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Arvind Fashions Ltd
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Ladies and gentlemen, good day, and welcome to Arvind Fashions Limited Q4 FY '24 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Ankit Arora. Thank you, and over to you, sir.
Thanks, [ Manoja ] 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, 2024. 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 fourth 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 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.
Thanks, Ankit. A very good afternoon to you all. Thank you for joining us for the Q4 results. AFL delivered a strong quarter 4 financial performance and continued on its mantra of profitable growth, even though the macroeconomic environment continued to stay subdued. We ended the year with our quarterly sales growing by 4%, aided by a healthy LTL of 4%, resulting in a retail channel growth of more than 10%. In line with seasonality, we had shifted our wholesale channel sales between Q4 and Q1, which negatively impacted our growth this quarter. We delivered on our commitment of expanding EBITDA margin for yet another quarter with an improvement of 150 basis points to 13.5%. This was achieved despite our continued higher investments in advertising of around 100 basis points on a year-on-year basis.
On a full year basis, FY '24 has been a year where we have delivered differentiated results with sales growing by 5%, led by sharper focus and execution across the retail channel, even though we saw a large degrowth in the online B2B business. EBITDA grew by 15% with an improvement of almost 120 basis points. Another significant achievement has been a robust improvement in our return on capital employed by 400 basis points to more than 16%. Over the last many quarters, we have undertaken multiple strategic interventions and initiatives to improve this metric, and we stay well on track to achieve a 20%-plus ROCE in the near term.
As we enter into FY '25, we are pleased to see demand trends improving in the current quarter and expect growth to witness a strong uptick compared to quarter 4. We have significantly invested in multiple growth drivers and expect to benefit as consumer demand bounces back backed by the strength of our marquee brands. We will continue to stay focused on our priority of accelerating the sales growth through innovative retail formats and a higher network expansion, coupled with further improvement in profitability and return on capital employed.
I would like to now hand it over to Shailesh to take us through the specifics and more details about our financial performance.
Thanks, Kulin. Good afternoon, everyone. My pleasure to take you through the details of AFL quarter 4 results. We will cover Q4 results, full year FY '24 results and also some points on the way forward. You saw a continuation of subdued market conditions and revenue of this quarter can be split into 2 parts. Part 1 is about AFL business in January and February. And the part 2 is about wholesale business of spring-summer [Technical Difficulty] season supply in Feb and March. We have delayed the end-of-season sale in December because winter had not set in by December, and we did not want to discount so early. We did not discount winterwear till mid Jan and because of that, the peaking of U.S. has happened in January and February. And in Q4, our retail sales grew by a healthy higher than 10% number.
There was full absorption of discounting in this quarter, whereas last year, some discounting had happened in December as well. We achieved our full season sell-through of fall holiday '23 season, with very good like-to-like retail growth of 4% in this quarter. Given the delay in onset of winter and then of summer, we also adjusted our primary billing of spring-summer goods for wholesale channels in line with seasonality and saw lower billings in MBO channel and department store in quarter 4. This will get hopefully realized in quarter 1 with shift between Q4 and Q1. After a few quarters of destocking in online, Q4 saw healthy growth in online business, both online B2B as well as B2C. Overall, revenue growth for April was 4% in quarter 4, with the highest ever quarter 4 revenue of INR 1,094 crores and a 2-year CAGR of growth of 15%.
With higher retail channel mix backed by cost efficiencies, EBITDA grew to INR 148 crores, a growth of 17%, a 150 basis point increase in spite of our wholehearted 100 basis point higher marketing investment. PBT for quarter 4 was INR 54 crores, which is the third continued quarter with PBT in the range of INR 50 crores to INR 55 crores. With this, AFL revenue has scaled close to INR 4,300 crores in full year FY '24 where share of healthy and important retail channels has gone up by nearly 3% with growth in early teens. Similarly, online direct channel, B2C marketplace has also gained nearly 3% in revenue mix. The full year EBITDA reached INR 544 crores, 120 basis point improvement through better channel mix, a 300 basis point improvement in gross margin backed by annual retail like-to-like growth of 4%. The growth in EBITDA is 15%. This was despite 100 basis points higher investment in marketing in FY '24, which was needed to keep our brands top of mind and very salient in market.
At brand level, our efforts have been to offer differentiated product [Technical Difficulty] and premiumize brand appeal. In quarter 4, both Tommy Hilfiger and Calvin Klein have delivered record performances, both in terms of top line and bottom line. U.S. Polo Association has continued its leadership journey with impressive growth in EBITDA in quarter 4, fueled by strong performance in retail channel as well as in online B2C channel. The focus of USPA has been to strengthen its leadership with higher investment in marketing and in retailing. FY '24 saw a very impressive Legends campaign in USPA, including a mega event in Bombay. The brand has moved forward in its journey of opening very large-sized multi-storage flagship stores across the country, which showcase all categories of the brand, including menswear, womenswear and kidswear.
Adjacent category like womenswear are showing good promise in USPA, also existing adjacent category like footwear, innerwear, kidswear are all quite for stronger move forward. FY '24 saw good growth in Arrow across channels despite muted condition in the market and remains profitable at low single-digit EBITDA. Going forward, we expect Arrow business to scale up further and reach mid-single-digit EBITDA soon. These are early days of reenergizing FM brand and SS '24 season has seen fully develop new avatar of FM, including new cool merchandise for Gen Z and millennial consumers with the new logo backed by rollout of a new store identity. The performance of FM in competitive MBO channel and value department store and in few dozen-odd renovated FM stores in spring-summer '24 season now has been encouraging. While these are early days of improvement in FM, there is a visibility of early green shoots. We have clear improvement priorities ahead on FM in the next few seasons.
On working capital front. Q4 saw stable GWC days with continued tight control on inventory and debtors amid soft market conditions. Debtor days were lower by 2 days, Y-on-Y and stock turn remain close to 4. As we discuss what is ahead, let me refer to the 3-year scorecard that we have put out in the investor deck. In the last 3 years, we have created a powerful platform of these 5 strong marquee brands with fantastic team, new standards of shopping experience with new store identity, high visual merchandise standards and international way of storytelling. These are the [Technical Difficulty] which are driving like-to-like growth in recent times and will continue to drive like-to-like growth in future as well. And we have done this with increased marketing spend and keeping very strict hygiene on working capital and ensuring focus remains on profitable growth.
EBITDA margin has improved by 150 basis points in the last year and by 370 basis points in FY '22. With the backing of this strong platform, the key priority for FY '25 is to up revenue growth. Our brands remain top of consideration set, ready and prepared and we benefit whenever market improves. Going forward, our aim is to put energy behind each of our top growth driver, including retail network expansion, like-for-like store growth, online B2C buildup and growth of adjacent categories. Let me just touch upon 2 drivers here, starting with retail network expansion. FY '24 saw gross addition of nearly 146 new stores into our network. Also, there was a onetime correction in terms of closure of large number of unproductive small stores to fuel profitability further and maintain healthy working capital.
We expect net addition of square foot in FY '25 to be in 15% to 20% growth over the current base and with annualization of business of the stores that we opened last year in FY '24, we expect higher revenue growth. It will all shortly depend on the market conditions, but we remain surely hopeful of stronger growth ahead from where we are at Q4 FY '24. Adjacent category expansion is another key driver of growth ahead. This is a higher than INR 500 crore profitable business for AFL across all 5 brands, and it's growing double digits. Footwear, kidswear have already gained scale of close to INR 200 crores each, but market conditions improve, adjacent categories of a potential of growing more than 15%, and we can reach -- and these can reach 20% share of revenue in medium term.
I must also add that in FY '24, in soft market conditions, we saw annualized [Technical Difficulty] like-to-like retail growth and online B2C channel has also grown at a very brisk pace. A lot of growth, obviously, is linked to external market conditions and business does get influenced by economic realities. But from 4% growth in Q4, we are confident of a stronger revenue growth ahead.
Thanks, Shailesh. Manoja, we can open it now for a question-and-answer session.
[Operator Instructions] The first question is from the line of Priyank Chheda from Vallum Capital.
Yes. Fantastic performance on the operating side. My question is on, Shailesh, can we get some perspective on individual brand performance for the full year, not for the quarter? Maybe in terms of growth and profitability, has that something drastically moved versus last quarter, if that can be highlighted, it would be great?
When it comes to the brand-wise, the picture is very similar to what we discussed in the last investor call. Tommy, CK with the focus on premiumization, market continued to deliver very good top line, bottom line. USPA had a very good quarter 4 in terms of EBITDA. In an annual level, some brands have got impacted by a bit of a slowdown in online B2B business. But U.S. Polo delivered fantastic EBITDA. And like we said, it's a brand that's growing retail. It's growing marketing investment. It's growing adjacent category. I'm very happy to share and what we didn't discuss in the last investor call is that we opened 5-odd marquee flagship stores in the last quarter. We opened up -- these are like full building, multi-storage, 4,000-odd square feet stores of U.S. Polo, and they house the entire line of U.S. Polo from menswear, all the division; womenswear, we have now started working on.
So we started after good response online, we started selling it in off-line in our stores. Also, we are testing a little bit of shop-in-shop in off-line channel there. Kidswear is a big focus, has grown really well in quarter 4 and we are pushing that channel forward. In addition to that, the footwear has got a little impacted because of the BIS in confusion right now. The government policy has changed. So currently in the footwear the whole industry has a little bit of lower inventory and assortment is impacted. So that is a short-term blip. But if I compare to what happened in the previous investor call, I would say expansion of flagship stores is a big thing in U.S. Polo.
Arrow, very similar to what we said. It's gearing scale. Brand has got good traction. The product lines are doing well. Premiumization is happening. We will be launching new stores. The EBITDA is breakeven level, low single digit. And from here, we are hopeful that as the market sort of grows and we open more square foot, our platform is ready. And as the market improves, Arrow will also benefit and should reach mid EBITDA, what we had said in the previous call also. FM I just mentioned that now this season, first time whole new avatar, FM has rich market and we are happy with what we are seeing in terms of the growth and the appeal with the channel and the consumer, but very early days. We have a couple of more seasons to bring more energy behind flying machines. So I think market remain subdued. Our platform, our brands are very salient and whenever market improve, we've seen our brands do really well. So that's the sort of some total of what has happened in quarter 4.
Perfect. Perfect. I'll reflect back on the Arrow, when we started this year, 1 year ago, we were very confident on the -- on whole of the corrective action plan that we had set for Arrow to at least reach a good sizable EBITDA contribution coming from this brand. It's a sizable revenue brand. But yes, the EBITDA performance has been slightly muted versus what we had thought. So any -- exactly what has gone? Which has not performed well? And what requires further to rectify that?
No, no. I would say we are fairly pleased with the way Arrow is moving forward. Yes, markets have remained tough. That's outside of our control. But if you go to the -- some of the new Arrow stores, let's say, example, there's a mall in Bangalore, Mall of Asia, you go there and look at the quality of Arrow stores, the merchandise we added [indiscernible] 1850 and premium line. I think the consumer traction on Arrow is very good. We're just waiting [Technical Difficulty] improvement in the market condition. The rank in department store has improved in formal category. So there's nothing to worry about Arrow. I mean it's gaining scale, it remains profitable. And as the market improves, as we open more stores, it will reach the stated line. Quarter-to-quarter, there's no sort of disappointment or change in the Arrow, and we are as upbeat about Arrow as we were in the last quarter investor call.
Correct. So nothing to do with quarter-on-quarter. What I'm asking is the consumer cohort of the segments where we operate. So our consumer income would be fairly stable. Our consumer record salaries are getting created in India, what we have been witnessing. So why would we say that the market condition is muted for our consumer, which is towards kind of a premium end, it's something which we're not able to map it out.
See, I think I'll break down your question into 2 parts. I would say the journey of Arrow that we set it out, it's going forward. Whatever we said about exciting the consumer with the brand, it's happening as we see. Now it's a reality that in that price point that Arrow operates in and the competitors, and we've seen the results. There is a market slowed down. We're gaining market share. I've seen in the department store rank in the formal trouser and shirts. Arrow has now become the top brand in both the key department stores. So I would say that Arrow progress has been good. Still not mid-single-digit EBITDA, but that's a process, it'll happen. I'm sure it's going to happen very soon.
Sure. Now on the innovative store format, which you have highlighted, if you can further touch on what would be the total investments that we plan on this, all of this formats and then your observation on to the Megamart versus Club A seems to be very similar format. Only difference being Megamart seems to be having an upfront discount from day 1. So, is that not diluting a brand? Just wanted your clarity, why would we try out so many multiple formats versus a very exciting lovely kind of a format?
So let me answer that question because in your question, there was some clarification required. See what -- let's first look at what is our objective. We want to drive the business of these 5 marquee brands and profitably. The profitable growth of these 5 marquee brands is agenda. We don't want to get distracted. We don't want to do new things, et cetera. We want to focus on the growing the business of these 5 brands profitably. And retail is a very good opportunity. Our platform is ready. We understand this quite well. Now in our business, we need to have an outlet model earlier the whole -- entire old merchandise was sold through online channel, and we saw opportunity.
Our competitors are doing a very large outlet business, and we were not present in that format largely. So we opened -- and also Hilfiger, you need a big format so that you can get car parking and consumers come into a large format. So we created a multi-brand outlet, also the size-wise in single brand, you get shortage. And in multi-brand, you get your size in some brand or the other. So we opened this Megamart and in last 2 years, it's really scaled up. Also it gives us opportunity to liquidate with better realization and much faster cash realization. So that's one format called outlet of these 5 brands called Megamart. it's in the areas where the outlets are present and there are these outlet markets across the country. So it's already there, and we opened a large number of that store, and it's been working very well, and that's something working well.
Then we also saw that especially in high street, we see a need for, again, a very large format. These are the premium high streets like the Indiranagar of Bangalore where the wedding consumers go, very special occasions, consumers go and they are very important high streets of every city and we didn't have a presence. So we created this premium, it is like a super premium format where brands like Tommy Hilfiger, Calvin Klein, the better part of U.S. Polo, Arrow, Flying Machine are there. So this is a completely different model. It's got nothing to do with Megamart. Megamart is in the outlet localities and look and feel, cost of retailing and everything is a very, very outlet.
Club A is a very premium format. Here, we don't discount. We don't sell old merchandise, at full price, special occasion customer. And we tested in 1 store in Indiranagar in Bangalore, and we found very good traction and we see a lot of premium customers come, very nice parking. The 40 feet frontage. It's a whole building, very, very impressive. But for now, we have decided based on the trial we did in Indiranagar, Bangalore to now put money behind this and we'll expand it. So that is a completely different format. And third format is the footwear format called Stride which is largely a footwear and accessory like handbag and we're seeing that traction in those categories for our brands. So we sell handbag and footwear in U.S. Polo, in Tommy Hilfiger and Calvin Klein, et cetera. So that's a completely largely currently a mall business in the accessory zone and the footwear zone and outlet it's a separate format.
Coming to the investment level, the question that you asked, we remain -- our mindset remains very asset-light and most of the stores that we want to expand are with our FOFO model. And once we have done the trial and most of the expansion of these innovative formats will be with asset-light mindset with largely with FOFO model. And this will be the fuel for the growth of adjacent category and the main categories of the existing 5 brands.
Perfect. Just the last question. With a very overlap of this outlet model, are we planning to severely scale down the MBO channel? And then how should we read 2% decline in whole of the year for this channel? Have we lost out some market share in the MBO channel too? I mean how do we balance out both the formats at the same time?
See, let me just first clarify that -- see the MBO channel is a full price channel. Outlet is a old merchandise discount channel. Now if you go to, let's say, Agra, Bachoomal which is a key MBO, the top customers of Agra go there, especially for the shopping for the wedding occasion, et cetera. So they are not a discount retailer, all the key MBOs, [ JetBlue ] in Ahmedabad are similar, I can keep taking the name, they are all the top retailers of that city. And we are very proud to be present in a very large market-leading way inside their stores across the country, and it's an area of strength and we are building the full price business, the full season business of our brands with them, all our 5 brands, and it's a full price business. And here, we've been very, very strict with hygiene and collection and inventory management. So that's the one business.
It is not an outlet model. So this is not a cannibalization or outlet is not a cannibalization for MBO channel. That channel has grown in high single digit in the FY '24 and it will continue to grow at its own pace, but we will be very strict with the hygiene of that channel. So outlet is not cannibalizing MBO business, it's a separate business.
Now coming to your question on the growth of the wholesale channel, like we said that we've been very, very watchful on stocking and especially in the department store, we've been very careful in inventory level. We are not overstocking that channel. And that's why these are not primary, so that channel has been a little slow in this quarter. It will switch over to the quarter 1. So if you look at the quarter 1 data also and overall spring-summer, I think there will be a small growth in that channel also. So don't -- let's not confuse between the outlet channel and the MBO channel. They are completely different distribution, different cities. And MBO, you can go to many large number of cities. Outlet, we don't go into so many large number of cities.
Perfect. Very clear. Just on the feedback discussion that we had last quarter, we have to yet improve on the basic disclosures like brand-wise, store counts or maybe pre-Ind AS EBITDA numbers. If that happens, then it would be very great.
Welcome.
[Operator Instructions] The next question is from the line of Palash Kawale from Nuvama Wealth Management.
Congratulations for the good set of results. Sir, my question is related to categories. So what is the size -- if you could give some data about what is the size of the categories like footwear, kidswear, innerwear and womenswear and what kind of margins are we making there?
See, 2 of these categories have already become more than INR 200 crores each. That's kidswear in U.S. Polo and we do kidswear in Tommy Hilfiger. U.S. Polo in it's segment is a market leader and Tommy Hilfiger in its own super premium category also is a market leader and there's an opportunity to open exclusive -- many more exclusive stores of U.S. Polo kidswear and we will put energy behind that.
So that's already crossed INR 200 crore mark. It's a market leader in its segment, it's fairly profitable and close to double-digit EBITDA there. So it's a fairly good business. Kidswear also post-COVID, there were closure of a lot of kidswear local brands and that opportunity came up. And in India, the way the new structure, it's a secular growth going forward, and we want to capitalize on the growth opportunity in the kidswear segment, and we are very well-placed brands in U.S. Polo and also Tommy Hilfiger. That's a one part.
Second piece is the footwear where our company invested really ahead of time. And we have really benefited from that focus on a dedicated footwear business. We have a separate team. And that business now is also reaching close to INR 300 crores mark and it's close to double-digit EBITDA again. Again, a market leader, both in the online spaces. Within Stride format, we are going aggressively behind off-line distribution. In our own stores of U.S. Polo, we do a very good share of revenue from the footwear and very profitable business for us.
We also do footwear business in womenswear just launched last year, it's showing good promise. We've also done a small trial of Flying Machine footwear, which is again showing good promise. Also, Tommy and CK in their own super premium there, they do a business of footwear in their stores.
Currently, footwear is a bit of under challenge on supply because of the new government regulation, BIS, where need certification. So there is a bit of confusion right now and the inventory levels in the distribution online/offline is a bit challenge. And -- but I'm sure this will sort of pass in the next couple of months, and this business will continue to grow at very, very high growth going -- continue to grow forward.
And then we also have other accessories like adjacent category like innerwear and we also have small handbag, et cetera. So we will continue to expand those categories. Womenswear has been the recent introduction, which is showing good promise in U.S. Polo. In other brands like Tommy, CK, we do fairly good business of handbag and apparel.
So these are the 4 categories where we are putting a lot of efforts, which is footwear, which is innerwear, which is kidswear and womenswear. Overall, this is higher than INR 500 crores business and it is growing in double digit. And currently, the share is more than 15%. And I think as the market improves and the growth accelerates and we open more distribution, this, in the medium term, has a potential to reach 20% of our AFL revenue share.
Sir, my next question is related to FM brand. So what kind of margins are we making there? And how do you see margins shaping out in the next 2 years?
See, margin shaping up in the next 2 years, yes. Currently, Flying Machine is in a -- like I mentioned in my comments, it's a new avatar. This is a season we have actually launched with a new cool merchandise, new logo. We've seen encouraging response. The growth -- in the current market condition also, the growth rates are fairly good. Beyond that, we don't want to give it too much of brand color, but this is a brand where definitely we want to see better margin in the next few years.
Okay, sir. Sir, and destocking in online B2B is done or there's still some room there?
See, what has happened from the peak of the COVID business, there is a realignment happening in the online world, and the industry is moving from wholesaling to the portals what we call B2B towards what is known as the marketplace, B2C, where the whole shopping experience is controlled by us, where we hold the merchandise, we decide the assortment, we do the online exclusive style and we deliver it at the prices that we want and not sort of heavy discounting, et cetera but there's a sort of a healthier business and a long-term business. So not just as the whole industry is moving from B2B to B2C. Currently, B2B is a slightly bigger revenue business than B2C. But B2C is showing a lot of promise and the business has almost doubled in FY '24, is showing very good traction.
And we will continue to transition the business from B2B to B2C, that way the industry is also doing. So in next couple of quarters, we will continue to see this transitioning of B2B to B2C. And overall, we expect that the online business will stabilize and grow further because when I look at our long-term view, there is a set of consumers we will -- their first choice of discovery and shopping is online, and that new customer, whether it's a millennial or a Gen Z customer, will eventually buy online. So we will stay heavily invested behind the online channel, but we transition to a better version of online business.
Okay. Sir, just last question on bookkeeping. So what is the ad expense for the whole year?
Our advertising, you said right?
Yes, yes.
So we are close to 4% of our sales in advertisement, which is almost 100 basis points higher than what was in the previous year.
Okay. And how do you see it going forward? It would remain around 4% or...
It will remain stable at this level. And I would say that we will not leave any stone unturned. We need to invest more. But the kind of visibility I have in the next year, I think it'll remain stable close to where the current numbers are.
The next question is from the line of [ Sheyaz ] from Swan Investments.
First of all, congratulations to the team on a good set of numbers. Sir, my first question is more to Kulin and Shailesh. So we start FY '25 on a clean slate. We have 5 brands. Most of the cleanup is now done. We are ending with about 16%, 17% ROCEs, 0.5% debt equity. So I think we are in a fairly comfortable position now.
And you also highlighted in your presentation that you've seen growth rates better than Q4 to come in from next year onwards. So I just wanted to pick your brain on how do you look at the overall market? You were earlier guiding for 12%, 13% of top line growth and most consumer companies that we talked to are also seeing some green shoots in consumer demand. So we have brands that play across both value as well as premium. So internally, how are you guys looking at FY '25, FY '26 now that every -- all the cleanup that we're talking about is done?
Kulin, you want to start, then I'll take it -- continue forward after that?
Yes, I'll start. So thanks for the question. I think the last year has been a year where we have really built a very exciting platform to scale up our growth through the next level. I think we've made the investments in the brands. We have really upped the game in terms of the retail experiences that we want to offer in all of these brands. And we have an extremely strong balance sheet with very high level of newness and freshness in inventories. So I think the hard work has allowed us now to really look forward to a stronger growth cycle in the coming year.
And as Shailesh mentioned earlier, once all these formats are scaling up our square footage addition comes in and as the adjacent categories also scale up and we didn't talk about it too much today, but I personally believe the productivity engine of the company is in very, very good shape. So in a very bad market, we've been able to give an LTL growth.
So in even a neutral/slightly positive market, I feel LTL is also a lever very much poised for a much higher level of delivery. The markets have remained weak, as we said. So I think with all of these things coming together, you will see in FY '25, a significantly better growth than in FY '24. And once the market conditions become a little bit more neutral, I'm very confident that the higher range of that 12% to 15% growth target is very achievable with the portfolio that we have and the growth drivers that we have in place.
You want anything else, I can just sort of supplement.
No, that helps. My second question is, sir, like now retail has grown by 300 basis points. So just wanted to understand, going forward, what is the kind of mix that we look at in terms of channel? Do you think retail has more scope, can it become 50% of our business and online 25% and MBO 25%? So what is the number that we are targeting? Because clearly, retail sales have from my understanding, better ROCEs for us. So that is 1 question.
The second part to it is just in terms of some understanding, if you could give us in terms of ROCE, which channel is better for us in terms of ROCE if you could rank them?
First question, yes, retail is definitely a very healthy channel for us, have GP, from brand side also very right, cash conversion also quite right. So we believe in it and last 2 to 3 years, a lot of investment, like Kulin mentioned, we have put behind to improve our productivity, like-to-like growth. And even in the tough market, we've grown last year at 4%.
Now the strategy for channel going forward is, what we said, direct-to-consumer. So we want to continue to focus. Even last year, if you see the 2 channels have really grown, and both have added almost 3% revenue share, one is the retail that you mentioned and the other one is the online B2C, which has almost doubled and it's also gained share. And we believe that with both the channels, we see the white of the eye of the consumer, and it gives us an opportunity to directly influence the consumer choices through good shopping experience, through assortment that we can control. We can use the machine learning too throughout the right merchandise to the consumer on the front-end. So we are very clear that this direct channel, the retail and off-line and B2C in online are the priorities. And already, if you see last year also, both the channels have added a share of mix and have grown handsomely and also both are adding very good margin improvement for the company. So these channels will continue to be focused and our mindset is asset-light.
So we will sort of grow the retail channel and all these innovation that we are talking about through -- largely through the franchisee route FOFO model. And then our ROCE and those channels are very, very healthy.
So could you just help us understand which format gives us the best ROCEs in terms of order?
So I'll not be able to really exactly tell you because that's something which is what we don't disclose. But to give you some sense, of course, MBO and retail are the best channels for the ROCE business because -- but please understand the absolute EBITDA, which is what you get in retail channel is the highest because you're able to drive the full price business with a higher gross margin. So from that standpoint, that's where we are focusing a lot more on retail with a significant higher amount of controls in retail and on the working capital and better inventory management. Our capital employed remains under control, and that's where you see our ROCE is going up, and that's where the investment is what Shailesh also spoke about.
Okay. And my last question would be on PVH. So what is the kind of revenue EBITDA and PAT that we would have done for this year FY '24? And similar to that would be what are the PAT losses in Arrow, if you could just help us understand that number now that the whole year is over?
So we don't really give exactly revenue EBITDA, PAT, ROCE, all of these metrics brand-wise. But to give you some sense, of course PVH being on the premium side of it as what Shailesh mentioned, would have grown slightly better than, of course, the company-wide average, and we are benefiting from the entire premiumization trend. However, as to what Shailesh said on all the other parts of the business, U.S. Polo also continues to do extremely, extremely well. Of course, there is a way to go on Arrow and Flying Machine. Arrow, of course, losses have meaningfully and significantly come down over the last few years and you are seeing the entire benefit on margins and ROCE is getting better because all of these focused efforts is what we are yielding.
There is, of course, an internal target and journey to go, but of course, we need external environment support, but we stay confident of moving all our metrics what we have delivered over the last 3 years continue to inch upwards as we look out for FY '25 and '26.
Okay. And my last question would be to Kulin. So Kulin, the kind of growth that we're seeing in the premiumization happening in India, you look at companies like Ethos delivering 20% growth every quarter. So just wanted to understand in terms of Tommy/CK, obviously, we've had some baggage in the past and maybe that's why we're being a little conservative on the growth aspect.
But do you think now you push the pedal a little more higher in terms of Tommy/CK where there is an aspiration there. We were seeing numbers of the collective in ABFRL. They are posting strong numbers. And the whole market also seems to be favoring premiumization as a story. So just wanted to understand, are you being a little conservative on that aspect on Tommy/CK and being a little conservative? Or do you think now is the time you capture that growth that is there to -- for you to take, you have such strong brands on your side?
As a company is to drive profitability, right? We want to make this a very high return on capital employed company, a company where the growth comes alongside extremely strong key cash flow generation. And if you -- your question is, if you have to choose between heavier growth and dilution of cash flows and ROCE. That is something we will not do.
Now coming to your question on Tommy and CK, I think these brands have had industry-leading growth, a very interesting fact is that the size and scale of Tommy/CK is possibly 4x larger than any other brand in their class in terms of their price point and the bridge to luxury segment.
So they are examples of an exceedingly large dominant franchise, and I don't think on any dimension. We have had a lack of ambition. The number of stores and square footage, which are being added the way. Tommy is now the most searched brand in the lifestyle space online. So these are all numbers, which clearly show that there is no lack of imagination or ambition. We will not push the growth of these formats, any of our 5 formats, beyond what we believe could be the healthy way we need to grow these brands.
Even look at our investor deck, we clearly mentioned there that we have got here both in terms of top line, bottom line and both the brands have grown across the channel, whether it's in online space or own retail channels, shop-in-shops. So they are a wonderful [Technical Difficulty].
Hello? I think we lost you. Hello?
Yes, I'll connect back. The management line has been connected.
Shailesh please go ahead.
So I think Shailesh was answering the question, I think.
What Kulin said and I also said that there's no lack of ambition. The performance has been outstanding in Tommy, CK. So yes, I mean, these are the leaders in the market.
Okay. And just last question, sir. What is the kind of store addition that we envisage both in Tommy and CK? And my question was, was because last 4 years, we've seen about 10, 12 store addition in Tommy and CK combined and that business is about 100% ROCE for us. So that question was more on that bit.
So let me first say that the overall AFL strategy that we want to add close to 15% space from where we are today. And there will be also some reduction because 3% to 4% of cleaning up our distribution happens every year, it's healthy. So that's our overall strategy at AFL. Coming to Tommy, CK, they are in super premium space. They're already present in very large number of cities, both are present in more than 70 cities of India. Very few international brands of that quality and price are available in so many cities. And as and when the new city emerges or new distribution emerges, we will expand.
Also, a brand like Club A are very good opportunity to expand high-speed distribution of Tommy, CK along with other 3 brands. So again, I'm saying that we leave no stone unturned in the successful market-leading brands, but it has to be done like Kulin said, in a quality way. We'll not compromise there for the sake of expansion, but it has to be done in a quality way and we are leaders because over the last 18, 20 years, we've built it in a very high quality and that will be the handwriting going forward also. We will not compromise.
The next question is from the line of Rajiv from DAM Capital.
Regarding PVH, this brand, because this is largely asset-light, barring the stores you have bought last year. The margin structure is largely stable, is it? Or there is operating leverage still there?
Yes. So the margins are quite healthy, very happy with the EBITDA percentage. But there is a scope further as we sort of scale the brand forward, further efficiency possible. So there is a surely leverage possible in these brands also.
So you -- in your opening remarks, you mentioned that PVH has done record profit, that was for the full year, not for the quarter, right?
For the quarter also had a very good numbers combined, if you see, the performance of Tommy, CK have been very, very good in quarter 4 also.
But this minority interest number we see there is a Y-o-Y decline, right?
Yes. So it also includes Flying Machine and that number. So Tommy, CK brand [Technical Difficulty] Flying Machine is a business like I said, that we are reworking and quarter-to-quarter, there could be data there. So overall, when you focus on, Rajiv on Tommy and CK, they had a very good quarter 4 also, and they had a very good quarter -- full year also.
Sure. And regard to this Ruf & Tuff and Newport thing, which was held for sale and you brought from ALBL to AFL, what -- are we looking to revise these 2? And what is the idea here?
So just to give you a perspective, Rajiv, this is just a movement between the holding company and -- sorry the subsidiary and the holding company. This is largely being done to optimize cash and cash flow purposes. You would realize that there is no impact on the consolidated financials. I just said, I would just like to reiterate that our focus is to keep working on the 5 marquee brands and keep working on them to improve our performance and profitability.
Perfect. And on the wholesale business, is it possible to specify how much is SOR now? What percentage of your wholesale is SOR?
So Rajiv, we will not be able to discuss the financials on a business model-wise numbers. But as to what you can see, our focus is continuing to drive the retail channel, which is where, of course, we have tightened the controls and, of course, making the entire working capital a lot more efficient over the last 3 years and doing the entire bit on stock turns and debtors as well.
No, so I was just wondering because if you're moving away from SOR, your -- the inventory number, which you share on the deck versus this thing, there is an increase on that bit, right, which is an SOR inventory.
No, it's just an accounting representation, Rajiv. The way we look at our business is essentially the entire whole universe of inventory, whether it's lying at our doors or inventory, which is potentially can probably get returned from the doors which is where -- it has that ecosystem and allowing in terms of customers.
So it's the right prudent way when we report into our presentation, but it's only the thing, the differential number is shown as other current assets, which is as part of the balance sheet. It's just an accounting thing. But for all practical purposes, the way we look at our inventory is including that returnable assets, which is shown as other kind of assets on the balance sheet side. And that's the number of totality what you see in my investor deck when I put out.
No, I understand that. My only thing is that delta number has increased.
So don't think too much into it, Rajiv, you should look at that number on a full year to full year basis. because there will be some channels. There will be some billing which is what we will shift. There will be some seasonality, which is what we'll be playing. So you should look at that number on a full year to full year. As a percentage of sales, that number would have largely remained stable. I don't have the exact number for the full year as a percentage, but that number wouldn't have meaningfully changed for the FY '24 versus FY '23.
Okay. And is it possible to, let's say, comment on the, let's say, health of the inventory how much is, let's say, a season old, how much is a year old inventory in your system?
We are very happy with the inventory quality. Even, Kulin in the earlier comment mentioned that we've never had a pressure round of inventory, and we are very -- the freshness index in our inventory is very, very good. And we've been very selling inventory close to the market, and that's why one of the reasons you've seen the Q4 to Q1 shift is happening. We're very watchful and our health of inventory is very good and bulk of our inventory is less than 1 year old.
The next question is from the line of Jatin Sangwan from Burman Capital.
As I can see in Q4, we have reached an EBITDA margin of 13.5%. Now going sequentially, Q1, which is like the lowest for us, are we confident of maintaining the similar margin in Q1? And also what kind of margin improvement are we looking for FY '25 and also in the medium term, let's say, in the next 3 years?
See, as far as quarter-to-quarter EBITDA comparison, see, we're a very seasonal business. So sequential EBITDA percentage don't make like we have a quarter, which is more wholesale. There are quarters where we have more end of season. So when we look at the EBITDA of quarter 1, we will compare it with the quarter 1 of last year because that will be the right way to look at it rather than comparing it with the current 13.5% in the quarter 4.
Second point is that what is the guidance on EBITDA. We've been saying that we want to increase the EBITDA by at least 100 basis points. Good times even or higher stretch of 150 basis points. Now if you look at our journey of the last 3 years and the scorecard that we are fond of, our EBITDA increase is much higher than that.
Even in the last year in all the current market condition, we've seen a 120 basis point improvement in financial FY '24. So EBITDA improvement and a profitable growth, while we see prices now after revenue growth from where we are in quarter 4. But we will have a lose sight of the profitable growth. So the EBITDA improvement continues to be our mantra of profitable growth, and we hope to continue on this journey of close to 100 basis point improvement. Yes, there are -- sometimes markets are very bad. Sometimes markets can be very favorable also. So -- but the attempt will be to grow EBITDA by at least 100 basis points.
Got it. And as I can see, employee expenses have increased on Q-o-Q and both on a Y-o-Y basis, were there any offs or one-offs in the employ expenses?
So don't -- please look at quarter data on employee. If I look at the annual data for a company with EBITDA increase of 15%, our employee costs have only gone up by 7%. And this is what really minimum required to be competitive in the space to be a good employer. Also, when we look at this cost in the last quarter, we've seen good savings on the overhead side, the travel costs, et cetera. So overall, we remain very efficient on the employee cost plus the overhead cost that we have. So I don't think there's a need to read too much into the employee costs. Please look at the annual increase of 7% in FY '24.
The next question is from the line of Niraj Mansingka from White Pine Investment Management.
Just 1 question. Can you share about the category performance, how these various categories performed during the quarter and the year?
See, in the -- earlier in the call, we did say that adjacent category, different categories we've built. In the core category also, if you look at the core focus -- bulk of our business comes from T-shirt, shirts, jeans, chinos, et cetera, and the winterwear. Our sell-thru's and fall orders have reached whatever our target was for the full season. So we remain very focused. And whenever we got the feedback on our product line and our road show has been very encouraging. So we're very happy with the product engine and the category engine that's working for us, and we'll continue to make our categories very relevant and modern.
I was more looking for footwear versus innerwear and kidswear, what is the growth in percentage and what's the share right now? Some color, like?
Sure. So in the -- this very same call, we had tried to answer this question a little more in detail, and I again repeating that. We have these 4 businesses. Kidswear already crossed INR 200 crore mark very market-leading business, growing in quarter 4 growth is more than 20% in that business. And on a regular basis, this business can grow close to 15%.
We have another big business, which is more than INR 250 crores business, which is footwear, across U.S. Polo, men, women; Flying Machine, we have done a little bit of trial; Tommy, CK have footwear business. Currently, that business has not grown in the short term because of the BIS confusion, and we're not able to bring in, we are not able to import inventory. So there is a short-term issue there, but that business has grown more than 20% if you look at the last 3 years.
And once the BIS confusion gets done and the new policy gets implemented, we will be able to bring in the new inventory and sell it. So that -- if I take a medium-term lens, this business will continue to grow close to that 20%. And then we have the business of womenswear we launched, so overall adjacent categories are more than INR 500 crores. These are at high teen share could become 20% in the medium term, and they're growing more than 15%.
Okay. Some related, you had -- can you share something on the U.S. Polo womenswear and what is the experience you have in that.
See, let me qualify very early days of that business, a couple of seasons only. And very, very early days. We started that business with online first mindset. We want to test it with the young modern consumers on online players. And we saw good traction. We saw a good promise. So now we have started first season a few -- actually weeks, not even a season of in the off-line channel. We added few shop-in-shops. We are now putting it in our flagship store, showing very good promise, good performance, but it's very early days to read into it.
Okay. Sorry, I'm taking more questions. And FM, when do you think will breakeven on EBITDA and...
See, as far as the Flying Machine is concerned, the improvements have just started, and we will need a couple of more seasons to reach a point where we can talk about it. But performance will improve for sure that we are very confident of. Where it will reach a point where on profitability, et cetera, time will tell. Very -- it's premature for me to put a guideline or a day. But we are focused on putting the right input right now. So we are going all out to put the right input behind the brand Flying Machine. .
And Niraj, just to add what Shailesh said, please also note that Flying Machine is our single most brand where it had the significant dependence on online. And of course, that has seen a significant degrowth in this year. So of course, Flying Machine would have had a slightly more than its wallet share compared to all other brands' impact of that. It's all external led.
However, what Shailesh said is we have done everything, whatever is in our control, whether it's new retail identity, new product architecture, pricing, newer stores with new retail identity. So all of that, whatever is in our control, we have made adequate investments and investments behind the team in this year. So however, we are seeing green shoots of our success very early, but we are seeing for sure the improvement and our reducing of our salience over online and driving that business in line with other brands, which is what we want to do through retail format. So that's where is what how I would put it, you should read about Flying Machine.
The next question is from the line of Gautam Rathi from CWC.
Shailesh and team, great performance, one thing which was very...
We can't hear you. Can you please be closer to the handset?
I was just saying a great performance. You guys -- really, really appreciate all the effort you guys have put in. Just wanted to understand this cash flow that we've generated this year, right, we've generated more than INR 200 crores of operating cash flow.
So on that line, is there any further scope for us to work around? And are we -- so the question is, are we at the optimum level in terms of inventory and debtor days? Or do you see is there any further scope for you to improve that number here?
So [ Nishit ] (sic) [ Gautam ], thanks for the question. See, we still believe, of course, the low-hanging fruits of this entire efficient working capital management is in the bag. However, if you ask us as Shailesh and Kulin also mentioned briefly is the entire retail engine and the retail transformation journey over the last 3 years, we have traversed a long way.
Of course, is there significant room for us to kind of even take the channel mix higher? Absolutely, yes. And will that have a positive impact on working capital? Absolutely, yes. So having said that, of course, we have our internal targets far more of fall order in terms of even improving the stock turns even from a current level while of course, we are at probably amongst top quartile or amongst the gold standard companies and having the 4x inventory turns. But can we improve? We believe we can, and there are a lot of initiatives, strategic interventions, which is what we are driving internally.
So cash flow, the way you look at it, yes, there is a room for us to drive even more efficient working capital. But you will need to look at in the line of the fact that there could be times where we need to invest in behind the brands and in the working capital to chase growth, but we will be very, very prudent and you've seen the hygiene over the last years, we will not compromise on any of those parameters going ahead. And as the growth comes back, we see our cash flow even getting better from the current level, which is what we've witnessed in FY '24.
Yes. And so the point out there was that the whole -- so you're saying one of the vectors for you to improve working capital will be the move away from the increasing mix of retail, right, is 1 vector. I'm just trying to also understand the entire exercise that was done with the vector, has all the benefit of that flown through? Or is there a bit of it yet to -- can we see more benefit out there?
The question is, are there some other -- has all the part of the low-hanging fruit come through or is there some bit of it which is still yet to come through this year, apart from just the retail mix shift?
So you rightly said that retail mix improves the debtor. The cash conversion is faster. So that's true. And we have sure aspiration to increase the share of revenue further for all the reasons that we have discussed. Coming to the vector part, there are these transformation needed because we are now already at 4 turns. And now from 4 every 0.1, 0.2 is -- it requires transformation in thought process, working on the merchandise in a new way, doing shorter lead times, et cetera. Coming specific to the vector project, that project is on, and we are very happy with the progress of that.
But I would still say that it's not the end of the gains from that project. I see we are greedy about it, and we see a lot of scope of benefits coming from that in the next couple of years further. So it's not the end of the road. There is definitely opportunity to grow further and improve the stock turns further from that project.
So related to that, Shailesh, when do you see us becoming a debt-free company?
I mean I want to be cautious, but our game plan is that -- let me answer it in a way and probably if you want to take it, we can give a date also. But the point is that, see, the business is throwing a certain amount of cash. We don't -- we have a capital asset-light mindset, we don't have large capital being sort of sucked in through stores or through technology or any of those things -- acquisitions. So their entire cash flow whatever after the working capital need for growing the business wholeheartedly we will pay down the debt. So that's for sure is going to happen and it will happen as we go along.
So today, where we are another 2 to 3 years, probably why not? I mean we could become a debt-free company. The journey is on, depends on the market conditions. So I don't want to say, if markets are tough, it may take longer. If markets are still more positive, it can happen faster. But the journey is on and whether it happens in x years or x plus 1 year, that time will tell. But clearly, that journey is on.
No. No, I fully appreciate that. And one last question was just on the womenswear side. I just visited one of your stores and it looks like a fairly decent amount of space, which you have dedicated and the things that you're trying. So how fast can this become a very relevant category for us? Because it's in your core category, it doesn't have to be adjacent.
So how do you think about that as a vector for growth? Because it is something which -- where you don't need the markets to grow. Just would love to get your thoughts on how you're thinking about that category? Is that going to be a bit more gradual or could there be some surprises out there in terms of growth in that category?
See, where we are today, we are very early stage. So if I have to say a couple of one more season, 2 more season, it will be gradual because we want to be very data-driven and very scientific in our thought process, see the data and grow that. Now the point is wherever we put the line, we will give a full representation. So the store you went to, you would have seen a good representation because unless you offer choice to the women consumer or any consumer, they will not buy. So just sort of a token space in some store won't help. So wherever we go, we will give a wholehearted representation. But we will not expand it very fast, we will do it sensibly. But the day we see that our cities are like -- we can go very aggressively thereafter. .
We've done something similar in footwear. We took time to test it out. We saw different channels. Stride we open in small town, big town, high street. When we saw it was meeting our expectation, now we're putting a lot of money behind it and expanding very rapidly. And same thing will hopefully happen with womenswear. It will take some more time for us to check out everything and then we'll expand.
No. This is good. Thanks a lot, and all the best to you guys.
Thanks a lot.
Due to paucity of time of the management, that will be the last question for the day. I would now like to hand the conference over to the management for closing comments. Over to you, sir.
Thank you, everybody, for joining us on the call today. If any of you have any further questions or any follow-ups, please feel free to reach out to us, and we would be happy to answer them offline. Thank you, and have a good day.
On behalf of Arvind Fashions Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines. Thank you.