margins would be similar at around 40%, 45%. 40%?
No. It's closer to 45%.
45%. Okay. And double-digit margins. And then -- so FY '21, can we expect Unlimited to be breakeven at EBITDA level? Or there will still be loss for Unlimited?
It would be significantly lower losses, but not completely towards breakeven. Because we are hoping to increase, in fact, our investments on advertising for the next year. We have kind of been fine-tuning the price/value proposition and improving the product this year. And we want to induce trials next year. So there will be a lot, but it will be substantially lower than this year.
Okay. So how much is the loss this year?
We actually don't get into that level of guidance. So we might not be able to share that number with you.
Okay. And lastly, on the CapEx side. Till now, how much have we spent? And what is the remaining amount on -- in Q4 and for FY '21?
So far, we have kind of spent around INR 75 crores, and we'll be spending another INR 10 crores to INR 12 crores for the rest of the year.
And for next year?
Next year should not be very, very high. In fact, it would be slightly lower than this year, somewhere between INR 50 crores to INR 75 crores.
The next question is from the line of Gaurav Jogani from Axis Capital.
My first question is with regards to the cost of depreciation and interest, which has increased meaningfully Q-o-Q. So can you highlight the reason for the same?
Sure. On the depreciation side, because of Ind-AS, we have had kind of a onetime higher depreciation because of life of certain assets, the definition of that. We are not expecting that to continue in the quarters to come. As far as interest cost is concerned, Q3, Q4 would be a little elevated, but we are expecting it to correct from Q1 with the proceeds coming in, and the working capital improvements of -- sequential improvements quarter-on-quarter kicking in. So we are expecting that to materially change from Q1 onwards.
Sure. Sir, can you quantify the one-off impact in depreciation expense for this quarter?
It's around INR 11 crores.
Sure. And sir, with regards to the debt profile that you mentioned, that is around INR 1,130-odd crores, and you did -- due to the efforts, were able to bring down that INR 150-odd crores in debt, but that then you used to pay off your creditors. So what would the profile look like at the end of March 2020?
As I mentioned, the overall quantum of debt will remain similar in these 2 quarters, whilst the net working capital came down. There were obviously cash losses in Q3. Those losses will come down significantly, moving forward. Secondly, we use that to retire creditors. And with the lower inverts, the overall creditor level has come down. So that's why in Q4, you won't see a meaningful reduction. But after that, you will see a meaningful reduction.
So March 2020, can we expect the same like INR 1,200 crore of debt to be there?
So the rights issue will be completed, as I mentioned, by March end. So that will make a positive difference. And then as I mentioned, we are aiming to mobilize another INR 200 crores from the business as the year progresses. So that is when you will see a meaningful change.
So if the rights issue, say hypothetically goes by [ par 10 ], then it will be INR 300 crores, plus the INR 200 crores you're seeing by the inward mobilization. Or else it will be the same, right?
Correct. INR 300 crores plus INR 200 crores. We are expecting that to go down by close to INR 500 crores, next year.
Sure. And so my next question is with regards to the power brands. You mentioned in your opening remarks that ex of the Arrow, the power brands saw marginal growth rate. Was that right?
Yes. That's right.
So -- but how is the overall -- because you mentioned that it was a very good quarter with a very good [ retail ] sales growth. How are you seeing the power trends then going ahead in the seasons to come?
Yes. So let me just explain where this dichotomy is coming from. Actually, if we look at the customer offtake, which is the sales at retail, key accounts, online, the actual sales to customer is double-digit for our power brands. The impact of the lower billing in our wholesale channels is what is kind of creating this anomaly of an overall negative growth. What is changing in the quarters to come is that this negative impact is going away, because it's a onetime correction where we are matching primary to secondary. So already in Q3, that impact is less than Q2. And in Q4, it will be significantly less than Q3. So that is when the primary growth -- or the number which you see, the reported number, will actually move towards the underlying number, which is the customer offtake.
Sure. And sir, shouldn't this be anniversarizing in the Q4 quarter that's coming in? Because if I remember it correct, we started this entire process from the Q4 last year. So would...
Yes. No, I mean from Q2 and what we had indicated to the market is it would continue in Q3, and the impact would be less, which is why there is a sequential improvement. And we had said in Q4, it will be much less, and we will be moving much closer to our historical average, which is why we are saying in Q4, we are expecting close to double-digit EBITDA and high and mid-single-digit growth. So you will see this kind of happening. Because Arrow is not 100% coming back to the growth rate. But for all the other brands, it is coming very close to historical rates by Q4.
So when you're saying double digit EBITDA, you mean double-digit EBITDA margins, right?
Yes, margins.
Okay. And sir, how is your -- so you did mention that you have taken some steps in Arrow. So you have also exited [ inventories ] in the Arrow Piece as well. So what are the new initiatives that you are taking that gives you the confidence that the brand will surface again?
See, that's what I said. One is that this whole wholesale channel correction is going away. And the way the wholesale channel works is you take forward bookings. So we actually have a very, very clear idea of where this channel will go 6 months before the numbers actually come into the P&L. So based on the way there is a demand growth happening in wholesale. And now that the correction is over, that big swing would happen in a channel like, say, the MBO channel. So that is one, which would be the main component of why the Arrow numbers would significantly swing. The second is the effort which we are doing in the underlying health of the business, which is the way we are upgrading product, stores and marketing, where also the initiatives are showing a lot of promise. So based on the onetime correction which is happening in MBO and these fundamental changes which we are doing in the brand, we are very confident of a very strong turnaround in Arrow.
Sure. And sir, one last bit on the emerging brands piece. So I do understand that you have actually taken -- exited the 4 brands Gant, Nautica, Elle & Izod. Sir, in this quarter, also, we have seen some correction. So when do we expect this particular business to behave normal -- I mean, so to get on track basically?
Yes. So as we exit Q4, we are expecting this to, on a fundamental basis, be an efficient business, which is not going to lose significant money at all. And even Q4, the remaining corrections which are left would be completed in Q4, and the quantum of losses would be much lower than what you are seeing in Q3.
Sure. Sir, can you highlight like what old inventory is now remaining in Q4 in the emerging piece?
See, the same themes are there. One is there are still inventory liquidation. We have been closing down stores. So when you shut down stores, there is old excess inventory, which needs to be liquidated. So there are losses because of that. Secondly, we have renegotiated our royalties so that we are -- we don't have very onerous growth required over the next tenure of all these brands. And that required a onetime sort of payout in this particular year. So as we exit this fiscal that entire restructuring would be over. And because of this, we would be left with largely now profitable stores and a secondaries-based wholesale business. So because of that, as we exit Q4, it should be a clean business, which is not having unexpected sort of losses.
So sir, if I understand it correct, now, will the focus of this, particularly the emerging brand piece would more be wholesale oriented and less of [ the clothes bought ]?
Yes. So we have just shrunk down the retail. See, the retail business is the one which has heavy capital requirements, and it also can swing things significantly. So to derisk the business, we have said that whatever online is there -- whatever stores are there would be Limited, and we run them efficiently. And then the wholesale business is a capital efficient business, which we are running on a pure secondaries basis. So with key accounts, it is not the MBO kind of business. This is the way we run department stores, which is completely on a secondary basis where whatever you will see is the customer sales and no -- not any billing sales. So online and shopping shops is what we mean by the wholesale part of the strategy. So that is scaling up well for these brands.
Okay, I get it. So sir, just one last bit on this, the emerging brand bit. So you had mentioned earlier that you have negotiated the royalty and there was some payout. So can you please quantify the amount with regards to the additional cost that is coming from the royalty renegotiation?
We can't get into that level of specificity. But what I can say is that what you are -- a bulk of the negatives you are seeing right now are one-offs in the emerging portfolio.
Sir, you had quantified the royalty negotiation in the last call. And hence, I want you to remember -- because is there any duplication is what -- because there was -- it was a...
We can take it offline, but we will not get into that level of specificity.
[Operator Instructions] The next question is from the line of Manoj Bahety from Carnelian Capital.
I have 3 questions. So first one, I just wanted to understand like what's the reason for paying creditors? Like if the business was enjoying X number of credit days from our vendors, is it something like those creditors were supported by some kind of non fund-based limit from banks, which we are now liquidating? That is one. Secondly, on the cash flow itself, like you mentioned INR 500 crores kind of debt reduction over next year, INR 300 crores coming from rights issue, and INR 200 crores...
Can you repeat the second question?
So you mentioned INR 500 crores kind of debt reduction over next year, INR 300 crores coming from right issue and INR 200 crores by way of working capital reduction. So my question is like when we are expecting like almost all the pain points are getting over by Q4, and we are expecting good amount of growth, double-digit margins. So, I believe that the business will also start contributing cash flows from the cash profit. So we have not factored in that because right now, also we are factoring one-timers only, right issue and working capital correction. The sustainable part is the recurring cash flows from the business. So next year, can we expect like some cash flows from the business also going to the debt reduction?
Sure. Let me try and answer both your questions. But first, what I meant about creditors is when you cut inwards. So what we have been doing is we have really been sharpening the way we buy. So we have had, in most of our brands, even though we are growing, we have kind of been focused on increasing our full-price sell-throughs, which means that we are ordering less. When you order less, it means that the creditor availability, the total creditor amount goes down. So usually, that creditor comes and funds the business. So -- but when you cut your orders, that goes down immediately, while the cash generation from the new buys happens over the entire season. So that leads to an upfront anomaly. It cuts down the available creditor funds you have. That is what I was trying to explain.
Got it. Got it. So inventory goes down and creditor goes down. So both...
Yes. It goes down. So it negates, but what would then happen is as the season progresses, and your inventory start getting liquidated of that season, that's when the cash flows -- additional cash flows come, which is what I was saying that in Q3, Q4 that cut has come. The positive impact, it comes with a little bit of a lag. That is what I was trying to explain. You are very right in saying that there is an expected significant amount of improvement expected in the profitability of the business next year, and it will generate positive operating cash flows, but we are also expecting to grow in a healthy way. So there will also be a healthy growth in net working capital. But net-net of all of that, because of a better profitability and the tight new way that we are managing our inventory and our supply chain we believe that the business will release that kind of cash between working capital and a better profitable business.
So just to elaborate it further, like [ governments ], if all our incremental growth or EBITDA margin if it gets parked in the working capital. Then when the business will start generating cash flows for shareholders, like working capital reduction and rights issue, it will be onetime. But on a recurring basis, in spite of getting double-digit margins and good sales growth, are we expecting some kind of cash flow release post working capital [ in the ]...
Yes. No, that's correct. I think the business is very close to reaching that sort of operating leverage where the incremental EBITDA will go and actually lead to free cash flows. With some of the decisions we have taken, I think that free cash flow generation is much closer, whether we are able to achieve it next year itself. If not, definitely the year after because the overall scale and EBITDA of the business has reached the point where the cash generated will not all go into net working capital. It's just a question of reaching that [ math ]. And post [ that ] business would be generating, because per se, our business is now quite a CapEx-light business. We are talking about a INR 50 crore to INR 75 crore CapEx. That is a very asset-light kind of model. So there is no reason we will not be able to kind of deliver on this. I think the challenge in the past has been that the receivables cycle and the inventory has been the overhang. But the level of focus with which we have attacked these -- you are seeing now the change in momentum on that. And we believe that because of these initiatives that we can drive the business into a free cash flow generating business very soon.
Okay. Okay. So next year, we can expect some kind of cash flows from the business if double-digit margins and growth materialize?
So that's what I'm saying. We will be very close to that. Next year is that inflection point. There is a real possibility we can tip over that as well, where it would go into FCF, but we are very close to that point.
Got it. And secondly, just wanted to understand, you mentioned that on power brands, in Q4, you are expecting double-digit margins from around 6% kind of margins in Q3. Just wanted to -- like if you can give us a broad breakout, like where this kind of margin improvement will come, whether it will come from gross margin improvement or whether it will come out of cost-cutting or whether it will come out of operating leverage? So just wanted to understand the broad-level breakdown of journey from 6% to double-digit margins.
One of the biggest impacts is the Arrow turnaround because we have had a massive negative variance coming because of the MBO channel. So if I were to put it very simplistically, the biggest component is the impact of the primary to secondary billing going away in Q4. More so in Arrow, but even so a little bit in the other brands.
Okay. Okay. So mostly because of Arrow losses, which might have been there in Q3. That going away in quarter [ what the channel ]
[ That will be normal ]. The MBO channel is a high profitable channel. This is the channel where we have had the inventory corrections, which took away the profitability. And as we have reached Q4, we are hitting the fundamental underlying profitability of the MBO channel. Most seen in Arrow, but also slightly in the 2 other brands. And fundamentally, there is always operating leverage. So as that anomaly of MBO goes away, the underlying operating leverage improvements are also going to become visible across all of it.
Okay. So sir, if I got it, it is mainly on account of inventory correction, which is over in Q3 [ mostly over ] in Q3, right?
And that's why we have had secondary customer sales, which have been healthy, but net sales that you see have been negative and EBITDA has gone away largely because of that trade channel correction. And as we move out of this fiscal year, that would be completely over.
Got it. Got it. Lastly, I have one more question, like, if you can quantify how much of your sales is on a returnable basis? And also, if you can give a brief overview on your innerwear business, how it is scaling up -- and how do you see this business shaping over next couple of years?
Sure. So the -- out of our total business in the branded side, retail accounts for close to 35% of the business, and that is on a completely secondary basis, which is whatever is sold is the customer sale. So in that sense, there is no receivables. It is only inventory. Even our key accounts, we operate on a secondary basis. The 2 channels where we operate on a primary billing basis are trade and online. Online is close to somewhere between 15% to 20% of the business and trade would be around 30% of the business. Now online, again, is a very real-time business where you have very high visibility. So the business where you have to -- where we have had the problem of inventory returns has been the MBO channel, where, as a company, we have put a lot of concerted effort on managing the visibility of that channel. So today, we have invested in technology and processes where we have full visibility and control now on the customer sales even in this channel. And we have now matched the way we do primary billing based on the secondary offtake. So all of that work has gone into now balancing out that channel. So that, in a sense, the whole business is being run on a secondary basis. I hope I've answered the first part of your question.
Right. Only one thing if you can cover in this, that how much of our trade is represented by MBO?
Trade is MBO. Sorry, I'm using these 2 terms interchangeably.
In fact trade is MBO, right?
Yes. We call it MBO. Yes, that's the same...
Retail is all these like -- all these [ large-formatted tools ], right?
No. That is key accounts. So there are 4 channels. One is retail, which are all the stand alone stores. Key accounts are all these department stores like Shoppers stop, et cetera. Trade is the MBO channel, and then we have online. These are the 4 main channels.
Okay. And key accounts must be another 15%, 20% then in this case, right?
Yes. It's around 20%, yes.
20%. Got it. Got it. Right. So now if you can touch upon my second question being mainly on the innerwear category.
Yes. So we are very excited about our innerwear business. As we entered the year, we had around 7,500 points of sale. As we speak, we have taken the distribution up to 13,500 points of sale. And as we exit the year, it will be 15,000 points of sale. We have been seeing very, very strong traction on U.S. Polo. Even this quarter, we have grown by 32%. If we actually look at the offtake at the customer end, it is even higher than this number. So fundamentally, the brand has very good traction happening. Historically, the bulk of this business for us was the innerwear piece and not comfort wear. We relaunched our comfort wear just in the last quarter, in quarter 3. And the initial response of the relaunched comfort wear is strong. So we are expecting the comfort wear part of the business to start scaling up very meaningfully. Some of which will happen in Q4, but a large part of it, which will happen in the next year. So I think we are very excited about the way U.S. Polo is scaling up. Of course, we have Calvin Klein as a niche business on the higher end side. But I think U.S. Polo has with a distribution of 15,000 points of sale, and a much stronger comfort wear line coming in, we are expecting that business to get a big leg up.
Okay. Okay. Any numbers would you like to share at this point of time on innerwear business?
No. I mean, as you know, this year, we have grown at more than a 30% rate, and we are not giving a specific guidance for next year. But with comfort wear also coming in, we are expecting exciting growth in that business next year as well.
Already, this must be INR 150 crores or INR 100 crores kind of category for you overall in revenue?
We per se are not giving brand-wise, very detailed revenue and bottom line. So we prefer not to get into that level of specifics.
The next question is from the line of Pritesh Chheda from Lucky Investment Managers.
Yes. Sir, just a few questions in power brand, when we said that the reported revenue decline is 9%, and Arrow is the reason for decline. So some comments on how -- at what pace is the other brands grow combined? I don't want individual brand -- and -- or to what extent Arrow decline, is the question. And similarly, what would have been Arrow's impact on margin? Now you could give it for quarter 3 or 9 months, whatever is comfortable. And similarly, in emerging brands because we have discarded a few brands. So the residual brands, which is our focus brand, at what pace did they grew? And what is the impact of those discarded brands on margin either on 9 months or quarter 3, whatever you are comfortable with.
See, on the power brand side, other than Arrow, the growth was low single digit. So Arrow grew by close to 30%. And that is more because there was a correction in that 1 channel. So it doesn't have to do anything on the fundamental offtake in retail or any of those other channels, it is largely because of the trade channel correction that you saw that in Arrow.
This is 9 months or this you're referring to quarter 3?
This is quarter 3, but it's very similar. There has been -- Q3 has been a slight improvement over Q2. But around 30% growth is for the 9 months. And your second question on emerging brands, please, can you repeat?
Similarly, in the emerging brands, we have a few brands discarded, right? So adjusting for that brand discard, our focus brands within the emerging band would have grown at what rate? And what would have been the impact of margin, if any, on those discarded brands if you have taken any inventory write-down or any royalty adjustments you [ can tell me ].
The discontinued brands were written off in the first quarter. So what you are seeing now doesn't have any impact of the discontinued brands. So whatever you are seeing in the emerging brands is kind of the remaining focus brands where you are seeing, in a sense, a kind of scale-down because we have exited billing channels completely in those brands. And we are now completely secondary, and we have cut down stores. So that would mean that whilst you are doing that, it would mean that there is a contraction. So whatever you are seeing in that emerging brand number is the remaining brands and has nothing to do with the discontinued trends.
So what is the growth rate of the focus brands within the emerging brands, which is Calvin Klein, Ed Hardy and Aeropostale, because on a Y-o-Y basis, the impact of discontinued brand would continue, right?
Again, let me just clarify. Whatever is discontinued is no longer in the Q2 or the Q3. We wrote it off in Q1. So whatever you are seeing now in the results of Q2 and Q3 are the remaining emerging brands. So you know what the growth rates are -- I mean they are there in the -- in our reporting. So they are also de-growing because we have been kind of scaling down retail and the [ trade ] channel, which is why it is a strategy to degrow them up till Q4 till they are being restructured, but then you will see the growth coming in.
Okay. Then a couple of questions on the working capital and the CapEx side. So on the working capital side, if you could guide us what would be the net working capital day reduction that we would see in FY '21? Because currently, it is flat, right, because whatever you reduced on inventory and debtor, you paid down the creditor. So there is no [ absolute ] total net working capital reduction, what it would be next year?
See, we are still closing the business plans of all our brands. So we may not be able to give a guidance on the full net working capital days as we speak today. As we kind of get into the next quarter, we will possibly able to give -- shed more light on it. But as we said that we believe still with the steps we have taken on our new way of kind of buying and a tighter supply chain. We would be able to bring the days down even beyond what we exit the year at.
Okay. And lastly, on the CapEx side, sir? When we are giving out INR 75 crores this year and whatever, INR 50 crores to INR 60 crores next year. Is it that we are actually not getting into our own retail space addition, and a lot of the CapEx is now done via franchise? Or we are actually eyeing the online part of doing business, and hence, the CapEx number is reduced, and eventually, it has to come back, is that the reading? Or do you have any other comment on it?
No. So as far as our brand business is concerned, it has always been dominated by a franchisee-led expansion. So if you look at power brands, the majority of the stores opened, and we open a lot of stores every year, has been franchisee investor-led. CapEx largely goes in what we call specialty retail. Within specialty retail, a large chunk of our CapEx has been going into Unlimited. But since Unlimited is still restructuring, next year's strategy is to get throughput from the 80 stores, which is why you will not see a large CapEx. Beyond Unlimited, there would be Sephora and GAP where we have been largely doing the Capex. Sephora is covered under the CapEx number, which we are opening as many stores as we can get. The format is doing very, very well. But there is only a certain number of stores which can open in a year. And for brands like GAP also, we have now moved the expansion into a franchisee-based expansion. The other reason why CapEx is coming down is we have had a very strong IT CapEx cycle. Especially last year and this year because we had a rollout of some very large programs on the IT side. Those are also going away. So that is also helping reduce the overall CapEx requirement.
Okay. But your aspirational ambition on Unlimited? Is it postponed? Or it is reviewed, it is -- how do I put it -- or you have changed your aspiration on Unlimited that you'll not explain?
Because, as I mentioned before, even with the 80 stores we have, the idea would be that we can bring this business to breakeven. We have been working very hard to restructure the business, improve our customer proposition. So the focus is more, how are we upgrading product, how are we running our stores better, how are we getting productivity, before thinking about how are we multiplying. I mean that is, we believe, the right strategy. We have started seeing some signs that parts of what we have done are paying off. Our cost structures have significantly changed. So the focus we are having for next year is to really get our proposition right, get the store-level [ CBA ] up and get the 80-store network to perform.
The next question is from the line of [ Nidhi Agarwal from Sunidhi Securities ].
My first question is that, are we done with losses, or -- except for Unlimited -- should we expect more exceptional items?
So as I mentioned, in the emerging brand side, there would be, in Q4, still some one-offs which are there. They will be smaller than the number you are seeing in Q3.
Other than that, we are done.
Yes. So Unlimited, we are expecting the losses to come down. As I mentioned, we would not -- Unlimited would not be possibly breakeven next year, but the losses would be lower, significantly lower.
Okay. Okay. And my second question is that we are also hearing that there's a lot of inventory in the -- a lot of channels. So we are expecting double-digit growth next year. So what is giving us this confidence of double-digit growth?
I'm not sure I understood how -- what is the link between inventory and growth. So let me try and answer what are the growth drivers of this business. One clear growth driver, obviously, is network expansion. And in Q3 also, we opened almost 50 stores in our brands, and we are also opening in specialty retail stores. So 1 factor of, or driver of growth is channel expansion. The other driver is category expansion. And once again, we have given some details to you. There are certain new categories which are growing very, very well for us, be it footwear, be it innerwear, be it kids' wear. So that's the second major driver of growth. And the third, obviously, every year is throughput, which is what are we doing to get our LTLs up. So that also, there has been quite a bit of effort happening. And you saw good performance in Q3 as well. So this business fundamentally has very strong growth drivers. And nothing makes us feel less confident about that. In fact, our brands are in the sweet spot of being in the casual wear side where underlying demand. And I forgot the fourth big driver is online, which continues to grow at a very, very rapid pace. So I don't think there is a challenge at all for us in terms of growth drivers for the business.
But what about the margins? Because, sir, my inventory, there a lot of inventory in the channel. They are ready to sell at [ lot of ] discount. So how will you tackle that?
No. So let me explain. I don't think it is discounting in the channel, which has had the impact in our margins. What has happened is that in certain channels, we sell to the channel, and we book the revenues, and then they sell onwards. This is only for the MBO channel. Now what has happened for us is we had 1 onetime correction where we had more returns coming back from the channel. We have corrected that by now kind of putting much higher level of controls and visibility into the actual sale. Once that is now balanced, there will be no P&L or bottom line hit because of this issue going forward. The overall discounting levels of our brands have not gone up. That is not the reason why our bottom line has come down. It is this onetime billing correction where there was a revenue reversal, which has hit our bottom line. And as I mentioned, as we exit Q4, that is over for all the power brands, which is why the double-digit growth would come back.
Okay. And my last question is that we have been reading that you're in the U.S. There are more stores closed there than the new stores that are open. So how do you see this trend in India?
Yes. So I don't think the U.S. is a very good market to benchmark. I'll explain why. First of all, the density of stores by population is the highest in the U.S. compared to any market in the world. What does that mean? It means that it's a very, very overbuilt, oversaturated market. And in the world of omnichannel where online and offline coexist, you must never have overbuilt off-line. So that's one of the reasons U.S. has seen such a dramatic correction. The second is India is at a very, very different juncture in the S curve, where we have barely saturated. I think a better comparison is China. If you look at China, most organized brands will be present in close to 800 to 1,000 cities. In India, our power brands are still barely across the 250-city mark. And we are now opening, say, for example, even in one of our brands, like a U.S. Polo, we would open 60, 70 new stores. A large part of these are completely new markets where we are opening, where a store never existed. So India has so much saturation to go, that I don't think America is an example at all. India will develop like China, which is an omnichannel world. And omnichannel world is very different. So for example, what we are seeing in India is that our customers are first getting added to the brand due to online. So online is feeding our brands in new towns, and then we are following up with a store. So the great news for us is we are not overbuilt. We are growing up in an omnichannel world. We can use online to seed our brands and then go and saturate the market in off-line. So you should not be caught in an overbuilt scenario, because of the way India is developing as a market.
Okay. And my last question is on advertising. How much was the expense this quarter?
See, we tend to have our advertising at close to 4% to 5% of our net sales. So that's broadly where it has been.
So will it change with increasing contribution of online sales?
No. The way advertising is being done is changing significantly, which means the channels are changing. You are spending a lot more on digital and not on off-line. But there won't be a substantial change in the percentage of marketing as a percentage of revenue. The way you will spend it will change.
Ladies and gentlemen, that was the last question. On behalf of Arvind Fashions Limited [Audio Gap]