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Ladies and gentlemen, good day, and welcome to the Q1 FY '24 Earnings Conference Call of Go Fashion India Limited. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions, and expectations of the company as of the of this call. These statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. As a reminder, all participant lines will be in listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. [Operator Instructions]. Please note that this conference is being recorded. I would now like to hand the conference over to Mr. Gautam Saraogi, Executive Director and CEO. Thank you, and over to you, sir.
Yes. Thank you. Good evening, and a warm welcome to everyone on the call. Along with me, I have R Mohan, our Chief Financial Officer; and SGA, our Investor Relations adviser. I hope you all have received our investor deck by now. For those who haven't, you can view them on the stock exchange and the company website.The retail sector in India has experienced a multiple decline over the past few months, and the current operating environment has presented significant challenges for businesses in this industry. While marking as a whole export, our company has demonstrated exceptional resilience and growth, allowing it to outperform the market. We delivered a revenue of INR 190 crores, [indiscernible] a growth of 15% Y-o-Y. Our PAT also grew by 8% to INR 26 crores. This growth has been on the back of volume growth and consistently increasing number of EPOs. Despite the challenging environment, our SSG grew at 2.46% for Q1 FY '24. Same cluster sales growth was at 16% on a Y-o-Y basis. 96% of our sales in Q1 FY '24 are full priced sales. The average selling price of our [indiscernible] stood at INR 771 for the quarter. In Q1 FY '24, the company has added the next 25 new stores for the quarter, and this stands at new total of INR 655 stores. An essential aspect of our expansion strategy is our focus on venturing into new markets and establishing our presence in different cities. In line with this, we have expanded our network to 6 new cities during the quarter, bringing our total presence to 149 cities. This strategic move reflects our commitment to tapping into untapped markets and catering to its diversely of consumers across different regions.We plan to expand by 120 to 130 EBOs every year. We focus on establishing additional EBO across Tier 2 and Tier 3 towns and deepen our presence in in existing geographies and also grow our existence in newer geographies. This expansion aligned with the aim to bring our products and services closer to the consumer, enhancing accessibility and convenience. To further enhance customer experience, we are also exploring omnichannel engagements, leveraging technology to create a seamless shopping journey that transplants physical and online bounding, reaching consumers across various cities. We are present across 1,822 large-format stores. Our LFS business has come back to normalcy during the last quarter. As part of our efforts to improve the efficiency of our business operations, we have prioritized maximizing the utilization of our working capital. During the previous quarter, we were able to reduce the number of days in inventory by 19 days. Overall, our working capital days stood at 136 days in Q1 FY '24. The strategy has enabled us to optimize our operations, resulting in increase in our operating cash flow. Our Pre IND-AS 116 cash flow stood at INR 25 crores, and our Post IND-AS operating cash flow stood at INR 49 crores. Our ROCE and ROE for the business on an annualized basis stood at 19.1% and 19.8%, respectively. A critical factor contributing to our success has been establishing a robust branding teams. This team has played a pivotal role in crafting a clear and compelling brand identity, effectively communicating our unique position to our target audience only and creating a strong and lasting presence in the market. The Indian retail industry is projected to maintain a steady growth rate of 9% CAGR till 2030, driven by increased discretionary spending, increasing urbanization, changing fashion preferences. India's fashion and apparel retail sector is expected to contribute significantly, accounting for 45% of this growth. By the end of the decade, the industry market volume is estimated to exceed $2 trillion. Looking ahead, we are enthusiastic about the future and remain committed to our innovative and creative approach in the bottom wear.Our determination to introduce new designs will respond with our customers, driving further brand loyalty and engagement. By expanding our brand destination, we aim to offer our customers a more delightful shopping experience, which in turn will enable us to achieve a growth rate of 20% plus CAGR and gain a larger market share in the years to come. With this, I would like to hand over the call to our CFO, Mr. R. Mohan, for the update on Q1 FY '24 results and financials. Thank you.
Thank you, Gautam, and good evening, everyone. The company has delivered strong growth despite subdued demand and a challenging environment. Our revenues for the quarter stood at INR 190 crores as against INR 165 crores in Q1 FY '23, a growth of 15% year-on-year. Gross profit stood at INR 117 crores, with a growth of 16% Y-o-Y with a GP margin of 61.3% for the quarter. GP margins increased by 70 bps on Y-o-Y. Our EBITDA for the quarter stood at INR 64 crores as compared to INR 53 crores in Q1 FY '23, a growth of 21% year-on-year. Our EBITDA margin stood at 33.8%.Profit before tax for the quarter stood at INR 35 crores, a growth of 9% year-on-year, whereas profit after tax for the quarter stood at INR 26 crores. An 8% year-on-year growth from Q1 FY '22. Our PAT margin stood at 13.8%. With this, we'll now open the floor for the questions.
Thank you very much. [Operator Instructions] The first question is from the line of Devanshu Bansal from Emkay Global.
Congratulations on a good set of numbers under challenging circumstances. Gautam, I note that the ASP for the company has increased by 7% to 8% in Q1, while the reported SSG is at about 2.5%. This suggests mid-single-digit or even higher volume degrowth. So just wanted to understand 2 things here. One is, what are the drivers of this [indiscernible] ASP, which has grown by 7% to 8%? And secondly, obviously, times are challenging. So what are your sort of initial expectations on volume growth revival?
So on the first question, see, the 7% growth, what we had in the ASP is largely driven by the change in product mix. So just to go a little deeper, if you take the 2.5% of SSG we have, is only to the extent of 1% or 1.2% was impacted due to the historical price hike. The balance has been completely driven by product mix. So our volume degrowth SSG number is minus 4% and reported SSG plus 2.5%. So in this, plus 1% to 1.2% would be related to price hikes, which were done in December 2021. And the balance is because of the product mix. So the price hike impact on SSG is largely tapered off.
Got it. And how sustainable is this Gautam-- just to complete this question. So from a better revenue mix perspective, so this rest, I would say, is about 6% growth in ASP. Is this what you expect to continue going for the next 3 quarters?
We are hopeful, once we can continue at 5% to 6% increase in ASP. And I think because of the newer products what we are coming up with the slightly higher selling price. So I think we should be able to keep a -- our original target of SSG was 10% on a value level and 5% on a volume level. So we would idly hope that our product mix can drive about 5% to 6% increase in ASP.
Okay. And about the volume growth revival, what are your initial expectations on that?
See, the consumer market has been a little struggle over the last 4, 5 months, or 6 months. But look, we're very hopeful that flexibility [indiscernible] in Q3. So Q2 onwards, we are very positive that we should start normalizing a little bit. And maybe by the Q3 festive quarter, we should have a good big success. So we are expecting that in Q2, if we are able to at least have -- expecting to have more degrowth in volume. I think we've done a good job. We've delivered a minus 4% on the SSD level. We would be hopeful that this coming quarter in Q2, we'll be able to make that negative growth. [Indiscernible].In Q2. So our first target that is minus 4, should come down to 0 before we think about positive volume growth in Q2.
And secondly, on the cash flows, working capital. So we have generated about INR 25 crore operating cash in Q1 versus last year, full year, we delivered about INR 20 crore cash. So just wanted to understand, can we expect this kind of cash flow to accrue in coming quarters as well? Or this is more of a seasonal thing, and you will be investing in working capital going into next --
This is a good question. We have generated good operating cash flow because we have created some efficiencies in into optimize inventory. But see, what will happen is in Q2, our inventory was slightly more because that's going to be a quarter just before the first quarter. So on a quarterly basis, cash flows will go a little up and down because of the seasonality perspective. However, on an annualized basis, we are expecting that we will deliver 50% of pre-ended EBITDA to operating cash flow. Right now, we are at 65%. If I do my current conversion of pre-ended EBITDA to operating cash flow right now, converted 65% of our operating EBITDA to for OTS. On an annualized basis, we will be looking to generate and convert 50% of our pre-ended EBITDA on annualizes. Some quarters might be up and down, but on an annualized basis, we would look to [indiscernible].
Just a related question to this Gautam. So my estimate suggests that you may be -- you may end up generating about INR 17 crores, INR 18 crores of operating cash this year, so base 50%, whatever. And we already have about INR 140 crores, INR 150-odd crores of cash. So does this suggest that we will be sort of increasing our pace of store expansion? So what are the plans for utilizing that cash on the balance sheet?
Yes, it's going to go towards store expansion. So this year, we are going by a target of 120 to 130 stores. And next year, we will start increasing that number to 150 crore to 170 stores because we are building on [indiscernible] well. And we've had new recruits in our [indiscernible]. And it will take some time for them to settle down because the new development also is a unique skill set. So I think by next year onwards, we should target to look to open about 150 to 170 stores. But this year, our target will remain the same at 120 to 130 stores.
The next question is from the line of Sameer Gupta from India Infoline.
Firstly, I want you to address this challenging quarter for retail. What, in your opinion, are the reasons for this? And in your experience, have you encountered such an environment before? And typically when -- or how much time does it take to turn around? And in this context, can you give some broad consumer trends within your category, which are the segments that are more affected or less affected geography-wise, price point-wise, any color on making us understand the slowdown a little better?
Yes, sure. So see, I think the slowdown from what I understand is that the consumer sentiment has been skewed towards more services than have real consumables. And you've seen the consumers that have preferred spending on services like travel, leisure, hotels. So I think the little priority of consumers over the last couple of quarters has shifted towards that. In my experience, look, we do come back to normalcy. It's very difficult to predict how long. But we are hopeful that by Q3, we should have some sort of normalcy. Q2 will be like a transmission or reviving in the quarter. So by Q3 is when we see the demand from a consumer perspective should be back to some sort of normalcy. What was the second question?
Any broad consumer trends that you can see?
Yes. See, I think what has happened is, for us, what we have noticed is that the metro cities or Tier 1 cities have been fairly better than Tier 2, Tier 3. But our presence is more we want to begin with more metro cities to begin with. So we have done better than most other companies from that perspective. And we have seen like for us, North India has done fairly well and Delhi NCR if I take in Q1, Delhi NCR which had the maximum highest [indiscernible]. So for us, certain pockets have done very fairly and some pockets have struggled. But because we are a more metro city brand of [indiscernible] brand, the impact of the slowdown has been far lesser on us than compared to others.
Got it, sir. And any trend on footfall? Are you clocking similar footfalls as you were? Or is it primarily the --
What we have started doing is we have started tracking footfall by the mechanism bill cuts. So we have seen that in Q1, we have seen a decline in bill cuts. So when bill cuts drop, it's a clear indication that footfalls have dropped at store level. Because there is a drop of bill cuts, that's why there has been a degrowth of minus 4% on the volume SSG.
Got it, sir. Second question, if I may. This 2.5% SSS growth this quarter. Now I understand that you are still expecting normalcy in 2Q, but are we still good to guide for a double-digit SSS growth and a 20% plus sales growth this year? Or do you think that may be a stretch, given the first-quarter performance?
See, I think we will be in a better -- for an annualized basis, what rate you would end up achieving, you will probably be in a better state, you give it probably at the end of Q2. But in Q2, we are hopeful that if we are able to get a 5% SSSG in the current scenario of things, we have been able to do 5% SSSG with no volume growth. I think we'll be in a good position.
Got it, sir. Third question, if I may. Other expenses are down 7%, and this is despite some 24% increase in stores. So is it just ad spend phasing, or there are certain costs that we have cut down, and these are likely to come back as volumes pickup.
These are largely absent. I'll tell you the rationale behind [indiscernible] quarter. And I'll tell you from my experience of so many years in retail, whenever there is a slowdown in the market, advertising should be very frugal, because when the consumer intention of buying is not there, doing very high ads don't make sense. So the reason we didn't do ads was because we didn't want to waste money. I mean the idea was not being that we want to maintain our margins, [indiscernible]. That was not the answer. The idea was that the consumer is not willing to buy back easily right now. And in a tough environment like this, spending higher on advertising and wasting money does not make any sense.
The next question is from the line of Prerna Jhunjhunwala from Elara Securities.
I would like to understand this reduction in inventory days. We saw a reduction in Q4 as well as now in Q1. So what steps have we taken, and how sustainable these reductions in inventory days are?
See, I think we are pretty much sustainable, we've evaluated how much raw material will be here, how much could we have at the warehouse, and we have taken those necessary steps to optimize them. Today, we have about INR 221 crores inventory which is about 107 days. So we are looking to bring it down to 90 to 95 days by the end of the financial year. So in Q2, inventory rates might slightly go up again because we would be building some stock from a festive [indiscernible]. But on an annualized basis, we would really expect our inventory days to come down to about 90 to 95 days.
Okay. And this is largely with store rationalize, like store increase and rationalization of inventory or -- any other steps apart from this that you have taken?
The only way inventory days can actually come down if either the revenue goes up, or the absolute inventory will come down. We are looking at both. So A, because of higher revenue growth this year, the inventory day should come down, and we are also reducing our inventory at warehouse. See, the inventory at the store level is optimum. I don't see any further efficiency there. So what inventory we're looking to optimize is more at the warehouse level. So the reduction in the warehouse inventory and increase in revenue, both will contribute to a further reduction in terms of the inventory from 107 to 90-95 by the end of the financial year.
Sir, the second question on competitive intensity with raw material prices coming down, competitors would be looking forward to reducing your ASPs. What is the competitive intensity in your segment? And how are you reacting to the same?
See, currently, the competitive intensity in our segment is low. Having said that, this product is also made by the likes of the other large formats stores and other software brands. No one has actually reduced the prices because the way the cotton prices have actually fluctuated in the past, it will be very unreasonable or risky for us to reduce the prices, and then tomorrow the RM prices increase again, then again, we have to take in hike. So I mean, for any brand to value bottom or prices right now, very unlikely. Not only bottom wear, whether top wear or bottom any form of apparel for them to reduce the prices will be very unlikely, and we do not see anyone do that.
Okay. And sir, any color on revenue still performance till date because you are expecting volume to come down to 0 for the second half. So some color till date would be helpful.
Yes. I mean, look, we needed a 15% growth at the value level on a Y-o-Y basis at the company level, and you had 7% volume growth at the company level. So if you ask me if I'm happy with the performance, it's a good performance. I would want to be as close to 20%. And our endeavor will be that in the coming quarters, we'll try pushing that number. But as such, considering how the overall market scenario has been, 15% is a good number.
Okay. And [indiscernible] how has the [indiscernible] I know you don't discount, but in the season, general people prefer to buy and purchase more. So how have you experienced [indiscernible].
Se e, for us, our [indiscernible] happens in quarter 2 and end of quarter or starting of quarter 4. So quarter 1 we have not had any [indiscernible] access and our full-price sales ratio has been also impacted before. In July, we started our regular uses like what we have done before. So it's picking up the same trend like what we have in historical years. There is no real change there.
[Operator Instructions]. The next question is from the line of [indiscernible].
Just wanted to understand at the bottom wear, which products are doing better because we have seen a volume decline, but again going up, so which products are doing good?
I think you've not seen any one particular product stand out. Our product mix perspective has been pretty similar to earlier quarters. So our Chudidar, leggings which used to contribute to 45%, 50% of the business that continued the same ratio. And in our other value-added products have pretty much been at the same pace. So I think from a product base perspective, there's nothing any one product which is stood out or performed back. There's no such product.
And second question regarding the store openings. You guided like 120, 125 stores FY ‘24. And then the coming year we will be looking to add around 150 stores. So you'll be looking at the space consumer. Where do you think the stores will be coming? They will be coming in top 8 cities only, or will they be going down the Tier 2, Tier 3 cities also? Tier2 or Tier 3 cities also?
See, I think what is going to happen is that the ratio of Top 8 to Tier 2, Tier 3, what we have currently, the same ratio will maintain. So our expansion also will happen in the same issue. But if you ask me from a regional perspective, it is going to be definitely a lot more concentrated in the South and West of India. North and East is going to be relatively slower in expansion compared to South and West because, by default, South and West has a lot more larger cities than North and East.
Okay. And then just a discussion on the store point. Do you think that we have gotten space available for store openings, or it may also lead to a collaboration of liquid sales going to other outlets? Do you think that much space is available for you to open the stores?
Yes, definitely, we are still very underpenetrated in South and West. So in terms of expansion, we very, very have a clear road map, and we are very confident that we'll be able to add those numbers in South and West. Now coming to the cannibalization perspective, look, when you're growing in clusters and that too in big clusters, some stores do get cannibalized. And that is why we monitor the rate SCSG which same cluster-same growth. So when the sales are going at a good rate, that means the cluster-wise growth is pretty healthy. But even if few stores get cannibalized, the overall growth of the cluster is pretty big and pretty large. So we don't see a problem in that penetration in South and West India from that comp.
One last question from my side. Are the stores that have opened in the last 1 year or 2 years [indiscernible], how they're performing? Have they reached the level where the older stores are performing, or are they are lacking?
I think that is a good question. See, the newer stores that were opened in the last 6 months have actually lapped in performance. I wouldn't say it lapped, but it has been looking below the average of our new stores, the reason being because of the consumer environment. What happens in the consumer environment is usually the newer stores suffer more than the vintage and the older second because we wanted [indiscernible] be driven in the newer store like for it to read some sort of maturity. So in a tough consumer environment, the newest store suffers the most. So our new stores are slightly [indiscernible], and we feel that as the consumer continue to improve, that number also will come back to normal.
The next question is from the line of Nihal Jham from Nuvama.
The first question was on the part of cannibalization that you mentioned. When I look at the difference between the SSG and SCSG that we report, in a way, it is [indiscernible].
I can't hear you properly.
I'm sorry, am I audible now?
Yes, you're audible.
Yes. I was asking if this 121 would share be a similar cluster, and increase [indiscernible]?
Yes. I mean, look, we are growing in clusters, and that's how our growth expansion has already [indiscernible] out of the excellent medium of advertising. And when we open more and more in clusters, it acts as a stronger medium of advertising. So I think as we see growth in clusters, there will be a gap between SSG and SCSG. Now how much gap will be making it very hard to comment? Ideally this 2.5%, I don't think it's fully impacted because of the cannibalization factor. I think the consumer sentiment is a little weak. We would have estimated that after cannibalization also, we would have delivered a SCSG of 6%-7% minimum. So I think this reduction of SSSG cannibalization is to do with the overall consumer thinking.
The question also was that currently, if I look at the last few quarters, we have been disclosing this metric. The difference is around 12%, 13%. So would that differences ballpark similar in the future quarters? Do you expect, based on the store plans and maybe this number could increase with more [indiscernible] stores in a similar question.
You're talking about the SCSG and SSSG?
Yes.
So I'll tell you, we have seen from our experience that SCSG usually doubles SSSG. But the SCSG is a new data point that we have started tracking in the last 2-3 quarters. It's very early days for us to state as you say and what may [indiscernible]. But what we have seen is usually, SSSG will be half of it.
The second question was in your press release, you mentioned about the branding team. Is it the incremental initiative or something more that's being done, and you just highlight that?
No. See, look, though we have cut down the cost on branding on advertising as we have cut down considerably, but we have started doing a lot of influencer marketing for products. And in fact, Denim was one product. We launched a couple of size in Denim, which did fairly well, and we have a good digital campaign. So our branding teams, digital team, I would rather put it that we are strengthening this point.
Got that. So basically, you're saying that the increment bidding could be more influencer-driven, which is a new avenue that we are taking on that could --
Influencer was always there. And look, just what we spent today, this 1.5%, 2%, whatever we spend on advertising, this is largely towards brand building, and brand building advertising is really through YouTube, through influencers that we've always been doing. Is there an additional advertising that we have cut down in this particular quarter.
The next question is from the line of [indiscernible]
One is, can you explain this working capital, which is corrected, if I had to just make up between RLFG and work in progress, how many days would have got corrected? And is it also linked to, let's say, market-to-market value?
Sorry, the last one was?
Is it linked market-to-market, let's say cotton prices are down, and inventory is being gathered at a lower cost of market value purchase price. Sorry, and just one more thing is how do you calculate working capital? Let's say when you give it for quarter 1, do you multiply this quarter and take it into four, or you took the last 12 months as we are working up this number of this?
See, usually, from what -- on the revenue part, you take this quarter's revenue. And on the inventory part, usually, it is a [indiscernible] inventory. You take an average start. Mr. Mohan, correct me if I'm wrong. I think that's the way it is done. Inventory is calculated based on taking the opening and closing inventory, we take an average, and then we use the next quarter achieved revenue, and then we calculate inventory days. From a working capital base perspective, it's basically inventory plus returns, minus payables. And that's how we calculate working capital. Now coming to your question on the absolute inventory, I think, look, INR 221 crores is the inventory that we had, INR 223 crores is the inventory that we have as of June 30. I'm not having an exact breakdown with me written down right now as far as how much is finished goods, but what reduction we have done is largely on the warehouse front. I can share this offline amount. I'm not having it handy right now, but the inventory that we have reduced is on the warehouse front, the RM, and especially at the RM.
The slight update, it is not opening and closing Gautam it is only closing whereas on a particular day, the inventory, what developed by that.
Yes, it's closing, basically divided by your monthly quarterly sales. That's how we calculated 107 days.
So effective this quarter multiply by 4, what you're doing to get the number of days? So you're not taking any seasonality in the sales for this inventory?
Yes, we have taken the quarter sales as is, and when we are done, the division converted that into monthly, and the numerator is the absolute value of [indiscernible].
Got it. And then the second question is, you say you take this SSG or the cluster growth, whatever number you want to take 2% or 16%. And if I just look at the EBITDA number, operating profit, excluding ad spends, there was roughly about 200 to 250 bps gross EBITDA margin compression. So are you trying to say, let's say, at 2% or 2.5% SSG the margins would contract to be roughly 200 to 300 bps with the rate of expansion which...
It's difficult to make that correlation. But I'll answer your question in a slightly different way. Because the overall company revenue usually, if you take a rent to renovation at the company level, it will be in the range of 12% to 13%. This time, it has been higher, it's been a range of 15% to 16%. Because the revenue has been muted, the rent-to-revenue ratio automatically has gone up, on even the salaries-to-sales revenue ratio has automatically gone up. That's because of muted revenue. So even though we've had an operating margin increase from that because of lower advertising spends our rent and salary ratios [indiscernible] to revenue has gone up because of [indiscernible].
Sir, if I take ads as CapEx and not as an OpEx, with this asset number same 3% brand, give or take 1%, you should have, let's say, 200 to 300 bps EBITDA margin contraction if you want to open the kind of stores which are complete. That's how one should think about it, right?
Well, I think, look, I think you are partly right. The only thing is because there is a new store sales element also in the company review, exactly correlating the SSG with the EBITDA would be slightly difficult. I know what your question is, but because there's a new store sales element as well, it is very difficult to exactly come down on how much would be the increase or decrease in EBITDA because of SSG.
So if I look at the number of suppliers, sequentially, the number of suppliers has increased materially. So are you changing vendors? What are you doing here?
No, no, we're not changing vendors, we're just increasing our supplier base. This is at our CMT or subcontracting job work level also and [indiscernible] -- but right now, our current volumes are still the same to the same suppliers. It's just that our base is increasing. As a company, we are adding more stores. The company is growing year-on-year at a rate of 20%. We are also investing a lot of time in getting new suppliers on board in the supply. But has the numbers changed with that existing supply from a social perspective? The answer no.
[Operator Instructions] The next question is from the line of Ankit Kedia from Phillip Capital.
Sir, 3 questions from my side. First is, given that we have seen more revenue mix change towards premiumization. A lot of our old stores are 300 square feet stores. How are we managing our inventory in these older stores given the mix change you are seeing from a consumer demand perspective?
So Ankit, think, look, we have started signing slightly larger stores. I mean, our average is usually between 300 and 400 square feet. We have started finding slightly larger of 450, 475 square feet to accommodate this additional size. But in our existing stores, so we don't have too much of trouble because for bringing the new products, some other ratios of other existing products are optimized to bring the new [indiscernible] inside the store. See, at the end of the day, our product type, we are holding our garments and keeping them at the store level. So if you're slightly optimizing the ratios of the existing SKUs, it's an easy product to bring in the new site. It is a challenge that we are able to manage it. That is also what we are signing. We're signing slightly higher selling 50 to 70 square feet higher.
So is it fair to assume that in the older stores, leggings and Chudidars inventory would be lower today than it was a couple of years back?
Not only the existing store, even in the new store, because see, what happens is [indiscernible] historically to be 70%, 80%. Over a period of time, it's come down to 45% to 50%. So the inventory ratio at the store level will dynamically change with the scale. So if the Chudidar sales are coming down, hypothetically I'm telling you, and leggings sales are coming down hypothetically. So even the ratio of leggings at store level automatically increases. So that's an ongoing thing. It happens on a real-time basis. It has nothing to do with historical sales.
Understood. My second question is regarding the LFS. We are seeing revenue for LFS decline by 10% in the quarter. Now quarter 4, we had some issues with Reliance POs coming in. How is that now? And have things gone back to normal? We are seeing more demand pressures coming from LFS and revenue is declining out there.
No, no. See, I think at an LFS level, things have normalizing, it started normalizing onwards. So if I say how things are today, things are absolutely normal with [indiscernible] an operations perspective and demand profit. It is just because some part of April was impacted. That's why our LFS growth is only at 3% on a Y-o-Y basis. But how this time today, it's normalized. So probably in Q2, you will get the true picture of how LFS is growing.
And you have to see the volume got last quarter you shared at the company level versus the EBO level; what would be the volume of the company growth?
So at a company level, we've had 7% volume growth. At the EBO level, we're at 10% and at LFS level we've had minus 2%.
Understood. And my last question is on the rentals. What would be our fixed versus revenue share rentals that you can share? Because last 2 quarters, we are seeing a rental increase, obviously, because the SSG or revenue growth has been slightly muted. So just to -- are we signing fixed rental deals other than revenue share? How should we look at that?
From our perspective, maybe some of our best-performing stores in malls are on revenue share. But if I take a proportion of rental working relation, we are largely fixed because the majority of our stores also [indiscernible]. So the ratio of fixed rental and revenue share, the fixed centers, will be much higher.
The next question is from the line of Sabyasachi Makati from Bajaj Finserv.
My first question is on the ad spend. You said that the environment is not that great and hence, you have kind of cut down on the ad spend. But what would be your guidance for the full year? Do we see an increase in the ad spends going ahead in Q2, Q3?
I think, from an ad spend perspective, we will be anywhere -- see, this quarter, we have been just below 2%. I think on an annualized basis will be between 2% and 3$. Last year, we were between 3% and 4%. This year, we will end up between 2% and 3%.
Okay. Noted. And on the store closures, I think we had 3 store closures during the quarter. Airport, what was the reason...
Actually, see, one of the 3 stores where we had 2 stores in the market. So we had actually opened a relocation store. And one of the relocation stores and newer were opened last quarter. And usually, whenever we relook at a store in an existing market, we let the holders who we then do for 3 months. So I think out of the 3, one is more of a relocation. And the other 2 stores are [indiscernible].
2 High-stretch stores that we closed during the quarter.
[indiscernible] one was also closure, but it was more of a relocation cut.
Any specific reason behind the closures? Not the relocation, but the 2 closures?
No, the rental cost is very high. These are some of the markets where sales have not improved after COVID, and historically, the Indian market has been good. See, we wanted to take some time before we decide to close.
And on the rental part, you mentioned that the rent-to-revenue ratio has increased this quarter. I mean purely because of the muted sales that we have on the EBO basis? Or is it like we are facing some serious red escalations from the...
No. I think it's 100% related to [indiscernible] sales. The escalations are pretty much standard, which are at about 5% or 15% every 3 years. So it's not the escalation. It's largely to do with the [indiscernible].
Got it. And if you have handy the breakup between the inventory of fabric garment warehouse stores.
Actually, I'm sorry, I don't have that file with me right now, otherwise, I would have shared it. I share it on [indiscernible]. I will do it. But I can -- I know for a fact that inventory, which has come down from INR 230 crores to INR 223 crores, the reduction has largely happened at the warehouse level.
It was INR 100 crores, I think, at the end of Q4. So basically -- and 230 overall, I think INR 7 crores inventory that has come down purely from the warehouse reduction. Is that a fair assumption?
It's only warehouse reduction. From what I understand, it's completely warehouse reduction. At store level, we're not optimizing it because we had about 45 to 50 days of inventory at the store level, which is adequate.
The next question is from the line of Gautam Rathi from [indiscernible].
Just a couple of questions. Just wanted to understand how many clusters do we have because we talk about this same cluster growth rate. The question I'm trying to understand is how many clusters do we have? And what has been the trend around that, right?
See, we have about -- so I'll tell you what qualifies to be a cluster. Any cluster which has 2 or more multiple stores that qualifies to be a cluster. So we have about 150 to 160 clusters and about 400 to 440 are mapping charts.
So 400 out of your 650-odd stores, 450 are cluster-based stores, and 200 are...
I don't have the exact number, but 400 to 440. So somewhere between that, because the number of clusters is not [indiscernible], but it's between 400 and 440.
Which is very fair. And the second, just to follow up on this, is this -- how is this number growing? How many new clusters have you been adding or do you look to add on an annual basis?
See, we don't have a target on how many clusters we would add because that's a byproduct of how many stores you had. So right now, we've not set a target towards that. But in the last 3, 4 months, we have not seen any increase in clusters.
Okay, sir. So is that your growth is very close to your [indiscernible]?
Yes, the existing market, correct.
Okay, sir. And the second thing is you mentioned that you are looking to see open slightly bigger stores to house the entire collection that you have in certain places. The follow-up on that is that comes with the assumption that your revenue per square foot will remain constant, which will mean that those bigger stores will mean higher revenues than your historical average of INR 80 to INR 100 crore per store. Is that fair?
Yes, I'll clarify this. The bigger sizes when I mean we are opening 50 to 70 square feet larger. We're not dramatically increasing very large stores. Having said that, in our model of business is whether I have a 400 square because I have a larger store. My operating expenses in that store are the same. My CapEx also is pretty much similar. Only what is the differentiating factor is the rent. So today, if my rent is in my rent-to-revenue budgeted ratio, then my store-level EBITDA will not fall. Having said that, if you calculate on a per square basis, then the sales of the first case will fall, but my absolute EBITDA and as a percentage of revenue does not fall. So more than sales for prices in our business, the more important thing to practice is whether the averages of our store are falling and are the EBITDA percentages of our portfolio. Those are the 2 important issues which are still tracked in our business. Because I believe if I find the store slightly larger in size, but the rent is very much [indiscernible] the largest role because tomorrow, I might have the benefit of adding more SEUs also tomorrow available. So for me, my decision factor to open a store on the basis of rent rather than square feet.
Which is absolutely fair. I was just trying to understand, is this a deviation from the strategy? Or it is more -- and if you find bigger stores, you will take it, right? And either a division in strategy, then I'm pretty sure that -- I'm just trying to understand that, but should we -- because one of the ways we think about it is the number of stores into the revenue that they stay could generate, has the revenue generation potential also gone up, that was broadly the thought process.
Yes. So our process is that our average which is currently at INR 80 to INR 90 lakhs or so, that should increase. So for us, salesforce does not matter too much beyond the point. For us, averages of a sole matter. The averages of [indiscernible].
So that should increase with slightly bigger sales, right?
Exactly. That should be the case. Cost might fall because of square foot business, which [indiscernible].
You're saying that slightly as to your sales craft might fall a little, but the absolute increase in square feet will mean that your overall revenue from that store will be higher per store.
So without compromising on the EBITDA margin.
Which is perfect. Very, very helpful.
The next question is from the line of Mehul Desai from JM Financial.
Firstly, you mentioned that you will be happy if you end up Q2 with flat volumes. Is this more an ambition, or you are seeing something similar trend playing out in July so far?
Very early to say right now, early days, I think probably one tender of August, and we are halfway through August. We'll have better clarity because right now, it's too early because July is a complete EOSS month. So it's very difficult to just based on July's performance. We have to probably by the middle of August, we have better clarity or end of August.
Sure. And how do you look at your gross margin trend for the balance you're given that your ASPs are trending well, product mix is improving? And my sense is that the RM environment remains benign. So keeping this in context, how do you see the gross margin trend shaping up for you for the balance part of the year?
I think by the end of the year, we should deliver a gross margin on an annualized basis of about 61%. Last year, it was around 60%. So I think maybe this year, we'll be at about 6%.
The next question is from the line of Vinod Jariwala from [indiscernible] Securities.
What would be the rent expenses in this quarter?
It is INR 26.9 crores.
And how much of this...
This is before India. This is the rent field.
Right. And how much of this would be covered above the EBITDA line?
No, this I'm talking about 3 [indiscernible], I mean, this is fully above the EBITDA line.
Okay. Second is Gautam, if I look at the other expenses, and if I adjust it with the advertising and sales promotion expenses, they would have been flattish Y-o-Y, despite you adding roughly about 122-odd stores in the trailing 12 months. So just wanted to understand are there any one-offs that were sitting in the base quarter or have we undertaken some cost structure exercises or an...
We have not -- cost-cutting and cost optimization is something that the company we've done for at least a month. Every quarter we do it. But having said that, I think other SMB-other expenses calling expo advertising, I think it is largely because certain costs of 6, I guess. And with the increase in revenue, I think that gets rationalized over a period of time. They get upsized over 20%. But to my knowledge, we have not cut any significant cost and there are no such one-off items in the base.
Nothing to read from the freight expenses also or nothing of that sort?
Nothing. It's in the normal course of business. There's nothing like that.
Understood. Okay. And the last question is on the -- as of now. You said that you're augmenting your real estate team, right? So as of now, as we speak, what is the bandwidth? How many properties can you evaluate?
See, currently, I think EUR 120 million to EUR 130 million. I think by the end of this year, we should have a team that could deliver conversions of 150 to 170 stores starting next year. We've already started recruitment. Some people have joined some inflammatory trains. So I think we should get some positive results in the increase in number of stores by starting from a Q1 next year.
Okay. So based on the historical understanding that for about -- for delivering 100 -- or let's say, first closing 120 to 130 stores, you need to evaluate roughly about 1,000 or real estate options, that's a strike rate of 12%, 13%. So as of now, also, are [indiscernible] same as 1,000 or that...
The 1,000 number would increase. Because the 12%, 13% of conversion does not change. So even when we deliver 150 to 170 stores, we'll have to evaluate a lot more options. And that's why we are building our digital. So many have joined, and many will join again during the balance part of the year and then get trained by the end of the year. So we start seeing those results coming in Q1. But the 12%, 13% does not change. So if you have to deliver 150-170, we have to evaluate that many more options.
In a year's time -- okay, so you're asking this differently. In a year's time, how confident are you that you will be able to evaluate 25% more real estate?
Because we are adding more people in the business. And once they get paid, it's a matter of time before the options start coming in. Everything is people-dependent. So once we've added enough number of people in our [indiscernible], these options are closing because the people and the big team have to also be clean of how to evaluate the location and what is our criteria when we finalize the location. So it takes some time for them to also set down in terms of what targets we set. So it should happen from Q1.
Understood. And the final sign-off on the property happens through you , right?
Yes. So I'm part of the BDC and will be committing with our head office. So every property that gets finalized is my final approval. I mean there is a lot of layers, and there are a lot of team members we evaluated before do, but I have the final say in that.
Fair enough. Okay. Just a confirmation. Pre IND-AS EBITDA, was it roughly INR 37-odd crores?
No, no. So our Pre IND-AS in EBITDA for Q1 is 21.3%. And are both in days EBITDA after capitalization rate is 44.1%.
The next question is from the line of Vaishnavi from Anand Rathi.
On the gross margin this quarter with relation to the raw material prices being softer. And if I look at the gross margin with the contracting expenses included the gross margins -- sorry, without the subcontracting expenses, only the pure COGS gross margin is down to almost 81 basis points on a Y-o-Y level and by around 300 bps to quarter-on-quarter level. So does this have to do with the sales channel mix being more towards LFS and the other channels away from [indiscernible]?
No. I think the right way of looking cost of goods sold will be combining subcontracting and material consumption because some quarters, we might have [indiscernible] purchased because we also buy garments, right, as a sourcing model. So for us to look at it individually might not be the right way. The right way to we're looking at it is that similar item cost of goods sold. So that we have delivered 61.3%, a 70 basis point increase. This 70 basis point increase we have seen is because of the slight increase in BOC. The RM prices, I did a very detailed study and there's a lot of our RM was purchased when the prices were high. So right now, because that older inventory was purchased at the older price, we have actually not seen the benefit of the reading scatter pricing yet. Because we are in the stage of optimizing inventory, we have not been purchasing a lot of late. So our COGS is largely based on the older RM price. What you're seeing is largely because of the [indiscernible], which was 71% earlier and 73% now.
And the quarter-on-quarter decline in margin, which is over 250 bps ?
See, last year's Q4 was an exceptional quarter because we had some write-backs and write-backs on the revenue because of the LFS discount reversal if you remember. Q4 is not the right quarter to compare it. I would compare Q1 versus the entire FY '23 as a comparison, not individually Q4.
Ladies and gentlemen, that was the last question for today. I would now like to hand the conference back to the management for their closing comments.
Thank you, everyone, for joining us. I hope we've been able to answer all your queries. We look forward to such interactions in the future. We hope to live up to the expectations of all in the future. In case you have any further details, you may contact SGA, our Investor Relations partner. Thank you.
Thank you. On behalf of Go Fashion India Limited, we conclude today's conference. Thank you all for joining. You may now disconnect your lines.