© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, good day, and welcome to the TCNS Clothing Company Limited Q3 and 9 Months FY '21 Earnings Conference Call. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on date of this call. These statements are not the guarantees of future performance and involve risks and uncertainties that are difficult to predict. [Operator Instructions]. Please note that this conference is being recorded. I now hand the conference over to Mr. Anant Daga, Managing Director, TCNS Clothing Company. Thank you, and over to you, sir.
Thank you. Good evening, and welcome to our Q3 FY '21 Earnings Conference Call to discuss operational and financial performance for the quarter. I am joined by Amit, our CFO; and SGA, our Investor Relations advisers. I hope you and your near ones are continuing to be safe and healthy. I will take you through key updates, while Amit will share financials for the quarter. Q3 overall has witnessed healthy recovery. October and November saw good traction led by facilities. Even though demand in December was somewhat moderated, demand started picking up in January despite lower discounting than last year, which is an encouraging sign. Overall, sales continued to progressively recover to 72% of corresponding quarter of the previous year. This is despite any meaningful primary billing in MBO channel. The offline channel saw some disruption due to COVID, but still recovered over 65% with EBOs and LFS experiencing similar trajectory. A heartening sign has been a fast, sharper recovery in geographies less impacted by COVID, particularly the ones, the Tier 2 and 3 markets. Many of them have already surpassed pre-COVID levels, clearly demonstrating letting demand and interest in the category. While bigger cities like Delhi, Mumbai and Bangalore are experiencing lower recovery, now with ongoing vaccination, these 2 should bounce back. Our brands continue to show better absolute sales and recovery rates than most of our peers in ethnic segment across offline formats. Online channel has continued to deliver robust performance in Q3, registering a 65% year-on-year growth on consumer sales. Primary billing was lower in Q3 due to partial stocking up in Q2. Specifically, our brand.com is growing at over 150% of pre-COVID levels. The strong momentum in online sales should continue, though with gradual opening up of offline channels we expect some moderation in the growth rates. We continue to invest in building capabilities to deliver a seamless omnichannel experience to our online consumers backed by best-in-class certified operations. This would be a key differentiator for us in both short and long term. While MBO secondary sales have been picking up gradually, so far, we have not commenced any significant primary billing to the channel. Another key positive going forward is resumption of the MBO primary sales with spring/summer '21 launch. With bulk of rationalization behind us, we are now set to grow this channel once again. As you would recall, at the beginning of the year, in light of COVID, we set out a 5 pronged approach for FY '21. Preserving the balance sheet strength was the key priority, while retaining the ability to scale up as needed. We intended to focus on controlling costs, conserving cash, engaging our consumers, building organizational resilience and seizing potential opportunities. We have achieved our objectives on key fronts. Let me provide a quick update on the same. To start with, on the cash conservation front, we are happy to share that we have been cash accretive in Q3. Since our last call, we have been able to add approximately INR 40 crores to INR 45 crores to our cash balance. Our cash results are now tracking close to the level that we started the year with. And as on date, we have roughly INR 155 crores in addition to unutilized bank limits. This has been achieved through a combination of working capital reduction, in particular, inventory levels and a positive bottom line. We are on track to build on this balance, even in Q4. Another key achievement has been in the focus area of cost reduction, where we are well ahead of our targeted saving across all key items. On rentals, we have been able to further increase our projected annual savings to over 35% compared to last year. On employee costs, we are on track to deliver around 20% annualized savings against last year. And overheads too, there should be a savings of over 35%. Other focus areas for us were customer engagement, organizational resilience and seizing growth opportunities. Timely readiness and execution on our omnichannel strategy has reaped us significant benefits and has been a huge differentiator. We built capabilities to leverage inventory across channel to be shortlist and sold to our consumers. Our direct-to-consumer initiative has scaled up well and have been institutionalized as a core consumer offering. As I mentioned earlier, our own brand.com is standing at 2.5x growth and already contributing in double digits to the online business. Marketplace, direct-to-consumer business, though on a lower base, grew at 10x over last year and is now contributing close to 1/4 of third-party marketplace sales. All this gives us confidence to further deepen our investment in direct-to-consumer and omni capabilities. Now having navigated the pandemic, while preserving the strength of the balance sheet and emerging with a robust cash position, our focus now shifts to growth. Seeing a narrow window to lock in long-term accretive real estate opportunities, we are embarking on an accelerated store expansion plan and will target opening at least 60 to 70 new stores in FY '22. This will include upgradation of existing stores, entry into newer markets and probably we'll try newer store formats. We also have visibility of promising growth in LFS channel. We should be able to add 200 to 250 stores therein and play a bigger role given the current flux in smaller brands and labels. As I mentioned, with MBO channel also picking up again, we are getting ready for strong headway for growth in future across channels. Despite adverse market conditions, we observed the healthy traction across our new category pilots. Accessories are already contributing to high single digits across many of the pilot stores. This includes [Technical Difficulty]. We would see a full fledged launch across LFS and EBO stores and online over the next 2 seasons. Pilot range of Aurelia girls also received encouraging response in the festive period, and we intend to expand the range and distribution in MF21. We will now be opening more EBO stores for Elleven, which was paused due to pandemic and will expand Elleven to LFS stores. I think we'll get a much better read on this by end of festives. We continue to invest in people, processes and infrastructure to support and accelerate growth. As mentioned, we are building strong skill sets in areas of design innovation, data sciences and supply chain. We are making investments in inventory automation, express delivery module and omnichannel capabilities. We are also in process of setting up a future-ready warehouse, which should be fully operational by Q2 of next year. To sum it up, we will focus on building growth runways and key capabilities while keeping a sharp eye on evolving market situation and pandemic. Now I will request Amit to take you through key financial highlights for the quarter.
Thanks, Anant. Good evening, everyone. I'll be giving you an update on our financial performance in Q3. Our Q3 revenue was INR 238 crores, which translates to a 72% recovery from last year's Q3 revenue of INR 329 crores. Our gross margin in Q3 was 61% versus 68% last year. As mentioned earlier also, this is due to skewed channel mix and similar dormancy policy on a lower sales base. However, there is a significant sequential improvement vis-à-vis the first 2 quarters, and the same should continue building up as business returns back to normalcy. Under Ind AS 116 accounting, total rent concessions of INR 6 crores has been accounted for in Q3, which has been reported under the rent expenses. Degraded salary reductions that we implemented in May are being gradually reversed. We expect full year saving on ERC to be around 20%. Other expenses have also reduced by around 23% in Q3 compared to last year. The company has generated positive EBITDA in the quarter of INR 43 crores versus last year's EBITDA of INR 75 crores. Our PBT in quarter 3 is positive INR 17 crores versus INR 40 crores last year. PAT is not comparable due to impact of positive tax adjustment last year. On a like-to-like basis, PAT in Q3 was INR 13 crores versus INR 31 crores last year. We closed 22 stores and opened 9 stores during Q3. As Anant mentioned, we are now embarking on accelerated store openings, and Q4 should see a net positive addition in store count. Acceleration will start from Q1 of next year. Our FY '21 9-month revenue was INR 414 crore versus INR 929 crores last year. EBITDA for the 9 months were INR 10 crores against an EBITDA of INR 203 crores last year. PAT for the 9 months in FY '21 was a loss of INR 60 crores against a profit of INR 93 crores last year. The strength of our balance sheet is reflected in our cash position, which is around INR 155 crores as on date. This is in addition to the unutilized bank limits. We added roughly INR 45 crores to our cash balance in the last 3 months supported by a reduction in working capital and a positive bottom line. We are on track to build on our cash balance further in Q4. We will now open to questions. Since we are the only listed entity in our segment, we might not be able to share granular details that could be competitive information. We'd request your understanding of the same. Thank you.
[Operator Instructions] The first question is from the line of Susmit Patodia from Motilal Oswal Asset Management.
Congratulations on the results. My first question, Anant, is could you give some details on inventory? How does the inventory move quarter-on-quarter? And how much is fabric and how much is finished?
Sure, Susmit. So while we have not shared all the balance sheet details, our inventory is already about 7% to 10% lower than what we saw in September. In terms of FG and fabric bifurcation, about I think 25% is what is fabric and close to 75%, 80% is FG. And FG also, more than 90% of the inventory continues to be less than a year old. So that's the broad breakup.
And just to understand, because 1 season was nearly missed. The larger reduction in inventory would only happen when that season comes back, right, which is next quarter, FY '21 -- '22.
Susmit, when we look at the seasonal basis, it cuts across quarters. So you are right. We blindly didn't carry forward everything from spring/summer '20 to MF20, and this is what we have explained in earlier calls also. And then for the first half, you didn't see any reduction in inventory. Now those have started getting deployed from December. We have launched our fresh season early. So some part of reduction has happened in Q3 and some part will happen in Q4. But essentially, SS20, most of the inventories are being used in SS21. So there the reductions would be then in the H2, both quarters put together.
Okay. Okay. And my second question is, you've said that employee expenses sustainably would be down 15% to 20%. Could you just give us a little more color on that? How are you managing, especially the fact that you'll be adding so many stores next year?
Susmit, I think when Amit mentioned about 20%-odd reduction, it was on an annualized basis. In fact, a larger portion has come in Q2, Q3. Q4, you will see relatively lesser savings. On the existing employee side, we are reinstating the salaries in graded manner. In front end, where we have been able to save cost is 2 things. One is when we have tried to variabilize the salary parts of our front-end staff. So that would be dependent on sales. And second, we have been able to rationalize some staff, given synergies between 2 branch stores in the same location and across LFS and EBOs and driving efficiencies more at the front-end space. So that is where long-term savings would continue. Frankly, in back end, we are building more capabilities. We are getting in people to -- in supply chain, in data sciences, building omni business. So not too much savings would come on there.
And just 1 last question is if you could give us some details about the warehouse. How would it help in efficiency, speed to market and cost?
So a couple of things on the warehouse side. One is see, right now, our warehousing operation is divided into multiple locations, which all individually are running at a suboptimal level. So I think consolidation of that to a more organized setup would definitely have its impact in visibility and in efficiencies that a warehouse -- a more organized warehouse can get in, number one. Number two, we need -- a lot of our future plans also revolve around direct-to-consumer initiatives and new product categories. And keeping that in mind, we need a warehouse which should be ready for all this. So there are very innovative models, which we are trying with third-party online spaces, when we are looking at re-hauling our own express delivery mechanisms. So this is where the new warehouse will play a significant role, in building newer capabilities, in ensuring better efficiencies. And in long term, there could become some cost savings also on this.
[Operator Instructions]. The next question is from the line of Nihal Jham from Edelweiss.
Anant, 3 questions from my side. First, when I check with you that is it the discounting this year started early? And generally, I think January is a month where the EOSS runs into or starts with. So is the demand that you're seeing sustained in Jan driven by discounting? I just wanted a sense first on the trends because I see the gross margin improvement has been good. So your thoughts on that first.
See, last year also, EOSS started in December. And this year also, the start date was very similar. So 2 things. First, our January recovery rate has been better than December. And second, on discounting front, after a long, long time, we have seen lower discounting, even in December and even in January. So I think it's a healthier trend. Now 2 things to my mind that has helped us. One, we have been able to launch the season very early. So a good proportion of sales is coming through fresh articles. Second, with buyers being more serious, lower discounting also worked. So first trend in January is better than December stand-alone. Second, the discounting has been lower than earlier.
That's helpful, Anant. And during Q2, 1 thing you had mentioned is that, obviously, 1 of the reasons that we were seeing an increase in inventory because we were building up fresh stock for SS21. So is it that when we are entering SS21 -- and you mentioned that you're carrying over some stock from SS20 -- what would be the approximate breakup between the fresh and the carryover inventory?
So Nihal, frankly, this entire year has become a slight mix of various seasons put in together. So not only spring/summer '20 got carried forward to spring/summer '21. Also some part of monsoon festive also was carried. Because see, we had non-festive stories already carrying forward from SS21. So MF21 -- sorry, MF20 non-festive stories also got carried. So about at least 20%, 25% at least is something that got carried forward. I don't have that particular number, but between both seasons put together at least 20%, 25%.
Sure. My apologies. What I was specifically referring to is that approximately what will be the proportion of the stock that the customer will be seeing for the first time. That's more what I was getting into. So even if SS20 would -- yes.
Sorry, sorry. So see, spring/summer '21, at least 80%, 85% of the stock would be fresh. Customers would be seeing first time. Apart from core. Core categories always continue throughout the year, apart from that.
Sure. Just 1 last question, Anant. On the MBO channel, as we understand, obviously, that the issues with liquidity that you had faced last year, did the channel generally seem to be more or less sorted with? And we used to do, on an average, more than INR 100 crores per annum when things were normal. Now that you plan to start building to this segment, is it that you expect that kind of a run rate to start with? Or are you going to be cautious and just initially try building up gradually? Just your thoughts on that.
So see, to start with, we'll be cautious. And till now, the focus will be on credit quality. So the run rate that we used to have, I don't think we're going to hit it right away. But hopefully by festive, which is end of next year, Q2, when we launch the next seasons and all, things should be -- should come close to that. Because apart from the broader market, the kind of rationalization we did last year, and the fact that we have not really built any primary sales through this channel this year, despite decent recovery in secondary sales, we should be in a good position.
[Operator Instructions] The next question is from the line of Jignesh Kamani from GMO & Company.
Just wanted to continue on the inventory part. If you take about sales, as you mentioned, 70%, 80% of the last year spring/summer may look fresh. But from the customer mindset, if you take about the inventory manufacturing, that is still more than 1 year old or probably 11, 12 months old. So how is the consumer mindset while you address into this? So still they're happy buying, you can say, even though fresh inventories, but buying a 1-year-old merchandise, particularly at a lower discount over the fresh which is at full price?
So see, what we have seen at least in this EOSS is that the percentage of fresh sales is very, very healthy. [Foreign Language] I think it's 1 of the healthiest that we have seen in last few years. So there's definitely appetite for fresh season product also. Having said this, there's always discount seekers who would go after price. And for them, buying an old inventory, there are many, many channels available.
No, no. What -- I mean if we take about last spring/summer collection, which looks fresh to the consumer because it was not launched last year, but in manufacturing date it will be 1 year old. So when consumer is buying, probably he may know he's buying 1-year-old product. So just want to know from the consumer mindset.
No see. So typically, this is a bigger mindset issue with intermediary. So when you build something like this to a dealer network, they have an issue with the date of manufacture. For consumers, frankly, if the stock is fresh and -- then it's not such a big challenge. And when we say we have forwarded a lot of SS20 merchandise, a lot of that was just at fabric stage also. So we have been able to manufacture later with a more current dating label also. So it's not that everything that got carried forward was all FG with old manufacturing dates. So a lot of fabrics also got pushed out. So if you see, historically, our fabric proportion to entire inventory was always in excess of 30%. Right now, it's just 20% to 25%.
Sure. Second thing. With this lower discounting in December, Jan, have we lose out to a competitor? Because when I look at the discounting by the competitor, it still continue to remain aggressive.
No. So Jignesh, now again, see, we don't get any syndicate data on this. But whatever reports we get from our multi-brand partners, including large-format stores and online guys, our brands continue to do equally well and better despite lower discounting. Hypothetically, yes, if I would have increased discount, my sales would have been higher. But I don't think, given the way we have planned our inventory and that alternate channels that we have, I don't think there's any point going beyond that. Most of the customers are very serious right now and marginal disutility of additional discounts is very, very high.
Sure. And how much fresh inventory we bought in last 3 months? Just to understand if consumer is looking for some kind of fresh inventory, whether we have enough freshness in the store or there might be competitor might have better edge over there?
No. So in fact, we are 1 of the first guys to have a decent sale of fresh stock. So as we speak, it could be anywhere between 30% to 40% -- sorry. In terms of presence, it could be -- in EBOs would be at least 40% to 50%, which is fresh stock. In LFS, it would be 30% to 35%. In terms of sales, it would be tracking somewhere around 25%, 30% between the 2 channels.
The next question is from the line of Vikas Jain from Equirus Securities.
Sir, my first question is in terms of the stores that we had closed. This time we had closed just around 22 stores. So what would be the number of airport stores that we have closed this time? And what would be a net airport store that we have currently?
I'll just get back with the exact number, but we started the year with about 26 to 28 stores. And right now, we are less than half of that. And these stores also -- the ones that are left are slightly bigger, which are also important from a brand-building perspective, and we have been able to get good rental deals out there. So those are the ones which are existing. I'll just share with you the exact numbers. Just give me a couple of minutes. I'll get back to you.
Sure, sir. And sir, with your commentary from 4Q onwards looking bouyant, and we have seen a good demand recovery. Do we expect further closure of the stores? With overall demand looking good, so will we continue to further bring down our stores? Or will now we add going ahead?
So see, I'll just tell you first the philosophy with which we are closing stores. So first of all, we have been very ruthless. The stores which we think -- don't think can make money, where we are not getting good rental deals, and where WDBs are lower, we are just going ahead and closing those stores. We believe in market today we are seeing opportunity to open fresh-up stores at lower discount with better real estate. And that's the reason when we say we'll be embarking on a accelerated store opening plan, that's what I mean by that. So there could be many instances where in the same market we are closing down 1 store and opening another. Now as we speak, the recovery has not been very homogenous across markets. For example, there are a few markets, which, like Northeast, like Assam, Nagaland, which are already -- which have crossed pre-COVID sales in Q3, while there are some bigger cities, especially Delhi, Mumbai, where the sales are still at 55%, 60% level of pre-COVID things. So out in these markets, we are still renegotiating for rentals. And we still want deals. Now a lot will depend upon what kind of rental renegotiations we are able to do, even going forward. Otherwise, wherever we feel that we can get a new real estate, and we can save on rent, we'll close those stores. Right now, by the look of it, it doesn't look like, on this part, we have more than 10, 15-odd stores to close, but this is an evolving situation.
Correct. Sir, and next question on the cost part. So first, on the rental front. So what -- I believe that the FY '21, we achieved a substantial 35% kind of a savings. But going ahead in FY '22, where probably the demand would normalize, would we return back to our earlier contracted rental agreement where the range would be returning to probably at around FY '20 levels? What would be your comment on this?
Yes. Most of the stores will revert back to FY '20 levels. The only 2 silver lining to this would be 1 that we have closed in the process many, many high rent-to-sales ratio stores, so that should help overall rentals. And second, the deals now we'll be locking in probably could be slightly more accretive from a long-term perspective. But for existing stores, where we choose to carry on the business, most of them will return to normal rental. We'll still have a few concessions, but those would be far lesser than what we have seen in FY '21.
Right. And similarly, on the salary or employee cost front, there also we'll be largely returning to the similar run rate -- quarterly run rate for FY '22 of what we had in FY '20?
Yes. So employees also, especially with the new initiatives and all that we are building, should get back there. Overheads, we might have some savings, but most of the overheads that we had, where we were able to reduce for all sales window onetime off, so those again would inch back. So I don't think 1 should take too much cost saving from a long-term perspective in overhead and ERC.
And sir, last question. Since you've guided for significant store addition starting FY '22, so any CapEx number that you plan to attach to this?
Yes. So on the store front, we should be doing about INR 20 crores, INR 25-odd crores worth of CapEx in the next financial year.
Right. And a large part of the new store addition will be the Elleven brand? Or it would be a proper balance?
No. So this -- right now, in these numbers, we are just counting about 7 to 10 pilot Elleven stores. Balance would be regular. And once the Elleven brand model stabilizes, those stores -- additional stores would be over and above the 60 to 70 count.
The next question is from the line of Anuj Sehgal from Manas Asian Equities Value Fund.
I had a question on your channel-wise revenue split that you've shared. So you mentioned that 23% of your revenue is coming from online and others. So can you help us understand what does online and others exactly include? And does it also include the WhatsApp sales and the O2O sales that you have? And then secondly, again specific to online sales, you mentioned that your own brand website has grown 150%. And even at the marketplaces, you've seen 10x growth from your direct sales. So where is this growth coming from? Is it largely coming from Tier 1 cities? Or are you also seeing that same growth in Tier 2, Tier 3 cities? And then lastly, given this whole experience with COVID and change in consumer behavior, the new store opening targets that you have, how does that account for the whole sort of consumer behavior towards online shopping? And just want to hear your thoughts as to how you're thinking about e-commerce in general and online as an overall strategy?
So Anuj, let me first start with the last part of your question. So if you look at online, we have always seen it as an opportunity. Even from the early days, whether it was launch of our own site or getting on to models like fashion and you, I think we were amongst the early adopters. We believe that with price parity, this channel, again, is an addition to our existing channels. We don't see, frankly, it as a competition, as long as you are able to manage parity. Now if you look at this channel right now, it's contributing to about 23%. I think in midterm, about 3 years' time, it should anywhere be between at least 1/4 to 1/3 of the total sales. And we ourselves, as a company, are trying to push this. See today, whether it is online guys or offline guys, both are trying to get a slice of both channels. So online guys are opening offline stores. Offline guys are going online, because everyone understands that, ultimately, the way these businesses compartmentalize online and offline, this is not how the consumer will see it. It will be only channel play. And we being early movers in online and having a huge backbone of almost 550 stores of our own in offline, the way we are thinking about this business is taking an omnichannel approach. And that is where a lot of processes, systems, new warehouse, we all are building that. So that's one, the way we are looking at this segment, per se. Second, when you talk about where the growth is coming from. Actually, we are seeing a very similar trend. It's not very different. So bigger cities also are contributing decently to the growth, so are the smaller cities. Yes, there are some pockets which have done better. But that again is mirroring more or less what offline trajectory we are seeing. So in terms of growth, again, it's not like any particular territory or particular in is a big call out. It's overall coming from various segments. Third, when you say what does -- what constitute online and others? So other is a very small business. So we do some exports to some markets. And second, we have also started institutional sales channel, which is corporate gifting, which is very, very small right now. So those are the things which falls under this segment.
Right. So fair to say that a large part of online and others is actually online sales?
Yes, yes, yes. Balance everything is...
And then just to elaborate on that point, Anant. I mean, as you rightly said, omnichannel is the way to go because the consumer in her mind doesn't see any difference. So you also mentioned that omnichannel fulfillment is live on both your own website and third-party marketplace. So is it possible to give us a sense that of the online business that you have, how much of it is where you are enabling omnichannel? I.e., the customer is ordering online but picking up from your store -- in your physical stores.
So Anuj, this is right now in the pilot phase with the third-party people also and us. There are a lot of system integrations that were required, and there were a lot of processes. So we are building that. In fact, next week is when we'll be full-fledgedly launching it in over 50 stores. Right now, the stores where we have experimented it with, it was about a 45-day, 50-day experimentation. There, we were seeing -- already seeing about 4% to 5% of contribution coming from omni. That's a very small pilot. So maybe by next quarter, we'll be able to give a thorough number on this. But my guess is it should be at least a high single-digit number to start with.
The next question is from the line of Ankit Kedia from PhillipCapital.
Sir, apologies if I'm being repetitive. I joined a bit late. I just wanted to know from when could our SSSG turn positive, given that in a couple of your statements you mentioned markets like Delhi, Bombay, Bangalore, continue to be at sub-60% of pre-COVID levels?
So see, Ankit, frankly, I don't think any of us have any definite answer to this. Our -- see, the way we are seeing that is, it could be quarter 2. It could be around festive. It could be earlier than that. It all depends upon how the macroeconomics and the COVID situation turns out to be. What I can share with you is what we are seeing on ground. So for example, in -- see, today, we understand that the reason why people are not coming, could be 1 is like shrunk Wallet size. Second is, of course, a limitation of occasions where -- fashion is just not a need-based category also. It's also an aspiration category. So obviously, with occasion usage being really restricted, I think that's the second impact. And third, finally, is this whole fear of COVID, of people venturing out. So what we saw in Q3, the gap up between Tier 1 and Tier 3 markets was tremendous. It was not so much in Q2 and Q1. Which means markets where COVID impact was lesser, I think people still came out and spent. So for example, in our Tier 3 markets, our recovery rate in Q3 is at least 85%-plus. So that's what is very, very encouraging. Now with vaccination drive on, with number of cases coming down, with things opening up, I think it could be any of our guesses to know when people would start coming out again and shopping. One thing is for sure that, in April, May, June, we have a lot of weddings. And if things get more opened up, we should see a healthy revival there. But it all depends upon how many -- how soon things will open up. So that could be anyone's guess.
And sir, with that being the case, how has been our inventory buying then? So are we planning to do 80% of pre-COVID inventory buying for the spring/summer '21 season? Or we are growing 100%, and you might just carry forward, again, the old inventory next year? So how is that back-end being placed now?
So Ankit, we have done a lot of stuff around to manage this demand-supply fluctuation and build a responsive supply chain. I think it will be a very, very long answer. Maybe we can also connect offline. But just let me give you a gist. So the entire model of coming closer to season and doing a short replenishment cycle, this is -- what it's helping us to do is reduce our upfront bias. So at today, because of this, I don't need to take a call on whether I'm able to buy 100 or 90. I can still buy 70 and quickly replenish the best earning style in next 23 to 30 days. So I think that is the kind of flexibility we are building, number one. Number two, we have also strengthened our core range. So we have now something called timeless and forever classics, which again is contributing as a never out of stock situation. So that is easily carriable. Third, we always have a range or 2. As we explained to you, most of our business is all about commercial new styles, which are broken down into festive and non-festive style. And that easily carries -- can be easily carry forward to next season. So we'll always have that 1 range, wherein probably you will see inventory on our books. But there's no risk of obsolescence there. It can be launched as first launch of monsoon festive instead of last of spring/summer. So putting these together, we are trying to manage at least 15% to 20% gap-up in demand and supply that happens.
And sir, how has our inventory been for competition if you have done some analysis? Are they also carry forwarded last year's spring/summer inventory this year? And is it a level playing field for everybody? Or they went for deep discounting and tried to extinguish liquid in the inventory?
So there has been 2 kind of approaches, frankly. There are a few people who have been able to put more relevant inventory, and those are the guys who had a healthy cash balance and no pressure on working capital. But those have been very, very few. Most of the guys have carried forward their old inventory. And most of them have again discounted very heavily. Unfortunately, it would be out of my place to say -- give you a particular number or more definite trend because we don't have any particular data. But this is what has been seen in the market, and this is what we hear from our partners.
Sure. And sir, my next question is on the gross margins. What has been the provisioning in this quarter at the gross margin level? And do you think we can go back to the old gross margins given the -- your ambition of doing 25% to 30% share in online, and that will continue to be impacted? While in the past, you have always said that online gross margins are the same as the company average. But what we are seeing in numbers say some different picture.
So Ankit, the small correction out there. Maybe we have not communicated rightly. But gross margin, there's always a difference in online versus other channels. What we meant was bottom line performance because online doesn't have ERC, doesn't have rental. So all the costs sticked mostly above gross margin. So at gross margin level, definitely, there's an impact of online. And this is what we have mentioned in the first 2 quarters also, when gross margin drop was significant. It was because of the skewing online sales. So that's 1 part. Second, see, in the long run, as you see, already offline sales have started picking up, and the share of online has well settled at a more reasonable level. There could be some impact in gross margin. But again, that won't be as significant as what we have seen. Coming to long-term gross margin. See, we think the margin structure of 64% to 66% is very, very attainable. If you look at this quarter also, despite higher provisioning, which your question was, it's about 3.5%, 4% on quarterly numbers because the sales base has been lower, and our dormancy provision policy has been same. This obviously will come down with sales picking up. So I think once business gets back close to normalcy, you'll also see gross margin inching back to pre-COVID levels. As of now, we don't see a big challenge. What you should be aware of is -- and I'm sure you are aware of it. See, there has been sharp increase in fabric prices. Now while we are mostly covered for this season and we are taking lot of steps to mitigate most of this in next season, there could be some impact if you don't take a MRP increase, but that's a call which we'll take after seeing fabric prices for another month or so. But overall, long-term perspective, gross margin structurally there are no changes.
And sir, if I can ask -- squeeze in one more question. One of your competitors just acquired a majority stake in a luxury ethnic wear brand. With our Wishful now contributing around 5%, 6% of our revenues, while it may not be luxury, but at a premium range. So how is that market shaping up now? And what's our vision for Wishful for next 3 to 5 years?
So Ankit, that market is very different. We are nowhere even close to that with Wishful. So I think it's just not comparable, frankly. Wishful has a market of its own. And obviously, last year, because of COVID, because of occasions going down, Wishful, frankly, couldn't get a chance to do whatever was required. So I think that's a separate thing altogether. But the brand that you are -- the business that you are talking about is a very different business. There's no connection, honestly.
The next question is from the line of Kamlesh Kotak from Asian Markets Securities.
Just to continue on the previous participant's question on the competition. Do you see there is any structural change in terms of the competition, especially from the unorganized part as we see? And is there anything that has now been seen as the new normal for us from the market positioning?
So see, I think the real picture will emerge only this season. There are a lot of small labels and brands who are organized in a sense and unorganized in another. Those guys had inventories, so they carried on with their inventories last season in large-format stores and MBOs. What we have heard is few of them are struggling to connect fresh merchandise, and hence, they are right now liquidating old stocks. I think picture will emerge slightly more clearer in next 3 to 4 months, once the old inventories would be off. My -- the sense we are getting from our partners is they are looking at us to fill some gaps, which they believe the long tail of brands then create. And we could already see a couple of smaller labels being out of large-format portfolios. But probably this season will show us a better picture. I think there would be some consolidation. There would be some shift to more established players who would have the ability to supply and scale up with these partners. So yes, that should happen, but we'll get a more clear picture this season.
Sure. Second thing you also discussed about finished goods management and raw material management inventory, software and systems in place. Can you just elaborate on the same? What -- is it launched across the channel partners? And how has been -- what has been the cost incurred in that? And also you mentioned about warehouse setting up. So how much CapEx there would go in the location part of it? If you can help us understand what this.
Yes. So let me start with the second part of the question. So we would be investing about INR 8 crore to INR 10 crore in the new warehouse that we spoke about.
Sorry, I missed it. Any location you highlighted? I mean...
So we have already taken -- signed up this particular warehouse. It is in Haryana in a place called Pataudi. Yes?
Yes.
So that's about the warehouse. In terms of the investments that we've done into managing different systems, to manage our FG fabric inventory basically better, the investment should be in the range of about INR 3 crore to INR 5 crore, over a longer period of time.
Have you already started rolling out those systems across our channel or...
We are at a pilot stage. Hopefully, in the next month or so, we should be able to roll it out in a gradual manner.
So just adding to what Amit said. The infill optimization model is right now being piloted for brand W. The express delivery model is already institutionalized. It's more about processes. And the way we are thinking of time lines and setting up the back end for that, so that's not system dependent or that doesn't entail any CapEx.
Okay. Okay. Right. And lastly, what -- way we see the branding and marketing spend from here on from the next season and beyond, I mean, are we looking at significant rationalism there or it will continue the way or it will go up? How you see that?
So this season, we'll step it up, but the festive is the time when we'll get it back to pre-COVID levels, a full-fledged campaign. But this time the focus would be more on creating impact on social platforms -- social media platforms and doing slightly more target database marketing kind of stuff and better storytelling at stores.
Okay. But any ballpark percentage? As a percentage of revenue, how much we are planning to spend?
So see, post -- I think in festive we'll return back to the earlier levels that we were doing, about 3% to 5%. But right now, on a lower base, I think percentage won't frankly give a clear picture.
Sure, sure. Okay. And finally, if you were to see from just a directional point of view without diluting the numbers, how has been the trend in January compared to the festive season, which we had seen last quarter? I mean is it slightly showing some traction or how it is shaping up?
Okay. I think let's not look at the quarters together because there was an impact of Diwali also. And November so, frankly, we were as a company more than pre-COVID level versus last November. I think if we look at December and January, January trends offline and online is similar. Offline is better.
The next question is from the line of Susmit Patodia from Motilal Oswal Asset Management.
So just in the context of Tier 2, Tier 3 doing much better, would you be able to give us what top 5 or top 10, whichever metric you look at, contributed a year ago, cities, and what it is now?
Sorry, Susmit. I didn't get your question. Could you please repeat?
I'm saying, what would be the top 5 or top 10 city contribution a year ago? And what would it be now?
Across or you are talking about Tier 3?
No. Top 5, top 10 cities. I mean, whatever you look at.
Okay. So Susmit, I think we'll have to share that number at probably later because I don't have that handy. But just to give you an idea, Tier 1 cities have recovered to 55% to 60%-odd, Tier 2 was about 70%. And then Tier 3 was about 85%. So this was the kind of recovery rate. Maybe we can get back on with particular details.
All right. Okay. And just 1 more interesting thing that you pointed out at the beginning was a cash generation of INR 45 crores. Did I hear that right? For this quarter?
Yes. Yes. Since last call, yes.
Yes. So we basically mentioned the cash during the call. So if you remember last call, we mentioned that we had INR 110-odd crores of our cash reserves. And that number is today around INR 155 crores. So that's the INR 45 crores that we are talking about.
So just to understand. At INR 240 crores sales, if you're generating INR 40-odd crores of cash, this is like a new normal? And is this sustainable?
So Susmit, a big part of that is also working capital release, which we had planned for second half. So I think there, you'll again see working capital reduction happening in Q4. So there would be that number. Now whether Q4 cash generation when we speak next would be INR 45 crores, INR 30 crores, INR 40 crores, that we have to see. But working capital release will happen.
No. What I meant to ask actually was, Anant, that in FY '22, does the cash generation for the same top line of FY '20 is now significantly higher than in the past?
No. It won't be in FY '22. So this Q3, obviously, we have a larger part of this cash coming from working capital reduction. And as we mentioned, it is primarily from the inventory front. Now once the lower base of working capital gets established at the end of Q4, every subsequent quarter won't see a similar reduction. You will see obviously the cash reserve addition is due to that reduction, which happened in the inventories.
Got it. And just 1 more last thing. Your gross margins are down 670 bps year-on-year, while EBITDA margins are down only 450. So this is -- a little bit of this is also coming because of e-commerce, as you were saying that gross margins are lower, EBITDA margins are higher?
So some impact of that is in gross margin. It's correct.
And also then slowing up in the EBITDA margin, right?
Yes.
The next question is from the line of Jignesh Kamani from GMO & Company.
In the supply chain side, earlier, you were like close to 95% to 100% on the Delhi and the NCR region. We were exploring, you can say, improving the supply chain in Himachal Pradesh and UP and other markets. Any further development on that or probably because of the COVID slightly we are going slow on that area?
Sorry, the question was very unclear. Could you please repeat it?
On the supply chain and sourcing side, I think 90% to 100% sourcing have been right now from Delhi and NCR. So we were trying to develop a supply chain system in the UP, HP and other market. So any development there?
Yes, yes. I think from that, we have come a long way. So right now, close to 25% of our manufacturing capacities are outside Delhi, NCR.
And any cost reduction because of that because there is a government incentive on the labor portion, everything in the UP, Bihar and HP and other region?
So see, there are a few reasons for that. One is, obviously, there are some schemes also available. Second, the labor cost is significantly lower. And our business that is in fabrication, that is 1 of the biggest costs. And third is simply derisking. So we didn't want to have the entire concentration in 1 place. So these are some of the objectives. Apart from this, there's a huge social impact of all these initiatives. So wherever we have been able to place these units, we have been able to do some meaningful work around that also. So these are also regions where we need to also move out.
So any color, what kind of sourcing advantage you will have from the non-NCR doing 5% cost reduction, 10% cost reduction? Anything you want to highlight.
Yes. See, I won't like to quantify that because that's not what too many people are doing. But a simple thing is the -- forget about everything. The labor cost arbitrage itself is meaningful.
And any feedback on the Elleven branch? Though it is, I can say launched and then COVID has hit, but any initial feedback from the consumer, anything you can? And how can -- is scalability of this?
Yes. So typically, what we do is whenever we take a new project, our first test is product customer test. And then second is channel test, and then we scale up operations. So for example, in footwear, we have been able to launch in our 40 top stores. We have seen tremendous traction. So this season, we are launching in LFS, doing a channel test, and then we can build it up. Unfortunately, for Elleven, we took the EBO route. And finally, we could open only 3 EBOs. And we don't have too much -- those EBOs, we are seeing customers coming. We are seeing repeat customers coming. But see, right now, we have launched an LFS. We'll open a few more stores. I think it will be too early for me to talk on Elleven. Because it was a EBO route, it got completely on the back burner. So give us some time. Maybe in the next 4 to 6 months, we'll have much better answers on Elleven.
And last question on the store opening. On the base of close to 590 stores, the 60 to 70 store when lease rental are pretty attractive right now is to -- and considering strong balance sheet, can we be a little bit more aggressive? Or right now, we can say, because of the market, we want to open only 60, 70 next year? I think is there a probability of 100 plus?
So the answer to that is we definitely have a scope of going more aggressive. Right now, once we look at Q1, Q2, our confidence will grow and then scaling up won't be a challenge. But right now, this is the minimum visibility that we have. And we are reasonably confident that despite a weaker recovery, I suppose, in the market than what we expect and all, even then we'll be able to do as much. But if things get -- start getting built up better in Q1 and Q2, definitely, you will see a bigger number there.
The next question is from the line of Shivaji Mehta from Nippon India Mutual Fund.
What proportion of our gross margin impact would be on account of the cotton/yarn spreads being at all-time high levels?
So see, right now, there is no impact because we have got fabrics much in advance and all the stocks that we have in our stores are all made earlier. So this season, the impact is frankly very, very low. And as of now, whatever the stocks are there, it's nothing. For monsoon festive, first of all, we don't use only cotton fabrics. So we use multiple fabrics, and there's an arbitrage that we have there. Because most of the styles, we can lend to as well to different fabrics. So I think once we -- if you speak about cotton itself for a brand that is 100% cotton, it would be at least 12% to 15% increase. But thankfully, cotton is a small part of our range, especially in festive. So that impact would be slightly limited. Whatever impact of fabric prices is something that will come only in monsoon festive and there also -- it's right now at all-time high. People expect it to come down in near future. So we'll assess the complete impact.
Sure. And if so this spread, say, it will change for the next 1 to 2 quarters, or would we be able to pass it on fully? Or do you expect that we'll have to take a bit of high end?
So first of all, see, there are a lot of mitigation measures, which we will do. So obviously, the total impact won't be as high as it looks. Number two, if beyond that, it continues to go up, everyone will have to take a price increase, and this will be across the market. So I think relative pricing of all the brands would have to go up.
Due to time constraints, that was the last question. I now hand the conference over to Mr. Anant Daga for closing comments. [Technical Difficulty]We would request the participants to please stay connected as the line for Mr. Daga was disconnected. Thank you. We have Mr. Daga reconnected. Sir, you can go ahead, please.
Yes. Thank you, everyone. We take this opportunity to thank you for joining on the call. We hope we have been able to address your queries. For any further information, please do get in touch with us or SGA, our Investor Relations advisers. Have a nice evening. Take care and stay safe. Thank you.
Thank you. On behalf of TCNS Clothing Company Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.