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Arvind Fashions Ltd
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Ladies and gentlemen, good day, and welcome to Arvind Fashions Limited Q2 FY '23 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded.
I now hand the conference over to Mr. Ankit Arora. Thank you, and over to you, sir.
Thanks, Seema. Hello. Welcome, everyone, and thank you for joining us on Arvind Fashions Limited Earnings Conference Call for the Second Quarter and Half Year Ended September 30, 2022. I'm joined here today by Kulin Lalbhai, Non-Executive Director; Shailesh Chaturvedi, Managing Director and CEO; and Piyush Gupta, Chief Financial Officer of Arvind Fashions Limited.
Please note that the results, press release and earnings presentation has been mailed across to you yesterday, and these are also now available on our website, www.arvindfashions.com. I hope you had the opportunity to browse through the highlights of the performance.
We will commence the call today with Kulin providing his key thoughts on our financial performance for the second quarter. He will be followed by Shailesh, who will share insights into business and financial performance. At the end of management discussion, we will have a Q&A session.
Before we start, I would like to remind you that some of the statements made or discussed on this call today may be forward-looking in nature and must be viewed in conjunction with risks and uncertainties we face. A detailed statement of these risks is available in this quarter's earnings presentation. The company does not undertake to update these forward-looking statements publicly.
With that said, I would now turn the call over to Kulin to share his views. Thank you, and over to you, Kulin.
Thanks, Ankit. A very good afternoon to you all. Thank you for joining us for the results. Q2 was a landmark quarter for us, where our strong execution helped us achieve record revenues as well as profitability. AFL saw an industry-leading growth rate of 46% year-on-year. This was led by strong like-to-like growth of close to 25% in retail and the MBO channel doubling in its revenues on a year-on-year basis.
The strong top line growth was accompanied by even stronger bottom-line growth with an EBITDA margin expansion of 2.7%. The bottom-line performance was driven by higher productivity, lower discounting and operating leverage. USPA has been a star performer for us this quarter and is poised to become one of the largest casual wear brands in the country in FY '23.
Our hard work on working capital control is yielding results with a meaningful reduction in net working capital days to 36 days during the quarter, thereby allowing healthy free cash flow generation. This quarter has been noteworthy with the company achieving the milestone of going past the double-digit ROCE target, which we had set earlier this year to deliver annualized ROCE of around 15% in Q2.
We remain excited with the continued momentum and buoyancy and customer demand, which positions us to continue focusing on improving profitability further.
I would like to now hand it over to Shailesh to take us through the specifics and more details about our financial performance.
Thanks, Kulin. Good afternoon, everyone. With nearly INR 1,200 crores top line, which is the highest ever in a quarter at AFL, and this INR 136 crores EBITDA, we saw a very good quarter in Q2 at AFL. The growth in top line is 46% and growth in EBITDA is nearly 90%. The result is backed by some good execution of brand promises and activities in the market, both online and off-line. We saw a comfortable sell-through in SS '22 season, and the good work on sell-throughs have continued in FS season also, where we have maintained good sell-throughs and have continued to reduce discounting. The result of this good execution is very healthy, nearly 25% like-to-like growth in our retail, an increase of nearly 3% in gross margin.
There's a scale momentum at AFL and many of our businesses have become big, enabling growth in margins through operating leverage. USPA, U.S. Polo Association, our biggest brand, crossed INR 1,000 crores NSV at end October and has now clearly established its leadership in casual space. Footwear is another adjacent category that has fired with business at 2x pre-COVID numbers and a growth of more than 50% in Q2. Our portfolio of footwear business is likely to cross INR 250 crores NSV mark in this year with healthy profitability and market-leading position.
U.S. Polo footwear is now the leading player in its segment in all 3 fashion portals and recently won award as the best footwear brand in its category on Myntra. Arrow has also gained further momentum, has now grown at 50% in Q2 and has delivered positive EBITDA. Tommy Hilfiger and Calvin Klein have also grown really well at 50% with very healthy EBITDA margins.
Q2 also saw growth across channels. Retail has grown 70%. Indigo trade channel has doubled its business in this quarter over last year. Online is a very healthy 26% of our revenue mix and has delivered business of more than INR 100 crores per month in this quarter. I'm also excited about growth in Southern markets, which has been a focus area for company, and in this Diwali, we saw vibrant growth of business in key Southern markets. The revenue growth is supported strongly by omni linkages, and we have added 300 more stores in our omni network. And stores with omni linkages see a high single-digit sales contribution coming through the omni route.
The scale and gross margin improvement has come on the back of a wholehearted refresh of our key brands, which we have improved in terms of brand appeal, energized consumer-facing touch points and have developed smarter designs. Our key focus remains improvement in profitability, and I'm happy to share that we have delivered close to 15% ROCE in quarter 2 on an annualized basis. In the previous quarter, we had achieved high single-digit ROCE, and now we have reached close to 15% milestone in journey of reaching more than 20% ROE in the medium term.
The increase in gross margin of nearly 3% has flown into EBITDA margin and AFL delivered EBITDA of INR 136 crores in this quarter, a growth of 90% over last year same quarter, an increase of nearly 2.7% in EBITDA margin percentage over last year. This improvement in EBITDA is due to reduction in discounting, higher sell-through, higher freshness of inventory, operating leverage and improvement in Arrow profitability.
The business has delivered a PBT of INR 45 crores with a very healthy cash generation. This has resulted in net debt reduction to INR 383 crores. Through strong execution and site controls, we kept inventory in check and the inventory days have come down by 6 days right at the start of the season. We had done more than 4 stock tonnes. And in Q2, we have delivered 4.2 stock tonnes. There is overall focus on deleveraging of balance sheet. And besides maintenance of net debt level, despite a healthy 50% growth in top line, our net working capital has come down by 6 days. Both inventory days as well as debtor days have shown healthy reduction.
Q2 also saw strong collections from the market with tight controls on trade policies. PBT of INR 45 crores has resulted in a PAT of INR 18 crores after minority interest.
Lastly, I want to call out our mega brand U.S. Polo and its strong performance. Q2 saw the highest quarterly revenue by U.S. Polo. Now it's a INR 1,000 crore NSV brand at end October. Its NSV grew with whooping 45 tonne in like-to-like retail. Its adjacent categories, including footwear and kidswear have grown at more than 50% in the quarter, helping the brand continue its double-digit pre- IndAS EBITDA margin trajectory.
In last 1 year, we have spent a lot of efforts in brand refresh in U.S. Polo. You may have seen the new ad campaign on the concept of twinning, featuring Bollywood actor Arjun Rampal and his family. We saw use of Indian celebrities for the first time in U.S. Polo campaign. We also refreshed the brand, store identity and energized product designs, including its denim division. We are very excited about prospects of dominance of USPA in the casual wear space, and we'll continue to wholeheartedly invest in this brand to support its reengineered profitability and growth.
I see a growth momentum in our brands in the season ahead, and AFL should cross INR 4,000 crores top line this year. Our focus will be to further improve EBITDA margin and ROCE through profitable scale buildup, sharp execution of brand activities in the market, tight control on trade policies and deleveraging of balance sheet. Thank you.
Thanks, Shailesh. Seema, we can open it up for question-and-answer session.
[Operator Instructions] We take our first question from the line of Mr. [ Sagar Parekh ] from Oneup Financial.
Yes. Congrats for a decent performance. And good to see numbers finally taking shape. So congrats for that. A few questions from my side. Firstly, on sequential gross margin reduction, that could be purely because of this EOSS coming into July. Is that the reason?
Our business is very -- our industry is very seasonal. So you rightly said that quarter 1, which was largely a full price season, versus quarter 2, the GP has gone down, but we are happy to say that our EBITDA at a pre-IndAS level has gone up sequentially. So from our quarter 1 EBITDA pre-IndAS, the operating EBITDA to the operating EBITDA of Q2, the Q2 EBITDA has gone up actually. While the GPs, yes, has come down because of the EOSS discounting. But for all the other leverage in our expenses, which have not grown at the same pace, our GP has gone up by 15%. And because of that, our EBITDA has gone up by close to 1.3% pre-operating IndAS. And it's a similar -- post-IndAS, same number.
So Sagar, EOSS discounting is a reality, and we don't really compare sequential EBITDA margin. But we are happy to say that our Q2 operating EBITDA is higher than Q1 EBITDA.
But that Q2 to Q1 EBITDA higher of 1.3%, as you said, is also because of higher other income, which is INR 20 crores this year. So if I remove the other income, still the EBITDA is higher on a quarter-on-quarter basis?
Yes. So I reconfirm. Outside of other income also, our EBITDA margin in Q2 is higher, Sagar. As far as that other income is concerned, it's just an accounting IndAS entry. It doesn't have a bearing. But our pre-IndAS EBITDA has gone up in Q2, whereas, normally it tends to come down. But this year, because of the market transition and good performance, it's gone up.
And I can give you a little more color to that so that this whole question gets addressed squarely. See, there is a GP drop in this quarter compared to last sequence, but that's because of EOSS. But our GP went up by 15% in this quarter compared to last quarter. And I don't want to again and again compare Q1 versus Q2 because it's not fair. But I'm -- since you asked that question, I'm sort of saying that the GP has gone up in value by 15%, where our expenses compared to quarter 1 have not gone up at the same pace. And because of that, our EBITDA -- operating EBITDA has gone up. It's got nothing to do with the other income or IndAS. I'm talking operating business EBITDA target here.
Understood. Understood. And this other income of INR 20 crores, anything to read here, because it seems to be on a higher side?
Yes. But it's just an accounting practice, whatever is as per the accounting rule. So out of that INR 20 crores, INR 14 crores is account of IndAS 116 adjustment, which is basically to reassessment of leases and fair valuation of security deposits. And there is a INR 6 crore coming from the interest income and there's some small provision of write-backs. So frankly, Sagar, don't read too much into the other income.
Our fundamental business, operating margin in Q2 has gone up. But it's unfair to compare Q2 margin with Q1. I think the right way to compare is Q2 to Q2, because there's a large seasonality in our business, Sagar.
So if I compare H1 EBITDA, which reported EBITDA before other income of INR 208 crores for H1 FY '23, how much would be pre-IndAS? So in the past, you have mentioned about 4% to 5% -- 4%, I think, is the difference between post and pre. So fair to say that we would be at 6% EBITDA pre-IndAS on H1 numbers? On INR 2,100 crores...
11% EBITDA post-IndAS in H1. And as you said, there's a difference of close to 4%.
Got it. So it's about 10%, just correcting, because it's -- I'm talking about before other income.
No, but -- I mean that's an accounting entry 11% post-IndAS. Yes.
Okay. Fair enough. And just my last question. If I -- so this year, as you said, you will finish the year with about INR 4,000-odd crores of top line. Where would you like to see the margins pre-IndAS I'm saying? And in FY '24, as you have in the past indicated that we would like to grow our top line at about 12% to 15% on a steady-state basis going forward. So how should we think of margins on a sustainable side pre-IndAS EBITDA as we move ahead in FY '24?
See, if you look at Q2 power brands, we are at close to 13.1% post-IndAS EBITDA. As you can take your calculation of pre. We are very close to sort of the trajectory of double-digit EBITDA in power brands. And our first focus on profitability is to reach that stated guidance of reaching a double-digit EBITDA in our power brands of now -- earlier, we used to say 12 to 18 months; now 12 months, because we've made that journey in the last 6 months.
So Sagar, I think our first goal on profitability would be to reach a double-digit EBITDA profitability for power brands in the next 12 months. And we are confident that whatever we're doing through the scale leverage, through efficiency of our execution, reduction in discounting coming from higher sell-through, improvement in some of our brands' profitability -- overall, we are guided towards that and we'll have to work hard towards that.
And we are very committed to that journey of reaching double-digit EBITDA in power brands in the next 12 months.
As far as the growth momentum, currently, obviously, you've seen our growth momentum is very, very strong, it's industry leading. And our guidance on the top line growth is around 12% to 15%. And currently, it looks more like closer to 15% because there is a strong growth momentum in our brands. All these 6 brands are very powerful market-leading brands. So that will help us to reach the kind of top line growth we're looking at.
And all the growth drivers be it digitalization, online business, be it adjacent's category growth, be it same-store growth through better execution and also the expansion into the small Tier towns, all are now becoming very live and green. So we are confident that we should be in that 12% to 15% growth, in the short term more like 15%.
We take the next question from the line of [ Ritesh Chaudhary ] from [indiscernible].
So first of all, congratulation on a very nice set of numbers. And it's actually good to see margin shaping up upwards. So my question is regarding the -- there were several new articles shouting around for the sale of Sephora. So what is the substance in this news?
Friend, we never respond to market speculation. We have to focus on running the business. So no comments from our side on that.
We take the next question from the line of [ Jay Shah ], Capital PMS.
Congratulations to the management for walking the talk and posting a good set of numbers. I'm actually relatively new to the company. So if you don't mind, could you just throw some light that when it comes to these brands, what part of the supply chain do we control? Like do we control the entire manufacturing itself? And even if it's that, then what are the geographies that we cater to with these brands? And even the manufacturing, is it like everything that is done domestically? Or we do even source something from other geographies?
So I think let's break down our 6-brand portfolio into 3 brands: U.S. Polo, Arrow and Flying Machine. Now Flying Machine is our own brand. We own the brand. We started this as a first denim brand many decades back. Arrow and U.S. Polo are licensed from international giants. In these 3 brands, we do the complete designing as well as production, sourcing, end-to-end everything we do. And we pay royalty on Arrow and U.S. Polo to the principal.
But we do what -- this is internationally known as a life sensing model, where we are licensed to design, produce, distribute these brands in our territory. Now Flying Machine, our brand, we can do what we want across the world. Arrow, we sell in India. We have a couple of stores in Middle East. We have 3 stores in Dubai. We have rights for many other countries, some small part of Africa. But the focus, frankly, remains on India. It's the largest opportunity. But we have some other geographies.
U.S. Polo, which is our biggest brand, also is a license. We design, develop the brand. And a very large adjacent category in this. We have footwear, kidswear, women's wear, innerwear. And we sell all channels in that. And we sell in South Asia. We have business in Nepal. We have business in some neighboring countries. But the focus, again, remains on India. So that's about the 3 brands.
There are 3 more brands, which are international brands. So Tommy, CK, it's a joint venture with the principal. It's an equal JV with PVH, Phillips-Van Heusen of U.S., headquartered in New York. And we've been doing the business of these brands -- Tommy -- 2004 we have a very strategic long, perpetual license on Tommy. And Calvin also is a very long-term contract with PVH. And there, we sold goods on their line. So the principal does the designs and the selection of the vendor. And after that, we take the goods directly from the vendor into our system and then we pay the royalty to the principal.
There is a lot of localization through the help of the principal because they see India as a very big opportunity, and we are a high-duty and depreciating currency regime. So we have gone and done very healthy percentage of localization in this brand higher than any other international brand of similar repute. So it's a very unique relationship and a very unique supply chain that we do. And our gross margin performance is very good in these brands and market-leading brands.
The final brand is Sephora. We are a distributor there and we source these multinational brands, megabrands, likes of the MAX and the Dior and all, Prada, Pixie. We import them and we retail. So the role with Sephora is more of a distributor in India. Does that answer the question? Anything specific, more detail you want? I'm happy to sort of throw some more light on that.
No, no, no, that was really helpful. So I just wanted to know that in the geography is that -- when you say that you have all the rights from designing to distribution. So then it is on your peruse that you can even get it manufactured from a third-party player also, right? I mean, you would take...
No, there are global guidelines on production. So they have to be vetted in Arvind. Our own manufacturing standards are very, very high, and we vet the factory on a lot of parameters so that they meet any international parameters because Arvind standards are very, very high standard, AFL standard. And we produce in the approved factory that we approve. And sometimes, in Tommy, CK, we source from approved vendors by the principal.
Okay. Okay. And would it be safe to assume that the next level of growth would primarily all be focused on India and not the rest of the geographies as much, comparatively?
Right now, India is a very big opportunity. And in times to -- sure, we will take the brand even more strongly. But in the short run, our principal focus is to expand in India, and we see huge opportunities in small Tier towns, like I said earlier. And we have a lot more to do to really exploit the large potential. It will take us many, many years to reach that potential. But we will be always open to other territory wherever we see opportunity.
We take the next question from the line of Mr. [ Kunal ] from Alpha Invesco.
Hello?
Hi.
Am I audible?
Yes, sir.
Yes, yes. Sir, my first question is related to Arrow brand. I just wanted to know the progress in Arrow as -- just using one of the matrixes that, in FY '20, there were 286 stores of Arrow and in '22 it's down to 212. Approx 74 stores have been closed, I assume, in the last 2 financial years. So what is management's strategy for Arrow forward? And could you just let us know the pre-and post IndAS EBITDA margin of Arrow specifically?
See, Arrow has been a big focus for us in the last 2 years. COVID was not kind to many formal brands. And we had to really adapt the brand to the new realities of post-Covid or work-from-home and we increased the proportion of it, smart casual line called Arrow Sport. We made the brand a little more ceremonial. We got a new logo on the brand, 'A' vector. We signed up with Hrithik Roshan as a big mega Bollywood celebrity to create demand for the brand. We created a new retail identity and which we have started opening doors.
So Arrow has now turned around really well and is one of the fastest growing in our portfolio. In the first half, it has doubled the NSV. Second half -- second quarter is more than 50% growth in the Arrow business. Also, if I see the fall holidays, the current season, the improvement in sell-through in Arrow is significant, almost like 10%. It's like one of the highest in the industry. And because of this increase in sell-through because of lowering of discount linked to that, Arrow has now turned around. It's become EBITDA positive. And it's a very good news. And we are very excited about the brand where it is.
And with this energy that the brand has, we are getting now a lot of demand from the trade to open more stores of Arrow. And we're targeting that how fast we can open the next 100 stores for Arrow. It may take us probably 2 years. But we are very committed now to take the distribution footprint of Arrow forward with a position of strength, where we have done well on the current distribution. Our like-to-like growth in the business has been very, very healthy. Sell-throughs have been very healthy. Brand has become EBITDA positive.
And this is now the right time to accelerate and open many more stores. So maybe a year from when you asked this question, our store count would have gone up significantly higher. So we are very excited about what the short-term future holds for Arrow as a brand.
Okay. Sir, my second question is for U.S. Polo. Sir, could you just tell me what is the sale of adjacent as a percentage of overall U.S. Polo sale? Also, the management said once in their earlier con calls that stock turns and margins are better in footwear segment. Sir, if you could just give me the quantification of what are the stock turns in footwear segment?
So let's start with the adjacent category. U.S. Polo, we have a lot of adjacents categories. This is one adjacents category where we have invested ahead of the time. So we started with footwear business with a separate dedicated team. We set up a innerwear team, a separate dedicated team again. We have a very large kids' business in U.S. Polo. And now we're launching other accessories as we speak, things like belt and wallet and women line of footwear, et cetera, et cetera. So accessories -- adjacent category is close to, I would say, 250 -- this season it will cross INR 300 crores of NSV of adjacents category. It will be north of that actually. And we are hoping that, that number could touch INR 500 crore NSV mark in next 2 to 3 years because there's a lot of energy going behind USPA and its adjacent category.
Coming particularly to the footwear. See, if you look at our footwear portfolio, U.S. Polo is the largest part of that footwear portfolio. We have a good, healthy footwear business in Tommy Hilfiger figure also. And we are looking at designing some footwear line for some other brands as we speak.
This business is almost like a -- this year should touch close to INR 250 crores of NSV. Bulk of it is -- will be from U.S. Polo, which will be north of INR 200 crores NSV mark. It's a fairly healthy double-digit EBITDA business. It's grown really well. In fact, the quarter 2 number is almost 2x the pre-Covid number. In quarter 2, growth is about 50% like. It's a business which is doing really well, and it's a market-leading position. It has an online first line. So on all the fashion portals -- if you look at Myntra or AJIO, it does very well.
Last week, there was an event in Myntra for annual performance, and I'm happy to share that U.S. Polo footwear won the best footwear brand in its segment. So we won that award for footwear. The turns on that business are quite healthy. So it's a profitable fast-growing category, and we want to grow the footwear and other accessories, adjacent categories like the innerwear and small leather goods and kidswear strongly.
Yes. So it would be just really helpful if you could just give a ballpark number of what is the stock turns in the footwear segment? Just any ballpark or casual number would be fine.
See, as a company, we are at a 4.2 tonnes. And I can say that the footwear enjoys a slightly higher turn than that. Yes. It will be crossing 5 kind of tonnes already. So it has a slightly higher stock turn than the company stock turns. I mean, does that answer your question? Or you want me to be a little more specific?
No, it answers my question, sir.
Okay. Yes.
We take the next question from the line of [ Naisar Parekh ] from [ Natis Capital ].
My first question is on the channel mix and how are the channels performing, especially the MBO channel where we had faced some problems in the past. So can you just give a sense of what is the mix by channel and the growth in them?
Yes. So in Q2, obviously, you've seen kind of growth we have delivered. Across channels, there is energy and our brands have done well. So typically, if you look at our largest channel is retail, which is close to 40%. And based on the quarter and the seasonality, it can move from 37% to close to 45%. But around 40-odd percent at an annualized basis is the retail channel.
The second largest channel is online. In the quarter 2, it was the 26%. So this is a channel which has grown at 20% CAGR post-COVID. And we've like done around INR 100 crore-plus monthly run rate in quarter 2 also. So this is around 25%, and it has grown at around 20-plus percent CAGR in the past.
Then we have 2 other big channels: department store and the MBO, the trade channel. The trade channel tends to be at around 15-odd percent. Currently, in the quarter 2, it has gone higher because we do the primary filling for the season in September after the [ EOSS ]. So this quarter, the numbers are slightly higher than 15%, but that's where it is right now in terms of 15%. And a similar number is expected from the department store channel.
So that's the overall sort of mix we enjoy. And we have a small export and institutional business. But this is how the overall channel has come across.
Got it. Okay. And my second question is on the online channel. Do we have any plans to launch any kind of -- launch or acquire any kind of online first brands given that that is the focus area for many people? So is there any plan on those lines? Or the idea will be to just do the brands?
Very, very focused on our existing brands. And we have these 5 apparel brands, and Sephora, 6 brands. So we want to very single-mindedly stay focused on these businesses. And we see a huge opportunity for growth in the next many years in these brands to grow at 12% to 15%. We don't see any paucity of growth opportunity in our own existing brands. And make them bigger, more profitable, that's our focus.
And you've seen our -- last 1 year, we have demonstrated how sharply we have done our capital allocation and sharply defined our portfolio. So currently, we don't have any plan for any digital first brand, any acquisition or buildup. That's not on our cards. But in each of our businesses, we have a very large heavy online business and from wholesaling to the portals to our own nnnow.com, to marketplace model, to omni linkage. We are very committed to online as a dominant channel and we want to grow that channel profitably aggressively. But we don't have any plan to do any other online for separate brand.
Got it. And sir, if I can ask one last question. If we look at our minority interest, that has made INR 10 crores of PAT, whereas we, as a whole company, has made INR 18 crores. So we've made only INR 8 crores, excluding Tommy Hilfiger and Calvin Klein, right, which is -- where the margin is, obviously, low. So how should we look at that? And when do we see -- obviously, it has improved, but as a margin, it's still low compared to TH and CK. So how should we think about that?
[ Naisar ], Ankit here. I think you are looking at the wrong numbers. The total PAT reported for the company consolidated is INR 28 crores. Out of that, INR 18 crores is excluding PVH, which is after the minority interest. So this quarter, we have had a landmark quarter, where we have meaningfully improved our PAT margins, if you really look at it. And on an overall consolidated top line, despite me having adding top line on the -- of INR 1,182 crores, I have done about close to 1.5% PAT margin for AFL after minority interest.
So it's INR 28 crores with INR 18 crores coming from AFL after minority interest and INR 9 crores or INR 10 crores coming in from PVH. And as to what you would have seen, [ Naisar ], I would just kind of really highlight the fact that our bottom line profitability has been on an absolute exponential upward trend over the last 4 to 8 quarters. Our first journey was to improve our PBT, which is what we did in H2 of FY '22. And then since then, we have been improving our PAT profitability as well.
And that's the journey and our steadfast focus on improving bottom line profitability along with our EBITDA margins and as what Shailesh highlighted on growth of 12% to 15% CAGR moving forward.
Got it. Sir, the INR 10 crores is for PVH and INR 18 crores for the other brands?
Absolutely right. That's correct.
[Operator Instructions] We take the next question from the line of [ Yash Mandawewala from Mandawewala Family Office ].
Congratulations on a good set of numbers. I'm just seeing a provision for slow-moving inventory of about INR 47 crores in the cash flow statement. Can you just provide some more color on this?
See, we have tightened our policy on inventory. And one of the reasons why our GP went up is because we have kept our inventory very fresh and our GP does well when the inventory is fresh. So we've gone a little more conservatively and tight on our policy, and we've started keeping a little higher provision. It's a graded provision based on aging, but we have created a little part of war chest pool going forward. And that's what this value represents. It will help us to liquidate inventory parts and keep the inventory fresh so it will have a further impact on our GP.
Perfect. The second question is, can you just provide some more -- some updates on how the festive season has been? Has it been a bit softer than your expectations, so October Diwali season?
See, this season, that is the fall holiday season, is going as per our plan. We launched the season on time. We saw -- the festival season starts from Onam in Kerala, then to Puja in East and some parts, and Diwali now. And then heading into the winter season, wedding season and then Pongal in Jan. So the season -- there is a buoyancy in the market and our brands are very, very strong. So the season is going as per our plan. Our sell-throughs are as per we had planned. And we hope to end the season as per our plan.
We take the next question from the line of Mr. Rishikesh Oja from RoboCapital.
Only one questions from my side. If you could provide some outlook on the debt cycle, sir?
Sorry. I missed -- your voice -- I couldn't -- can you repeat, please?
Sure. Sir, if you could please provide some outlook on debt?
Yes. So if you really see our debt position, our net debt is at INR 383 crores, which is slightly lower around INR 40-odd crores. So we have always guided that our debt levels, despite the very large growth that we're doing, will be similar to what they were last year. And we expect from now till the year-end, they will move sideways. So similar levels as last year March -- last year March level.
We take the next question from the line of [ Sagar Parekh ] from Oneup Financial.
Just one on the Sephora. While you may not comment anything, but just wanted to get your sense that at what point will you eventually decide to exit the business as you have done in the past for all the other...
You are forcing me to say something. We don't comment on such speculation. Please...
No, but is there a thought for you to like probably look to sell eventually or look to exit this venture? Or there is no thought process at the moment?
I don't want to comment on that. So just please pardon, yes? See, Sephora is a business that we run 26 stores, and we have done really well. If you look at the quarter 2 numbers, like-for-like in Sephora is probably the best in the industry. We're delivering one of the highest sales densities in the mall. Ask any mall which is the best performing store in sales, Sephora will be right there.
We've done a fairly good job when we took over the Sephora from other distributors, and it's been a core part of our business. And we'll continue to sort of engage with women consumers in its premium off-line-driven appeal. And that's what Sephora's role in ours. It's a beauty brand for our portfolio.
Okay. Got it. And my last question would be on the Arrow. So you mentioned that you're looking at overall power brands reaching double-digit pre-IndAS EBITDA in 12 months. So on Arrow specifically, once the portfolio reaches that double digit, like Arrow would be on a lower side and probably U.S. Polo and Tommy would be on higher side for -- is that like a fair understanding? Or even Arrow can possibly reach about double digit?
Arithmetically, you're right, because Arrow will also reach double-digit EBITDA. We are very committed. It'll take maybe a year more or 1.5 years more to reach there, because it's just broken even where -- brands like U.S. Polo and Tommy are already double-digit pre-IndAS EBITDA. So right now, it's just broken even at early stages of EBITDA. But we see acceleration at a higher pace in Arrow going forward. And it should also reach -- we're very committed to Arrow reaching double digit. But when the overall portfolio reaches 10%, maybe Arrow is a notch probably less. But it should also then soon reach double-digit EBITDA. Our ambition is -- on Arrow also is the same, to reach double digit. It may take 2 to 3 years.
Right. And Flying Machine?
Similar. So see, Flying Machine is also at a scale where we will need to double the scale. It's now just a little south of probably INR 500-odd crores. And see, the journey of these brands will be interesting when we can grow them in next 3-odd years to INR 1,000 crores with new categories in Flying Machine. We are focusing a lot on jeans and new categories being developed, including footwear, including innerwear, including kidswear in the next 1 to 2 years.
It will take some time, but we have started thinking on adjacent category. We're also looking at some regions where it can grow faster. We can look at some channels where it can grow faster. So there's -- a lot of energy is going on to see how we can grow the brand from a slightly, right now, subscale in that sense to a scale where we can talk about a very, very healthy EBITDA.
Right. So Flying Machine and Arrow will probably take some time to reach double digit, maybe 2 years out or maybe 2.5 years.
You're right. And we are committed to that. But compared to Tommy Hilfiger and U.S. Polo, they may take a little longer time, a couple of more years.
We'll take the next question from the line of Mr. Nishid Shah from Ambika Fincap Consultants.
This is Dhruv Shah. Congratulations on a good set of numbers. Sir, the question is pertaining to our U.S. Polo store, which we opened in Chennai, which was one of the largest stores which we have opened. And if I'm not wrong, this is because we are weak in South markets. So can you just tell us how has been the response and how we look the southern market going forward?
Very good question. And U.S. Polo is strong in South also now. U.S. Polo is an INR 1,000 crores brand. It's strong across channels, across markets. Relatively, yes, I mean, you can say a little more division. But there are pockets: like Telangana extremely strong; Bangalore City, very -- we opened 5 stores on the same -- in the same week in Bangalore. We opened, like you said, in Express Avenue, which is probably one of the biggest, most important mall in South. So we opened a very large store.
And I'm happy to share that U.S. Polo now is the third biggest brand store in that mall, and that mall has all the brands. And so USPA has become like a top 3 revenue store in that mall. And I'm very happy with the progress there. If you go to the store, it looks quite nice. The standards of retailing are very, very high. And from here, it will only grow faster and forward.
So U.S. Polo now opened a lot of stores in Kerala, Telangana, Andhra. Andhra, we have opened 5 stores. Express Avenue store. So when we want to go even stronger in southern markets, I think U.S. Polo will be the first brand that will take us into that leadership or the strength position in South. So U.S. Polo is doing fairly well.
When you say that we are trying to go into Tier 2, Tier 3, what kind of store size would that be?
See, we are very clear that their store size will be similar to the current store size, maybe the smaller version of the current. We are not looking at necessarily a different format or a different -- a smaller store, et cetera. Because what we have realized is that the well-to-do, affluent and even higher middle class consumers in the smaller towns, their aspirations are very similar to the big metros. And otherwise, if the offer is different, then they end up going to the big metro to shop. So that's the learning in all our brands that we want the consumer to shop in their own hometown and not go to the nearest metro to shop. So our offer will be very, very competitive to an urban metro center in these towns also.
Right. And do we intend to open more U.S. kids separate stores? Or you plan to merge everything in one and open one large store going forward?
No. In fact, we are open to both the formats. But I think a kids' separate store is a very interesting opportunity. And some of other brands like Tommy Hilfiger, we opened very large number of kids' stores. The largest in the world, in fact, the number of stores that we have in Tommy in India. And U.S. Polo also exploring that route. And we'll be open to -- we have a multi approach, whatever works. So a couple of stores -- we'll continue to open family stores together. But definitely, there is a scope of opportunity for kids' stand-alone store in U.S. Polo brand.
[Operator Instructions] We take the next question from the line of Mr. [ Sheryans Jay ] from [ Swan ] Investments.
Sir, I just wanted to understand how has been the response for women's wear in USPA?
Sorry [ Sheryans ], we missed that. What did you say? What's the response in USPA?
How is the women's wear response for USPA?
We had discontinued women's line in USPA a couple of seasons, especially during the COVID. And then we are now restarting the efforts on U.S. Polo women's wear. And it's on the drawing board, very early days of the effort. And in times to see -- in the couple of seasons, you will see we relaunching the women's wear. So today, if you go to any of our stores, you will not see women's wear.
Got it. So why I'm asking you is because fundamentally women's wear, you need a lot of SKUs to stock, right? And you somewhere mentioned on the call where you plan to get into footwear for women as well. So what I'm trying to understand is the need for higher SKUs and design, will that not actually lead to balance sheet again getting bloated and higher requirement for working capital going ahead?
Yes. So we'll do it very smartly. That's why we are very cautious right now. We are now prototyping our thought process. Footwear is a different opportunity, and online much easier to sell. And we test launched the women's wear in last 1 month. Initial response is very good, but still early days for us to comment.
Apparel will follow after that. So right now, I'm not able to comment on what you're saying about the [ width ] options, et cetera. We are on the drawing board, and we'll come back with hopefully a smart plan.
Okay. And sir, a large part of the Indigos that we're opening would be company-owned, company-operated? Or are they franchisee stores?
No, we have an asset-light franchisee model-led expansion plan. So you look at our CapEx, not too much of investment going. And most of our stores or a majority of our stores will be franchisee stores.
Okay. All right. And we sell the inventory on an SOR basis? Or once sold, we don't take it back. How is that? How does that...
We have many models. We have a consignment model also. We have outright model also. And it changes from franchisee to franchisee, market to market.
Okay. All right. And sir, somewhere in the presentation, you spoke about a model where you want to like sell products which are not sold at a discounted price. What is that model like? You plan to open stores for that?
Yes. So we have -- outlet industry has very large outlets in physical stores, which are linked to omni. And we didn't have that. So a year back, we went ahead with that model. And now, we have these stores which sell our 5 brands, only our 5 brands, dedicated to the 5 brands we have. And I don't know which city are you -- which city are you from?
Bombay.
Bombay, okay. So we don't have a store in Bombay yet. But like, for example, Bangalore, at the airport and at Marathahalli, we opened a large 3,500. And these are pure outlet models. There's no other model there. It's not other brands. It's our own 5 dedicated brands.
And they're doing very well. And it's an efficient way of liquidating old inventory in a controlled manner. And this model is really working well for us. So we opened 20 of these outlet stores. And by March, we should have close to 30 of these stores, which will help us liquidate old inventory at a faster pace in a very efficient way and good margin.
Thank you. Ladies and gentlemen, that was the last question for the day. I would now like to hand the conference over to Mr. Ankit Arora for closing comments.
Thank you, everybody, for joining us on the call today. If any of you have any further questions which have remained unanswered, please feel free to reach out to me separately, and I would be happy to answer them offline. Thank you for your time, and look forward to interacting with you again next quarter.
Thank you. On behalf of Arvind Fashions Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines.