Arvind Fashions Ltd

NSE:ARVINDFASN

Earnings Call Analysis

Arvind Fashions Focuses on B2C, Growth in Footwear

Arvind Fashions is shifting its business model focus towards B2C (business-to-consumer), intending for it to represent 75% of total business, a significant increase from the current 50%. This shift will enhance product assortment, customer experience, and discount control. The company is in the midst of destocking to reach an optimal inventory level expected in the next few quarters, using online channels to efficiently liquidate old seasoned merchandise (OSM). U.S. Polo kids and footwear categories are experiencing healthy growth, with most U.S. Polo stores now featuring the brand's footwear. Despite a recent depreciation increase and some investor concerns, profitability in brands like Tommy and Calvin Klein appears to be rising by 15%-20%.

Commitment to Profitable Growth and Controlled Discounting

The company has emphasized its dedication to profitable growth, reflected in an EBITDA increase of approximately 18%. Efforts to manage inventory have been robust, with a focus on maximizing the return on inventory held. Despite a like-to-like market growth of only 2%—affected by unique factors such as the cricket season overlapping with the Diwali festival—the company has a history of healthier growth, citing 9% in the previous quarter and 12% in the same quarter of the prior year. The firm strategically avoids discounting, perceiving it as disruptive to their business rhythm and margin-detrimental. Investment in marketing has grown by 130 basis points, showing a commitment to brand strength and customer loyalty, which supports full price sell-through and sustained profitable growth.

Multi-Brand Outlet Expansion and Enhanced Sales Density

The company's Multi-Brand Outlet (MBO) channel experienced a growth of 15%, attributed to a broad expansion of distribution networks. This expansion, coupled with the channel's like-to-like growth, suggests a multiplicative effect in sales. Furthermore, while Exclusive Brand Outlets (EBO) have higher sales densities, which can naturally be more challenging to grow upon, the MBO channel is expected to improve as it benefits from this extensive growth strategy.

Acceleration in B2C Online Sales and Strategy Adjustment for B2B

Business-to-Consumer (B2C) online sales have seen a substantial uptick, doubling in the year-to-date. This growth comes as the company pivots its strategy away from Business-to-Business (B2B) online sales, a segment that has expanded since the onset of the COVID-19 pandemic and is now being intentionally downscaled. While the B2B segment faces destocking and primary sales decline, consumer sales in this channel continue to exhibit double-digit growth. The long-term strategy focuses on enhancing tertiary sales through controlled pricing and assortment on their marketplace and website.

Targeted Same-Store Growth with a Strategic Retail Focus

The company has been a leader in same-store sales growth, achieving rates of 9% and 18% in past quarters, but most recently, 2% because of market-wide challenges. However, they aim for a sustained target growth of 5% to 7% by rigorously implementing a storytelling approach, store layouts, staff training, and visual merchandising. A robust marketing strategy and an enhanced consumer offer are expected to improve walk-ins, conversion rates, and basket sizes, driving sales growth that outpaces industry standards.

Expanding Retail Presence and Consumer Conversion Strategy

The company plans to continue its rapid growth trajectory by opening more substantial stores and investing heavily in marketing to keep the brand highly visible and attractive. By expanding their retail offering to include more categories like underwear and footwear, the company seeks to capture the overall usage occasions of consumers, leading to increased conversion rates and average basket sizes. This approach focuses on meeting and exceeding the different needs of customers to ensure continuous growth in same-store sales.

Earnings Call Transcript 2024-Q3

[Operator]

Ladies and gentlemen, good day, and welcome to the Q3 FY '24 Earnings Conference Call of Arvind Fashions Limited. [Operator Instructions] Please note that this conference is being recorded.

I now hand the conference over to Mr. Ankit Arora, Head, Investor Relations and Treasury. Thank you, and over to you, sir.

[Ankit Arora, executive]

Thank you, Michelle. Hello. Welcome, everyone, and thank you for joining us on Arvind Fashions Limited Earnings Conference Call for the Third Quarter and 9 Months Ended December 31, 2023. I'm joined here today by Kulin Lalbhai, Vice Chairman and Non-Executive Director; Shailesh Chaturvedi, our Managing Director and CEO; and Girdhar Chitlangia, our Chief Financial Officer.

Please note that results, press release and earnings presentation had been mailed across to you yesterday and these are also available on our website, www.arvindfashions.com. I hope you had the opportunity to browse through the highlights of the performance.

We'll commence the call today with Kulin providing his key strategic thoughts on our third quarter's performance. He will be followed by Shailesh, who will share insights into business highlights and financial performance. At the end of the 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.

[Kulin Lalbhai, executive]

Thanks, Ankit. A very good afternoon to you all. Thank you for joining us today for the Q3 results. AFL continues on its journey of profitable growth, even though the overall demand environment continues to stay subdued. We grew our sales by 5%, which shows the resilience of our business model and the strength of our 5 marquee brands.

The highlight of the quarter was the 150 basis point lift in our EBITDA margin even after we invested 130 basis points higher in marketing costs. This was made possible due to better gross margin, lower discounting and tight control on expenses. We continue to strengthen the balance sheet with reduction in gross working capital of 5 days in quarter 3. This quarter's growth was largely driven by the retail and MBO channel. Our growth was impacted due to a degrowth in our online B2B channel.

Our growth in the offline channels for the year-to-date remains at double digits. As a strategy, we are pivoting our online business towards the marketplace model, where we hold the stock and have full control over pricing and visibility. In doing this pivot, we have a onetime destocking of our B2B online channel, which affects our primary billing. While this affects short-term revenue, it lays the foundation for a healthy online channel.

Our B2C online channel on the other hand has almost doubled, leading to strong tertiary consumer sales growth in the online channel. The negative impact on revenue growth for the online channel may persist for another quarter-or-so, after which the channel will revert to normal growth rates.

While the environment continues to remain soft, we remain confident of the inherent strength of our brands and the growth drivers that we have put in place to scale up our business. We will continue to stay focused on our path of profitable growth and expect to further expand our margins and significantly improve bottom line in the medium term.

I would like to now hand it over to Shailesh to take us through the specifics and more details about our financial performance.

[Shailesh Chaturvedi, executive]

Thank you, Kulin. Good afternoon, Girdhar and Ankit. And good afternoon, everyone else on this call. With NSV of INR 1,125 crores and EBITDA of INR 150 crores in Q3, AFL has registered revenue of INR 3,165 crores in 9 months of this financial year and EBITDA of nearly INR 400 crores.

Revenue growth is 5% in Q3, with a 2-year CAGR of 12% growth in NSV. EBITDA growth in Q3 is 18% and 2-year CAGR growth in -- EBITDA is 21%. The quarter has started with trading for Diwali festival, but that got impacted by Cricket World Cup, 7-odd weekends featuring India cricket saw like-to-like decline, resulting in overall flat like-to-like growth during Diwali festival period.

The industry followed it up with early end of season in mid-December to liquidate inventory. Since at AFL, inventory managed tightly. We resisted the temptation of participating in this early USS, which helped us lower discounting by 1% in Q3 over last year Q3.

The sense of our brands in seasonal winterwear products and continued casualizations favoring our brand, off-line channels have grown double digits in this YTD as well as in this quarter. The performance of retail channel is especially salient, where we are on course to meet plan of our square foot expansion. The margin from retail channel has also increased because of lower discounting, especially in our key brand, USPA, where discounting is down sharply.

MBO channel has also grown more than 15% with healthy margin. This off-line growth of double digit is driving EBITDA gains. Online D2C has also doubled in revenue this year through various efforts, including buildup of exciting online exclusive collections, healthier stock levels and required marketing support.

Besides the impact of India cricket during Diwali, we also saw lower business from online B2B wholesale, which has declined sharply this year because of our strategy to restock this channel for healthy and controlled consumer experience with tighter control on discounting, as explained by Kulin earlier.

AFL growth is in double digits even in these muted market conditions, but for this sharp decline in B2B online channel led to destocking there. Our growth will continue with investment behind growth drivers by store expansion, premiumization, wholehearted marketing investments and development of adjacents categories. Once market improves, we are keen to see growth moving towards 10% to 12% and even 15% if things go right.

Our key brand USPA saw a very healthy business in this quarter with reduction in discounting, growth in kids business of nearly 20%, large investment in marketing through highly visible Legends campaign and opening of few iconic large-sized flagship stores like the one in Goa and Jayanagar High-Street in Bangalore. The quarter saw healthy growth in EBITDA for USPA.

Most channels grew well for Arrow also, and we further invested into marketing campaign with Hrithik Roshan. We saw emerging leadership of Arrow in key categories, including blazers, formal shirts, formal trousers and few useful Arrow New York lines. The quarter also saw a rollout of more stores with a new retail identity in Arrow, for example, at Mall of Asia, a store of Arrow in Bangalore.

Flying Machine, refresh is going on and efforts are underway to grow this subscale brand through distribution expansion and product upgrade for higher sales and better profitability. Key channels like value department stores and MBO channel have shown enthusiasm already for this new avatar of FM and this brand refresh for FM will continue in year 2024.

The premium portfolio of Tommy Hilfiger and Calvin Klein continue to outperform with very healthy growth and margin profiles. These brands continue to set benchmarks in the industry on key retail KPIs. Our revenue growth could have been higher if we had participated in early USS, but we made a choice of focusing on our profitability and discount reduction given our tight control on inventory.

We also made a choice of increasing marketing investment by 130 basis points in order to support growth and keep our brands top of mind. We chose investment in marketing over investment into discounting. Our decisive focus remains on profitable growth through sell-through improvements, full price like-for-like growth and reduction and discounting, all leading to increase in GP and better EBITDA.

EBITDA has grown value by 18%, an increase of nearly 150 basis points, with EBITDA margin of 13.3% in Q3. EBITDA has grown due to efficiency in sourcing, lower discounting and better channel mix. We continue our sharp focus on balance sheet deleverage, ensuring price control on working capital and saw further 5 days reduction in GWC, with gains coming from reduction in debtor days.

We saw a reduction of nearly INR 70 crores in inventory value-add market consumed, inventory in festival time and stock turn remained close to guidance of 4 turns. In this muted market condition, we count our blessing through double-digit revenue growth in off-line channels, doubling of online B2C business, EBITDA growth of 18%, positive like-to-like growth in retail, reduction in discounting and further tightening of working capital resulting in ROCE of higher than 15%.

[Ankit Arora, executive]

Thanks, Shailesh. We can now open it up for Q&A.

[Operator]

[Operator Instructions] The first question is from the line of Priyank Chheda from Vallum Capital.

[Priyank Chheda, analyst]

A fantastic cleanup turn on the internal portfolio as well as on the P&L, kudos to the team. My first question is on how should we view the 2 contrasting data points? One, on the SSG for our retail network which is muted at 2%, while our wholesale MBO channel has grown at 15%. How should we view these 2 contrasting data points is the first question?

And to the adjacent question on the same, is a strategic decision to give away with higher discounts to our customer, are you compromising on our customer loyalty, till now been habituated to buy at a discounted prices? So these are the 2 questions on the strategic part.

[Shailesh Chaturvedi, executive]

Thank you. I just want to address the discounting bit. See, our mantra has been profitable growth. And anything we do, we have to look at in the light of growth in EBITDA of close to 18%. So -- and we've been managing our inventory very tightly, so always the question is on how do we get the best realization for that inventory we are holding.

And if you look at our 2% like-to-like growth in market, one is, yes, markets are muted. It got really impacted by the cricket in Diwali festival and those are peak days of retail. And that's why when I look at the industry number, our numbers are probably on the sort of better side, and it could have been higher if the Diwali was not impacted.

Also, the USS decision impacted, but we believe that this 2% has come on the back of last quarter where we had grown 19 -- 9% like-to-like and previous year same quarter, we had grown by 12%. So you see in that context that on that 12% like-to-like, we've grown further 2%, and we've been continuously growing at a healthy pitch.

Discounting is something we want to avoid as much as possible because it goes against our business rhythm because we need to do a certain number of weeks of discounting and the new season has to come at a particular time, so anything earlier breaks the rhythm and we lose margin.

So we are very clear that we don't want to discount. And our brands, we have invested very heavily. Our investment has gone up by 130 basis points in marketing. Our brands are very salient, our sell-throughs are fairly healthy industry-leading. So we didn't see the need to discount earlier, and we believe our consumers equity is very strong. They are very top of the mind, full price sell-through, our EBITDA growth, our realization, premiumization, a lot of indicators give us the confidence not to take shortcuts and focus on the long-term profitable growth.

As far as the MBO channel is concerned, see, the like-to-like and the full sales are very similar. MBO also has grown at 15% because of large distribution expansion. So it's a multiplying factor of new distribution as well as the like-to-like growth in those channel.

And also, EBO, our sales density are much higher. On that base, further increase becomes a little difficult. MBO can be increasing our sales density as we call them. Also, a large expansion is happening, which is in the 15% growth. Tertiary growth, if you look at MBO, there also similar healthy, but sales density-wise EBOs are higher than MBO and MBO will also catch up with higher growth there.

[Priyank Chheda, analyst]

Got it. Very clear. And it's very clear on the strategic decision that we have taken to scale up the online B2B channel, which is clearly visible with a lower sales. So is the large cleanup done or is there something more to come up which we should read because it's one of a significant sales contributor to your whole of the revenues, which is online B2B?

[Shailesh Chaturvedi, executive]

See, it's kind of a courage to do the right thing. We believe that online should be played through a marketplace model as explained by Kulin earlier, and we are building that business very aggressively through marketplace, through our own website, through omni linkages. And that business fortunately is really going -- it's doubled in the YTD this year, a B2C part.

As far as B2B is concerned, since COVID days, that business has grown and now we believe the time has come to descale, destock that business. The consumer sales on B2B are still healthy. In fact, in Q3, even in B2B while our primaries were down significantly because of destocking, our consumer sales are in double-digit growth. So we are very careful about growing the online channel. We are committed to that. Just that we believe it's better done through our own marketplace, through our own control on pricing and discounting and through our own assortment that we believe in and we can do a better job of.

So B2B is a short-term issue. In long term, we are looking at how we grow the tertiary sales with online channel, and we may have 1 more quarter or at best 2 more quarters of pain with B2B wholesale, but it will actually move towards B2C growth and our channel partners and we both are all aligned on this, and we will grow the tertiary sales of our brands on online space also.

[Priyank Chheda, analyst]

Perfect. And just last question on a very broader portfolio perspective, which is all now clean power brands with more than INR 4,000 crores of sales, right? How should we view in terms of what should be a sustainable SSG, if you can mix -- if you can break down with ASP or a mix change plus a volume growth for a sustainable SSG, B2B? And as well as if you can touch up upon, there is a portfolio like CK, Tommy, USPA, which has a very industry-leading KPI -- on a retail KPI. So which are the areas that we will have to work on for our other 2 brands in the coming years, if you can highlight also on that part?

[Shailesh Chaturvedi, executive]

See, if you look at last couple of seasons, we've been delivering really the industry-leading like-to-like growth. I mentioned, last quarter, we had 9% in muted conditions. Previous year in Q3, we were at 12%. Last year, Q4, we were 18%. We have really pushed the same-store growth agenda at full price season quite aggressively.

And we are -- markets are done and when a big season like Diwali gets impacted by cricket and the retail numbers are in that month and yes, it impacts the overall numbers. But we're very committed and we are saying that between 5% to 7% should be our target. Actually, last 2 years, we've been growing at much faster pace than that. This quarter, we're 2%, but we have seen industry are flat or maybe slightly negative.

So we'll continue to put the rigor in retail for same-store growth is right from the whole storytelling that we do, the way we do the layout of our store, the way we train the staff, the way our visual merchandising happens, how the whole kinds of category-wise assortment happens, the marketing support, consumer offer. So a lot of efforts are going to behind. We just wish the market improves a little bit and then that 5% to 7% like-to-like growth is possible.

Also, I would say that this should be the base expectation from big brand and smaller brand, it could be even higher like-to-like growth because they may have lower sales density. So a brand like U.S. Polo, maybe close to INR 2,000 crores, but the market size is very large. So there's no need for us to worry about future growth. This brand can continue to grow at a rapid pace from here onwards. And we'll continue to open larger store.

We'll continue to invest wholeheartedly behind marketing to keep the brand salient. And all other -- if you really look at the signs of like-to-like, it's all about walk-ins, into conversion, into basket size. So the walk-in, if we keep the brand salient and the store experience good through word of mouth, walk-ins keep happening. As far as conversion is concerned, the store layout and the consumer walk-in and category assortment, adjacent category expansion earlier they were not buying underwear, maybe they are buying underwear now. Earlier, they are not buying footwear, they're buying footwear now or tomorrow women's wear.

So we continue to meet all the usage occasions of a consumer and also the age groups of the consumer so that we can convert the consumer at a percentage higher than the industry. And then all these efforts also help the market size, not just a t-shirt in U.S. Polo, they may buy jeans also, they may buy underwear also, they may buy footwear also. So all the signs behind walk-in into conversion into basket size, we are really working really hard towards driving all the aspects of retail spend and we want to continue to grow better than industry as far as the same-store growth is concerned.

[Priyank Chheda, analyst]

And just on the key retail KPIs versus a stronger brands versus the 2 other brands like Arrow, FM, where is the further work and energy required to be done in coming 2 years?

[Shailesh Chaturvedi, executive]

See, what happens is a weaker brand may have a lower sales entry, sales per square foot per month or year, and it should have a higher discounting. So those are the 2 things we broadly -- there are many more things, but I'm just saying the walk-ins would also be lower in a weaker brand compared to a larger brand. So those things and we need to just push the agenda on sales density as well as on reduction of discounting and it's done through many things, through new store identity, new product category, better product. So like I said, we look at all the signs of it. And in weaker brand, we need to push SSPD higher and reduce the discounting.

[Operator]

[Operator Instructions] The next question is from the line of Varun Singh from ICICI Securities.

[Varun Singh, analyst]

Sir, my first question is on -- now that like we have got these 5 brands, which we call as power brands and maybe promoted Calvin Klein from emerging to power. So like how are you thinking about capital allocation among these 5 brands to drive growth?

[Shailesh Chaturvedi, executive]

Yes. So I think what you are seeing the adjusted portfolio is the result of a capital allocation strategy that we have shut down many businesses to focus on a few marquee brands. And these are the brands that we all believe in and we're going to invest wholeheartedly behind each of these 5 brands and whatever it takes to build and we have the required financial sort of strength to push the agenda.

So now since we have 5 power brands and each one is very uniquely placed. So if you look at Tommy Hilfiger in certain segments, U.S. Polo is in a different segment and Flying Machine and Arrow are also very uniquely placed. So we have a very differentiated 5 brands. And there is nothing which is stopping us to invest wholeheartedly beyond each one of these 5 brands. So we have done the capital allocation strategy, and that's how we reached these shortlist of highly focused, decisively focused 5 brands. And now we will invest wholeheartedly whatever it takes to build these brands and revitalize the growth of these businesses.

[Varun Singh, analyst]

Sir, my question is more related to the marketing spend to drive growth. And so how are you, I mean, for example, going to make a decision with regards to drive growth, maybe whatever [ KT ] that we have, given the overall consolidated revenue or you want to drive it as an individual P&L-driven investment into each of the brands?

[Shailesh Chaturvedi, executive]

So if you see our investment in marketing used to be in 3.5% of NSV in that zone. Now we updated to about 4%. And it has gone -- that increase has happened across the brand. Now the base of each brand is different. U.S. Polo, 4%-plus will mean a lot more crores given the scale and size of that brand. And Flying Machine, which is subscale, we need a higher percentage of NSV even with a lower crores of spend behind marketing. So that's the decision we take because there is a minimum threshold of marketing required to make an impact. And that's what we will do.

Now if I have to say if I'm left with only INR 1 and that INR 1 has to go to one brand, then we would put behind U.S. Polo because at the end of it, U.S. Polo is our marquee brand and it's very, very important for AFL. And this is where -- if there is an unlikely situation we have to make a decision among these 5 brands, then I would make that decision in favor of U.S. Polo. But I don't see a need to reach that stage. We will invest behind marketing, and we have increased to 130 basis points in this quarter during muted market conditions because we believe it's important to keep these brands salient and grow these brands through higher marketing investment.

[Varun Singh, analyst]

Okay. Got it. Sir, my second question is on the large size stores that you might have mentioned. Given that retail is incrementally becoming more important channel, and it is likely to become even more important going forward, given that's the only may be linear growth, which is more under our control.

So given that context and given our aspirations of adding maybe if not all, maximum franchisee-owned franchisee-operated stores, I understand the customer experience in large-size stores is superior, we have more real estate available to maybe put more categories that we are venturing out. But still, having said that, large-size stores also create -- I mean, it comes with the baggage or the obligations of higher rental, higher CapEx requirement.

And as a consequence, the necessity of the business to be dependent on customer footfall. I mean, it cuts both way, right? If it goes right, we enjoy more, we will benefit. If it goes wrong, the downside is also incrementally much, much higher. So I mean, what is the need for going for a larger-size stores other than the category -- I mean the more real state and categories that you need to put that as a reasoning. And in this context, if you can give some competitive successful examples, if not from India, maybe even globally is also fine.

[Shailesh Chaturvedi, executive]

See, we are looking at only a certain number of large-sized stores, and we are not saying that every store will be large-sized stores. So like U.S. Polo, our current visibility is that we're going to open the next 10 large-size these 4,000-plus kind of square feet stores. And these have been identified in a very, very key location, where as a brand we want to make a statement and it's very competitive decision.

And also, we want the brand to remain top of mind in the key location in the country. And it's a long-term asset that we are building. So it will be a very careful model. We've already done last 2 years a lot of stores model at large scale, and we've seen good result, and now we are rolling out. So rarely, we do something where we are not modeled and seen the success and then based on those success parameters, we open.

So we'll open only a certain number of stores and they become very important for image and for like you rightly said about the categories of the women and kids and adjacents category, et cetera are coming in. So whole lifestyle of the brand can be displayed in the chosen few lifestyle stores, which are also on franchisee system, FOFO, where we have like-minded partners who are building that business.

And we have good experience of running large scale among our portfolio of 5 brands. So we are very confident about that strategy. Also, we link these stores with omni connectivity, so we get online visibility also. So we go out of way to push all our categories and make sure the sales density are comparable to our slightly smaller store, so that the stores remain profitable. And whatever we have seen till now of large-scale stores, they are fairly profitable stores, and they are in key locations and with high sales density. So we will -- we are rolling out. We believe in that strategy, but not all stores will be large, there will be a limited number of very well-chosen stores like that.

[Varun Singh, analyst]

Got it. Got it. In that context, like how many stores we would have closed in the current year? And the reason that I'm asking is also, I mean, for example, last quarter, you highlighted or maybe guided that U.S. Polo stores will be maybe larger size from the current 1,500, 2,000 square feet model. Therefore, having this -- maybe, if not concerned, seeking to understand that if not larger than 2,000 means maybe 3,000. So when you say 200 more store addition going forward, if not in FY '24, so a bulk of it would be a 2,000 square feet and like as you mentioned 10 stores in U.S. Polo 4,000. So I mean, in this scheme of things, basically, how is your this store evolution strategy? That's my last question.

[Shailesh Chaturvedi, executive]

That's rightly said, these are store evolution. So I'll give you an example that in Indranagar, High Street in Bangalore, we had a store of a certain size, and then we decided to make a bigger store. So we had to shut down the old store. So it's not -- let's not look at it as a shutting down of stores, more as a relocation of the store to a bigger and more prominent location. We have done exactly the same in Goa also. And we keep doing this across our brands. So this right word that you use is the evolution of the retailing standard as more and more categories come and we've added Denim as a big category. We're adding women. We've added kids. We've added footwear. We've added innerwear and belts and wallet. And the need for square foot in brand like U.S. Polo is increasing. Same is for Arrow and Flying Machine and Tommy Hilfiger.

So we are increasing the size. And for that sometimes, we have to shut down the previous store as we find the new store. So it's not so much as a store closure strategy, it's more as a relocating evolution of the store to a better, bigger store with higher revenue and hopefully higher profit also. And that is done in the case-to-case basis. I can't give you a number. We continue to look for -- right now, maybe we're looking at 15 locations in the country where we want to open bigger store for U.S. Polo alone. And as we find something, then we'll shut the old store and when you open the new store and that evolution happens.

[Varun Singh, analyst]

Got it. Got it. And sir, sorry, just one question, if I may squeeze in. What is the revenue contribution from non-apparel side of the business? I mean this footwear...

[Shailesh Chaturvedi, executive]

So currently, that adjacents category, especially in U.S. Polo is now hitting close to 15% of the revenue, and it's growing very rapidly.

[Operator]

The next question is from the line of [ Palash Kwale ] from Nuvama Wealth.

[Unknown Analyst]

Congratulations from the -- for the healthy expansion in margins. So sir, my first question is on gross margins only. So do you think that gross margins that you have achieved in first 9 months are sustainable like...

[Ankit Arora, executive]

Yes. The gross margin that we have achieved in the first 9 months, we are seeing that, as of now, it is going to be on a sustainable basis because the trend on the cotton prices continues. We have also maintained a very high level of census and a control on discounting, so all these put together will ensure that we will deliver sustainable basis the gross margin.

[Unknown Analyst]

Okay. And my next question is, so OpEx for first 9 months has increased by around 14% versus 5% increase in overall revenue. So any brand which you would like to point out which is responsible for this? Or anything -- any comment on this?

[Shailesh Chaturvedi, executive]

If you look at YTD, where CapEx is at INR 61 crores. This quarter was INR 26 crores. So we are at an annualized rate of INR 80 crores to INR 85 crores of CapEx. Now the only place -- our expansion plan is very asset light. So most of our store expansion is on a FOFO basis with franchisee. Except that in Tommy Hilfiger, we have taken over close to 25 stores, which got -- that accounting happened in quarter 3, and that is one change from thing. There's no other major change that is happening from CapEx point of view. Girdhar, do you want to add anything? Ankit, do you want to add anything?

[Ankit Arora, executive]

So Palash, I think your question also was on OpEx as well and maybe Shailesh just added a bit of flavor on CapEx, we understood kind of that. You would need to kind of also understand the piece around the channel mix change playing a role here as to what we really said when you grow retail plus, of course, the franchisee commission expenses, which, of course, flow through the gross margins, and that's the reason which is where you're seeing a trend going up. So that also has a role to play in other expenses going up.

And of course, you would have seen Shailesh speak at length about advertising expenses being higher on a YTD basis also from a last year's standpoint since we have invested significantly in advertisement. There will be more than about 100 basis points on a YTD level if advertisement increase, which is forming part of other expenses and OpEx, which is what the line item you are seeing.

[Unknown Analyst]

Yes. And if only one question that I could squeeze in. So you like discussed about focusing on margin expansion and return on capital, but what would be those levels for margin and return on capital after that you can say that now the focus would be on growth. Now you can push the pedal there. So what would be those levels?

[Shailesh Chaturvedi, executive]

So if you really see that the growth of -- profitable growth of our brand is critical. And we've been extremely tight on balance sheet. If you see on our inventory days or in terms of our debtor days, we have maintained the best hygiene possible. So when the working capital is tight and brands, hopefully will go much faster pace, profitably, then we'll generate free cash flow, and that's how we want to grow our ROCE.

So I think we have now crossed 15%. And medium term, we are looking at a ROCE of more than 20%. That's the first benchmark. And we believe that if we grow at the guidance that we have given and the kind of margin expansion, we think at least 100 basis points every year in EBITDA. So if you really do the math, then we are confident that in the medium run, we will be above 20% ROCE.

[Operator]

The next question is from the line of Sagar Parekh from One Up Financial.

[Sagar Parekh, analyst]

Sir, the channel mix that you have given in the quarterly sales breakup in the presentation. If I look at retail, so last quarter, I'm assuming would also have Sephora within the retail channel. Am I right in that?

[Shailesh Chaturvedi, executive]

No, no, we've removed the Sephora data, it's like-to-like.

[Sagar Parekh, analyst]

Oh, it's like-to-like. Okay, fair, because -- okay. So then -- like-to-like, then the growth is what, 3%, 4% only, which includes 2% L-to-L and the rest would be new store additions?

[Shailesh Chaturvedi, executive]

See, yes, I mean also the annualization kicks in. So the retail growth in this quarter is 10%, double digit, and 2% is the like-to-like growth plus whatever we had opened more than 12 months annualization of that and then the new stores that we opened, it all adds up to 10%.

[Sagar Parekh, analyst]

Okay. Got it. Yes, it's 10%. Fair enough. And secondly, did I hear it correctly? You said U.S. Polo grew by 20% for this quarter in your opening remarks?

[Shailesh Chaturvedi, executive]

No. I mean what I said is that the discounting has come down in U.S. Polo and margins have been good. And I didn't say 20% increase in U.S. Polo. What we mentioned was adjacents category that kidswear, maybe you would have read somewhere that kidswear, in my opening comments, I mentioned that the kids category has grown at 20%. That's -- I get it now. So I think that was about kids.

[Sagar Parekh, analyst]

Kids. Okay, okay. Just U.S. Polo kids?

[Shailesh Chaturvedi, executive]

Yes. U.S. Polo kids, yes.

[Sagar Parekh, analyst]

Okay. But you said 15% is the overall contribution of revenues from all adjacent categories for all brands put together, like including Tommy...

[Shailesh Chaturvedi, executive]

U.S. Polo is where the highest share of adjacents category happens. That's a large business between -- among innerwear, footwear, kidswear and on that large scale of USPA, the adjacents categories are now more than 15% of the revenue for U.S. Polo.

[Sagar Parekh, analyst]

Okay, fair. And how much is the debt number as of end of December after the Sephora sales?

[Shailesh Chaturvedi, executive]

Our net debt is now close to INR 225 crores.

[Sagar Parekh, analyst]

INR 225 crores. So then next year, basically, we can be like debt-free, right? Because you have like INR 80 crore, INR 85 crores of CapEx, and you're talking about 100 bps margin expansion, so next year, the -- and the entire growth is all FOFO-related expansion largely. So basically, your free cash flow will be very strong next year. So then we can assume like full debt repayment by next year?

[Shailesh Chaturvedi, executive]

We will -- that's our medium-term aspiration, and we've gone to media also, we said we have a desire in the medium term to be a debt-free company. Now, we'll see. We are generating some free cash flow even now this year. And we don't have major need for CapEx and that's why the profit is going into free cash flow. And we'll see how it goes. It's also a function of how much capital will be required for growing the brand because that's the first stage in that, that we want to grow our brand profitably to their potential. And then whatever else surplus come, we surely use it to pay down our debt. Whether it will become 0 debt, I don't know. Girdhar, you want to comment? I mean, Ankit, you want to comment further on the net debt, whether we reach...

[Ankit Arora, executive]

We'll see. As Shailesh said, our aspiration is basically to be debt free in the medium term. Any surplus cash that we will generate, obviously, will be used to pay off the debt.

[Operator]

The next question is from the line of Abhijeet Kundu from Antique Stockbroking.

[Abhijeet Kundu, analyst]

Congrats on a good set of results. My first question was on discounted -- sorry, discontinued businesses. You can say that the royalty for Ed Hardy and Aeropostale that will accrue as profit too because those losses will come off, INR 39 crores is in this quarter. So this -- I mean, the brands are dormant brands or we have discontinued sales or I mean...

[Shailesh Chaturvedi, executive]

That's what -- look at, when we -- the Sephora transaction happened, we had 2 brands which were dormant, but not active, but we were paying royalty for them as for the legal contract, which is the Ed Hardy and Aeropostale. So we're not doing any production or sale or business of that, but we had a certain legal, as per the contract, commitment, this was coming to close to INR 10 crores, INR 12 crores a year for next couple of years. And this year, that figure was around INR 15 crores. So what we have taken -- what we have done is that we have taken the present value of these future royalty expense and plus some other expenses linked to these brands, and that we made the provision of INR 39 crores there.

[Abhijeet Kundu, analyst]

Okay. So technically, we are not selling these brands anymore. So more royalty has to be paid, no expenses have to be -- but these 2 brands are coming for renewal in 2 years, right?

[Ankit Arora, executive]

So Abhijeet, Ankit here, let me just clarify that for your benefit. See, these brands were already made dormant because we were very decisively allocating capital towards the 5 marquee brands, which is what Shailesh has spoken at length. We were not investing behind these brands. So because there is no sales, but of course, there is a minimum commitment on royalty, which is what we have given and we mentioned this on the call earlier as well in Q2.

And so the expense on account of that is what we have made a provision netted off against the gain on the Sephora transaction sale is what the number which is what you are looking at it. So there is not going to be any further drag coming on the profitability of these 5 marquee AFL brands going forward on account of this minimum royalty commitment which is what we had to pay for the next 2 years pertaining to Ed Hardy and Aeropostale.

[Abhijeet Kundu, analyst]

Okay. And I mean, how should we account for it? So say, for FY '24, this discounted operations -- profit from discounted operations, say Sephora would be INR 100 crores, I mean, like that or it will be just INR 74 crores only?

[Shailesh Chaturvedi, executive]

Your estimation is correct. So there is no NSV coming in from Ed Hardy or Aeropostale. It was very, very marginal. So the only NSV, which is what was coming in, which is what has been discussed. As far as the question on ratio is concerned, it's only Sephora. And your estimation is broadly in line with the number, which is what you just mentioned.

[Abhijeet Kundu, analyst]

Okay. And my second question was on -- it has been asked earlier, but still a few things in that. One is the accelerated store expansion that you have talked about 200 stores, which will essentially more of EBOs. So is this -- so, one is what would be the CapEx requirement, INR 85 crores is the CapEx requirement that you are saying for 1 year, per year or...

[Shailesh Chaturvedi, executive]

Yes. Yes, annual. You're right.

[Abhijeet Kundu, analyst]

Annual, INR 85 crores per annum. And second is that the -- we are talking here about the gross base addition, the net space addition. How should we look at it? I know earlier also you said that it is difficult to say that, but the color on what will be the net space addition? It would help us to derive the overall sales growth because there would be element of a same-store sales growth and there would be element of the store expansion which will play out over the next 2 years.

[Shailesh Chaturvedi, executive]

See we have -- I would put this gross addition, net addition into 2 parts. One is, see, there's a regular business. In regular business, typically 3% to 4% of distribution gets shut because those markets become not good or the store is not viable, we make mistakes or something else happens, market is very dynamic and moved.

So that's a normal 3%, 4% of your distribution, you do clean up on an ongoing basis. That's a reality of our life, some malls become ineffective, some High Street become ineffective, it's a mix, and et cetera, that number happens.

So what we track more than the number of store because see, when we're short, there are smaller store maybe in larger numbers, but we open larger, bigger number of fewer stores. But I think that emphasis on square footage internally, we look at how many square foot or what is the CAGR on square foot that we are looking at. And that's the target we are looking at to grow forward more than the store numbers.

Store numbers are also important, and they indicate eventually the square foot expansion. But our internal KPI is more and more on square foot expansion. And plus/minus of the store evolution transfer, closure, et cetera, keep happening, but we're very keen on having a certain high-quality square footage in our brands.

[Abhijeet Kundu, analyst]

Right. And what would be the targeted one, like your trends also in terms of 3%, 4% will go off, so 7% is the square foot addition...

[Shailesh Chaturvedi, executive]

If you look at our square foot expansion, it's more like 1.75 lakh to 2 lakhs. It depends on the markets also sometimes. So it's in that zone that we are targeting right now.

[Operator]

The next question is from the line of Niraj Mansingka from White Pine Investment Management Private Limited.

[Niraj Mansingka, analyst]

Just 2 questions. One, what was the growth in the square footage on a Y-o-Y basis?

[Shailesh Chaturvedi, executive]

We have opened more than 120 stores. We can just check the number, and I can just confirm. Do we have the data on that?

[Ankit Arora, executive]

We'll have to just check the exact data. Niraj, I can circle back separately on this.

[Niraj Mansingka, analyst]

No, the reason I asked you that what we said is more of a gross number of opening of stores, right? And what is the net number of stores? If you can give that on a regular basis also and now also it will be useful because that shows how much you have actually added on a net basis rather than gross.

[Shailesh Chaturvedi, executive]

We'll take this as a feedback, and we will ensure that data is made available on a regular basis.

[Niraj Mansingka, analyst]

But what is the number for the quarter? How many stores you might have added for the -- on which basis?

[Shailesh Chaturvedi, executive]

We added more than 20 stores in this quarter and more than 120 stores in the year. So that's the number we have currently.

[Ankit Arora, executive]

We added 31 stores, Niraj, in Q3.

[Shailesh Chaturvedi, executive]

31 stores.

[Niraj Mansingka, analyst]

Okay. So please, let us know the net stores in future, so that, that will be more realistic way to look at rather than the gross number, okay? Then second question is on the revenue growth. Can you share what is the revenue growth from each of these brands like Polo, FM, Tommy?

[Shailesh Chaturvedi, executive]

We don't share brand-wise data for competitive reason. And also, a lot of our brands are licensed. So our global partner also are very sensitive to that. And our industry also, our competitor also don't share, but we give enough color so that we mentioned how the brands have done and how they're growing. So -- but we've not given in the past a very specific brand-wise sales number or EBITDA number.

[Niraj Mansingka, analyst]

Got it. But can you give some color on which is the highest growing brand and how is the lowest one? Just wanted to get some color on that actually? We'll know on what...

[Shailesh Chaturvedi, executive]

The Tommy, CK business has a very premium portfolio, they are growing faster because there is a -- people say, k-shaped recovery or premiumization is working well. Right now, people are buying a little more differentiated products. So last couple of quarters, we've seen a higher growth in premium categories in Tommy Hilfiger and CK and also the premium parts of Arrow 1851 or premium parts of U.S. Polo also has grown well. And as far as the lowest growth, right now, FM is under a new refresh and we are waiting for a lot of piloting to happen in the FM. Once we see the fruits of that piloting we are doing, we will expand. So right now, the growth are lowest in FM and highest in Tommy Hilfiger.

[Niraj Mansingka, analyst]

Okay. And last question. Can you just share some color on what you're doing so that, that you shared about the -- refreshing the brand on FM. Can you share what you're doing and how you want to compete with other brands, which have taken over your market share over years on that part?

[Shailesh Chaturvedi, executive]

So if you look at FM, it's a very strategic asset in our portfolio. It's owned by us. We don't pay any royalty in that. And it's our own brand, which we have a partnership with the Flipkart Group. And that partnership also give us an unique edge in online space understanding of that space. So when we looked at the brand, we said let's refresh the brand. This is one of the first jeans wear brand, maybe the first Indian jeans brand in country.

And we have done refresh of CK. We've done refresh of Arrow. And then we said now do it for Flying Machine. So what we did is that we said that the Flying Machine will be a brand which will be built on 4 pillars. One pillar is jeans wear. Now it's a very large market in India, especially in the MBO channel, et cetera, very large business happens in the jeans wear and FM is the first authentic heritage jeans wear. So we said that's the first pillar.

Second pillar is youthful, and we look at how India is a very young country, the Gen Zs are becoming important, millennials continue to remain important. So we said, this is a brand where youthfulness, the appeal to Gen Z and millennials will be very, very important.

Third part we said will be kind of a value proposition that will be attractively priced for the product that we give, not the cheapest in that sense, but it will be attractively priced. So the third pillar that we have decided to focus on Flying Machine was to focus on value proposition. And the fourth was a more emotional pillar that we said in a young country where social media is very important, we want to target online imagery of young customers where they are nobody, but they should feel like somebody really hot.

And this expression of that fire emoji that people get -- people crave for that emoji coming as a reply to them on social media, the fire emoji. So the being hot and the internal phrase we use is damn hot. And we're saying that the fourth pillar will be that, it should look like a damn hot and it should solve the problem of somebody towards his journey and the machine will take it from anonymous person to somebody damn hot. So those are the 4 pillars.

And in terms of execution, how we are doing it is that we first changed the logo of the brand. We changed the font of the brand. We got a new propeller, the new font. We got a new color scheme. We've got a completely new merchandise architecture, which is targeted Gen Z customer so that the product also looks damn hot. We've got a new retail identity develop for Flying Machine that we opened in commercial street, High Street in Bangalore around a year back.

And now we are using these pillars of new merchandise direction, the new retail identity, new ad campaign, which is focusing on being damn hot, we are trying to excite the young customers, Gen Z plus millennial, so that they feel that they are damn hot when they wear Flying Machine.

Now it's an early journey. We're testing a lot of these things. And what we have seen is that the MBO channel and the value department store have already got infused by what the new avatar of Flying Machine is.

Also, we've renovated almost like 12-odd stores with a new identity and we've seen very like -- good like-to-like growth, double-digit like-to-like growth in those stores. It's still early days. We see a full effort another year to get everything right to build it. But that journey has started.

And if you see vision is also for Flying Machine to be a INR 1,000 crores brand. It will also have to have all the adjacents category that we talk about. And we are very keen that we will add 3, 4 new adjacents category in Flying Machine. And we'll build distribution. We'll build new product category and expand through MBOs, through value department store and as well as through our EBOs eventually. So that journey has started.

[Niraj Mansingka, analyst]

Got it. Got it. And just you said the 12 stores that you've renovated have seen a very high double digit growth.

[Shailesh Chaturvedi, executive]

Yes. See, I mean I -- since you asked that specific question because really when you are early stage, if you want to keep quiet and keep doing the right thing and once we see a model work, then we talk about it and expand it. So it's a very early stage of -- we're seeing green shoots, but still it's early days of the recovery for Flying Machine.

[Operator]

The next question is from the line of Jatin Sangwan from Burman Capital.

[Jatin Sangwan, analyst]

I noticed that depreciation has increased Q-o-Q. I guess that was because of addition of Tommy Hilfiger and Calvin Klein on COCO model. So if you could breakup depreciation by ROU assets and by PP and the same for interest, break up by lease liabilities and interest due to borrowings?

[Ankit Arora, executive]

So Jatin, Ankit here. I just want to kind of clarify, interest is a very small portion. Quarter-on-quarter, it has increased only by about INR 2 crores, which is generally on account of our Ind AS adjustment because of our COCO stores.

Yes, your observation is absolutely right on the deprecation side of it, it has increased by about INR 7-odd crores. There is a one-off in the depreciation on account of COCO store conversion, which had happened in PVH, which is what we have been speaking to you all about. Since the entire documentation and lease signing of all those COCO conversion stores got done in Q3 and hence, there is a one-off charge and a cumulative impact in Q3 to the extent of about INR 5 crores to INR 6 crores in this quarter out of that INR 7 crore. And that will come down this depreciation number by about INR 3-odd crores, INR 3 crores to INR 4 crores from Q4 onwards. So there is a one-off cumulative impact in depreciation on account of that.

[Jatin Sangwan, analyst]

Sure. And if you could give the breakup also depreciation by ROU and similarly for interest?

[Ankit Arora, executive]

So interest on our borrowing is usually is around INR 18 crores to INR 20 crores and rest is on interest on lease liability. And on depreciation, that number is on fixed assets is about INR 15-odd crores and the rest is depreciation on ROU assets.

[Jatin Sangwan, analyst]

Okay. Sure. And what's the gross debt number that we are carrying as of December '23?

[Ankit Arora, executive]

You asked about the gross debt number, right?

[Jatin Sangwan, analyst]

Yes, gross debt number.

[Ankit Arora, executive]

Yes. So that will be under INR 350 crores.

[Jatin Sangwan, analyst]

Okay. Sure. And what was this [indiscernible] number on September '23?

[Ankit Arora, executive]

I will have to just check that. Our net debt number was INR 476 crores as of September. You can look at the reported balance sheet, which is what would have been part of the H2 financials.

[Operator]

The next question is from the line of Ankit Kedia from PhillipCapital.

[Ankit Kedia, analyst]

Sir, my first question is regarding the MBO. You mentioned that the tertiary sales are in line with the retail like-to-like growth, while we have reported 15% overall growth. I just wanted to know how much are the MBO counter additions in the quarter Y-o-Y growth? And over the next 2 years, what is the aspiration for the MBO counter addition? And of the 4 brands which we have, if U.S. Polo is the highest counter addition or Arrow, what would be the other 2 brands like Flying Machine or the other brand versus the leader? So how much could the depth we can increase by and also the width from the MBO channel?

[Shailesh Chaturvedi, executive]

So MBO is growing -- in the Q3, it has grown at more than 15%. Also, if I look at the YTD data, also has grown double digit. Growing well now. It's a function of, like I said earlier, expansion, annualization and like-to-like growth. Also, the MBOs are working at a lower sales density than our EBO. EBO are at much higher sales density. So the growths are higher in MBO because there is a scope to increase the sales density and by putting our own manpower to build more category assortment correctly, reducing category, putting the right category, we are also -- our sourcing has been very efficient. Our [ OTs ] has been very efficient. So we've been launching the season really on time among the best in the industry. So MBO channel is benefiting from better sourcing and better supplies also from our side. So that's the growth picture.

And if you see aspiration, again, is a very large market and the market share of different brands or companies will be still not there and huge ability to grow and go to newer towns with the MBO channel and like every other channel, EBO are also.

So I think there's a secular growth possible in MBOs channel, and we've been very careful on hygiene and that's very important for us that the inventory level at the MBO channel as well as the debtor situation with the MBO channel, we are very, very careful, watchful, and we are growing with very good hygiene. That's very, very important in terms of our aspiration.

As far as the scope is concerned, that U.S. Polo is leading brand. That's the first brand we take to a new city or to a new counter or new MBO channel because the desire for that brand is very high. It's a very large brand. Countries leading, probably the biggest men casual brand in the country. So every MBO counter wants that brand first. Tommy, CK have a little more exclusive reach because that price point doesn't work everywhere. So that's a really careful expansion of Tommy, CK thing.

Arrow and Flying Machine, both show very good potential to grow the MBO channel further. In last 2 years, we've really expanded the Arrow MBO channel significantly. As the model started working, we started expanding. FM, we are doing that. And the last number I remember is this spring/summer '24 and the fall holiday '23, the previous season and the current season, we are opening almost like 90 shop-in-shops in Flying Machine between the 2 seasons, and we'll continue to expand as the brand starts proving itself in the MBO counter and we'll continue to grow. So overall, I think it will grow at a healthy pace. But I think the important thing is to maintain the hygiene of inventory and the collection.

[Ankit Kedia, analyst]

Sir, specific number, I was looking at the number of counters we have present in MBO today and over the next 2 years, what will be the counter addition?

[Shailesh Chaturvedi, executive]

I'm sorry, I don't have specific data on that. And like somebody mentioned earlier on the store count, these are the areas that I think we will take this as a note of better information sharing with the investors. So this time, please excuse me, we'll come back with this kind of information.

[Ankit Kedia, analyst]

Sure. Sir, the last quarter also, same feedback was shared with the team. Sir, my second question is regarding discounting. Now if I go online on U.S. Polo or the footwear brands and other brand, discounting is very high in online channel. Obviously, you're moving away from online B2B, where the discounting is higher. So how much inventory is still in the system where if a consumer goes online and sees the discounting, it remains high versus the store where you are actually controlling the discounting. And over the next 2 years, where do you want the online B2B business to be positioned or reduce the inventory out there?

[Shailesh Chaturvedi, executive]

So if you look at our aspiration, we would want our B2C model with the partnership with these portals, that's in our key marketplaces. We want it to be close to 75% of the overall business. Currently, it's inching towards 50%. So that's a scope to sort of convert the business towards more and more B2C and our aspiration should be as high as possible because then we assort the product very scientifically and also we manage the experience and the pricing and control the discounting. So that's one part of it.

Now as far as the current discounting on B2B portal is concerned, let's look at 2 ways. One is that we are destocking, like Kulin mentioned earlier and I also elaborated that we are very keen to destock and the consumer sales are growing and -- but we are reducing that stock level and it's a couple of quarters where the destocking will get done and it will reach a BAU level where the inventory should be.

Also, I want to explain you on the fact that when the discounting happens, the large part is what is known as OSM, the old seasoned merchandise, which we pull back from our physical stores and other distribution and online is a very efficient way of liquidating OSM, what we do in outlets, et cetera. So online, one side is a very efficient outlet model, and that model continues as OSM merchandise.

And also, we do some online exclusive merchandise that call SMU, which B2B people pick up and sell. But a large part of that online exclusive merchandise now they are doing in B2C with our own marketplace, and we're building that business with our own control and our own sense on pricing. So that process is on. That strategy is being implemented and initial primary billing hits we are taking. And I think in a couple of quarters, this will stabilize.

[Ankit Kedia, analyst]

Sure. And sir, my last question is regarding U.S. Polo kids and footwear. We have seen a very healthy growth in both these categories from a U.S. Polo side. So how many counters or how many EBOs today are both these categories present? Or you think there's scope to -- now it's only on consumer demand or there is still penetration remaining for both these categories?

[Shailesh Chaturvedi, executive]

Yes. So we started this journey of adding footwear to all the stores. And now majority of our U.S. Polo stores have the footwear and it accounts for a healthy share of U.S. Polo stores and you'll see -- in every key U.S. Polo store, you'll see footwear being present.

As far as kidswear is concerned, also opens up opportunity to open exclusive stores of kidswear in future. So we look at that version also. Also footwear is sold through our own -- we have a footwear chain where we do multi-brand stores. That also pilot is happening, and we sell footwear through those stores also. So you see, our expansion will happen. And clearly, the feedback on how many stores is present, et cetera, we will provide that information.

[Operator]

The next question is from the line of Rajiv Bharati from DAM Capital.

[Rajiv Bharati, analyst]

Sir, what part of this 120 gross additions are COCO stores?

[Shailesh Chaturvedi, executive]

Very few, the number will be less than 20.

[Rajiv Bharati, analyst]

And in terms of this depreciation increase Y-o-Y, is it safe to assume that bulk of this can be attributed to your COCO conversion on the TH side?

[Shailesh Chaturvedi, executive]

Yes. And like Ankit just explained in previous question that accounting happened in Q3. And that's why there's a one-off, INR 7-odd crores depreciation compared to the Q2 has happened, and now it's come down by INR 3 crores to INR 4 crores as this stabilizes. So COCO, our expansion is based on asset-light model.

And in Tommy, particularly, we're taken over almost like 25 stores and some new stores will open on a COCO basis because of the capital efficiency there and the increase in ROCE. So in Tommy, we'll continue to open COCO store, but other than that, we will be only on very specific occasions, bulk of our retail expansion in other brands will be on FOFO basis.

[Rajiv Bharati, analyst]

Sure. And because when I see the minority interest part, which is for your Tommy, CK piece, which is, I think, minus 2% decline. And if I adjust this depreciation difference, it seems that you have grown 15%, 20% profitability on Tommy, CK combined. I mean, is that number right?

[Shailesh Chaturvedi, executive]

They are growing at something similar to what you are saying.

[Operator]

Ladies and gentlemen, due to paucity of time, that was the last question for today. I would now like to hand the conference over to Mr. Ankit for closing comments. Over to you sir.

[Ankit Arora, executive]

Thanks, Michelle. I understand some of you may have a few unanswered questions, but management had a paucity of time, so we'll have to close this call. Thank you, everyone, for joining us on the call today. If you have any other follow-up or any more questions we can take that separately, I'm always available to answer those. Thank you so much for your time, and have a lovely evening.

[Operator]

Thank you, members of the management. Ladies and gentlemen, on behalf of Arvind Fashions Limited, that concludes this conference. We thank you for joining us, and you may now disconnect your lines. Thank you.