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Ladies and gentlemen, good day and welcome to Arvind Fashions Limited Q4 FY '21 Earnings Conference Call. [Operator Instructions]Please note that this conference is being recorded.I now hand the conference over to Mr. Ankit Arora, Head, Investor Relations and Treasury, Arvind Fashions Limited. Thank you, and over to you, Mr. Arora.
Thanks, Nirav. Hello, and welcome, everyone, and thank you for joining us on Arvind Fashions Limited earnings conference call for the fourth quarter and fiscal year ended March 31, 2021. I am 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 had 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 go through the highlights of the performance.We'll commence the call today with Kulin providing his key thoughts about strategy and financial performance for the fourth quarter and fiscal year ended 31st March 2021. He shall be followed by Shailesh, who will share his thoughts and key priorities for us moving forward. At the end of management's 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 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 would now turn the call over to Kulin to share his views. Thank you, and over to you.
Thanks, Ankit. A very good evening to you all. Thank you for joining us for our Q4 results.We, as a country, seem to be coming out of the worst of the second COVID wave. But as all of us would agree, the last 2 months, especially May, have been exceptionally difficult, and we have been doing all that we can to protect the health of our employees and support them through the COVID emergency. We have tried our best to provide wholehearted support to our team in the fight against COVID, including tying up with medical institutions, enhanced financial assistance and insurance covers; tying up with hotels to provide facilities for our employees to self-quarantine; and taking special care of front-end retail employees with appropriate SOPs on working during the pandemic.Coming to the business performance, the strong momentum gathered in Q3 continued into quarter 4 as well. The business was able to post a year-on-year growth of 14% comparable quarter last year. The EBITDA grew sharply by 98% due to the healthy recovery in sales and the various cost measures that had been carried out.This quarter witnessed a strong sales recovery [indiscernible] of [ 114% ] with a marginal growth in like-for-like sales as well. The online channel continued on a rapid growth trajectory with a 390% growth over last year. We remained cautious on our wholesale channel due to the COVID uncertainty and achieved 60% of our pre-COVID-level billings. This decision will ensure that the inventory levels in the channel are healthy as we come out of the second COVID wave.Let me share some segment-level highlights. Our power brand portfolio performed very well. U.S. Polo achieved high growth of 125% and a very healthy mid-double-digit EBITDA for the quarter. The 2 new category extensions of innerwear and footwear saw quarter-on-quarter growth of 30% and 102%, respectively. Both categories are emerging as winners. Tommy and CK both grew revenues in excess of 25% in quarter 4, with a double-digit like-for-like growth in sales as well as more than a 100% growth in online revenue in the quarter. FM continued its rapid online growth by doubling the online business on a large base.While power brands saw a strong improvement in profitability versus the quarter 4 of last year, the margins were impacted by lower wholesale billing, a slower recovery in the department store channel and the COVID impact in the second half of March. With the increased investments behind the power brands and improvement in the cost structure and a healthy inventory position, we are confident of reaching pre-Ind AS double-digit profitability in the power brand portfolio as soon as the business normalcy returns.Quarter 4 is a historically weak quarter for our specialty retail business. However, with the cost corrections and the business model improvements in Unlimited, the quarterly EBITDA loss was 80% lower as compared to pre-COVID levels. Sephora had a very strong quarter with our retail sales recovering to 114% levels and our online sales contributing to greater than 10% of the revenue.One of the areas that did not go as per our expectations was the wind-down of businesses that we are exiting. We have seen higher exit costs on both inventory and stock closure and a delay in the GAP exit, leading to higher operational losses. While all the brands other than GAP will cease to impact the numbers in FY '22, the GAP resolution should be completed in the H1 of the current fiscal.Over the years, the company has made big investments on the digital side. This includes our proprietary in-house omnichannel tech stack, deep talent and expertise in managing the direct-to-consumer digital business, and the product offering that has been specifically made for the online channel. These efforts have helped us achieve digital revenues of INR 700 crores, which accounted for more than 30% of our total revenues in FY '21. While the percentage contribution of online revenues will come down once the off-line business fully recovers, we expect a large growth in absolute revenues in this channel in the years to come.Our direct-to-consumer part of digital, which includes NNNOW.com and our marketplace model, grew 3.5x, and now comprises of 35% of the total online business. Over time, we see the share of the direct-to-consumer business to grow, which is strategically important as the DTC business allows a full control over the brand experience online.We have fully integrated our retail network with NNNOW.com and the third-party marketplaces. A substantial part of our off-line revenues were contributed by online fulfillment, and we see this share growing over time. These omnichannel linkages will help us increase store productivity and also improve sell-through and inventory turn.The improvement in working capital continued with a reduction of 30 -- INR 67 crores in gross working capital compared to December '20. Overall, during FY '21, gross working capital has seen a reduction of INR 523 crores. As we enter FY '22 with a much lower level of inventory, the fresh inwards will significantly enhance our freshness and support business growth and better productivity.The sharp reduction of gross working capital and the large infusion of equity have allowed us to reduce our net debt by INR 300 crores during the year. The net debt at the end of FY '21 stands at INR 943 crores.FY '21 was one of the most difficult years in the company's history. However, in spite of many challenges, we have been able to carry out many strategic resets, which have made us stronger. From a low point of quarter 1, when revenues fell to 12%, the business was able to quickly recover to 114% by quarter 4.The strong digital pivot saw the digital business moving from 14% of FY '20 sales to more than 30% of FY '21 sales and ensured that our brands remained top of mind to our customers even when they could not shop in stores. We substantially cut down on inventory and brought it down by around INR 400 crores. Having completed this onetime correction, we have put in place the processes and systems to ensure that working capital turns will substantially improve in the years to come.While the business saw very large cash losses in H1 of FY '21, the company raised a total of INR 860 crores of equity so that we were able to bring down net debt by INR 300 crores in addition to funding the large levels of COVID-led losses. In response to COVID, we reduced our overall cost by INR 540 crores, which is a 40% reduction on the total cost base. We expect a more than INR 100 crores of structural fixed cost reductions, which will benefit the business in the years to come.With the portfolio rationalization and the strong focus on 6 high-conviction brands, once the COVID's second wave abates, we expect the bottom line to significantly improve due to the exit of loss-making brands and operating leverage kicking in, in the power brands.I would like to now hand it over to Shailesh Chaturvedi to talk about the current COVID-related challenges and how he sees the opportunity moving forward.
Thanks, Kulin. Good afternoon, everyone. This is Shailesh Chaturvedi here. I hope you are all safe and healthy in these COVID wave 2 times.Clearly, our main focus currently in this round of second wave is safety of our employees and towards vaccination of our team. So 3 days back, we had our first on-site vaccination camp at our Bangalore office, where nearly -- probably more than 800 colleagues and even our business associates here and our partners and vendors got vaccinated. And we are now trying to conduct more camps across India. We are also in touch with malls and the department stores to prioritize vaccination of front-end staff, which is going to be very key as we revive the business.The current wave started impacting the business from the second half of March. While most stores operated in the first half of April, the Western region, Maharashtra, began shutting down somewhere around mid-April. And by the end of April, most of the network was shut down. Month of May has been the severest -- it has seen the severest impact with almost the entire off-line channel being in a lockdown and even online deliveries being barred in large parts of the country.The first week of June has seen many states unlocking with high street stores opening up with limited timing currently with constraints. We expect a gradual opening up of the network over the next 4 to 5 weeks. We hope that with the acceleration of vaccination programs, consumer sentiment should improve steadily.And one area which has been really strong in all this compared to the last COVID wave has been the online channel, as Kulin explained earlier in this call. We saw a good pickup in online deliveries in May month also. With uncertainty regarding the pace of the recovery, we have proactively taken required steps to cut costs and balance our inventory in this COVID wave 2.With the first round of unlock being seen in June month, I'm really excited about the opportunities before us. Our 6 high-conviction brands are leaders in their respective segments, and we have clear plans on how to scale them up profitably, and we are busy building our capabilities to execute our plans smartly.One good thing about our portfolio is that we have that right work-from-home appeal. And even in the COVID times when the recovery happened, our brands bounced back very strongly the way we saw in the H2 of last year.U.S. Polo is our largest and the most profitable brand. The key focus for us in U.S. Polo is to scale up the offline network also, including in smaller key accounts; strengthen our new categories like winterwear, kidswear, innerwear, footwear; and further cement U.S. Polo's position as a leading brand in both online as well as off-line channels. I've been working nearly 15 years with Tommy Hilfiger, and with this JV of Tommy and CK, I've seen how strong these global power brands are in India. In H2 last year, both brands, Tommy and CK, doubled their EBITDA. We will continue to strengthen their leadership aggressively with growing the online channel, accessorization of product categories in both the brands, and we'll increase the local production to improve margins in these businesses.We are also very, very excited to scale up Flying Machine plants as the online-first, youth-focused brand with the introduction of new categories in the online channel, such as womenswear, footwear and accessories in our partnership with Flipkart Group. In addition to online push, we are also rapidly scaling Flying Machine into smaller towns through its unique model called FMX. It's a model meant for small towns. This movement to small town India is likely to open a very large market for Flying Machine.Arrow has been going through a full reenergizing with a new brand ambassador, Hrithik Roshan. It has a completely revamped product offering, especially on the smart casual and the youth segment, right, for work-from-home environment. Arrow has a new store identity and has a full cleanup on the inventory. Market is hungry for Arrow.With the new season launch in autumn/winter '21, we are confident of significant improvement in scale -- sale and productivity at [indiscernible], and we hope to achieve a positive EBITDA in the second half of FY '22.Sephora is continuing to see very strong off-line recovery with many exciting new brand launches which are unique to Sephora and improvements we are making in our customer shopping experience. We expect a strong improvement in store productivity once the market normalizes. Our online business is also gaining momentum in Sephora, and we hope to significantly ramp up our online offering in the quarters to come.The planned journey in the Unlimited business on cost rationalization and on inventory optimization has been carried out fully, resulting in a much sharper cost structure and much lower inventory levels. This has ensured that losses are contained, and we are much closer to achieve a breakeven in this business as well.The key priorities for us in the current financial year include: one, significant expansion of our retail network by opening 150-plus stores throughout the country through the franchisee route; second, digital scale-up powered by category and brand extension, marketplace and NNNOW.com ramp-up, and further omnichannel linkages and strong relationship with the online world; third, strong control on inventory, which will allow us to significantly scale up revenues with minimal increase in working capital; fourth, rapid growth in new categories like innerwear, footwear and kidswear; fifth, strong push in sell-throughs and productivity in the retail channel through better buying, better planning and visual merchandising; and finally, sixth point, continued focus on cost management is so much required in these times.We are also strengthening some of our key capabilities in the team so that we can better execute our strategic plans. We are building a centralized sales function for the first time to get economies of scale across our brands, and we have hired a new Chief Revenue Officer who has joined us recently. This common sales structure will allow us to improve our market coverage and also give us efficiency.We are also currently strengthening our supply chain function, which we want to transform, and have hired a new supply chain head with a mandate to improve inventory velocity across the entire system and thereby improve turns, which are very important.We have also brought in many senior industry leaders in the last 3 months across our brands who have deep expertise in our domain, our industry domain, so that we can work towards energizing each of our 6 high-conviction bets towards our strategy of profitable growth. We have bold plans, friends, and I feel confident that with our strong -- uniquely strong portfolio of brands and a very capable and energized team, we will be able to steer Arvind Fashions Limited towards a very exciting future. Thank you.
Sir, shall we open the floor for questions?
Yes, Nirav. Please go ahead.
[Operator Instructions] The first question is from the line of Nishit from CWC.
My first question is actually on your -- on the balance sheet side. The -- it's good to see the turns in the second half, specifically, both on the inventory and debtors side showed a good traction. And from whatever you are saying, it looks like this -- there is still some room for improvement. So I we'd love to understand how should we think about inventory turns, right? You have already, right, inventory and both actually debtors. How should we think about it? What is the normalized levels? And what are the key drivers which will take us there? And I have a few more I can ask -- I'll ask them.
Shailesh here. As far as the inventory turns are concerned, it's like a top priority for us going forward. As we gain our scale both post COVID in terms of [ NSP ] and EBITDA, the key priority is how to improve our stock turns. Now during COVID times, the whole business closed down and inventory lies in the closed stores or in the warehouse. So it's closed down the turns. But what we have done is that we've gone -- last year, you see our DWC reduction of INR 523 crores. We've gone hammer and tongs in terms of reduction in inventory. Also, we have tightened our processes on buying and made sure that there was a lot of discipline on that.Also, I'll briefly just mention to you that we want to start a transformation project on the supply chain, and we've hired a sort of a domain expert who's coming with a mandate to increase the stock turns. So the whole idea is to improve stock turns and move towards a model which is more demand-driven than forecast and push model driven the way the industry has worked in the past.So there's a lot of focus going forward to improve the stock turns, and we are making sure that the discipline on inventory, discipline on the processes and also the new expertise on supply chain that we are trying to achieve to reach much higher level of stock turns than we have. Also, one thing that is sort of going to enable us is that our inventory levels are quite low as such right now and there's a need for fresh goods. And typically, fresh goods tend to move faster and give you a better margin also. So I think the way our inventory position is today, once the COVID sort of subsides and we move forward, I expect to have very good velocity on movement of goods in our business.
So Shailesh, if I understand it right, our inventory, which is roughly around 100-odd days plus or minus something, so can -- you are saying that turns could come down and the gross margins could -- going forward could also see better improvement because of higher fresh -- full prices? Is that understanding correct?
So let me break down your question into 2 parts. One is about the turns and other is about the gross margin, right? So as far as the stock turns are concerned, like I said earlier, there is a lot of emphasis to increase the stock turns. So there's no way we would want stock turns to come down. There's a good opportunity for us to increase the stock turns going forward, and it's a very important mandate for us and that's our key focus area. Second part is gross margin. So like I said earlier that inventory levels are now at historical low. Of course, currently, COVID is again hitting us. But once we come out of the COVID, we are expecting in this work from home, our brands are very well placed. Our inventory levels are quite low as we start filling in the channel again -- in a few months again. Our gross margins would kick in at a higher level because gross margin have a direct correlation with the freshness of the inventory. And as we pump in more fresh merchandise into the market, into different channels, we expect our gross margin to be at a very healthy level.
Great. The second question is on the digital sales. So you said around INR 700 crores was our total digital sales and of that, 30% was roughly your direct-to-consumer sales, which is both marketplace and NNNOW.com, right? So I have 2 questions here. Question number one that I want to understand is, are our terms of trade -- is it similar or better or worse off in terms of our digital sales? Like do you get better margins, better turns? Or is it similar margins? Or is it slightly lower?And the second question is with respect to both NNNOW.com, are we losing money there? And marketplace model, if you could just explain what exactly are we doing there in that marketplace model. These are the 3 questions with respect to digital.
So again, let me go one by one. So online revenue last year of INR 705 crores, 32%, growing 30%. So these are all very good numbers for us to take into the next year. We're proud of the scale we have risen. It's a market-leading position. That also helps us to get good margin because we are a very large player in this segment. And we have not just one model, we have multiple models from our own DTC and NNNOW.com to our own marketplace. And also, we have a very good business relationship with large portals, where we do large business with them also on online business. So our margins -- our online business is not deductive, it is additive. Its margins are as good as many other channels.Also, we have a very specific plan to improve the margins in the online business this year. What happens typically is that we tend to bring in old goods and sell to them at a certain margin in the online place. But the focus now is shifting to what is known as SMU. These are specially made merchandise units, which are like online for online. So what happens is that we use the consumer analytics of the online players, including our own NNNOW.com. And we design the SMU products which are right for this online world at full price, not a discount business. So we use the consumer insights of the online world, and we use our own brand and the product design strengths to -- it's like a good marriage between the 2. So it comes out as a SMU where our margins are very good. And this year, the biggest focus is SMU drive. So this is a full-price business where very decent, healthy margins for us, and we want to push that business. Our brands are very strong. We have a right appeal in the post-COVID world. And we want to use this appeal in the online world to further improve our margins, which are anyway healthy. But they can go up further through this drive of SMU line that we are talking about. The next question, I think you discussed NNNOW.
And the turns -- sorry -- Shailesh, sorry to interrupt but turns on the online business, are they similar or better? Or are they slightly worse?
Online turns are very good. For example, what I just mentioned, SMU, it's made to order. Immediately, we ship out, get our money. And so extremely fast turns. Also, we have unique manufacturing processes like flexi production where we can do small runs on a very flexible manufacturing where there's no inventory immediately low that would get shipped out to the portals or sold through NNNOW.com. So it's a very fast turn business. So overall, online is a faster turn than average. So it's better from a cash conversion. On a stock turn basis, online is a very fast business.Coming to NNNOW, NNNOW has reached a good scale. It's reaching -- the most important metric is the positive unit matrices, and it's reached that level. We're breaking even on that. It still remains an area of investment for us. We will continue to invest behind the whole experience of NNNOW, and we will support it through more and more differentiated merchandise as we go along. So NNNOW is that story.And the last question I think you asked was on the marketplaces. So we have built large capabilities in the last 1 year. COVID hastened and sort of made us do it even faster. So we have built a large number of warehouses, which are fully equipped to do B2C billings. And we have 5-odd warehouses right now, and we are looking at further strengthening that capability so that we can service our marketplace orders closer to the demand faster, probably at a local -- lower logistics cost.So marketplace is a business which has really grown significantly. We do, as you rightly pointed out, 35% from DTC, but that percentage is going to increase as we go along. And it's very important because it gives us a chance to influence the consumer experience online world in a very direct way, and that remains our focus going forward.
And just last question from my side. This INR 400 crore enabling resolution, can you just throw some more light on that as to how are we thinking about it? Because at these prices, to dilute any further will be like really very painful for investors like us.
Yes, let me take that question. It's Kulin here. See, we have gone ahead and done an enabling resolution, and we intend to have this as a rotating, enabling resolution which we are going to do every year. We believe that in any uncertain environment like the one we live in, having a resolution in place is a good idea. As before, we have always maintained that we will be proactive in ensuring that the business never has any want of capital. But at the same time, I'd also like to share that as of now, there is no immediate fundraise plan in front of the Board. But we felt that just looking at the uncertainties that we are facing with COVID wave, it is important to have the flexibility and have the resolution.
The next question is from the line of Sagar Parekh from One Up Financial Solutions.
Congratulations on decent performance. So firstly, on -- how should we look at the debt for FY '22, net debt figure? So I believe we are at about INR 920-odd crores level for March 2021.And secondly, if I look at your FY '21 cash flow, your interest cost is about INR 249 crores that we have paid during FY '21. If I even average out the total debt of -- for the year FY '21, it would be approximately about INR 1,000 crores to INR 1,100 crores, on an average. So I'm not able to reconcile. So basically, are we saying that the interest cost for the year was at 25%?
Pramod, do you want to...
Yes. Yes. So this INR 225 crore of interest cost includes Ind AS 116 interest on the lease liabilities. So that is a...
No, the cash flow -- I'm just saying -- I'm just looking at the cash flow statement, which says the interest cost is about INR 249 crores.
Yes, yes, yes. So that interest cost will -- let's break down the interest cost between 2 components. One is, the interest on borrowings, and then the other one is the interest on the lease liabilities, which is under Ind AS -- that long-term leases are capitalized, et cetera. So you back out INR 72 crore out of the INR 225 crore. That leaves us with INR 153 crore. That INR 153 crore is like -- while our year-end borrowings are at INR 900 -- a little over INR 900 crores, the -- we started the year with much larger borrowings. And before the fundraise in the month of July, the borrowing unfortunately went up further. And also, during the first quarter, during COVID period, in order to bring in a certain amount of liquidity and keep the operations going, we also had to incur certain higher interest costs. So therefore, one is to look at the year-end level, and other is to look at the year beginning and the buildup of the borrowing that happened before the fundraise happened, and our debt levels could come down.
Sure. So actual cash interest cost is about INR 150-odd crores is you're saying, right? So on a...
Yes. INR 153 crores...
INR 153 crores. So -- right. So that also is about 15-odd percent kind of -- even INR 1,000 crores assuming average interest cost for the year...
No. So therefore, we started the year with INR 1,250 crores. And then -- and that went up a little bit in the -- until the month of July. So we do have a higher level of interest in the first 4 months of the year, and then it sort of gradually came down.
One way of looking at it, Pramod, could be to see the run rate of quarter 4 interest?
Sorry, run rate of?
Quarter 4 interest.
Yes.
Right. And how should we look at the debt levels for FY '22?
Kulin, you will answer or...
No, go ahead, Pramod.
Okay. So for FY '22, we should be looking at approximately similar level of debt levels at the end of March '21. Should not be a significant difference as compared to the FY '21 level.
So debt will not go down? I was expecting the debt number to go down because, A, you will have some rights issue money coming in; and plus, assuming the cash flow for the year would be positive now given the fact that demand is likely to bounce back once the...
Yes, 2, 3, things...
If I can come in here...
Yes. Sure.
Let me take this one. See, there are 2 things. One, we are expecting a very, very significant ramp-up in revenue between what we achieved last year and what is kind of the business plan for this year. So it is a disruptively higher growth rate on a base because the business is scaling back after a COVID disturbance. But in spite of that, the working capital will not dramatically go up. It would go up somewhat.Secondly, there are some COVID uncertainties at least in the first quarter, which are going to impact the business, and we'll see how the COVID unlock happens and how quickly we move back. But because of those, it is -- on a conservative side, I think we believe that the debt level should be similar.
Okay. And on the interest cost, given the fact that now -- this INR 153 crores number should come down, right? Because I believe INR 153 crores -- since you mentioned that it was INR 1,250 crores at the start of the year and then we had some additional debt, so that's why the interest cost is on a higher side. But this Q4 interest cost number should be -- can I multiply that by 4 to get the interest cost for the year, for FY...
Broadly, yes.
Okay. And how much was the interest cost for Q4 then, excluding the lease liabilities?
I think it was around INR 35 crores.
Okay. So about INR 70 crores and another -- so INR 140 crores should be the number then?
Yes. You should be able to think about that.
[Operator Instructions] The next question is from the line of Priyam Khimawat from Infinity Alternatives.
So just looking at the numbers, we've done around 64...
Sorry to disrupt you. Sir, your voice is not coming clear. Can you come in a better reception area, please?
Hello? Is it better now?
Much better, sir. Thank you.
Yes. So just looking at your presentation, we've done around 64% recovery for our power brands. So assuming that we reached around INR 2,500 crore revenue mark for our power brands, we earlier used to do around [indiscernible] EBITDA margin. So assuming that we reach that maybe in second half this year or next year F '23, what kind of EBITDA margin are we looking at? Will it be substantially higher considering the cost reduction which we've done? Or will it be in the similar range? Just wanted to understand that from you.
Shailesh here. We looked at the -- this year into 2 parts, H1, H2. So we have started, unfortunately, with COVID wave 2. This first quarter got impacted. We also have some final cleanup on the GAP business that will get cleaned up in the H1. H2, we expect the EBITDA to sort of bounce back in that proportion.Well, power brands are already delivering good EBITDA. Even in the last quarter, if you see, the power brand EBITDA is fairly good, middle double digits, and it should continue its improvement journey as we bring in more and more fresh goods, where the margins are quite good for us. So as we grow the digital business, as our cost efficiency kick in, more fresh inventories go into the market, the EBITDA margin should be better.
Just to put my question another way, like, we've done around INR 500 crores-plus savings in costs this year. So how much of that do you think is sustainable? Because at the start of the year, we were telling that around INR 150 crores, INR 200 crores of the cost reduction is sustainable on an annual basis. So just wanted to understand that.
See, if I really see the cost elements, so there were rental savings, there was a supply chain saving, there was manpower cost savings. So definitely, there's a -- INR 100 crore-plus kind of saving is structural, and it will go forward.Some of the costs as we scale up the business significantly, hopefully, in the second half of the year will come back. So the rents will not remain at concession if the business bounces back. Rent will go back to its contractual amount. A little bit of employee also we'll have to hire as we -- to support the growth.So definitely, a significant portion of the cost saving is structural, and it will accrue and will go forward. There is some we'll need to sort of add back the costs. So I don't know whether it answers your question.
Okay. Understood. Fair enough. And just another question. Our F '20 rentals were around INR 400 crore, actual rentals, without this Ind AS impact. What kind of concessions were we able to get this year? And what is our actual rental outflow to landlords this year? If you could just help me with that number.
So there are 2 forces happening right now because that will make it difficult to put a number to the rental right now because the first quarter COVID impact, our discussions are in progress with our partners' landlord. We've already written letters to them seeking help. And they'll get resolved soon, but we don't know the exact number. We can't comment on that. Something is not certain as yet.Second part is also that there is a plan for growing the business to the franchisee network. So there is a possibility that we will convert some own stores to franchisee stores and -- as we ramp up the business forward. So I'm unable to put a number to the rental for this year as...
Yes. Sorry, sir, that is understood that for F '22. I was just trying to understand from F '20 to F '21, which is the last year which we've done. F '21, what was our actual rental outgo?
Okay. I don't have that in -- Pramod, do you have that? Or...
Pramod, can you...
We'll take back this question and come back to you. Ankit will come back to you with an answer. Ankit, that's fine, right?
Yes. Priyam, I'll come back to you on this.
Sure, Ankit. Sure, Ankit. I'll get back. Okay.
The next question is from the line of Dhruv Shah from Ambika Fincap.
Congratulations on a decent Q4 performance. I just have 2 broad questions on 2 of your brands. One is Sephora. What -- how do you plan to ramp up now? Because seeing your competitor doing really good growth, what are your plans in Sephora going ahead?
Sephora is a brand which is really known for its shopping experience. And we saw in the month of January and February this year, Sephora recovered the [ past year ] business the fastest. So there is a very strong consumer pull for this brand. And we expect that the post-COVID Sephora will continue to grow rapidly. We are upgrading the shopping experience even further. They are very good already, and Sephora is a leading brand in most malls. So we want to up that game further.Second thing we want to do is that we have a very strong line of launches of exclusive brands, and that's very important in the -- this beauty segment. So there's a -- there are 5, 6 very, very strong mega brands which are in the pipeline. In fact, 1 or 2 we had to delay by a couple of months because of the current COVID wave. But that exclusive pipeline of these power brands in the beauty segment will help Sephora further. Also, we will explore whatever is the possibility of expanding the geography of the Sephora business in India as we go along.And lastly, online is very important. We have seen a good traction with Sephora in our own marketplace and in our own NNNOW.com business. And very -- we started it recently, and in a very quick manner, it has crossed the double-digit contribution for Sephora. So this online journey will continue to grow, and it will help the Sephora business to grow.So the excitement at the store, launch of exclusive brands, online linkages and the growth that we are planning, all these will take the Sephora business forward.
Right. And my next question is on Unlimited. How do we -- and so are we planning to close any further stores? Or are we done with the realignment, restructuring and now onwards, this year, you will see a breakeven and from next year probably you will see some EBITDA positive overall, Unlimited, please?
So there was a big drive to rationalize the business. We closed down a large number of not-so-profitable stores. So the current distribution network is quite healthy. Unfortunately, currently, COVID is impacting in the pure retail. With online linkages, it's impacting more. But as we come out of the COVID, I think Unlimited is a very cost-efficient model. The last year, the new model of [ Saral ] stores that was done is very successful. Also, Unlimited has built its private brand expertise further and also it built its online and the omni capability further in the last 6 months. So Unlimited is in a very healthy and efficient way. That's why you'll see in the last quarter also, its losses were 1/3 of the same quarter last time. So it's at a fairly efficient stage in the times when normalcy returns, and we expect the -- Unlimited to be sort of close to break even in the normal times. Currently, COVID is impacting most businesses. But as we talk about normal times, Unlimited has reached a fairly good degree of efficiency.
Let me put it across, Shailesh, that -- well, Kulin says that there is a ramp-up. So whatever ramp-up you're seeing, is Unlimited a part of that? Or you would just have a focus on 6 brands and Unlimited is not part of your ramping up plan?
So what we do is that we do one step at a time. In Unlimited, our focus was to restructure the cost base so that we don't lose money, and it reaches its breakeven. And I must say that Unlimited team did a great job of very rapidly bringing the cost efficiencies, cutting down stores, getting them [ Saral ] model, getting the capabilities on online only, new tabletops, new pricing method. So they've done a good job of that messaging. We just want to continue for a few more quarters in that phase where we want to make sure -- also, COVID is not helping right now, but we want to be 100% sure that these efficiencies that we already got and we saw in the quarter 4 much sharply reduced losses. It stays, and we want that -- to see that these are sustainable. And then we will figure out our next stage of the Unlimited business.
[Operator Instructions] The next question is from the line of Chetan Phalke from Alpha Invesco Research.
Sir, I'll just continue with the last question. I think out of total capital employed, close to INR 400 crores is in our Unlimited business. So how do we ensure that we get to a reasonably okay capital employed -- return on capital employed going forward over there? Can you just elaborate how we can get there? Because we haven't been there in the last 3, 4 years.
I just want to reconfirm the capital employed number, and our CFO, Pramod, can just comment on that, then I'll take the answer forward.
I think capital employed should actually be much lower. I would separately like to understand from you as to how the INR 400 crores number has been arrived at because if you were to look at the inventory, and the inventory includes a fair amount of partner brands, which are like -- we account for them as inventory in our books, but there are corresponding creditors, and we have to pay only on the basis of the secondary sale. So therefore, you might be looking at only the gross and not the net. So...
Let me just add to what Pramod is saying. We -- in my view, the capital employed is a much lower number.
Okay. Okay. Is it less than...
But anyway, let's come to the question -- yes, yes, sorry.
Any ballpark number that...
We can separately reconcile the number, but it will be significantly lower than INR 400 crores.
Okay. Okay. Got it.
Sir, do you have any follow-up question?
Yes. So I mean, how do we -- what is the road map going forward for Unlimited? I mean recently, there were some news reports that we might just find a buyer for this division and it might be disposed of to someone. Is there anything like that on cards? Or are we looking to turn around the business on our own and go to a 20-odd percent kind of a return on this business?
Let me come in here. This is Kulin here. I think what we have clearly maintained is that as far as we are concerned, we want to invest our capital behind the 6 brands. Our Unlimited business, we wanted to get to a milestone of achieving 15% store profitability. And side-by-side, as Shailesh mentioned, it is becoming quite a large, profitable online business. Having achieved these 2 milestones, on the first milestone, I think we are still perhaps 6 months away. Second milestone of scaling up digital through the private label online route is going quite well. But once we have achieved these milestones, the idea should be how do we create long-term value. And we are not looking to put capital employed behind growth in this business.So we are looking at all the different ways in which we can ensure that the platform which we have created, which is now a good, large, reasonably scaled and omnichannel platform, how we can realize the right value and the next steps in terms of unlocking something out of this.So we don't have a specific update we can share at the moment except to say that we have made the business kind of -- we have brought it to a level which is healthy. We'll continue to improve its profitability and scale it online with the existing network. And we'll parallelly look at ways in which we can solve the issue around not having -- not putting capital behind it to scale it up ourselves.
Okay. Sure. Sure. So sir, one more question. I mean our inventory correction in Arrow is fully complete now? And can we see fresh inventory spillovers given that our retail side is closed since the last couple of months?
Yes. In fact, the inventory correction has been the sharpest in Arrow. And in fact, there is a shortage of inventory right now as we speak. And as the market improves post COVID, we plan to fill in the channels very soon in Arrow. And we're hoping that the second half of this financial year, Arrow should be an EBITDA positive brand.
Okay. Okay. Yes. So can we see fresh inventory spillovers in our other brands, let's say, in Polo, in Flying Machine, in other brands? Because the retail side is closed.
So what has happened is that, we've seen last year also some best practices that we will carry to this COVID wave 2. So inventory correction is important because we don't want the turns to slow down or the freshness to go down. So we have cut down increase by a couple of hundred crores in this round of COVID and sort of made sure that both on cost side and also on the inventory side, we remain quite sharp in order to fight this COVID wave. So while we have cut down the inventory, but we will have adequate -- fresh and adequate volume of inventory to supply to the market as the market picks up.Also, the second half is full of season. So Diwali this year also is 10 days earlier. So we expect Puja/Diwali season to start at least a fortnight early than -- earlier than last year. And that also would ensure that the channel, et cetera, starts picking up goods faster. And we also had a very low level of inventory with the trade channel. We've been very cautious about that channel. So my sense is that, that channel is also hungry. Just currently because of COVID, everybody is cautious. But once the market picks up, we should be able to apply a very large amount of fresh inwards in most of our goods -- most of our brands -- all of our brands, including surely U.S. Polo, which is our biggest brand in the market.
Great. Okay. Yes. Shailesh sir, I think you were mentioning about improving our supply chain drastically and improving our stock turns. So can you elaborate more? I mean what are the aspirational stock turns that we are looking at, let's say, 3, 4 years down the line for our power brands?
So frankly, for this financial at an aggregate level, at AFL level, power brands would be even better. We were looking at closer to 2.5 turns and somewhere in that zone, between 2.25 and 2.5, and that's our first journey, which we should be able to achieve that turn. And then the journey is to take that number even higher.So the process is starting. As we speak today, we have made huge progress in terms of inventory reduction, buying control, new discipline on our processes, sell-through rigor in the company. And with the new project that I mentioned, that there is a whole mandate to push the stock turn agenda forward. And I'm sure our power brands will even excel the numbers that I just sort of gave a hint about.
Okay. Are there any global benchmarks, I mean, for the assets and for the stock turns? Or Indian market is vastly different than the other markets, so we can't really get over there -- get there? Any comments on that side?
Yes. I mean we have -- we know the best practices in this industry. But I think the way we should look at it is that we have our own reality, and we want to improve on that reality and we want to do it fast. So our game is what we did last year and how do we improve it rapidly going forward.
If I can just come in here, Shailesh, to add. One thing that is happening in this business is that the earlier benchmarks around excellence have been built more around the velocities and turns of largely a physical business. And the reality of the world is that we are moving more and more to a digital-centric business. And as Shailesh was explaining earlier, digital is no longer the factory outlet of the physical. We are actually creating both an offering and a supply chain separately for the online channel. And this supply chain can be very, very real time because unlike offline where products are spread across a lot of retail stores and there is a certain speed at which products can move from the production hub to the warehouse to the store, in digital, it is very, very disruptive.So I think the old benchmarks should not be taken. I think as we build more and more of a high-velocity, digital-centric model, we should keep pushing the paradigm on how inventory turns can keep going up. And I think the omni world will change some of the older paradigms.
I'll give you one example to just take forward from Kulin what he said. Look at the omni linkages, right? The -- all -- a lot of our stores, including in power brands, are linked with the online world. And there is -- a large percentage of growth in the store channel is coming from the omni fulfillment. So that's another disruptive way of increasing your sell-through and the stock movement in the physical store through the omni linkages. And that's -- it's a completely new sort of linkage and capability in our industry, and they will all help us to increase the sell-through and the movement of our products.
Yes. Just one last question for Kulin, if I can put that forward?
Please go ahead.
Yes. So which brands, apart from GAP, wherein we are facing exit issues? And what kind of capital employed will get free once we exit all these brands?
Yes. So we exited quite a few brands over the time, right from Nautica, Gant. We had some online-focused private labels that we had built earlier, Ruf & Tuff, Newport. These were all the brands we exited. And we had broadly indicated that these discontinued brands would release a little over INR 150 crores of capital employed. I believe a little under half of that has been realized. Whatever is left is largely in GAP, which, as we mentioned earlier, by the -- in H1 of this year, we should have a resolution on that as well.
Okay. Okay. And Kulin, with respect to Sephora, what kind of sales we can achieve, let's say, in 5 years? And how is the industry positioned? How are we placed compared to Nykaa? Because I think Nykaa is also coming up with IPO. Can you just give us a brief on how the industry is placed going forward?
Sure, sure. See, one thing that I'd like to share is that Sephora is a prestige business. The average ASPs are north of INR 2,000. So it's, in a sense, a little bit of a more premium luxury format. So there is some correlation between the price points and the kind of distribution and scale that can be achieved.I don't mean to say that the opportunity is not exciting. In fact, it's very exciting because today, we have seen that wherever we place Sephora, it has the highest productivity in any mall of any concept. So the sweet spot of that premium customer, that prestige customer, that fit is perfect with Sephora.I think whilst India will be today able to possibly absorb somewhere in the single digit, mid- to high single-digit number of stores every year, because this format goes to the slightly more affluent malls and the premium locations, I personally feel that as the per capita income goes up over the years, I think the number of stores you will be able to -- India will be able to support will keep significantly going up. It's a little difficult to predict the curve there, but it's very clear that the number of cities that can support the Sephora price points will keep growing. And there is premium malls coming in. So that's the answer on the off-line side.I think the disruptive opportunity is on the online side. And in the past, our online offering was, first, a function of the size of stores which we had. What we have done since the last year is to, again, like we have done in apparel, look at online for online. And what that means is, we can definitely enhance the offering in digital.The price points, obviously, cannot go to a mass pricing because that is not Sephora. But there are so many exciting global brands that Sephora has, exclusive brands which have not yet come in India. So over the next 18 months, we have a very exciting calendar. And broadly, the offering is going to double.So in online, a lot of the sales scale-up is directly proportional to how the offering goes up. And beyond that, of course we will be investing more in customer acquisitions, more cosmetics-based feature sets. There are -- Sephora is very strong in its global management on digital. We are working with them to bring a lot of those best practices and knowledge to India.So I think today, it's very difficult to plot out exactly how the hockey stick of digital will go. But I think we will be focused enough that we really expand and scale up the digital. And the off-line will be a function of the mall supply that comes in, in India.Both put together, I don't see a world where Sephora will not become a large force to reckon with for the simple reason that the beauty of Sephora is that 60% of the offering is exclusive. It's unique between Sephora private label and all of these exciting brands. And because it's globally a EUR 15 billion format, it creates some of the coolest cosmetic brands in the world. So that engine of new brands, which will keep coming in, will come into India through Sephora. So I think structurally, opportunity, very exciting. And we are doing what it takes to start amping up the digital opportunity but within the price points and the ASPs that Sephora stands for. You cannot suddenly become 1/4 the price because that is not Sephora.
Right, right. So are we launching a separate website or a separate app for Sephora? Because I think from what I understand, at this point of time, we don't have a separate app to do it, to...
Yes. So we are doing it today through our multi-brand app, and we are working with global -- the way Sephora works is the digital front end or the retail store is like the off-line retail store. There is a certain SOP, structure and way it works. So we would work with Sephora global. If that storefront has to come to India, we'd have to work closely with them and bring it, which discussions and efforts we will be making in the quarters to come.
Got it. Got it. What percentage of our sales is online in Sephora at present?
Right now it is just low double digits. It's between 10% to 15%, but it's ramping up, as Shailesh said. The year before last, it was negligible. So it's become material last year. And we are hoping -- this year, we had quite a bold -- we have quite a bold plan to grow it significantly this year.
The next question is from the line of Abhijeet Kundu from Antique Stock Broking.
So my first question was on U.S. Polo. What would be the salience of kidswear in U.S. Polo? And how has been the performance? Looking at the kind of growth that kidswear has in the country, U.S. Polo can see a good amount of -- significant growth there. So during the quarter also, what we have said is, innerwear and footwear have grown by 30% [indiscernible]. So if we have to look at kidswear, how has been the growth. And what is the way ahead for U.S. Polo?
See, in our 2 brands, mainly USPA and another more premium brand, Tommy Hilfiger, we have a very well-developed kids' line, and both do fairly good contribution to the business. As far as U.S. Polo is concerned, it's already a leading player in the kids business and all the kids-focused shops, and it accounts for a fairly close to a double-digit number in our own stores also. We do large business of boys' line in U.S. Polo. There's opportunity to grow the girls' line of business in U.S. Polo. So we have plans. And in fact, in the starting comments, I had said that we want to grow the adjacent categories. And I had also mentioned kidswear. It's definitely a focus area for us because we see power of U.S. Polo and the brand pull it has for even kids' lines is very strong and we have very strong demand coming from our partners for the children's wear. So you will see increasing energy. You will see a little more action in children's wear from our side in times to come.
Okay. And so how has been the performance during the year? I mean during FY '21, how has been the performance of kidswear in U.S. Polo?
Actually, there are different phases of the children's wear demand. So when the unlock was happening last year in August, September -- September is when the final unlock 4 happened. At that point of time, we saw the kidswear business had come out fast because kids grow in size and they change size faster. So amongst the lockdown, we saw both online and off-line very -- first few segments that picked up along with open footwear was children's wear, and we did very good business in that season. After that, it has stabilized to the normal level of business. But as we grow U.S. Polo further in online and further in smaller tier towns in India, we see children's wear will be a key part of that strategy.
Okay. And my second question was on -- you have seen a significant growth in online revenue [indiscernible]. And -- but apart from the partner websites, the sales which are happening on your own website, there is one issue that normally comes up is the return ratio, so which typically, retailers are trying to mitigate the impact through omnichannel. So how are you planning to manage that? I'm just trying to understand the overall system.
In -- as far as the return of stock in the online channel is concerned, so we see NNNOW.com has a process on return mechanism. And I don't have off-hand all the details with me, but I am aware that the percentage of return that we were getting from NNNOW.com has significantly reduced in the last 3 months. So our efforts have been to make sure that return is managed well. And maybe I think Kulin can throw a little more light on that question of the return management on the NNNOW.com. Kulin, can you... [Audio Gap]
Question, please?
Kulin, we're talking about the stock return process in NNNOW.com, consumer returns.
What's about it? Yes. Can I understand the question?
Yes. Essentially, what I was trying to get a handle on was on -- so what happens in online revenues, a lot of concerns are there on return ratios because [indiscernible] typically, the understanding is that return ratios are in the region of 25%, 30%. So [indiscernible] from your partners' website is fine, but when it comes to your own websites, you're mitigating return ratio or managing it through omnichannel or something.
Yes. So the way it is managed is that, first of all, you have to assume that the return is going to come in because it's a part of the business model. So whenever we talk about net sales in our own business, we actually net it for the return provision. So it is pre-provided. We would actually only show 70 -- 65% to 70% of the sales as the book sales. And then on how do you efficiently manage the return, the world is becoming more and more sophisticated, where you try and take the returns locally, reprocess them and get them back into a salable state as fast as you can. We are making efforts to make that journey faster and faster. So in the earlier model, everything would have to come back to the central warehouse. We are now moving to a model where we reprocess it in the state level itself and get it back into retail stores quickly. So we are still optimizing that. But as far as revenue recognition, it's always net of the return provision.
Okay. Because there is a physical cost to it. Every time it is returned, [indiscernible] logistics cost...
Yes. So when we put logistics cost, it is built in largely almost in our online model. 50% of the cost is the return logistics cost. Even though only 30% returns come, the costs of returns are higher than the costs of forwards. And that is also built into the margin model. That's a part of the logistics cost. But the good part of an omni model is that since you deliver from stores, you have a lot more closed deliveries. And over time, we will have a lot more closed return. What that means is, in-state return and in-state delivery, as that keeps going up, the percentage of logistics cost keep coming down.
The next question is from the line of Nishit Rathi from CWC.
Just 2 clarification. You said you are targeting an inventory turn of around 2, 2.5x. I'm assuming you're talking 2 and 2.5x COGS, right?
Yes. It's COGS to COGS. Yes.
So that means 4, 4.5x...
We've seen some -- sometimes some people take sales to the COGS, but we are talking about COGS to COGS. That's the right way to look at it.
No, that is fair. So I'm just trying to understand. So you're basically saying that whatever -- you're basically talking of 4 to 5x sales number, right?
In inventory...
Yes. You have to double it..
That is -- exactly, right. And so roughly...
That is point number one. Second was, if I understood it right, in Sephora, what you're basically saying is we are going to sell on NNNOW.com, which is our own platform. And we are going to have a storefront in all the marketplaces. That is -- that could be Nykaa, that could be Myntra, that could be anywhere, right? Is that understanding correct?
No. No, no, no, Nishit. Sephora globally is EBO format. In some select markets, they also do third party. I mean -- so we would work with them to ensure that we keep making Sephora goods available elsewhere. I think the gentleman that had asked the question wants to say in addition to a multi-brand storefront, would there be a Sephora-only storefront? And that was the discussion we were having. I think on third-party marketplaces, I mean, in certain markets, they have done that. And as the markets in India evolve, we will work with our partners to see how we can optimize the availability of that 60% exclusive product that Sephora sells.
But today, basically, we only sell Sephora online primarily through our own platform, right? Is that correct?
We only sell it today through NNNOW.com, and the discussion we were having was sephora.com.
Ladies and gentlemen, due to time constraints, that will be the last question for today. I will now hand the conference over to Mr. Ankit Arora for closing comments.
Thank you, everybody, for joining us on the call today. If any of you have any further questions which have not been answered on the call, please feel free to reach out to me and I'll be happy to answer them off-line. Thanks for your time, and we look forward to speak to everyone.
Thank you very much. On behalf of Arvind Fashions Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.