Thank you, ma'am. Good day and welcome to Arvind Fashions Ltd Q1 FY 2026 Earnings Conference Call. As a reminder, all participants' lines will be in listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during this 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 over the conference to Mr. Ankit Arora, Head of Investor Relations. Thank you, and over to you, sir.
Thanks, Pari. Hello, welcome everyone, and thank you for joining us on Arvind Fashions Ltd Earnings Conference Call for the first quarter ended June 30th, 2025. I am 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 set forth in the 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 first quarter's performance. After that, we will have Shailesh, who will cover the details of 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 disclosed on this call today may be forward-looking in nature and must be viewed in conjunction with risks and uncertainties we face. A detailed statement of these risks is available in this quarter's earnings presentation. The company does not undertake to update these forward-looking statements publicly. With that said, I would now turn the call over to Kulin to share his views. Thank you, and over to you, Kulin.
Thanks, Ankit. A very good afternoon to you all. Thank you for joining us for the Q1 results. I would first like to talk about the change of leadership at Arvind Fashions , which we announced a couple of weeks ago. As part of the succession planning of the organization, we will have Amisha Jain join us as the company's new MD and CEO, effective August 13, 2025. Amisha is a seasoned leader with over 25 years of experience across technology, consumer, and real estate retail sectors. She joins us from Levi's , where she led the transformation and scale-up of the brand, spanning multiple geograp hies. She has deep digital expertise and has also worked in transformation assignments with new age business models.
She has a strong understanding of the new age customer, and we believe she is well-positioned to lead the charge for AFL and take it to the next level. Also, I would like to take this opportunity to thank Shailesh for his immense contributions towards executing a sharp turnaround at AFL, driven by profitable growth and strengthening of the balance sheet. He has been instrumental in getting the business to this stage. In his 19 years with Arvind, he has built Tommy Hilfiger and Calvin Klein into the most respected franchise in the lifestyle space in India, and has thereafter energized the entire AFL portfolio. He leaves behind a wonderful legacy, which we will now build upon. I am extremely excited about the future of AFL. We have one of the most compelling portfolios in the business.
We also have strong momentum across our brands with improving growth rates and higher profitability too. We will continue to strengthen our direct distribution channels, both retail and online, which will also entail investing more in product differentiation and premiumization, and then also an increased investment in marketing. We will further sharpen our existing capabilities and add new ones as required. In doing so, we hope to accelerate our growth and at the same time drive a further improvement in profitability, which in turn should drive a higher return on capital employed. Let me now talk a bit about our Q1 results. FY 2026 has witnessed a strong start, with revenue growth clocking 16%, along with improvement in profitability and a significant increase in our bottom line. It's pleasing to note that the growth is all-round, led across channels, especially strong growth in our direct channels of retail and online direct-to-consumer.
Our efforts over the last 12 to 18 months, including retail network expansion, coupled with higher investments in marketing to re-energize our brand, have yielded strong results. We invested 140 basis points higher in quarter one in advertising on a year-on-year basis, and despite that, we saw 20% growth in EBITDA, resulting in a multifold increase in our PAT. Moving forward, we hope that the demand environment should improve on account of the government effort, as well as the onset of the festive season. With investments across all our growth levers, we expect an uptick in growth rates for us on a comparable basis compared to last year. With that, I would like to now hand it over to Shailesh to take us through the specifics and more details about our financial performance.
Dear friends, hi. The story of quarter one results of AFL is growth. Impressive growth of 16% in NSV and EBITDA growth of 20%. There's all-around growth across channels and across brands. NSV in quarter one is INR 1,107 crores, and EBITDA is INR 148 crores. Our strong effort on growing direct channels of retail and online B2C has gained further fate in quarter one. This growth has now reached nearly 60% of AFL revenue. Retail growth is very healthy at 15%, backed by impressive like-to-like growth of 8.1%, with addition of nearly 40,000 square foot. Online B2C channels also grew more than 30%, establishing further our pivot away from wholesale online to online B2C. The share of digital business has crossed 25%, with very good improvement in profitability.
I'm also very happy to share that wholesale channel growth has picked up to double-digit growth, impacted by better freshness of inventories, higher clearance of our powerful brands, and better trading environment. We saw very impressive consumer traction at premium department stores. At brand level, our intense investment into our marquee brand, U.S. Polo Assn., is bearing fruit, and the brand has grown more than 20% in quarter one. Tommy Hilfiger and Calvin Klein business has also grown double digits, delivering exceptional margin profile. This acceleration of growth at AFL to 16% is backed by huge improvement in freshness of inventory, very sharp execution of consumer promise, very high 140 basis points increase in advertising, opening up nearly 40,000 square foot additional retail space, and strong momentum in our growth drivers like adjacent categories and digital business.
Kidswear, innerwear, and women's wear have all grown impressively on an average by more than 25% in quarter one. With BIS issue largely behind, inventory situation in footwear business has started to improve, and we expect footwear growth to inch up further moving forward. The growth in EBITDA at AFL in quarter one is 20%, a 50 basis point improvement despite heavy 140 basis point increase in advertising. Reduction in retail discounting by 1.2%, move to richer channel mix, cost efficiencies in select supply chain, and scale leverage have all led to improvement in marketing. GP has gone up by 60 basis points to nearly 56%. We felt that this is the right time to invest very aggressively behind marketing.
We saw opening in the market to fuel growth of marquee brands like U.S. Polo Assn. and Tommy Hilfiger, etc., to gain salience, to gain market share, and to grow aggressively. A lot of this marketing investment has gone into online visibility for recruiting new consumers, including younger consumers and consumers in small towns through our wide online reach. Our brands are market leaders across channels, and this market investment will further strengthen our leadership positions. One very happy example of this marketing investment has been the investment of Tommy Hilfiger into F1 movie that got released recently. You can see very strong brand visibility and brand association with Tommy Hilfiger in this movie. We saw an immediate spurt in brand search and increase in walk-ins with this film association, and the special F1 capsule of garments in Tommy Hilfiger got sold super quickly.
AFL has continued to focus on tight balance sheet control, with stock turns of four and steady management of working capital. Our inventory has never been more fresh than it is currently. We are seeing the results of investment into supply chain improvements and seeing better sell-through with better quality of product assortment across our brands. In this journey of profitable growth, the PAT in Q1 is at INR 13 crores versus INR 1 crore in quarter one last year. The growth in PBT is nearly 65%. We've also benefited from better trading conditions than what we have seen in the last year quarter one, where there was the impact of general elections. This year, April and May saw more wedding days and lesser heat waves.
Based on the business we have seen in the initial days of quarter two, the outlook remains encouraging, and we are likely to see double-digit growth, which is higher than the growth we have seen earlier in the last one year. Of course, the actual numbers will depend on market forecasts. There are uncertainties, but with early onset of festivals, we are encouraged by the demand coming from our channel partners. This is my final investor call as MD and CEO of AFL, and I take this opportunity to express my sincere and wholehearted gratitude to all investors of AFL, to the promoter Lalbhai family, who have supported me in the last 19-year journey where I have led the development of Tommy Hilfiger and Calvin Klein business, in addition to the rapid turnaround of fortunes at AFL in the last four- odd years.
It is great to leave when the business is at such strong momentum and when the ROCE has crossed the 20% mark. I also wish all the best to the new colleagues at AFL , including Amisha Jain, who soon takes over as MD and CEO of AFL , and Satyen, who soon takes over charge as CEO of the PVH part of the business. I wish AFL even better days ahead. I will always root for this company. Wishing everyone good luck. Heartfelt gratitude for the support this community has provided to me in this assignment. All the best, friends.
Thanks, Shailesh. Pari, we can now open it up for question and answer session.
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 touchstone 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 Param Vora, from Trinetra Asset Managers. Please go ahead.
Hello. Good afternoon. Thank you for taking my question and congratulations for a great set of numbers. My question is that with the plan to open around 150 stores in financial year 2026, what is the average break-even timeline for new stores? What specific regions or cities are being targeted for the expansion plan?
Hi. We are, you know, seeing passion for our brands across the country, both offline and online. We continue to expand the square foot in top-tier town as well as in Tier 2 town. What we've noticed is that very, very acceptable brands like U.S. Polo Assn., we see demand from every new retailer, every new mall, every new department store across the country, be it Tier 2, Tier 3, Tier 4 cities. We continue to use that demand for our marquee brand. Same thing we see for Arrow and other brands like Tommy Hilfiger and Calvin Klein. In terms of the geography, we are looking at expansion across. Yes, for some of our brands, there's a metro focus, and we'll continue to expand in the top 15 cities. For most of our brands, including Flying Machine and U.S. Polo, we will continue to expand across the country to give the tier of the brand.
As far as the break-even is concerned?
Yeah. Hi. The usual break-even for most of our stores is between 12 months and 18 months, depending on the brand and the city and the catchment . It varies between 12 months- 18 months.
Okay, okay. Thank you.
Thanks, Param.
Thank you. The next question is from the line of Fatema Pacha from Mahindra Manulife. Please go ahead.
Hello, sir. Hello.
Hi, Fatema.
Yes, sir.
Sir, great job U.S. Polo and Tommy and CK . Could you just shed some light on how Flying Machine and Arrow are doing? We're just trying to figure out how to interpret the minority because if CK and Tommy have done well, definitely minority should have gone up. I'm assuming Flying Machine has had a drag this quarter. Is that fair?
Let me first start with Arrow and Flying Machine, and then I'll take on the question on the minority interest. As far as Arrow and Flying Machine, what we have been talking about in the investor call, the situation continues. We are in the journey of improving the profitability from low single digits to mid-single digits. That journey is progressing well. In this quarter, we saw very good like-to-like retail growth in Flying Machine. We saw very good department store growth in Flying Machine, and also, all the direct channels that I spoke earlier, Arrow has performed really well in that. We review the progress every season. At the end of this season, we'll again review the progress of Arrow and Flying Machine is on-course. These businesses will continue to grow fast and move towards their mid-single-digit EBITDA. That's the plan.
As far as the minority interest is concerned, Tommy and CK have had a very good quarter. They continue to grow at double digits with very good margin profiles. You're right in the sense that there is a third brand in the minority interest, which is the Flying Machine. Given the channel situation of Flying Machine, there is a seasonality index, in fact, and there is a correction in quarter one for Flying Machine, which will get corrected in quarter two. It's a normal business cycle based on the channel mix that brand has. At the end of the season in H1, we'll see good progress in Flying Machine as well. Business across the brand has done well. Both Arrow and Flying Machine have delivered double-digit retail like-to-like growth. We're very, very encouraged by this double-digit growth in the retail like-to-like for both the brands.
Okay. They are in a pretty much strong growth, even those two brands. Maybe margin improvements may yet not have come through in Q1. Is that true? Just like the 50-digit margin improvements or the...
It's a seasonal thing in Flying Machine. Both brands are in that journey of mid-single-digit EBITDA growth, and they're gaining scale. That progress is on, and it's a reflection on numbers, Fatema.
Thanks. Sir, secondly, if you could just tell us how did the sales season go for us? In general, if you have any insights on how the consumer has behaved this season.
I mentioned that we had advertised aggressively, got very good walk-ins, both online and offline, and numbers have been sort of good in our brand. We've delivered very good full-price sell-through. Our discounting has come down by nearly 1.2%, which has increased our GP. We've been very, very happy. We delayed because of that the end of season toward the last week of June. We did see slightly early discounting in the industry, but we resisted because our sell-throughs were very good. We were trading really well, we gained market share, and we gained margin on that. We continue to do well. Market share gains have happened. Our numbers, our like-to-like growth at 8% is higher than what we have seen in the industry. Overall growth at 16% is higher than the industry. We've done well. Our need for playing a very big role in season end sale is less.
We've discounted less, we've gained margin because of that. Our inventory health is good. We've never seen this fresh inventory in our business in the past. Overall, the dependence on end of season is less. We are going on sale later than the industry. We're gaining market share, and we're gaining consumer acceptance. All in all, we've had a very good season.
Okay, sir. Thank you. [audio distortion] .
Thank you. The next question is from the line of Chetan, from Systematix Group. Please go ahead.
Hi. Thank you for the opportunity. Congratulations on a healthy set of numbers. Just one question on channel mix. We are aiming to increase the share of direct channel. Along with it, we also expect the wholesale channel to grow at around 8%- 10%. What is the optimal target channel mix we are aiming for in the next two to three years?
See, you know, we've addressed this question in the past. I reiterate that our emphasis is on growing direct channel because the whole north star for us is ROCE. We see very quick conversion of inventory and cash in direct. We get to influence consumer directly. It gives us a very good opportunity to do the assortment of the product the right way. It also helps us to use our supply chain intelligence to do the demand planning quite smartly. Currently, we are reaching close to 60% of our revenue from direct channel. This business has grown really well in quarter one with very good profitability. Retail has grown at more than 15%. B2C has grown even higher percentage than that at more than 30%. This strategy is working really well for us. Our inventory turns have been very good. The freshness of inventory is very good.
At the same time, in our guidance for growth toward mid to medium-term growth of 12%- 15%, we believe that our direct channel will continue to grow close to 15%. At the same time, we believe that wholesale channel, which is the MBO and the department store, has an inherent potential to grow at high single digits. In the previous couple of quarters, the growth was not in high single digits, but we've made a lot of efforts. We have changed the inventory, the freshness of inventory in department store and MBO is very good. We increased our advertising spend very aggressively so that we are top of the mind, gaining market share. Because of that, the department stores and the MBO have also grown. The wholesale channel has also grown at 10% in this, thereby increasing our overall growth in quarter one to 16%.
We believe that direct channel strategy is the right strategy. Both the channels, direct retail and B2C online, will grow. R etail, w e'll keep expanding square footage. We have a certain goal post on that. We continue to push for high single-digit like-to-like growth. We're also pushing B2C agenda through a lot of online exclusives with the intelligence analytics backing it. We have only launched our website of U.S. Polo. A lot of efforts have gone to keep the growth of direct channels at around 15% above. Wholesale channel, with all the efforts we've done, have revived. This season was good. We had weddings in April, May. All that also has impacted favorably . We believe that inherent growth of wholesale will remain in high single digits, and thereby we'll be able to grow at 12%- 15% in the medium term.
In the short run, we have visibility that double-digit growth is possible. Based on how the market plays out, it could land in 12%- 15% growth. We are very confident that we grow at a higher pace because our square foot expansion is going up, going up. We'll continue to grow in double digits. Hopefully, our aspiration is to land in that 12%- 15% guidelines that we've given for revenue growth.
Okay, sir. Thank you.
Thank you. The next question is from the line of Deep Shah from Equirus Securities. Please go ahead.
I have to thank you for the opportunity and congratulations on the set of numbers. Sir, we see this quarter around, if you see across the retailers, the parallel retailers, we have seen some moderation in growth. Whereas for Arvind Fashion , we have improved our like-to-like growth on our sequential basis. Having posted the 16%- odd sort of a top-line growth for the first quarter, shouldn't we expect Arvind Fashion to be doing, say, more than 15% at least in the near term?
See, we have seen quarter one has seen significantly better growth than last year. We've seen macroeconomic changes, the stimuli that government has provided on the tax rate cuts and the interest rate cut. We believe those steps will help the demand environment to get better going forward. We have an aspiration, like I said, for a growth of 12%- 15% trajectory. It's still early days in the year, the very early days in the quarter two. Our efforts, the direct channel strategy, and all the priming of our growth engines, and all our growth engines are in very, very good health. A lot of investment has gone there. We believe that we'll hit double-digit growth for sure. We have visibility for that. Whether it'll land into our aspirational goal post of 12%- 15% will depend on the market condition, how the market behaves.
We are committed to that growth of 12%- 15% in the medium term. In the short run, we've seen clearly an accelerated growth from what we have delivered in the past. Double-digit growth looks possible. Based on how the market behaves, it could be slightly higher or it could be slightly lower based on how the market forces pan out. We are feeling very encouraged by the quarter one result, and we're very encouraged by the early festival and the demand that we're seeing from the channel partners. Let's see how the market behaves going forward.
Okay. I've got it, sir. Secondly, sir, you indicated, say, around 20% sort of a growth U.S. Polo. Can you highlight which were the categories which have been driving growth? We have been in the past years talked about bottom wear, women wear. Which are the product categories which are driving growth?
See, you know, if you really look back in the last two years, in the industry, very few brands have seen the level of investment that we have made behind our marquee brand, U.S. Polo Assn. Be it marketing, be it retail upgradation, be it product assortment improvement in the quality, the supply chain, online website that we launched two years back, and the back end, a lot of improvement in the team, etc. The brand has seen a large investment towards the growth in the last two years. We're seeing that it's a brand which is firing across channels and across product categories. If I have to single out, I've seen very, very good growth in all the adjacent category in this brand on one side. We've also seen very large digital growth of business in U.S. Polo.
Adjacent category, womensw ear, which we launched more than a year ago, is growing more than 50%. The innerwear has started to do very well. It's growing rapidly. Kidswear saw more than 30% growth in this quarter. All the adjacent categories are growing very rapidly. At the same time, this whole growth of online business, where our pivot from wholesale B2B to more like a D2C online, has now seen growth in U.S. Polo. The growth in B2C part of U.S. Polo is extremely impressive. U.S. Polo is seeing good traction. As per our AFL strategy of growing the business direct through websites, through marketplace model, through omni linkages of our store, through better product assortment, through better shopping experience, through growth of adjacent category, we opened large marquee stores in U.S. Polo. We are expanding a large amount of square foot across the tiers of town.
U.S. Polo last year crossed INR 2,000 crores, and it's growing very, very handsomely. It is going to be a very, very large brand in India.
Okay. One last thing if I may squeeze in . Sir, let's say Amisha joining in from Levi's background, who has been a very, very strong brand in bottom wear. How is the aspiration for the bottom wear brand? Typically, U.S. Polo is mainly for top wear, casual shirts, and polo t-shirts. What's the aspiration for the bottom wear? Do we expect bottom wear being a very meaningful driver in the years to come?
Kulin, you would like to take that?
Yeah, I can take that. I think denim, in general, if we step back, is a very interesting opportunity for us as a company because we have three brands, in a sense, straddling very, very different price points. We've got Flying Machine, which is youth-focused, at a very aspirational, I mean, a very sharp price point. Then we have U.S. Polo, which has emerged as, you know, our top three bottom denim wear brands in all the department stores and multi-brand outlets. It has risen in rank extremely fast. Then we have the top luxury denim brand in the country, which is CK. Even Tommy , between USPA and CK , is looking to strengthen its presence in the country. I think we have an extremely exciting denim offering as a company.
In fact, even in our current plans, we are leaning into that category because we see definitely a large addressable market emerging. There is only one strong brand in the space. We want to gain share. I think our top-to-bottom ratio, you will see bottoms overall in the next three to four years. You will see an improved share of bottoms to tops in the company as we execute on these plans.
Very good. Thank you. Thanks for the opportunity.
Thank you. The next question is from the line of Palash Kawale from Nuvama Wealth. Please go ahead.
Thank you for the opportunity and congratulations to the team for a good set of results. My question is on marketing spends. Would you expect the spend to be higher for the whole year as well?
You know, Palash, we have taken a stance to very aggressively invest in advertising. We see the scope of market share gain and higher growth. We have increased in this quarter, 140 basis point increase. We are committed to this strategy. It's not a one-off. You will see the last year also, we are steadily increasing our advertising spend. Our brands are becoming big, brands are becoming bigger. It is a conscious strategy to increase the advertising, remain top of the mind, and gain market share. This strategy will continue in FY 2026.
Okay. Thank you. Thank you, sir, for that. Yeah, that's all from my side . All the best to you, sir. It's been a pleasure interacting with you over the conference. Thank you. Thank you.
Thank you, PalashA .
Thank you. The next question is from the line of Varun Singh from AAA PMS. Please go ahead.
You're on, audible?
Yes, Varun.
Thank you for taking my question. Sir, congratulations on an extremely huge set of numbers. My first question is, you know, trying to understand the channel performance and expectation on the channel performance in FY 2026. As you pointed out, 12%- 15% kind of an overall growth. In the retail channel, I think 8% like-to-like and 16% revenue growth is an outstanding performance. Looking back in history, in the wholesale channel and in online and others, how should we look at these two channels with regards to expected growth? Please shethrow some light on these two channels.
Varun, I just mentioned in the previous question that our strategy is clearly to push growth through direct channel. There are a lot of strategic, you know, advantages of that pivot. We believe that if both these channels we grow at around 15%. R etail will grow through healthy like-to-like growth. If you look at our track record last three, four quarters, I mean, in this quarter, we've been labeling better than the industry like-to-like growth. If you look at quarter three last year, we had 11% like-to-like growth. If I look at this year, 8% in the last three quarters, our like-to-like growth is in the high single digit. Also, square foot expansion, we have done a lot of hard work on the ground. We see huge opportunity to grow the square footage. It's to 12%, 13%, nearly 150 stores expansion possibility.
We opened nearly 40,000 square foot net in this quarter, and the growth will continue. Likewise, new retail identity, renovation of stores, better and scientific layouting, better shopping experience in retail. A lot of all these things are helping us to deliver very good numbers and the growth in retail. We believe that retail channel can grow at 15%. Obviously, there will be ups and downs. The like-to-like will depend on how the market conditions are. If the market remains more or less steady without any terrible news, then we believe that retail will grow at 15%. B2C pivot is happening. We have consciously moved, pivoted the business from wholesale to retail kind of mindsets. We have B2C online. We created inventory online exclusives. There's an analytic that is helping. There are omni-linkages. We have websites for U.S. Polo Assn. That business is growing pretty fast, more than 25% growing.
It will also, combined with retail, will ensure that our direct channels at 60% of our business grow at around 15%. We have growth drivers which are prime . Adjacent categories don't take that much of a place in the stores, and they are growing. In online, also categories like footwear, innerwear, showing very good momentum. Both B2C and retail is likely to deliver together a 15% CAGR and drive our growth towards 12%- 5% at a company level in the medium term.
That's very clear. Lastly, I wanted to understand the B2B part, given that 40% of our exposure, I mean, 61% is B2C and retail. We have, I think, done exceptionally well since the past several quarters, and we would have outperformed the number one player in that category from the retail channel point of view. Lastly, I wanted to understand from the wholesale channel and the online B2B part, is it fair to assume 10%- 12% kind of a growth in these two channels, or do you think that we can do 12%- 15% kind of a growth even in these two parts?
I will reiterate the direct channel, our aspiration for 15% growth. We are by far the largest online player in the industry. Be it any portal, overall size of business, the company has invested in online ahead of time. That engine is working really well, and it should grow based on how the market conditions pan out around 15% minimum. The question on wholesale, we believe the inherent potential of the wholesale channel, which is MBO channel, which is department store, which is the online B2B, all these put together, we believe this channel can grow at high single digits. That's the inherent potential of a brand in these channels. Sometimes, based on the market, it's less. This time, we have favorable growth, double-digit growth in these channels put together. These channels, our aspiration is to see them grow very profitably at high single digits.
We will always be conscious of the quality of our growth. In MBO channel, we will always be very worried and conscious about the hygiene. We make sure that our stock levels, our data levels are very strong. In online B2B, also, we'll be very conscious of hygiene in terms of discounting and other things. We will make sure that the quality of our growth is very, very top quality, high standard. We want to deliver high single digits in the wholesale channel.
That's very, very clear, sir. My second question is on the margin front, given the change in the leadership. Is it safe to assume that the margin guidance and everything, that is 100% intact, and we can expect maybe 50-100 bps kind of an EBITDA margin expansion in FY 2026? That's my last question.
I think our focus, as we have very clearly said, is to build very exciting brand franchises. Everything that has been carried out in the last three to four years has been along the lines of how to make our brands stronger. Bolder retail, better products, and impactful storytelling have been the themes that the company has invested in. This is leading to organic growth where each of our brands becomes larger. That is when the operating leverage flows in. As we move forward, we are very, very clear that is the strategy of the company. We want to, over time, build larger and larger brands. I think there will be a time in India where even INR 2,000 crores, INR 3,000 crore is not the largest that a leading brand could be.
We will make our brands bigger and bolder and ensure that as they scale, there is a commensurate operating leverage which kicks in and a stronger OCF profile which emerges in the years to come.
Thank you very much, sir, and wish you all the best.
Thank you.
Thank you. The next question is from the line of Niraj Mansingka from White Pine Investment Management. Please go ahead.
Sir, thank you for the opportunity. I have a question on the adjacency, especially the footwear side. Can you give some thoughts on how you see that growing c onsidering there is a BIS issue, which is overrun on the supplies? And an opportunity where you can take advantage of the brand, especially like a sneaker market or other markets where the footwear is growing much, much faster in that side?
Hi, Niraj. Niraj, I want to just step back and look at how we, as a company, build footwear business. There was a large investment ahead of the time in the footwear vertical. We put a dedicated team. We put dedicated footwear experts in the brands which were otherwise largely apparel brands. That early investment has paid off for us. You know, very soon, U.S. Polo sneakers became the top brand on the portal like Myntra, etc. The business has grown at +30% in the past. It's crossing, you know, touching close to INR 300 crore a month. Our aspiration is to take the footwear portfolio to INR 500 crore, very profitability with double-digit EBITDA pre-IndAS very soon. We had one sort of aberration when the government policy on BIS came and they put restriction on the import of footwear and some additional conditionality.
That impacted the entire industry two years back. It's taken some time to live life in this new regime and conditionality. We have moved very fast. We have adjusted our supply chain very, very rapidly. Today, we have now started getting inventory in our stores in the new situation under BIS. Our brands like U.S. Polo continue to be leading brands. We do very large footwear in brands like Tommy Hilfiger, Calvin Klein. That business is now close to, I think, close to INR 300 crore business. We did see the depletion of inventory like the industry saw that impacted our growth and that impacted our like-to-like in our retail format called Stride, where we sell a lot of footwear. It's a very exciting retail format called Stride. Now the BIS is behind us more or less, and the inventory position has started to improve.
We expect that next one-year time, footwear business will grow very aggressively on a sort of a corrected base. We will again move back to the growth phase of around 20%- 25% based on the market conditions. This is a very exciting piece, very profitable, double-digit pre-IndAS EBITDA, and a scale which could be INR 500 crore very soon as the inventory builds up. It's an area of immense strength for AFL.
Just a related question. How large, as a % of revenue share, can footwear be for you? Just a thought from your side.
You know, overall, if you look at a brand like U.S. Polo, this business can be a INR 300-odd crore business for U.S. Polo. Today, the adjacent categories in U.S. Polo are more than 25%. A very large part of that business can be from footwear. It is a first among equal adjacent category. It is likely to deliver more revenue than the other adjacent categories, including innerwear and small leather goods, etc. It is a very important category for U.S. Polo.
Okay, great. Thank you.
Thank you. The next question is from the line of Gaurav Jogani from JM Financial. Please go ahead.
Thank you for taking my question, sir. Also, congratulations on a good set of numbers. One question from my end is, you know, now you have certain scale brands U.S. Polo now near INR 2,000 crores revenue. I'm believing the Tommy , CK together would be around INR 1,500 crores, INR 1,600 crores. What is your outlook on the other brands like Arrow and Flying Machine? How are you looking to scale up these brands? Where are they on the path of the profitability?
In a regular investor call, we have said that both Arrow and Flying Machine are below U.S. Polo and Tommy , CK in terms of profitability and the strength of the brand. A lot of efforts were made to re-energize these two brands. Arrow is still ahead in that journey compared to Flying Machine because the effort started earlier there. Both these brands, we have said that they should double their business in the next three to four years. That journey is on, and we are seeing good growth in both these brands. We regularly see the progress. The key thing here is to reach a point where from low single-digit EBITDA, we have to reach mid-single-digit EBITDA. The whole portfolio of these two brands has to become a certain PBT level.
That is the strategy to take these brands, grow them faster than the growth of AFL . When they were talking about close to 100 basis points EBITDA increase, and with higher advertising spend this year, we could be 50- 60 basis points. That growth, Arrow and Flying Machine have to grow faster in their EBITDA profile than the average of AFL . Also, if we're going to grow the company at double digits, Arrow and Flying Machine have to grow slightly faster than that. That's the plan. There's no change. There's no change of strategy. We are committed to what we've been saying in the investor calls in the last one year. The journey is on. We are encouraged by the response we are getting on Arrow and in Flying Machine. We have also done premiumization. We have done renovations.
We are building digital assets in these brands. The journey is on. Of course, they are behind U.S. Polo , Tommy , Calvin Klein are. That's also the source of further growth and further profitability for AFL .
Sir, a related question to this is, I mean, as we have seen how adjacencies have been a greater part of scale-up in U.S. Polo and even in Tommy Hilfiger to that extent . What kind of adjacencies do you think you can play out in both of these brands? At what journey of scale-up are these adjacencies right now?
See, we look at the theory behind adjacencies. When the mother brands are very strong, then consumers buy the adjacent category. Let's say if Tommy Hilfiger is a very aspirational brand, then consumers decide the apparel core category. They want to buy a watch from Tommy Hilfiger, for example. The same way in Arrow and Flying Machine. Of course, priority is to make the core categories thrive. The formal shirt of Arrow or the sportswear shirt of Arrow or the premium 1851 line of Arrow, the places where the brand is marketed, we want to make sure those businesses are in really prime and are growing rapidly. The same thing in Flying Machine. A business of jeans, for example, has to be in the pink of health. That's what our efforts have been to build the growth of the core categories in both these brands, Arrow and Flying Machine.
Once this happens, we will expand the adjacent category aggressively as a step two. Having said what I just said, we also did not lost on the adjacent category. We built in Arrow, for example, a line of small leather goods, belts, and wallets. We experimented with some other new categories. You see in Flying Machine, we already have a footwear line which we sell successfully online. We are piloting that category, and we will expand that as we go along. The step first is to make the core categories really energized, then we will look at adjacent categories.
Sure. That helps. Sir, my second and last question is with regards to the strong OCF now we are generating. You have also repaid that debt and paid some dividends. Given that the business will only improve from year on and the profitability will also improve, what is your plan of action of using this cash? Would you be completely repaying that debt? Would you be looking to certain allied acquisitions, maybe? Not a bigger one, maybe some smaller ones. A ny outlook that you can give me here?
Yeah, I think coming. [crosstalk] Yeah, go ahead, sir. I think here, currently, as we have said, our focus is scaling up our existing five brands. There isn't any imminent kind of area where we would want to deploy additional capital. What we have been seeing is whatever is the OCF we are generating is going into repaying the debt. Of course, we have been growing the business aggressively. We have been wanting to increase the freshness in the business. We have also been bold as we move in this year into buying fresh inventory. You have seen the impact of that freshness even on the growth of the company. I think the funds would be used to reinvest it back into growth and retiring debt.
Sure. Sir, if you can help me out, I mean, allied to this only. L ast year also we did generate a good handsome free cash of around INR 200-odd crores. What would be the CapEx plans for at least the next two years that you're looking for?
See, our strategy is very asset-light. For growing our business at 12%- 15% in the medium term, we don't need too much capital, etc. Most of our expansion has been through the franchisee model. We do some stores in some brands like Tommy Hilfiger. We do our own COCO stores because that business generates a lot of surplus cash, and it's a very smart way of deploying because the ROCE on the store of that brand is very, very high. Other than that, we typically have a very asset-light mindset. If you look at last year, our CapXx was around INR 100-odd crores. We have a run rate today of around INR 25 crores of CapEx per quarter. I don't see there is a material shift or change in that strategy of asset-light model.
Our CapEx at an annual level will be in that zone of around INR 100 crores.
Sure. In that context, when I was asking, you know, given the fact that, you know, maybe you will be able to generate very conservatively an INR 5,000 crore kind of a revenue by FY 2027, and assuming a 10% kind of a pre-IndAS EBITDA margin also, I mean, still you will be generating an INR 500 crores cash. You know, even if I reduce some interest and some taxation, also still ballpark will be generating INR 350 crores kind of an OCF. Given that I'm assuming an INR 100 crore CapEx goal, still you will be left with INR 250 crores. Now, given that we have only INR 225 crores of debt left , would it be fair to assume that you would be a net cash company by early FY 2027 in that case?
Okay. I think, you know, now the debt levels in general are so low that we are not kind of looking at debt as the thing that we have to worry about. I think whatever is the operating cash flows, I mean, we want the engine to get stronger. As you are rightly saying, with this increase in profitability, the business should give significant amounts of cash. In the absence of any target which we feel is very, very compelling, it would be used to reduce debt.
Sure, sir. Thank you, sir. That's all from my end.
Thank you. The next question is from the line of Rajiv Bharati from Nuvama. Please go ahead.
Hello. Good afternoon, sir. Thanks for the opportunity. Sir, especially on the departmental and wholesale business, was there any player who was not ordering earlier and they have made a comeback and that is helping our cause?
No. Rajiv, we've been, say, we are leading brands, and we are available in all the department stores, be it the premium department store or the value department store. There's no kind of a new expansion into a new chain, if that's your question. We've been expanding given our better performance and the fact that we are gaining market share. The ranks of our brands, be U.S. Polo and Arrow, are increasing, and they're gaining market share. We are getting more spaces with the existing partners. As they expand into new territories, we're also getting new spaces when they open new boxes. In the existing boxes, we're getting some more spaces. The consumer growth in department stores in this quarter has been extremely encouraging, very, very good. Our like-to-like growth also per door has been very, very healthy in high single digits.
It's largely an existing player relationship, but we are gaining spaces and gaining new spaces based on our performance in terms of our market share.
Sure, sir. An extension of that is AFL stand-alone, which has a big portion of wholesale revenue on the Arrow side, right? There is a de- growth there. Can you explain what I mean, why the numbers are like that?
Rajiv, it could be largely on account of we'll have to look into it. I can probably take that offline with you. I'll have to deep dive. It could be only on account of maybe an intercompany. Otherwise, wholesale channel across all the brands, wherever it is a lot more relevant, has grown in line with the overall channel mix, which is what we have discussed.
On the ad expense side, I see that you already addressed it. You are increasing your ad spend by close to 55%, if my math is right. Can you just split that by brand? How does it look? Earlier, PVH used to get a lower proportion as compared to Flying Machine. Are you trying to push again this time around Flying Machine and Arrow more on the ad side also?
I think it's a conscious, aggressive investment across the brand. In this quarter, for example, in Tommy Hilfiger, I mentioned about the F1 movie. We invested heavily behind that association because it was a one-off time and the brand has benefited a lot from that. Also, U.S. Polo and Arrow and Flying Machine, we have invested heavily in online visibility because B2C is a very focused priority channel for us. Whether it is the perf marketing or the top of the funnel, we have gone ahead and spent money across that. Given the scale and size of the brand U.S. Polo, a lot of that dollar value or the rupee value goes into U.S. Polo to support that growth. The business in B2C has grown more than 30%. The advertising spend also is higher basis points.
You can assume that the growth in value terms will be quite high. That's a conscious decision we have taken to gain market share and to keep the brand salient and grow the brands aggressively.
Sir, lastly, on store closure. Although your area has increased, I thought in Q4 you didn't have any closure. That was the end of your closure cycle. How much more cleanup is still left in the network?
Rajiv, you're right that most of the closure is behind us, and that was done. A small regular closure is part of our life. We will always close some 2%-odd of our distribution as a new mall opens in our area and the old mall becomes less if it's effective or some market forces happen. That never becomes zero, Rajiv, in that sense. It's healthy to look for some closure to keep your inventory fresh, to keep your full price sell-through high, to keep your like-to-like growth high. When you look at profitable growth, some channel, because of market forces, some retail does get impacted. We should always be aggressive in shutting that down. Around 2% of network typically in the industry is done. I don't see major large-scale closure going forward this quarter.
Also, the closure is typically a small-sized store which has lost relevance, and we are opening bigger and better stores. It's a net square foot addition. We've added close to 30,000 square foot. We are gunning for close to 1.5 lakh net addition this year. I don't think there is a big news or story there on closure. It's a regular closure. We'll continue to expand square foot very aggressively. We've done a lot of groundwork. We have a bigger team now. We have identified a lot of areas. You will see that our square foot expansion will only accelerate as we go forward.
Thanks a lot, sir. Thanks for all the input. Hope to stay in touch.
Thank yo Thank you. The next question is from the line of Lokesh Manik from Vallum Capital. Please go ahead.
Hi. Good afternoon. Firstly, Shailesh, congratulations for the achievements over the last 19 years, especially the last four years. You seem to have set a very high bar for the new CEO , at least on the ROCE level. Congratulations on that.
Thank you. Thanks a lot for your kind words.
Thanks. To finish my question, I'm playing, you know, a devil's advocate here. Flying Machine and Arrow have done fantastically well over the last two years, and you know, progressing as you guys did. Now, going forward, if, you know, God forbid, you see some roadblock on that and it doesn't progress the way you have thought in the next three to five years, or the management has thought in the next three to five years, are we ready to then pull the plug on it? Keeping in mind that to an extent over the last few years, it has masked the performance of USPA, Tommy and CK . Do we take that harsh call? Do we still go through with it?
I can take that. [crosstalk] I think there is never any sentimentality about anything in business. I think you have to be setting very, very clear milestones for any business. We have been very, very clinical. If you see, we have exited very large franchises the day we realized, you know, that they're not going to have a path to the ROCE. ROCE is the north star of the company. We've done it in the last five, and we will do the same in the next five, that everything has to achieve the ROCE threshold that is the hygiene ROCE threshold that the company has set for itself. The good part in at least the current portfolio is that every brand is moving or showing the momentum and velocity as we speak. If that reality fundamentally changes, then as a Board, we would be looking at it very objectively.
Great, great. Kulin, do you have any timelines in terms of when you want to review Arrow and Flying Machine by FY 2026 or 2027? When you need to decide we continue with the scaling or we need to scale it down? Any timeline on that?
We have. [crosstalk] we have two kind of items that as a company we go through. One is our annual operating plan, and then it is a three-year plan. In fact, we are now getting into our next three-year planning cycle. We just completed the previous three-year plan. As a part of the next three-year plan, there is a movement. As a part of the earlier three-year plan, at least a good part is many of the milestones which we have set for ourselves with these two brands have broadly been aligned and achieved. As we look at the next three-year, you know, timeline, we have also told the market that both of these brands have to have a higher lift in EBITDA bps compared to the overall portfolio because they are moving from a lower base.
That is the kind of milestoning that we have done, which Shailesh refers to as that mid-single-digit EBITDA. That's kind of the north star for these two brands.
Fantastic. My last question was, does the IndAS impact, if you can quantify it, for the, you know, the depreciation impact because of right-of-use assets and interest expense because of lease liabilities combined for this quarter? Just to get a better sense of feeling.
4%.
4% of stock, right?
You'll have to, at average pre-IndAS , deduct from the reported EBITDA - 4%.
-4%. That's great. That's great. Thank you so much.
Thank you.
Thank you. Ladies and gentlemen, due to the sparsity of time, that was the last question for today. I now hand over the conference to management for closing comments.
Thank you, everybody, for joining us on the call today. If any of you have any further questions, please feel free to reach out to us, and we would be happy to answer them offline. Thank you and have a good day.
Thank you. On behalf of Arvind Fashions Ltd, this concludes this conference. Thank you for joining us. You may now disconnect your lines.