Ladies and gentlemen, good day, and welcome to Arvind Fashions Limited Q2 FY 2025 earnings conference call. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing Star, then Zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Ankit Arora, Head of Investor Relations. Thank you, and over to you, sir.
Hello and welcome everyone, and thank you for joining us on Arvind Fashions Limited earnings conference call for the second quarter and half year ended September 30, 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 today the call with Kulin providing his key strategic thoughts on our second quarter's performance. Post that, we will have Shailesh, who will cover the details of business highlights and financial performance. 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. 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.
Thank you, Ankit. A very good afternoon to you all. Thank you for joining us for the Q2 results. We are pleased to share that AFL delivered its highest ever sales and EBITDA, despite the demand environment remaining muted. Our sales grew by 8.5%, led by a healthy 4.6% LTL in our retail channel and around 20% growth in the online channel. This led to an 18% growth in EBITDA to INR 170 crores and delivered more than 110 basis points margin expansion. We continue to stay focused on profitable growth, which is helping us deliver on our balance sheet and cash flow metrics, with overall gross working capital continuing to stay stable and inventory terms improving to more than four times.
One of the key highlights for us over the past few quarters has been the investment into our growth levers and re-energizing all our brands through marquee advertising campaigns. We invested significantly behind most of our brands during the quarter, and this led to new customer acquisition and market share gains. While the wholesale channel witnessed tepid growth, the online channel bounced back with strong growth, and our pivot towards the B2C model is showing good results. With the ongoing festival season and a strong wedding calendar in H2, we remain hopeful that the growth momentum will continue. We will continue to stay focused on our mantra of profitable growth, resulting in further improvement in return on capital employed. I would like to now hand it over to Shailesh Chaturvedi to take us through the specifics and more details about our financial performance.
Thanks, Kulin. I take this opportunity to wish everyone on this call very happy Dhanteras and a very happy Diwali. Friends, with 8.5% growth in revenue and 19% growth in EBITDA, Q2 FY 2025 saw the highest ever quarterly sale, the highest ever quarterly EBITDA, and the highest ever operating PAT for AFL. NSV in Q2 was INR 1,273 crores, backed by accelerating store expansion and healthy retail like-to-like growth of 4.6%. Direct channels, including retail as well as online B2C, reported robust double-digit growth. Q2 saw execution of heightened brand plans with first-of-its-kind collaboration collections with celebs like Orry and His Highness Pacho of Jaipur royal family.
As part of our premiumization drive, U.S. Polo Assn. has engaged with His Highness Pacho for a global tie-up for promotion of theme of polo globally, and creation of a premium collab line here, which has received tremendous consumer response with its unique insights collected from history of Jaipur royal family. While this collab on U.S. Polo Assn. was about nuances of heritage, the other big collab collection with social media sensation, Orry, was done for Flying Machine to further strengthen its appeal with Gen Z consumers, highlighting the new product direction inspired by Korean and Japanese oversized baggy outfits. Presence of Orry in key markets of Delhi and Bangalore in peak season fully supported brand visibility, and Flying Machine got higher media visibility in support of its new Gen Z modern avatar. Both the collab campaigns received tremendous media coverage and helped us register fantastic like-for-like growth.
U.S. Polo Assn. has seen strong momentum with further strengthening of business on its website. Continued rollout of iconic stores, resulting in double-digit growth in both revenue and EBITDA, and with very healthy double-digit like-to-like growth in Q2. A case of strong brands becoming stronger. Flying Machine has also grown handsomely in online space and has further increased its distribution with MBO channel partners. Arrow also saw improved profitability in Q2, backed by visibility through a unique marketing event for its Super Premium 1851 Collection, in partnership with GQ, that showcased brand ambassador Hrithik Roshan, walking down the ramp in a prestigious mega event in Mumbai. Tommy Hilfiger and Calvin Klein have again delivered sterling performances on like-to-like retail growth, overall revenue growth, as well as on profitability.
Overall, Q2 saw a strong momentum in our brands, showcasing immense strength of our powerful casual brand portfolio, poised for higher than industry performance. The quarter had started with good end of season sale in July and August, supported by the fact that we had delayed EOSS in June to June end because of good sell-throughs. September business continued its growth momentum because of early festival calendar, as well as with the positive influence of various marketing investments, resulting in healthy 4.6% like-to-like growth in retail channel in Q2, despite overall muted market sentiments. The quarterly growth of 8.5% benefited from higher investment in advertising, launch of unique collab collection, and a healthy square foot expansion, and higher revenue growth in direct channels with improved channel margins.
We increased advertising spend in Q2 by 50 basis points to support our premiumization and innovation drive in order to fuel growth. Despite this 50 basis point increase in advertising, our EBITDA grew by 19%, with improvement in profitability by 110 basis points. At end of H1, FY 2025, AFL revenue growth stood at 9.2% and EBITDA growth at 19%, with 100 basis points margin expansion. These innovations and higher advertising spend ensured that our growth drivers were on track. We increased retail square foot by 81,000 sq ft in H1, with addition of 56 new stores. The adjacent categories continued to grow faster, with encouraging doubling of business in US Polo women's wear on a small base, with continued growth in kids wear, footwear and innerwear. Premiumization drive and renovation of stores also contributed significantly to growth efforts.
Digital business has grown around 20%, with fantastic growth of 40% in online B2C direct channel, with improved channel margins. The growth in wholesale channels was lower because of muted market conditions, but mainly due to continuous pruning down of long tail, low margin distribution points in wholesale network. The resultant efficiencies are seen in the rapid growth of EBITDA. Our journey on improvements in GP continues. There was a COGS efficiency in Q2 of nearly 50 basis points, but it was offset by change in channel mix. For example, higher revenue mix of online business in Q2, resulting in stable GP at 50.4%. But with higher channel margins and overall cost efficiencies on supply chain, manpower costs, there was a healthy growth in EBITDA by 19%.
More than 110 basis points increase despite higher marketing spend of nearly 50 basis points. We continue to keep tight control on balance sheet items. Inventory levels have remained almost INR 100 crore lower than H1, and yet the business has grown at 9.2%, indicating faster rotation of inventory. Stock turns have stayed healthy at more than 4 turns. While inventory went down by 4 days, the receivables went up slightly due to the fact that Q2 was the billing quarter for festival season. But overall, GWC stayed stable at around 140 days, and N WC stable at 60 days, resulting in healthy reduction in borrowing and movement of ROCE towards 20% mark. Diwali business has picked up compared to last year, where it was impacted by the World Cup cricket, and now we are seeing good, healthy, like-to-like growth.
We will keenly wait and watch for the remaining two months ahead of Q3, with large business expected from wedding and winter seasons. We remain very committed to decisive focus on energizing our strong brands and to their profitable growth journey, thereby delivering improved ROCE. We remain optimistic that our consumers will continue to work in favor of our market leading brands in the second half of the financial year.
Thanks, Shailesh. Sandra, we can open it now for question and answer session.
Okay, sir. Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles... The first question is from the line of Priyank Chheda from Vallum Capital. Please go ahead.
Yeah, hi, team, congratulations for great performance. Just a clarification on the Tommy CK, when Sanjeev mentioned that it witnessed a strong LFL growth. While if I have to just compare on the PNL, non-controlling interest profits, which suggests that Tommy CK would have not grown in a strong double digits or single digits, even it's, the profits on the non-controlling interest is flat. So just help me with this, how the brand has actually performed?
Hi, Priyank. As I said earlier in the call, we saw another sterling performance in this quarter from the PVH brands, Tommy Hilfiger and Calvin Klein. The minority interest that you're referring to in the PNL, it also includes another brand of our Flying Machine, and this is the year of investment in Flying Machine, and we have increased our advertising spend significantly with this Orry initiative, and that's what you are reading in terms of the minority interest.
Got it. Got it. Very clear. And, on the wholesale business, while in whole of FY 2024, it was kind of a flat performance that we saw. And now, you did mention that you have reduced a tail in the LFR channel. So just help us, how should we see this, when it comes to the full year performance? And I also reckon that there is FM and Arrow which is undergoing corrections in this. So how should we look, wholesale business, for the full year?
See, Priyank, let me put it into two parts. One is the growth in other channels and also then the wholesale part. You know, our emphasis is on direct channels, and if you look at retail, has grown double digits, and the channel margin has grown even at a higher pace. If you look at online, the growth is close to 20%, and B2C has grown close to 40%, and the channel margins have also improved there. So our emphasis has been on direct channels, and wholesale channels have not grown in comparison to the direct channels because our emphasis is to push the channel where we directly control the experience with the consumers, and we do all the assortment and marketing and pricing, everything.
Now, this quarter, the online business has also grown faster than normal because the power event last year in online world was in early October, but it happened in September, so we got little higher growth than normal. While the business is growing really well, but we got even further growth in online business because of the preponement of the power event. Now, if you look at this growth in direct channel, the wholesale revenue as a percentage looks lower. Its business has been flat. Markets have been muted, and we all know that, you know, and parallelly, we've been continuously, you know, looking at our mantra of profitable growth, and we've been pruning, you know, loss-making tail doors in all channels, including in wholesale channel, especially in department store.
You know, we've done, you know, cutting down of the tail, especially in department store, and the benefit of that in terms of saving on stock, increased stock turns, lower manpower cost, that's flowing into our channel margin and is showing in terms of, you know, higher EBITDA. So I can say that while department store we have pruned down, the growth has been less, but our growth in channel margin on department store has been very, very healthy. So we are going for the profitable growth, and I think the trend should continue in the short term. The impact of the power event may not happen going forward, but overall, you know, our direct channels will continue to grow faster than the wholesale channels.
Perfect. That's clear. And just last question: so, Sanjeev, overall, we were looking out for a retail, you know, sq ft addition of 15%. Now, you know, for the first half, the like-to-like growth and the market demand has remained subdued. In such subdued scenario, do we alter our any plans with respect to our sq ft addition and focusing more on the kind of online, B2B, B2C? Any changes in the overall plan that you were thinking earlier?
No. See, if I step back and look at our overall growth drivers, we have put lot more energy in buildup of the growth, including in the square foot expansion. We put more feet on the ground. Our formats for store expansions are ready. Our innovation on formats like Club A, Stride, large store, U.S. Polo, iconic stores are all ready. So actually, we are further investing, and we are putting more fuel in our, you know, growth engine. Be it like-to-like growth, we've done 4.6% in very tough market conditions, and lot of our marketing efforts and, you know, the collection and the rigor on retail is helping us there. We are seeing accelerated square foot expansion, Priyank, so we will only add more square foot.
Even if you look at this year, first half, we opened net addition of 81,000 sq ft, and we are committed to this 15% figure, you know, every year on sq ft expansion. And this will only accelerate because we put lot more fuel. We have lot more people, lot more structure, lot more processes at the back end to be able to grow the sq ft expansion faster. So there's no change, Priyank. In fact, we remain very, very strong behind sq ft expansion, behind like-to-like growth, behind growth of our registered category, premiumization, renovation, growth of digital channel, which has done so well in this quarter. So Priyank, we are committed to the growth drivers that we've been guiding, and we'll continue to put more fuel behind that. There is no change.
Perfect. All the best and best wishes, best wishes for the festival. Thank you.
Thank you, Priyank. Wish you all the best.
Thank you very much. Our next question is from the line of Palash Kawale from Nuvama Wealth. Please go ahead.
Hi. Thank you for the opportunity, and, congratulations team on the good set of results. So my first question would be again on distribution channels. So could you just explain in detail the seasonality in this channel for Arvind Fashions?
You know, we have a business which is very seasonal, and if you look at our channel mix, if you look at retail, in the first half, the contribution of retail has been close to 40 to 41%. If I look at wholesale channel, it'll be around 20%, and online has been slightly above 25%. So that's, you know, if I look at annual contribution and the direct channel, which is the online B2C and the retail, are growing faster because that's where we are putting a lot more energy, and we see a rationale behind that because we get to influence the consumer decision much more tightly and, you know, in that, and that's a long-term strategy.
Also, the margin profile, ROC profile, because everything is about ROC, you know, ROC or mark-up. So that's a broad picture. Now, if I break down the business into quarter to quarter, we have, you know, two seasons, spring, summer, and fall holiday. Now, each of the season in the first part of the season get a little higher wholesale billing because we supply goods to the market. So in the Feb, March, April month, you'll see a lot more wholesale billing, whether it's to the department store channel or to the MBO channel, also to the B2B online. And in the second half of the season, so which will be in spring, summer, will be more like April, May, June, you'll see more retail contribution and more B2C online contribution.
So the first, in a way to really see, January-March quarter tends to be a little more wholesale quarter. And then same way, the July, August, September also sees a little more wholesale billing. Whereas the April-June quarter and the October to December quarter tends to be more retail-driven. That's our seasonality and business, Palash.
Yeah. Thank you for the detailed answer, sir. So I happened to visit one of the MBOs where Flying Machine products were selling, and could find the change in offerings and the products I found were very trendy and eye-catching. So kudos to the team. So, what kind of improvements have you seen in the demand or brand metrics? If you could please shed some light on that?
Thanks, Palash, for visiting our store and spending time on seeing all the hard work that Flying Machine and team has done on improving its appeal to a more sort of a Gen Z, oversize, Japanese, Korean-inspired brand. We've done a lot of work from the change of logo, to change of brand appeal, to the focus on consumer, which are more Gen Z plus millennials. It's taken us time, but now we are seeing the green shoot, Palash, on that. If I look at, you know, the channels which reflect that improvement immediately are the channel like online, because a lot of young Gen Z, the first channel tends to be online and also in MBO. Because MBO channel as an entrepreneur takes risks faster and in a very competitive environment, you see that the brand is doing well.
In both the channels, online as well as on, MBO channel, we have seen really good improvement in Flying Machine. I can say that in the last six months, so if I talk about quarter one and quarter two of this financial year, the online growth in FM has been more than 50%. Now, and this is a very important channel which we believe will be 30% of our revenue in Flying Machine. And this kind of, you know, this whole oversized, you know, tees with trends and, what the Orry collection has been, you know, the jorts that we sell, we sell a lot more on online, so we're seeing good traction. The channel margins also have improved for Flying Machine there. Also, MBO with this new appeal, and there is a gap in the market.
There are not too many, you know, brands like this in the offline world or B2C. Yes, there are some brands, but the traditional brands don't have this kind of revenue, and I think the channel is realizing, MBO channel, that they need brand like that, and FM can take a market-leading position in that. So the MBOs also, we've been able to grow the counters with, Flying Machine. I must caution here that it's very early days. There's still a lot of investment required behind refurbishing shop in shop, new visual merchandising standards, redoing the MBO.
So we are very early stage of the journey, but if I look back, we are very pleased with the progress that Flying Machine has made recently and the green shoot that we are seeing and what you saw at the counter, and we believe in it, and we'll continue to invest behind our own brand, Flying Machine, going forward.
Yeah. Thank you, sir, for your detailed answer. That's it from my side.
Thank you.
Happy Diwali, and all the best for the upcoming season. Thank you.
Happy Diwali to you, Palash.
Thank you very much. The next question is from the line of Tejas Shah from Avendus Spark Institutional Equities. Please go ahead.
Hi, team. Thanks for the opportunity and congrats on good set of numbers in difficult times. Just wanted to know, you just made a statement that we are going B2C to control the better experience, customers' brand experience. Just wanted to know, is this referring to B2— the, the wholesale is actually referring to departmental stores which are national chain, or we are referring to small mom-and-pop stores, wholesale businesses here?
See , Tejash, we, when we use the word direct channel, these are the channels where we directly interact with the end consumer. So basically, two channels are predominantly B2C or direct channel in our system. One is the retail, our EBOs, whether it's our own CoCo store or, in our case, largely franchisee-run store, where we directly interact with the consumers on a day-to-day basis. We see the white of the eye of the consumer on a daily basis. So the EBO is the one channel which is around 41% of our revenue mix, and second is the online B2C, where, you know, there are two methods here. One is we sell it to, let's say, a Myntra, and then Myntra on its own sells to the consumer at its own pricing and its own cataloging.
That's a wholesale model of online. But what we are referring here is a direct model where, what is also known as a marketplace model, which is seen in, like, Tmall in China, et cetera, where we keep the assortment of inventory. We decide what should be the assortment, we decide the pricing, we decide the discounting, we do the cataloging, and we do all the marketing, performance marketing, and key marketing efforts to, you know, influence the consumer. So we typically are talking about, retail channels, EBOs, and we are talking about online B2C or this marketplace model.
Got it. Right. Yeah. And just a follow-up: so out of the three objectives here, the way I understand, one is the brand positioning or the brand hello or experience, followed by more full price sale, and third is obviously the better ability to forecast demand or the trends based on your direct exposure to customers. Which of these three problem statements or there are more, which we are actually able to solve better by going direct?
These are two big issues or problems that we are solving or driving. One is the inventory, which is very important, and the sell-throughs of inventory. Second is the ROCE, because ROCEs are North Star. We want to do everything to maximize our ROCE in this company and cash generation. So as far as the inventory is concerned, that we believe that we have all the scientific tools, we have knowledge of, better knowledge of, fashion trends globally, and we have all the analytical abilities in the company to decide what assortment to prepare. And probably, hopefully, we do a better job than our channel partners will be able to do.
So we believe that in direct channels, when we take control of the inventory, we are able to drive the sell-throughs better, or, in a retail language, we try to say sales per square foot, or in online equivalent of that, that, you know, for every visit of the consumer or click, how much more can we sell? So, once we take charge of the inventory and the assortment, we believe, that's a better, you know, outcome for us, and we want to push the full price sell-through aggressively and through more scientific tools available to the company. That's one aspect of going direct. Second part also is the ROCE part. So what happens in a direct model, we have seen the movement of stock is faster, so our stock turns are higher. Also, the cash generation is better.
So in retail, for example, we send the goods on SOR, and every day, whatever is sold is next day transferred to our bank. So our cash conversion cycle is much faster in the direct model. Same thing in the online. Also, the cash conversion cycle is much faster. So we get better ROCE because our efficiency on stock is better, and also our cash conversion is much faster. So that's why we're going direct, and also we get the consumer database. We have a pulse of what consumer is, you know, expecting, what you use the word, shopping experience. So that's true. And then inventory sell-through, stock turns and also the cash conversion, all leading to better ROCE in this channel. That is the mantra.
Thanks. Thanks for very detailed answer and last one, if I may. You spoke about 15% footprint expansion. What is the nature of this? Will you be adding new territories or going deeper in markets or the store size because you are adding subcategories also in existing brands? So will it be expansion in store sizes, or will you be adding more locations in new markets?
See, this 15% figure is an ambitious target, and when we take a target like that, that we'll have to talk about close to one and a half lakh sq ft every year. So very aggressive and will require all efforts. It's not just one effort. So couple of things will happen that, you know, with premiumization efforts, addition of adjacent category, we need bigger space. Like, for example, U.S. Polo, where the adjacent categories are, you know, 30% of the business, whereas at a family level, we are 20%. So U.S. Polo needs more sq ft, and we've opened almost 10, these marquee stores in all the key high streets of India, from Banjara Hills to Jayanagar, Bangalore, to Indiranagar, Bangalore, to Goa to, you know, Jodhpur.
We are opening this large 4,000 sq ft building, ground plus two, where womenswear is there, kidswear is there, innerwear is there, footwear is there. So that's one large format. Second, thing also is that, and that's true for, you know, Arrow also, because Arrow has adjacent category going off, Flying Machine. So in all our brands, whether Tommy Hilfiger, Calvin Klein, we're adding bigger stores, so that's one part of it. Second is that if you look at our square foot, we are at close to 1.15 million sq ft, and we believe we should be in the near term, should be closer to 2 million, and there are competitors who are at that level.
We see opportunity to, you know, expand rapidly, because in some sense, we are slightly subscale, and there is an opportunity to increase the distribution in many key high streets and mall for all our brands, especially for Arrow and Flying Machine. We see opportunity without taking too much of risk to expand square footage. Also, we are seeing a lot of energy in the suburb of the big metro. It's not just a tier three, tier four expansion.
We are seeing that in a Bangalore city and then the population now going beyond 1.5 crore and tomorrow to 2 crores, or the same thing for Hyderabad, same thing for Chennai, where the metros are becoming mega metros, and we see opportunity to open 15-20 stores in all these big cities where consumption patterns are more, there's no risk. And also the smaller tier, we will expand, and we'll expand with the short brand like US Polo. So we see opportunity in small tier, very large opportunity in the suburbs of the big cities, the satellite towns of the big cities. We see scope to expand adjacent categories to larger store, and also we have format renovation, so format innovation. So we did outlet format, which is a 4,000 sq ft.
We opened that square footage. Club A, which is a full price, very premium. We opened, you know, one store in Surat recently in addition to the Bangalore, so that we already have. We have a accessory footwear handbag concept called Stride that we are expanding. We have a lot of new innovative formats that will also get to expand. One unique thing is that given the entrepreneurial energy in India, we are getting a lot of franchisee interest, so most of these are very asset-light FoFo model expansion. You know, the partners also bring a lot of value add in terms of negotiation or relationship with the landlord, et cetera. Most of our expansion is in FoFo model.
We are expanding in all direction, and we believe that, you know, we could add lot, many sq ft from the current 1.15 million sq ft that we have today.
Thank you, very clear. Best of luck for coming quarters and Diwali wishes to you and the team.
Thanks, Tejas. Happy Diwali!
Thank you very much. Before we take the next question, we would like to remind participants that you may press star and one to ask a question. The next question is from the line of Aniket Shah from RK Advisory. Please go ahead.
Hi, team. Congratulations on great set of numbers. So sir, my first question is, regarding the FoFo route. Just now also you have, told that we are opening these stores through the FoFo route. If I'm not mistaken, in the last quarter, we guided that we will be shifting to the CoCo model. So just need to understand why we are going through FoFo route again, if you can throw some light on that.
Mr. Shah, I mean, there's some confusion, but because for many years we are very focused on FoFo model. Our whole expansion is very asset-light FoFo. So I don't know when you picked up, sir, about this CoCo expansion. We don't have CoCo expansion now. Our entire expansion is largely FoFo, except one brand, which maybe you would have picked up in Tommy Hilfiger. That's a business which is very high on cash generation. The business sits on cash, so one of the way to improve our ROCE at AFL is to deploy that capital while the dividend is paid out regularly, but there is still a lot more money available to take over stores.
So in that one particular brand, that one particular business, because we have cash surplus in the bank, so we open now close to 60 stores on a CoCo model in Tommy, because that's, the margin there are extremely good, and that really helps the ROCE of the business. But other than that, more, that's more as a capital deployment sort of a strategy. Other than that, our entire emphasis is on the FoFo model, and it has always been like that. I don't know when you picked up something differently from us.
Okay, sir. So my next question will be, like, how we are enhancing our online consumer experience. So just compared to our wholesale outlet, especially like considering our wholesale contribution has been decreased to 33%, while online and other mix have increased to 30% in Q2.
See, one philosophical view is that we want to go where the consumers are, and we want to sort of follow where the consumers are. And a lot of young consumers, Gen Z, millennials, for their life, online is very important, both from the discovery as well as from shopping point of view, increasingly. And we are very committed. We are a market leader in that business. We invested ahead of the time. We have very large digital team to manage website, to manage analytics, to manage marketplace, to manage wholesale business, to key partners. We are a leader there. So, you know, we have done multiple things. We have invested aggressively, so more than INR 1,000 crore business for our company, profitable business. So we have a large investment done, and not now, many, many years back.
We have right from only linkages of our store, where the store inventory gets listed on the website, like, let's say, Amazon or Myntra, and your consumer traffic sees the inventory available in our store, and we sell full price business from the store backend. To the marketplace model, which I alluded to earlier, where we manage the inventory, we decide the assortment, and we are really taking bold call on increasing the inventory there, but we have very good stock turn, so that's not a risk. And we assort the goods right for that. We look at the analytics behind the assortment. We have a lot of analytical tools and the talent to manage the analytics in the company.
We sell, we do cataloging, we are available in all the key portals, websites of India, from Myntra to Amazon to Flipkart to Ajio. To all the, you name it, and we are the leader in the apparel space. Every possible thing we have a team to do our website, U.S. Polo. We have our own website, and that business is really growing well. It's getting more and more established. So, I mean, it's a wholehearted three sixty degree investment behind online business because we believe in that business, and we believe that as consumers go more online, we at AFL should also be with the consumers.
Okay, sir. Thank you. That's all from my side.
Thank you very much. The next question is from the line of Dheeraj Mistry from Antique. Please go ahead.
Yeah. Hi, good afternoon, sir, and, congrats on very good set of numbers. So, sir, my first question is regarding CapEx and the capital allocation. So what kind of CapEx, sir? So, I understand that last part of Arrow and other Flying Machine would be done through FoFo model, but there are some element of CoCo expansion as well as that. So, what kind of CapEx we would be doing over the next two to three years period? And how do we see that, the free cash flow generation post that, the utilization of that credit, we would be doing for the more of debt payment, or, we would be rewarding shareholders with dividend?
Hi, Dheeraj. We have guided in the past that our CapEx will be in the range of 90-100 crores. And, as Shailesh mentioned earlier in the call, we always have an asset-light model, so most of our expansion happens through CoCo model. Of course, we have certain maintenance CapEx, which we have to continuously do towards IT and some MBO assets. As far as your question on the utilization of the surplus funds, I think our first priority will always be to pay down our debt. And then, you know, so that's the objective over the next couple of years as of now.
See, in terms of, just to add to what Dheeraj said, that in terms of deployment of the capital, see, we are a growing company. In first half, we have grown close to 10%, and we use our capital to grow the business, and that's the first principle, that whatever capital available, we want to use it for the growth fund. And second is that after that, we want to pay down the debt, and you've been seeing our debt is coming down, and that those two strategy of funding the growth and then secondly, paying down the debt. These are the two main uses of the funds available.
Got it. And sir, when do we expect that our company will become debt-free?
See, the way the business is generating cash and, you know, we are very confident that, you know, in our asset-light model for a certain growth that we have, the capital needs are not that large. So we will be obviously be able to fund the growth, and we will hopefully have enough money left to draw down our debt levels. And at the current level of the net debt that we have, I, I think in two to three years, surely in three years, you know, we will sort of see a point where we'll be either zero debt or nearly zero debt company. And, you know, and our focus is on the current five brands. We want to grow those brands to their potential.
And then, after that growth of these five marquee brands, we will pay down the debt. Maybe in three years, two to three years, we should be in that situation.
Got it. And, second, in terms of our profitability guidance, where, particularly for two brands, Arrow and Flying Machine, where our aspiration was to bring improved profitability of Arrow and, let's say, mid-single digit profitability for Flying Machine. How are we in that terms, in that line?
I'll break down into two parts, at the AFL level and then at Arrow and Flying Machine level. Our guidance is that we want to improve our EBITDA margin by a 100 basis point every year. We've been doing better than that, but we see still room available for us in the next three years to grow. We are at a 13.3% EBITDA in the current quarter, when we are at that zone of 13% to 13.5% EBITDA, we should be able to grow by almost like, you know, 100 basis point every year, 300 basis point in three years. That's the guidance at an AFL level, and that guidance is also assuming a higher EBITDA growth in Arrow and Flying Machine, which are at a lower profit trajectory currently.
And we believe that those brands could actually increase their EBITDA by 200 basis point and not just by 100 basis point. Now, that's the stated objective, and we are very confident, and we are very committed that, these two brands will, grow. Because if you look at our portfolio, Tommy Hilfiger has a certain, high profitability. U.S. Polo also is a double digit, and it has very good momentum. And, you know, if you look at quarter one and quarter two, both the quarters, U.S. Polo sales and EBITDA has grown in double digits, so it's got a very good momentum and large scale of 2,000 crore, nearly 2,000 crore. It will continue to grow very, very rapidly, both sales and profitability in the near term. Then what leaves is the Arrow and Flying Machine.
We believe both the brands need some rejig, and we have done that, and I've explained that in the previous calls, what we're doing with Arrow to make it a more cool. Flying Machine, you've just seen the Orry initiative, what we are doing, and we're seeing the green shoot of that. So from the low single-digit EBITDA that we see, we want to see them in the mid-single-digit EBITDA, some part of efficiency, higher growth, better sell-throughs. I think also the scale, because both the brands are very subscale in terms of number of stores, in terms of size of the business, you know, they are, they are, you know, between INR 500-700 crore, and we need to take them to 1,000 crore, and we are committed to that journey.
Arrow is slightly ahead in that journey from Flying Machine, and we believe that Arrow will hit thousand crores sooner, and will have a certain EBITDA profile, which is in mid-single digit and hopefully higher than that. And FM will follow, you know, that trajectory in scale, you know, build-up and efficiency build-up, so that both the brands should grow their EBITDA by at least 200 basis points per year. And we are committed, we are working very hard towards that.
Got it. Got it. And, sir, in terms of, brand-wise growth, that, now U.S. Polo has crossed 2,000 crore a NSV. Also, the Flying Machine, this, PVH brand, Tommy and CK is then, the base is becoming high. Can we expect that they would continue to grow much faster, compared to Arrow and Flying Machine, or the growth would now be largely led by Arrow and Flying Machine going ahead?
See, I'll break down into two parts. One for Tommy, CK, and U.S. Polo, and second is for the Arrow and Flying Machine. We believe we are fantastic growth engine. Both, all of them are quite sort of warm and revved up. And there's no reason why Tommy and CK should not grow. I see Tommy becoming a thousand crore plus, first international premium brand to reach that mark. It's growing really well in last three years. If you see post-COVID, the growth has been fantastic in Tommy Hilfiger and Calvin Klein. So I don't see why, you know, they will not grow. And U.S. Polo has such fantastic momentum right now that the energy is quite palpable in a way.
Our like-to-like growth, all the growth engine, very like-to-like growth, record expansion, growth of adjacent categories, premiumization, renovation, and digitalization, all are working for these three marquee market-leading brands. So they should continue to grow at our guidance of 12% to 15%. Markets are playing muted, but as the market improve and as the like-to-like, you know, improves little more, I think all these three brands, which are market leaders, will continue to grow. Probably sometimes we've seen in our career that the stronger brands grow faster actually at times, so they benefit. Market shares are not that high in India for the big brands, so it's very fragmented industry, and there's no reason why these three brands can't grow at the guidance that we have given them, 10% to 15%, as the market improve.
That's the part about Tommy, CK, Tommy Hilfiger, Calvin Klein and U.S. Polo. Coming to Arrow and Flying Machine, we believe they are subscale and there are opportunities to open more stores. Some of the competitors have higher number of stores, and they should grow faster than the other three brands that I mentioned. So while the other three brands will also grow in double digit as the market improve, but the Arrow and Flying Machine will grow faster. And, you know, it's very important to grow at a faster pace to reach the profitability metrics that we're looking at. And scale leverage will also be important to make these brands adequately profitable. So I see all brands will have growth path, but Arrow and Flying Machine should grow faster.
Got it. Thank you, that's it from my side. Thank you very much.
Thank you, Dheeraj.
Thank you very much. The next question is from the line of Devanshu Bansal from Emkay Global. Please go ahead.
Hi. Yes, thanks for taking my question and congratulations on a very good quarter. So I wanted to understand, you've delivered about 4.5% retail LTL in Q2. So just, we are hearing varied commentary across players where they're indicating September was really good, July, August were bad. So if you could just talk about the performance for you across the months in Q2, and also if you could highlight the festive trends in Q3 so far.
So if you really see my commentary, I mentioned that, you know, we started with July, August with growth in the EOSS. See what happened is, look at Spring/Summer, our sell-throughs were better, despite markets being very soft. So we delayed the EOSS to end June. So all the entire energy of EOSS we got in July. So we got good growth in July and early August, because the EOSS business was good, and we grew quite well in like-to-like in those months. After that, we've seen growth in September because the season was preponed this time and Diwali day is earlier. Also, the online power events were earlier, so a lot of consumers were looking at shopping, shopping was in their mind.
I also see that our rigor on retail, the way we have launched the new season, the quality of visual merchandising, very scientific assortment of our merchandise, quality of in-store brands. We, you know, that we've been working very, very hard to improve our retail shopping experience, both online and offline, and that's really helping us to grow, you know, like-to-like growth. As the season came in for also Pujo business in East India, we did good numbers, and then the Diwali numbers have started. We had a good 4.6% like-to-like growth.
Also, like I said in my opening commentary, that we've spent a lot of money on these marketing events with, you know, Maharaja Pacho of Jaipur for U.S. Polo Assn., with Hrithik Roshan on Arrow and on, or with Flying Machine. So that also is keeping our brands very salient. And that we've also increased our advertising spend in this quarter by 50 basis points. So all that is really helping to grow the business at 4.6%, you know, very close to our guidance of around 5%. So we've done a lot of things, and the execution, I'm quite pleased with the quality of execution of our team, and that's why we are at 4.6% like- to- like.
Very encouraging, sir. Sir, any qualitative comments on Pujo, et cetera? Are the trends better versus what we have delivered ?
Pujo was good. Also, Diwali business has picked up. We are seeing good, healthy like-to-like growth. But still, I would say, you know, Devanshu, that it's still early days in the quarter. We have really two big months ahead, and we have festival calendar, we have winter season. So let's wait and watch. The current festive demand has been good, but let's wait and watch and see how, you know, the remaining sixty-plus days pan out of this quarter.
Understood, sir. Understood. Last question, so you have mentioned about improvement in channel margins, right? Across all channels. So if you could just... I know you mentioned in separate comments during the call, if you could just help me put across retail, online, and wholesale, what are the key initiatives that we have taken to sort of help us drive margin gains across channels?
First of all, there is a good channel margin improvement across the channels, across the brand. So, a large part of our 110 basis points improvement in EBITDA comes from higher channel margin. That's also due to, you see, at the back of, you know, our costs improved by 50 basis points, so that's helping the channel margin. Also there is a growth, and that growth is bringing, when you have a 4.6% like-to-like, it gives you better efficiency on your fixed in the stores, et cetera. So that's also helping because we have a good growth, we have a good like-to-like growth, and we have almost 50 basis points of improvement, and that's sort of flowing into higher channel margin.
Coming to specific to the channel, expenses, we've seen improvement in, manpower costs in some channels like Department Stores. So where we've pulled down the tail, the inefficiency has come down there. We also looked at a lot of supply chain cost improvements. We looked at margin structure with some of the partners. So we've done, you know, many things in this quarter to, you know, change that, efficiency in expenses and the cost control, and that's really working well, and that's also flowing into channel margin.
Understood. Lastly, sir, this EOSS, which majorly for this year it was in Q2. Last year also, was it in Q2, or there was that was distributed between Q1 and Q2 both?
If I look at June to June, this June, we had fewer EOSS days than we had in June 2023.
Okay, understood.
We have a lot more EOSS business in July this year compared to, we had seen in July 2023.
This margin improvement is despite higher EOSS business in this quarter, right? So that's a-
Yeah. So, you know, the impact of that EOSS, you know, typically in the discounting, but our sell-throughs are good, so we've been very tight. So we made sure that our discounting is under check, and it didn't have a material impact on our GP. So, you know, a lot of, you know, the cost efficiency has gone down into EBITDA improvement. [audio distortion]
Understood, sir. Thank you for taking my question.
Thank you very much. The next question is from the line of Rajiv Bharti from Nuvama. Please go ahead.
Yeah, good afternoon, sir. Thanks for the opportunity. Sir, I was, since your retail business has gone up YOY, and you're mentioned that on the online side also B2C has gone up, I wonder why the gross margin has not increased, and because what we are hearing from some of the competitors are that they have seen gross margin improvement on a YOY basis, and even-
So, you know, Rajiv, if I look at GP as two parts, one is the channel mix impact. Every quarter you see based on the channel mix, the GP moves from, you know, close to 50% to close to 55% based on the channel mix. Now, in this quarter, other is the efficiency that, you know, what you do on your cost or on your discounting or on your, you know, channel mix. So if I talk about first efficiency, even in this quarter while the number looks flat at 60.4%, there is an improvement. I mentioned just now that our discounting is under check, and also there is almost fifty basis point increase in COGS, which actually should deliver a higher COGS fundamentally at the operating level by fifty, sixty basis point.
But, you know, we've seen a channel mix change here, because, for example, online B2B, that business, overall online business, has grown faster than the other channel, and typically that business has a lower GP. While it has very good, channel margin, and it has very good EBITDA, but at a GP to GP level, that business tends to have a lower GP. So that share has gone up, in this quarter. So because of that, GP, there's a compensatory factors here, that channel mix, because of the certain channel with lower GP growing faster, have compensated or taken away the gain that we saw from discount control and for fifty odd basis point improvement in the COGS, that efficiency on the COGS. But all that has flown into the channel margin, Rajiv.
If you really look at this whole 100 and 10 basis point improvement in EBITDA, it's also flowing from COGS efficiency, discount control, and this you can look at channel mix as one way, but all the channels have improved their margin in this quarter, and all that is flowing into the EBITDA. I think should look at improvement in channel margin, improvement in EBITDA and COGS improvement, just that there's a compensatory factor of channel mix.
Sure. The other part is this, 81,000 sq ft addition on the net basis. In terms of store count, what is the routine?
See, today, at the end of H1, we are 954 store count, and we opened 27 new stores in this quarter. You know, in our business, Rajiv, we are focusing a lot more on square foot expansion because we are cutting down a lot of stores which are small, less profitable, less relevant in the modern time. So our closure tends to be a high number because we are cutting down a lot of these small stores which are losing relevance. But we are opening a lot of large new stores, which net-net, we add a lot of square footage. So in Q2 also, our net square foot addition is 36,000 sq ft, and total for H1 is 81,000 sq ft.
I mean, it's more than what we had opened in the whole of last year, and we opened that much sq ft in the first half. And like I said earlier in the call, we put a lot of muscle for store expansion, what is known in the industry as BD, business development. And we have more number of people, our formats are ready. So that engine is now accelerating, and we expect that this accelerated sq ft expansion will continue in the times to come. And we are committed to a 15% figure, which will be more like close to 100, 1.5 lakh sq ft.
Store, if I take the same number of stores, it could be one fifty, but the store count could be less or more, but it's the sq ft expansion will be close to 1.5 sq ft. We already opened 81,000 sq ft in the first half of the year. The rate and the pace is accelerating.
So I hear you. I'm very happy to see. Just that versus that 27 is because it's a gross number, and extra 57 is the gross number for H1. What is the net number? Because I somehow feel that, you know, your incremental stores are, what, 3,000-plus sq ft now versus, like, 1,100 sq ft historically.
I think the number, Raj, that I want to say is that the 36,000 sq ft is a net addition in Q2, and 81,000 sq ft is the next addition in H1.
Rajiv, what you just said, you are absolutely right. You know, what Shailesh also mentioned is, you know, we are closing down smaller sized stores and opening slightly larger sized stores. Of course, in H1, as Shailesh spoke about in his commentary in answer to one of the earlier participants, that we are opening large marquee stores of U.S. Polo, like, say, Banjara Hills or Jayanagar, Indiranagar, Goa, Jodhpur. All of that are significantly marquee ground plus two, you know, buildings with full presence of U.S. Polo, all the categories. That's also having an impact on this 81,000 is how one should read this data.
You know, I must also say that 2-3% of our distribution we always close on a regular basis because, you know, the some part of our distribution becomes less relevant or new mall takes away from old mall, some high street lose to another mall. So it's a very dynamic situation. So I think the main factor is how much net sq ft we've added, and we've added 81,000 sq ft in H1, and we are, you know, accelerating that sq ft addition, and we should hit close to our target of 1.5 lakh sq ft in this year.
Sure. So one last bit. With regard to the first question, which was asked, so the tax number, which you have on in your, let's say, the consensus number for six months, for the last couple of years, the tax is largely attributed to PVH, right? And I, if I see, let's say, total tax of six months this year versus last year, it's grown by 4%. Now, this is growing under, let's say, the 9% growth for the entire company in the say, first half. So PVH portfolio, because you mentioned that it is growing, let's say, at par with or probably better than the company level average, this 4% growth looks on the tax element, looks lower. I mean, which was the, I mean, the other participant asked from the minority interest end. Can you comment on that?
Sure, Rajiv. Ankit here. So couple of clarifications. One is H1 to H1. When you are comparing, you just need to look at it because we received dividend from that subsidiary in the last two years, which is 2024, and now 2025. So there is a component of business income coming from that, and that's also impacting the tax outgo. Having said that, PVH subsidiary, of course, continues to kind of perform well for tax. All of that largely is coming on account of it. And then on the other side of it, we are having, of course, the brought forward losses on which we are getting a tax shelter.
And as and when we continue to kind of generate profits, and which is what we are now doing and accelerating that pace, you will see our overall from a cash flow standpoint, the tax outgo marginal on account of coming in from that, except the non-PVH subsidiary part of the business.
No, Ankit, that's fine, but just that the absolute tax element was INR 49 crore. The dividend was INR 49 crore last year, INR 50 crore this year. So that incremental number has not changed. So the, the, if the total is basically in the same ballpark, the tax element should be negative. I mean, I, I'll take it offline, but the 4% number is, it's a 2 off from the aggregate number.
Sure. We can connect offline, and I can explain the mathematics on that. No problem.
Thanks.
Thank you.
Thank you very much. As there are no further questions, I would now like to hand the conference over to Mr. Ankit Arora for closing comments.
Thank you, everybody, for joining us on the call today. If any of you have any further questions, feel free to reach out to me, and I would be happy to answer them offline. Wishing all of you a very happy Diwali and prosperous year ahead. Thank you so much.
Thank you so much. On behalf of Arvind Fashions Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.