Arvind Fashions Ltd

NSE:ARVINDFASN

Earnings Call Transcript 2022-Q4

[Operator]

Ladies and gentlemen, good day, and welcome to the Arvind Fashions Limited Q4 FY '22 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded.

I now hand the conference over to Mr. Ankit Arora, Head of Investor Relations at Arvind Fashion. Thank you, and over to you, sir.

[Ankit Arora, executive]

Thanks, Vivian. Hello. Welcome, everyone, and thank you for joining us on Arvind Fashions Limited Earnings Conference Call for the Fourth Quarter and Fiscal Year ended March 31, 2022.

I'm joined here today by Kulin Lalbhai, Non-Executive Director; Shailesh Chaturvedi, Managing Director and CEO; and Piyush Gupta, our Chief Financial Officer.

Please note that results, press release and earnings presentation had been sent across to you on Friday, 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 shall commence the call with Kulin providing his key thoughts on our financial performance for the fourth quarter, which shall be followed by Shailesh, who will give the insights into our business, brands and financial performance and key priorities for us moving forward. At the end of the management discussion, we'll have a Q&A session.

Before we start, I would like to remind you that some of the statements made or discussed on this call 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 as well. 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. Hello, everyone, and thank you for joining us for the Q4 results.

FY '22, a turnaround year for AFL, and we have emerged as a much more focused, healthier and profitable company. In spite of 2 COVID waves, AFL was able to grow its revenues by 32% and posted a net profit of INR 40 crores in the second half of FY '22. We dramatically improved our balance sheet with a net debt reduction of more than INR 525 crores in the year and reached an inventory turn of 4x in the second half of the year, surpassing our commitment given at the start of the year. We have a focused portfolio of market-leading brands that have a leadership position in their respective segments and are being reenergized to take full advantage of the market opportunity ahead.

Q4 was a very strong quarter for us and continued on the momentum that we saw in Q3. Even though we were impacted by the third COVID wave in January and early February, our sales for the quarter were up 34% year-on-year. EBITDA, after adjusting for rental concessions, which we had last year in Q4, was up 36%. The retail channel turned around [indiscernible]. The like-for-like sales growth for the quarter was 15%, and if we remove the impact of January, the like-for-like sales growth in Feb and March was 20%. This performance was made possible by the reenergizing of our retail network, a timely launch of the season and new product innovations launched across our different brands. The department store channel, which has shown sluggishness until quarter 3, saw a strong rebound in quarter 4, with sales which were up more than 2x over last year. MBO channel has also shown very strong performance. With tight inventory management policies in place, this business delivered strong tertiary growth. The online business ended the year at close to INR 1,000 crores. We expect strong momentum to continue in the online channel, powered by new category expansion, our omni-channel push, and the strong leadership position of our brands in the channel.

Our balance sheet position continues to improve. We achieved an inventory turn of 4x for the second half of the year. This was made possible by the supply chain redesign that we are currently implementing. As we continue to transform our supply chain into an agile and responsive one, we expect our inventory turns to further improve. We also saw a huge improvement in debtor days, which has fallen to 68 days in FY '22. This has been possible due to strong controls and disciplined execution in the wholesale channel. Our net working capital for the year ended at INR 489 crores, which is INR 118 crores lower than last year. We were able to further reduce our debt this quarter and ended the year with a net debt of INR 397 crores.

We are excited about FY '23. With the turnaround complete, we expect the business to gain momentum in the coming year. We expect the retail and online channels to continue to drive growth and account for 60% to 65% of our overall sales. Retail growth will be driven by a continued push on productivity and sell-through as well as by the strong expansion into new towns. We expect online growth to remain robust even on a large base. Our new focus areas of footwear, innerwear and kids wear will see rapid growth. While we have multiple growth drivers, the focus will be on profitable growth and improving ROCE. An improved performance in Arrow, improvement in margins due to better sell-throughs and operating leverage due to higher scale will lead to a much improved profitability. We look to further improve our inventory turns with the help of our supply chain transformation efforts. Profitable growth, coupled with strong working capital controls will allow us to invest in technology and store expansion, and still generate free cash flow to bring down debt further next year.

I would now like to hand it over to Shailesh to take us through more details.

[Shailesh Chaturvedi, executive]

Thanks, Kulin. Good afternoon, friends.

With INR 917 crores revenue and EBITDA growth of 36%, net of [indiscernible] concession, there has been a consistency in AFL's performance in quarter 4. In the previous quarter, quarter 3, which is October-December quarter, was a INR 1,000 crore plus revenue quarter with 30% revenue growth. Q4 has kept pace with the previous quarter. It's been a very large revenue quarter with INR 917 crores, second highest in last many, many years, and maintained growth at 30% plus at 34%.

So AFS's H2 revenue was INR 1,925 crores, which was a 32% growth over previous year H2. EBITDA has also consistently grown. In Q3, in the previous quarter, EBITDA growth was 64%. And in Q4, despite COVID impact in Jan and in early Feb, EBITDA growth is 36% net of rent concession. Overall, AFL has delivered INR 200 crore EBITDA in H2 and a growth of 30% with a scale of INR 1,925 crores.

October, December quarter had seen brisk business as consumers have started shopping with energy. But even in that quarter, we had started seeing cracks in the second half of December due to the onset of COVID wave 3, and it led to severe restrictions on retail in Jan '22 across the country. Even as the Jan numbers were impacted due to COVID, we started seeing recovery in second half of February. March was a fantastic month, with an overall growth of 70% in revenue in March, which was around INR 90 crores of growth over [Technical Difficulty] couple of years March, backed by 45% growth in retail business. Department store also, business which was at around 55% recovery in November and December last year, has shown big strides. And in Q4, department store business has more than doubled over previous year quarter 4.

We maintained consistency in gross margins also, at around 45% plus, despite continued inflationary pressures. With our pricing power of brands, internal efficiencies, higher like-for-like same store sales growth, higher full price sell-through and resulted lower discounting, we ensured that second half gross margin improved by more than 180 basis points to 45.3% over a similar period last year.

While retail has grown 40% like-for-like in October, December, it continued to grow at 20% plus like-for-like in Feb and March after COVID impacted January. The fall holiday season that got over in mid-February saw all time full price sell-throughs. I'm very happy to share that this retail energy has continued into Spring/Summer '22 season, where we are seeing bumper full price sell-throughs in February to May period. Spring/Summer '22 sell-throughs are likely to be even higher than FH '21 season, where we have seen much lower discounting. These retail metrices have looked up because of our focused execution on new way of developing merchandise close to season, launching season with higher energy backed by stronger storytelling, better visual merchandising and a lot of emphasis on staff training. With our tight control on OTB for buying and focus on high stock turns, very high percentage of our inventory in the market is very fresh today, and fresh merchandise supports higher like-for-like growth, higher full-price sell-through and better gross margins. We consistently delivered 45% plus gross margin in H2, and we aim to improve further in FY '23.

Our iconic brand U.S. Polo Association has been strengthening its leadership with improved profitability in the market. USPA had grown more than 40% in Q3 with double-digit pre-Ind AS EBITDA, and it has continued to grow at 44% with double-digit pre-Ind AS EBITDA in Q4 also. We have significantly refreshed the brand with new brand campaigns on the theme of twinning with Arjun Rampal. We have developed a high-quality new store identity and made significant improvement to USPA product lines. The launch of the largest USPA store in Express Avenue Mall in Chennai recently has been a key highlight of quarter 4.

Adjacent categories of USPA, including footwear, innerwear, kidswear, have continued their profitable growth journey, and USPA is likely to deliver a scale of INR 1,500 crores plus in FY '23 with double digits post-Ind AS EBITDA margins. In a couple of years, we see the brand reaching the next logical milestone of sales and profitability and it will remain in the top few brands in this segment in the country.

While COVID impact has been a serious challenge for Arrow, our formal brand, and COVID impacted its Q4 financials, I believe the worst is behind us on Arrow due to significant sell-through improvement that we saw earlier in Q3, along with very high like-for-like growth in trade channel in Arrow. Backed by our product refresh strategy in Arrow, Q4 saw further gaining of momentum in Spring-Summer season, with Arrow brands turning around its performance significantly with very good like-for-like growth, further improvement of mid-teen percentage, very high mid-teen percentage and full price sell-throughs and strong reduction in markdowns in Arrow. With a large footprint expansion underway in Arrow, these results reflect the sharp rebound in Arrow, and we believe the brand will deliver better profitability in FY '23.

At the same time, our 2 market-leading brands in the super premium to bridge-to-luxury segment, Tommy Hilfiger and Calvin Klein, have delivered a great performance in quarter 4 despite COVID in Jan. Both delivered strong double-digit pre-Ind AS EBITDA and huge like-to-like growth more than 20%, with significant improvement in stock turns.

Sephora, another of our prestige brands, also delivered strong performance in Q4 with more than 50% growth in the quarter. With continued success of these market-leading brands, AFL has demonstrated its capability of nurturing and then start developing premium brands of repute in India.

Flying Machine has continued to do so, do very well in segment of denim wear for youth, and get significantly an appeal with consumers with online-first mindset due to its partnership with Flipkart Group. Like we said earlier, this financial year FY '22 that has gone by has seen big transformational changes at AFL. The company fought 2 rounds of COVID waves, strengthened its balance sheet through capital raise for rapid and consistent recovery with healthy, profitable growth across our brands with sharper execution focus, and has significantly deleveraged its balance sheet.

We have continued to focus on improved stock turns with transformation projects on supply chain and results are showing, with stock turns in H2 being 4x. We believe that the gain from supply chain initiatives, we are likely to increase our stock turns further in FY '23. We made sustained efforts this year to reduce debt. The net debt now stands near INR 400 crore mark. We see opportunity to further reduce that in FY '23, even if after funding our growth aspirations. With better stock turns, free cash generation for business and tight control on balance sheet, we should be able to fund growth momentum without increasing net debt.

With this, I hand over to Ankit for the further proceedings. Ankit, over to you.

[Ankit Arora, executive]

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

[Operator]

[Operator Instructions] The first question is from the line of Nishit Rathi from CWC.

[Nishit Rathi, analyst]

Congratulations, Shailesh and Kulin. Amazing quarter. It was a really challenging year, and you guys have really, really done well.

Just -- my point was basically, we seem to be doing well almost on 2.5 out of the 3 parameters we set for ourselves, right? So the revenue seems to have come back, the stock turn and the balance sheet turns are looking really decent. The only question that I have is, do we -- is it that we'll have to settle for a slightly lower margin to kind of -- to get -- achieve these objectives? Or can we also expect our margins to kind of keep moving forward? Because you're showing -- certain brands are showing that. But on an overall basis, on an overall company basis, how should we think about it?

[Shailesh Chaturvedi, executive]

We have a stated guidelines on this that in next 12 to 18 months, we want to see a double-digit power brand EBITDA across our portfolio. And we see opportunity to grow our margin through many means currently. While sale side, we have seen a lot of levers, digital, adjacent categories, small town expansion, sales density. On margin side also, we believe that the -- we will start seeing the operating leverage through larger scale. So post-COVID last year also saw 2 rounds of COVID. Whereas we grew significantly in our scale, but we see opportunity to grow further. There will be a growth because on the net base of COVID, so that COVID impacted months, we'll see a larger bump. And then there is a further 12% to 15%, more like 15% this year, growth. So we believe that operating leverage will come through that increased scale.

Second point, like I said in my opening comments that Arrow is a brand, we are now seeing the green shoots of recovery, and we are very confident that the worse is behind us on that and we'll start delivering initial round of profit. Also, our KPIs on full price sell-through, the way we are launching season, we expect the discounting will come down, which will further increase our margin. Also, we have seen large, tight trade hygiene the way we manage our MBO channel, very profitably on returns and some of those ad costs. So there's a tightness on our management of trade, and we are seeing better margins from the trade channel. Also, we have pricing power in our brands. So while the inflation is there and it's quite high, we've seen the industry is able to pass on price increase till now. And our strong brand will have ability to pass on pricing to consumer in line with the industry practices.

So because of all these margin drivers, we believe that our brand portfolio should reach double-digit pre-Ind AS EBITDA in 12 to 18 months.

[Nishit Rathi, analyst]

So Shailesh, is it fair to assume that your 4 power brands, basically U.S. Polo, Tommy, Arrow and Flying Machine, those will reach double-digit margins? And CK, if I heard it right, it's already in double-digit margins?

[Shailesh Chaturvedi, executive]

Yes.

[Nishit Rathi, analyst]

So for 5 of our 6 brands will be double-digit margins in the next -- .

[Shailesh Chaturvedi, executive]

Yes. Like our power brand portfolio, we think we -- our guidance is that we should hit total portfolio double-digit pre-Ind AS EBITDA in 12 to 18 months with it.

[Nishit Rathi, analyst]

Yes. Correct.

[Shailesh Chaturvedi, executive]

And we are on course for that.

[Nishit Rathi, analyst]

Perfect. And the assumption is none of this is -- in fact, you're saying you will improve the turns, right? That is what you're saying, right, through the initiatives that you've taken?

[Shailesh Chaturvedi, executive]

Nishit. We believe we have supply chain transformation in the way. We have increased our stock turns. We had guided that we'll hit 4 -- by the end of this year, in the second half of the year, we've hit 4 turns, and we have further levers to work on our supply chain transformation project is underway. And we see that we will continue to gain turns also. COVID slowed down turns. So even in H2, where [Technical Difficulty] January stock turn went down because of COVID. So in absence of COVID and the transformation project in the way, some of the new practices, which will sustain, we are aiming to improve our stock turns.

[Nishit Rathi, analyst]

Sure.

One last question from my side. You mentioned that the month of March was extremely good, and I read somewhere in your presentation that April and May, the momentum seems to have continued well. Is there anything you can share on that? Are we seeing March-like improvements continue in the month of April and May, or?

[Shailesh Chaturvedi, executive]

Nishit, there was sort of an extra hunger, so to say, in March because of the COVID in Feb, Jan-Feb, it was unreal month for the industry, and for us, we grew at 70%. That's exceptional. But demand remains strong in the short run, so April-May numbers are also very good. I won't use the March as the reference. But if I look at March to May, whatever the numbers we have seen, we are really pleased with the KPIs, the improvement in sell-through, the like-for-like growth.

We are having a little bit of sort of inventory shortage right now, and it's a good situation to be in. And we are very pleased with the performance of our brands in the market.

[Nishit Rathi, analyst]

No, I think this is great. And the most heartening fact is the number of times you have referred to the full price sales and sell-through, right? It's very good to your -- that you're focusing only on getting the revenue at the terms you want. That is very happy for us. I'll come back if I have more questions.

[Operator]

The next question is from the line of Pritesh Chheda from Lucky Investment.

[Pritesh Chheda, analyst]

And the performance is just moving in line with what the strategy you have started out.

Sir, just for the second half, where we are doing at about INR 1,900 crores of business, it would be very nice if you could share what is the pre-Ind AS EBITDA margin that is INR 1,900 crores? And how much of a burn or loss or number is there for Sephora? Because all the other brands, you largely mentioned that they are a double-digit, so.

[Shailesh Chaturvedi, executive]

See, we report a post-Ind AS number. And in H2, if you look at our INR 1,925 crore NSC, we have a INR 200 crores EBITDA.

[Pritesh Chheda, analyst]

EBITDA. This is pre-IndAS?

[Shailesh Chaturvedi, executive]

This is post-IndAS, that number. I'm saying it is 10.4%. The pre-IndAS tend to be a couple of percentage points lower, but we don't discuss the pre-IndAS numbers. We share the post-IndAS number. So you can get a sense from our EBITDA at INR 200 crores has grown at 30% over the previous same period. We've done well and our EBITDA percentage as an absolute value has improved.

[Pritesh Chheda, analyst]

Okay.

[Shailesh Chaturvedi, executive]

And Pritesh, you can take a 400 basis points difference between pre-IndAS and post-IndAS.

[Pritesh Chheda, analyst]

400 basis.

[Shailesh Chaturvedi, executive]

Yes.

[Pritesh Chheda, analyst]

And how much of EBITDA loss are we looking in Sephora?

[Shailesh Chaturvedi, executive]

See, again, we don't give brand-wide specific, but I can tell you that Sephora, like I mentioned earlier, has done really well. The growth has been very, very encouraging, and the business parameters like like-to-like growth stock turn Sephora has improved. But we don't share individual brand numbers.

[Pritesh Chheda, analyst]

Okay. Okay.

And sir, considering that we are also further focusing on improving our inventory turn from the exit of plus 4x, and the fact that we are looking at improving margin, I wanted to understand what is the CapEx that we have and will the CapEx be less than depreciation number? And if that's so, then we might actually lead to reducing our debt very soon over the next couple of years, we should be a debt-free balance sheet. So is that correct?

[Shailesh Chaturvedi, executive]

See, let me start with the debt part. There is a very likely chance that debt will reduce this year further. So we have now -- we have guided in the beginning to INR 400 crores. Now, we are at a -- we had guided for INR 600 crores, we are now at INR 400 crores net debt. And in FY '23, we see a possibility of further reduction. We don't know exactly because market is still volatile. But given the -- like you said, stock turn improvement and tight control on working capital and business flow in cash, there is a very high probability that debt will further reduce this year.

Whether in future, what happened, but the biases and the trend is towards reducing our commitment is to reduce the debt as fast as possible.

[Pritesh Chheda, analyst]

Okay.

And what will be our CapEx? Will our CapEx be --?

[Shailesh Chaturvedi, executive]

Yes. So this year. Our total CapEx is around INR 90 crores. A large amount of that is for retail, because we will renovate a couple of stores, markets are coming up. We will renovate a lot of our department stores. So we want to keep the brands very refreshed in the marketplace, so that's the main part of it. We don't have a major capacity expansion or factory or anything new, strong technology. But whatever is required to an investment into technology upgrade. And also the retail, we will do, which will add up to around INR 90 crores.

[Pritesh Chheda, analyst]

Okay, and just last one clarification.

So earlier when we were at this 20 -- I think about INR 3,000 crores of business, we were doing 8% pre-index, so let's say, whatever you have referred to [indiscernible] percentage lower than the reported numbers. So is there any cost items which is different in this INR 1,900 crore or, let's say, annualized INR 3,600 crores business?

[Shailesh Chaturvedi, executive]

See, our EBITDA margins are going up consistently, 30% plus. We have seen nearly 200 basis point improvement in EBITDA in the power brand, so we are doing well. I think sometimes the COVID does impact the EBITDA.

Also, there is a -- in the last year, there was a rent concession linked to the COVID, which was around INR 20-odd crores. This year, it's only INR 3 crores, so that sort of affect the calculation. But otherwise, we are doing well, and we hope to continue to improve EBITDA every year.

[Pritesh Chheda, analyst]

And, do you share a strong outlook for the April category per se, considering what you are seeing after quarter 3?

[Shailesh Chaturvedi, executive]

We have seen strong demand. That, also along with strong cost increase. We believe that ASL, we will grow as per our guidelines, which is COVID growth, so net of COVID. On top of that, we will aim for a 12% to 15% growth and more like 15% in this year. So we are sort of seeing strong momentum for our power brands.

[Pritesh Chheda, analyst]

Okay. And net of COVID means adjusting for quarter 1 numbers [indiscernible].

[Shailesh Chaturvedi, executive]

Adjusting for quarter -- that Jan, yes. Exactly.

[Pritesh Chheda, analyst]

Reported growth will be much higher.

[Shailesh Chaturvedi, executive]

We'll have a higher growth.

[Pritesh Chheda, analyst]

Yes. Reported will be much higher.

[Shailesh Chaturvedi, executive]

Yes. So there will be growth because of COVID base, and then on top of that, 12% to 15%.

[Pritesh Chheda, analyst]

Perfect.

[Operator]

The next question is from the line of Vaishnavi Mandhaniya from Anand Rathi.

[Vaishnavi Mandhaniya, analyst]

So the working capital improvement has been very drastic in this year. So if going forward, if you're focusing more on growth, what kind of working capital should we expect going forward?

[Shailesh Chaturvedi, executive]

See, we said earlier that we believe our debt will come down. We believe that working capital will remain timely. We see opportunity to improve funds, first of all. I mean -- so we believe that the working capital will remain in the zone that it is in today. And wherever there is scope to improve terms, et cetera, we will improve it further. So we are in the zone where we can make further improvements in working capital.

[Vaishnavi Mandhaniya, analyst]

But the improvement that we're talking about, will it be obviously on the inventory side with higher turns, there will be an improvement there? But then from the current 99 days, I think the lowest we have gone is 93 days, that was in FY '19. So can we go back to that level? Or should we assume it to be lower, or even on the receivables and 68 days probably has been the lowest for us. And on the payable days, 125 has been the highest. So how do we work with these numbers?

[Shailesh Chaturvedi, executive]

I will request Piyush and Ankit to take this question, but I can see that there is still a juice for us to improve working capital.

Ankit, do you want to take this?

[Ankit Arora, executive]

So basically, the way you could really look at it is our inventory days will continue to kind of improve from here onwards, back to where you rightly said and what Shailesh has mentioned on inventory turns continue to improve. Our debtor days, you are absolutely right, has been the lowest, and that's where the entire process control has been put in over the last 12 to 24 months and yielding fruits, and we expect these controls to remain sustainable.

On the creditor side, it will be unfair or not really right to really calculate 125 because there are 2 aspects which is being played out here. Basically if you really step back and look on a quarter-on-quarter basis, our creditors in absolute rupee terms have come down by about INR 50 crores. But as to what you would understand, we build up for season. And -- which is a seasonal buildup, and that will come down as the inventory turn into cash with the sales in Spring/Summer '22. So 125 calculation is more on the base of our current [indiscernible] as of March '22 versus INR 3,000 crores, which is what we've achieved, which is also actually impacted by COVID.

So if you really adjust to that, our normalized creditor days should hover in the range of about 90 to 100 days going forward. And that's the reasonable, which is what -- as for industry, which is what we will track on.

[Vaishnavi Mandhaniya, analyst]

Okay. Okay.

[Operator]

The next question is from the line of [Sandeep Badar ] from Sapphire Capital.

[Unknown Analyst]

Sir, I wanted to understand more on the aspiration front. You did speak about EBITDA margin improving year-on-year, and will start seeing the operating leverage advantage. So how do you see the aspirational level of EBITDA margin maybe next 3 years, 2 to 3 years?

[Shailesh Chaturvedi, executive]

Our guidance is that in 12 to 18 months, our power brand portfolio should do double-digit pre-IndAS EBITDA, and that's very key task ahead of our spend. We need to achieve this before we stretch our guidance further. It's better that we focus on this and achieve this, and then look at things moving forward after that. Obviously, our aspiration should be ambitious and we want to deliver many more, but we have a very clear focused task ahead.

[Unknown Analyst]

Right.

So but currently, our pre-IndAS power brand, I think in the fourth quarter, it was close to about 8%?

[Shailesh Chaturvedi, executive]

For quarter 4, we had a total -- total IndAS was 10%.

Ankit, do you want to just --?

[Ankit Arora, executive]

Yes, that's the reported number [Deepak], which is what we are referring to.

[Unknown Analyst]

Yes. So reported number, I think in the fourth quarter, we did EBITDA of INR 87 crores.

[Shailesh Chaturvedi, executive]

Yes, you're right. 12% post-IndAS. Yes.

[Unknown Analyst]

Post-IndAS. And I think you mentioned 400 basis point difference between pre and post, right? So that's how I arrived at 8% for the quarter.

So we are already at 8%, right, for power brand. So that's what we are targeting in the next 12 to 18 months, this 8% going up to 10%, 11%, double-digit rate?

[Shailesh Chaturvedi, executive]

Yes. That's our stated [indiscernible] to take the overall portfolio to -- of the power brands to double-digit pre-IndAS. Yes.

[Unknown Analyst]

Okay. Okay. Fair enough. Understood. Yes. I think yes, that's about it for me. All the best.

[Operator]

The next question is from the line of Mythili Balakrishnan from Alchemy.

[Mythili Balakrishnan, analyst]

Just a couple of questions.

I wanted to understand from you, you're talking about opening 200-plus stores. Is this largely the EBOs, how are you sort of thinking about this expansion?

[Shailesh Chaturvedi, executive]

We have set up a central sales structure Mythili, and we are now going into the smaller towns, smaller tier-grade towns, and our teams are now in the field who are scouting for stores. So these will be in individual brand, let's say USPA store or an Arrow store or a Flying Machine store, or Tommy Hilfiger. This will be the mono brand EBO, as we call it, exclusive brand outlets across the country, largely through the franchise deals.

[Mythili Balakrishnan, analyst]

Got it.

And the other question which I had was basically on this raw material inflation that we have seen. It's been a kind of an unprecedented inflation that we have seen. So I just wanted to get a sense from you as to whether we are passing it on in terms of ASP increases? And what's the response to that, and so on?

[Shailesh Chaturvedi, executive]

See, industry and us, we are trying to pass on the increased cost and it's been on for a year, and we'll see further increase in the next season in July, August. So we are able to pass on because these brands are strong.

But I would also say we are holding our gross margin because of pricing power as well as some internal efficiency on full price sell-through, lower discount. That lower discount is also helping us to maintain our gross margin at around 45%. We have not seen any skip on that. So that's the reality, and there is further sort of a cost increase for the next season, which we also will pass.

Currently, the way our consumer metrices are on sales, on walk-ins, conversion, full price sell-through, like that they're all very strong. So the strong metrices in Spring-Summer season indicated that consumers have taken this current price increase well. We'll have to see what happens in the next few seasons.

[Mythili Balakrishnan, analyst]

Got it.

And just a question on the accounting right, which is that when we have a minority interest, which is around INR 21 crores, what does it mean about the profitability of the remainder brands and the power in that segment, right? Because if we have INR 21 crores of minority going out and a large part of it is [indiscernible], then the profitability of the rest of the brand is clearly a bit lower.

[Shailesh Chaturvedi, executive]

See, I think it's -- another way to look at it is that USPA has a very good profitability, and its growing scale and profitability for the -- like I said earlier, it will be a large-scale business in FY '23, again, on an even bigger scale. .

Arrow is the concern area. I said that whenever COVID happens, Arrow profitably does get impacted, and that's why the -- when you say net of minority, the numbers go down because there's a plus and a minus. But what we are seeing that the worst of Arrow is behind us. We are seeing very good KPIs in this season in April, May, Arrow numbers are looking very good. So probably in future, you will see the net of minority, the numbers will look different then.

[Operator]

The next question is from the line of Riken Gopani from Capri Global.

[Riken Gopani, analyst]

Yes. I have 2 questions.

Firstly, in your comments, you have outlined that you focus next year on scaling up the adjacencies significantly. So what is the number currently, if you can sort of highlight what's the growth in that segment for you today? And which brands have adjacencies which have become input?

[Shailesh Chaturvedi, executive]

So let me start -- sorry, that was the first question adjacencies -- what is the second question?

[Riken Gopani, analyst]

I'll follow it up later, maybe.

[Shailesh Chaturvedi, executive]

Okay. So AFL invested ahead of times in very dedicated resources behind adjacent category, created a separate footwear team and division for U.S. Polo brand and innerwear brand. So to answer the question on which brand, U.S. Polo was the first brand that we focused on. And currently, on the other side, Tommy has a very large portfolio of adjacencies, including watches and footwear and eyewear and other businesses. Also, kidswear was a focused team in U.S. Polo, so the adjacent category that we are talking about today is kidswear. We are talking about footwear, we are talking about innerwear. And then there's opportunity to add categories like women's wear in U.S. Polo. And this business is almost like 15% of the business. Doing well, growing well, profitability, good stock turn.

And now, we want to grow our company and our brands through launch of adjacents category, the other brands also. For example, Flying Machine, we are testing few categories in that brand. We're adding some of the new categories and Tommy Hilfiger for example, a tailored blazer and suit which was not there in that brand, we are adding that category. But the classical adjacent categories are footwear, innerwear, kidswear, women's wear, et cetera. And we are investing ahead of time in these categories, and they are doing really good numbers right now.

[Riken Gopani, analyst]

Understood.

So just a follow-up to this. So 15%, when you say, it is of the specific brands or 15% of your current of --?

[Shailesh Chaturvedi, executive]

These specific brands, yes.

[Riken Gopani, analyst]

Okay. Okay.

So I can assume 15% of overall power brand business, or 15% --?

[Shailesh Chaturvedi, executive]

It's largely in U.S. Polo. The power brand also includes Arrow. We have not added a lot of agencies in Arrow as yet. So as we go, it will keep growing there. But currently, the main focus is in the USPA, our biggest brand.

[Riken Gopani, analyst]

Okay. And what's the growth? You said it's 15%, and you said it's growing well, but if you can quantify in terms of roughly --?

[Shailesh Chaturvedi, executive]

In different categories like footwear, I must call out here, that has been developed as an online-first mindset business. And it has grown really well, it's growing at more than 50% with very good stock turns and very good EBITDA margin. Innerwear is growing at double digits with healthy other business metrices.

So these categories have huge potential of further growth profitability going forward.

[Riken Gopani, analyst]

Understood. Understood.

And do they also have better margins compared to the core portfolio?

[Shailesh Chaturvedi, executive]

Yes. For example, footwear has very good margin, very good stock turns, very strong. And USPA footwear is a top-ranked brand in Myntra. So in a very competitive world, it's already established itself as a ranked brand, right? So -- it's built a brand appeal also, because a lot of consumers enter U.S. Polo through footwear products. And they fall in love with U.S. Polo brand because of its exciting range of footwear that it has, and so it's brand-additive both on appeal as well as on scale and profitability.

[Riken Gopani, analyst]

Understood.

And the second question that I had was on Arrow. So currently, if you could maybe outline in terms of size, in terms of where the peak size was and what the current size is? And how soon do you expect Arrow to again go back to its peak revenues?

[Shailesh Chaturvedi, executive]

Let me say that in FY '23, we expect Arrow to reach its peak revenue.

[Riken Gopani, analyst]

Okay. Okay.

So maybe if you can quantify or put some, let's say, what -- roughly what would be --.

[Shailesh Chaturvedi, executive]

Wait a few more quarters, right? I mean, we are in FY '23 already.

[Riken Gopani, analyst]

Okay.

And does Arrow also sort of, in terms of realizations and margins, deliver better at peak revenues in terms of margin? But would it be accretive in terms of margins in your assessment?

[Shailesh Chaturvedi, executive]

Yes. See, it's a process. Arrow gets more impacted by COVID than other brands because of formal nature of this product line, and also the fixed costs where the channel is largely -- department store and EBOs are our largest percentage in Arrow, so it gets impacted. So now today, the focus is -- and the -- all the KPIs we are chasing is to bring it to a decent level of profitability, and which we expect to deliver in FY '23.

[Riken Gopani, analyst]

Understood.

[Operator]

[Operator Instructions] The next question is from the line of [ Nysar Parik ] from Native Capital.

[Unknown Analyst]

So my question is just going back on the minority interest question. So if there is INR 21 crores of minority interest. Is it fair to assume that much profit is like reflective of the CK and EH brand, so the USPA is obviously profitable, so is it fair that between Arrow and Sephora, we will be using anywhere between INR 30 crores, INR 40 crores? Is that a fair assessment? Or how should we look at it?

[Shailesh Chaturvedi, executive]

No, I won't comment on a specific number. But like I said earlier in the previous question that, while Tommy Hilfiger, CK are indeed very profitable now, that's a fact, and we are happy about it. And U.S. Polo is also double-digit pre-IndAS EBITDA and it's looking strong going forward. Arrow has been sort of getting impacted by COVID and that's why the numbers look smaller. But we are seeing a very sort of a dramatic turnaround in Arrow performance, and we strongly believe the worst is behind us. So we will see, hopefully, better times on this particular case in FY '23.

[Unknown Analyst]

Sort of follow-up. I think Arrow has been -- something that has been a struggling brand really in -- there's a cycle in some way. So when do we -- if you could share some operational metrics or something? Because obviously, the loss on Arrow is significantly dragging the P&L, really. So if you have some operating metrics either in terms of full price [indiscernible] or in terms of how the brand has been [Technical Difficulty]? Or is there any other strategic approach that you have in mind, because the brand has really -- when we compare with some of the leading brands like [indiscernible] some of the leaders, the brand has been struggling for 5 to 6 years really.

[Shailesh Chaturvedi, executive]

Let me answer with the last 2 years' background. Roughly, we worked extremely hard in the last 2 years to make Arrow a more desirable brand, it has got stronger consumable.

Point number one, in tune with the times and COVID times, we changed the product category. So while it is a top brand in the formal elegant wear, we also created a line called Sport where it is more relaxed workwear, which is right for the COVID time, and it's doing fairly well as a category in Arrow. We also changed the logo for Arrow. We created a new, more powerful A vector, brought it as a part of the globalization in the industry to the pocket where consumers are really liking it.

We also created a -- point #2, we created a new store identity to refresh the brand in current time. Brand is from New York, so we took inspiration from the art deco look of the New York tall skyscrapers and we created stores, which have shown a higher sales density. We're opening more of stores of Arrow with the new identity.

Third, we tied up with Hrithik Roshan to show our commitment to the brand that we are still investing behind this brand with a power brand ambassadors like Hrithik Roshan, who has 50 million followers on social media. Large investment, even in COVID times. We never shied away from investing behind the brand. So our side is that we built a new team, building a new line of suit and blazer.

Now, sum total of all the hard work could not be seen in the peak COVID times. We saw 3 ways in last 2 years, you all know how COVID impacts our businesses. What we have seen from the fall holiday where we saw the recovery in October-December period, we saw the trade customers having more than 25% like-for-like store growth in Arrow. So smallish channel for Arrow, but we saw really encouraging numbers there. We also saw high -- this improvement in the sell-through as a percentage in fall holiday, thereby, the discounting started reducing by a few percentage points. We're very happy that in FH '22, we launched the season well. Our stores have gone up, started doing well. So this season, with the result that we will report after April-June quarter, we have seen very good like-for-like growth, very good full price sell-through increase and very encouraging discount reduction in Arrow.

In addition to that, a part of our supply chain transformation project we have done on Arrow, where we are trying to increase its categories of core products. Do you want to push that business? And in April, we saw that the fruits of that transformation project also added building results.

So sitting here, of course, we've seen COVID times and we've seen the impact on the numbers. Unfortunate, but that's a reality. And we are -- we strongly believe that the worst is behind us, and we believe that in FY '23, we'll see profitable performance from Arrow.

[Unknown Analyst]

Got it. That is very helpful.

[Operator]

The next question is from the line of Sagar Bhatia from Prabhudas Lilladher.

[Unknown Analyst]

Congratulations on the set of numbers. Pretty encouraging this quarter.

I just wanted to understand a little bit more about your online positioning of the brands going forward, and what the management is looking at in the next year or 2 years from now, just on the online front and not on the retail front?

[Shailesh Chaturvedi, executive]

See, we have a undisputed market leadership in online space in apparel industry. We clocked INR 1,000 crore revenue, profitable. And in COVID times, when the consumer changed their habit, we were ready because we had invested ahead of times in many things besides our own website. Now, in marketplaces and fulfillment centers across the country. So we have the benefit of that focused investment in the online channel.

So today, we -- all our brands do very large online business from wholesale business. We do with the portals to our own marketplace, which is growing at a large base and doing hundreds of crores of business. We have our own brand, nnnow.com, which is a very good consumer connect. We are chasing direct-to-consumer appeal of the brand, so now in marketplace, which has grown in quarter 4 also had more than 25%. So there is a good traction. Online has become somewhere close to 25% of the AFL revenue mix profitably.

Now, the idea is to continue to invest behind this exciting channel and take this forward. So one of the aspiration will be to recruit a lot of young consumers who are digital-first mindset to our online space and create appeal for our brands to that. So that we're doing a lot of assortment -- product assortment online [indiscernible] that we do, which are based on the reality and analytics of the online world. And in the last one year, we have really invested behind SMUs and we are taking that idea forward. The website continues to sort of grow well.

So we are investing a lot behind building the team and the assets to take the online business forward at a very healthy pace, because we are seeing a lot of traction in that space.

And Kulin, do you want to add anything more to the online space, please?

[Kulin Lalbhai, executive]

Yes, I think you have covered what we are planning to do. If you see, there are 3 or 4 very large trends which we are betting on. I think the first trend is that online is moving away from a liquidation channel to being a channel of its own, and that means designing products and designing a supply chain separate just for the online channel, which is what Shailesh was mentioning as SMU, specially-made units. I think that is the future, and that is what we are accelerating.

The other big shift is that off-line and online are converging, so how we are connecting our store inventory and whilst we have done it with our own dot com and some of the leading portals, many more portals are just now becoming omni compliant. So connecting our stores to more and more online demand is the second large theme which we are betting on.

The third theme is that, over time, we need to need this channel more. So the old paradigm was you sold to this channel and then you forgot about it. The new paradigm is you directly engaged with the customer through own dot coms and through Marketplace as a model. We are strengthening our capabilities there.

And largely, I think this -- lastly, this channel is very powerful for adjacencies. A case study of U.S. Polo with sneakers, to become the #1 leisure brand in a couple of years' time was only possible if you get your product strategy and your digital strategy right. So I think we'll use this channel to really catapult into new categories in a disruptive way.

So along these 4 themes, I think we are making investments ahead of time so that you can fully capitalize.

[Unknown Analyst]

All right. So that was a great detailed explanation of what's there to come.

[Operator]

Due to time constraints, that was the last question. I would now like to hand the conference over to Mr. Ankit Arora for closing comments.

[Ankit Arora, executive]

Thank you, everybody, for joining us on the call today. I trust all your questions were answered. If any of you have any further questions on either an clarifications, feel free to reach up to us, and I'd be happy to take them offline.

Thank you. Looking forward to interacting with all of you next quarter.

[Operator]

Thank you.

On behalf of Arvind Fashions Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines.