Ladies and gentlemen, good day and welcome to the Q1 FY25 earnings conference call of Go Fashion (India) Limited. This conference call may contain forward-looking statements about the company, which are based on beliefs, opinions, and expectations of the company as of the date of this call. These statements are not the guarantees of future performance and involve risks and uncertainties that are difficult to predict. As a reminder, all participants' 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 ping on an operator by pressing star then zero on your touch-tone phone. I now hand the conference over to Mr. Gautam Saraogi, promoter and CEO from Go Fashion (India) Limited. Thank you, and over to you, sir.
Good evening and a warm welcome to everyone present on the call. Along with me, I have Mr. R. Mohan, our Chief Financial Officer, and SGA presentation by now. For those who have not, you can view them on the stock exchange and the company website. During Q1 FY25, the retail industry continued to remain sluggish, which was further compounded due to the election. Despite these short-term challenges, we maintained a Full Price Sales ratio of 97%, demonstrating the resilience of our product in tough market conditions. Our ability to serve a diverse customer base and act as a one-stop solution for all of women's bottom wear gives us a competitive edge. This strength enables us to navigate challenges effectively while continuing to meet our customers' needs and guide business growth. Our unique product offering, combined with quality and competitive pricing, positions us favorably in the industry.
As demand begins to normalize, we expect our premium segment to lead in terms of growth. Moving on to the operational metrics for Q1 FY25. In Q1 FY25, our ASP stood at INR 727. It continued to witness growth due to improvement in our sales mix. Our advertising spend as a percentage of revenue stood at 2%, which was in line with what we had guided. Coming to store additions, in Q1 FY25, we have added 20 net stores in our portfolio, increasing our total store count to 700. We aim to open between 120 and 150 stores for FY25. Our SSG during Q1 FY25 stood at 0.2%. We, at Go Fashion, strongly believe in a sustainable growth backed by cash flows.
We achieved a strong pre-Ind AS 116 operating cash flow of INR 32 crore in June 2024. This success is due to our strong focus on inventory and supply chain efficiency.
On the inventory front, we have continued to emphasize effective inventory management, leading to a reduction in our warehouse inventory levels. As a result, our inventory days have decreased from 104 days in March 2024 to 87 days in June 2024, a reduction of 17 days. For the full year, we expect this to be in the range of 90-95 days. Lastly, our tie-in with Apparel Group in the Middle East is on track, and we should open our first store in this financial year. The strategic expansion will see Apparel Group leverage its for versatile and fashionable bottom wear across the GCC. On the SSG front, our first step is to achieve low single digits in the quarters to come. Second, we want to grow our footprint by increasing the number of stores in our portfolio by adding about 120-150 stores this financial year.
Despite the sluggish demand environment in the retail industry, long-term industry fundamentals remain promising, suggesting potential improvements ahead as economics. With a gradual recovery in demand, factors such as evolving fashion trends, resilient consumer spending habits. Outlook moving forward. With this, I would like to hand over the call to our CFO, Mr. R. Mohan, to update on the Q1 FY25 results and finances. Thank you.
Thank you, Gautam, and good evening, everyone. Despite the challenging business environment, the company continues to witness strong operating performance. Now, to give you the financial highlights for Q1 FY25, our revenues for the quarter stood at INR 220 crores again, which is INR 190 crores in Q1 FY24. The growth of 16% YoY. Gross profit stood at INR 136 crores, a growth of 17% YoY, with a gross margin of 61.8% for the quarter. Our EBITDA for the quarter stood at INR 32 crores, as compared to INR 64 crores in Q1 FY24. The growth of 12% YoY. Our EBITDA margins stood at 32.8%. Profit after tax for the quarter stood at INR 29 crores, and witnessed growth of 9% YoY. PAT margins stood at 13%. ROCE and ROE pre-Ind AS stood at 24.3% and 19% respectively. With this, now we open the floor for questions and answers.
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 the touch-tone 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 the question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Mike Sell from Alquity. Please go ahead.
Thank you. Good afternoon. Congratulations on a good set of results. You mentioned that you're expecting to see a gradual increase in demand as we go through the year. What gives you the confidence to say that? And do you think the budget would be neutral or positive or?
Thank you for the question. I think one of the reasons we're very optimistic that demand should improve is because we're seeing healthy single-digit positive SSG in the month of June. And because we are seeing this in June, and some of it is also carrying forward in July. July also has been a decent month. So I think overall, I think the overall Apparel space in retail is looking very optimistic. So I think in the coming quarters, the SSG improvement should be visible. As far as the budget is concerned, we are yet to study it fully, but from what we have seen, we don't see any big impact in our business as far as the budget is concerned.
Thank you so much. Just one follow-up question. Could you just talk about your thoughts about margins for the full year? If I understand correctly, your margins were down a little bit, yet they are marginal in Q1. Do you expect that to stabilize as volumes pick up? Where would you think we should be over the next 18 months in terms of margins? Thank you.
Yeah, as far as gross margins are concerned, we have seen a bit of decrease in gross margins. We would probably see a little more improvement in the coming quarters as far as GM is concerned. As far as EBITDA is concerned, once our SSGs are back to normal and some sort of good single-digit improvement in SSG, I think our EBITDA margins also should come back to normalcy of 20% and more once we are able to achieve 4%-5% of SSG. Moving forward for the full year, we would ideally want to be in the range of 19%-20% pre-Ind AS 116 EBITDA.
Thank you, sir. Thank you very much.
Yes.
Thank you. The next question is from the line of Devanshu Bansal from Emkay Global. Please go ahead.
Hi Gautam. Congratulations on a strong optimization of working capital. The inventory days have actually gone down below the targeted 90 days in Q1, so congratulations on that. I wanted to check on the capital allocation policy. So we typically require about INR 50 crore of annual investment in our business for adding 120-130 stores, which should very well be taken care of by our internal accruals itself. So how do you plan to use this healthy INR 220 crore of cash that is there on our balance sheet?
See, Devanshu, right now, the money is obviously the funds are available to strengthen our bottom line business, but very likely we said our internal accruals are very strong. So we haven't made any plans yet to deploy. As of now, as per our treasury policy, we have this invested in fixed deposits and liquid funds. As far as dividends are concerned, we will be probably deciding it this year. We would like to see another year of strong key cash flow, and then we will be taking a call on the dividend distribution.
Got it. Got it, Gautam. Second question, we are gradually diversifying our business from our leggings to [wading] into new categories such as active, denim, lounge, etc. Likewise, in my opinion, these new categories should also reduce our median consumer age profile and bring in new consumers as well. So with this context, I would request you to, if you can provide some color around our repeat purchase percentage or new buyer growth, will be really helpful. Your thoughts on this, please.
Yeah, repeat purchase has actually not really changed much. It's at around 40%-10%. But very rightly, you pointed out, even this year, this quarter, we have actually launched our activewear collection in our bottom wear category, and we have seen very good traction in it. And whatever new products which are coming out are also focusing on the younger audience. Many of our new releases coming out is actually targeting the younger audience.
Sure, Gautam. One feedback, if you could include some metric around these new younger consumer additions that are coming to our portfolio will be really helpful.
Sure. We are yet to track the data. Once we have the data, I'll definitely share.
Sure, Gautam. You mentioned that budget, you do not expect much change to your business. I wanted to sort of focus on one point that was mentioned in the budget. There is an employee-related incentive announced by the government where the government will be contributing about INR 3,000 per month for two years to the EPFO. So what is the benefit that should accrue to us based on this if we could throw some light?
See, Gautam, we are actually just starting today. We've had probably a little more clarity. We are also speaking to a few consultants as well. So we'll have more clarity in the coming week as far as this is concerned. So very difficult for me to comment on it right now. We'll definitely have more clarity in the next week or two.
All right. Last question, Gautam. From a gross margin perspective, this has inched up 50 basis points in this quarter. This is despite a 500 basis points higher mix of LFS channel. Ideally, this mix should have adversely impacted our gross margin by 150 to 200 basis points. What is the reason for this 50 basis points of gross margin improvement? Is this raw material higher full price mix, or there were some one-offs here?
See, well, I think, look, there are two there's one reason is that usually we liquidate a lot of our SKUs and items through exhibitions. This quarter, our exhibition outflow was very low. So that is also one reason for our gross margin to go up. But from what we have a little bit studied internally, it is looking because of lower bottom line. These are the two main reasons. The major reason is the lower bottom line.
Got it. This LFS growth of 40. The mix of LFS can remain at.
See, the contribution coming down. This was a very unique quarter because I had an offer running in their stores. It will considerably increase. LFS channel has been considerably large. This will normalize in Q2.
Thank you, Gautam. Thank you for taking my questions. Thank you.
Question is from the line of Sameer Gupta from India Infoline. Please go ahead.
Hi everyone, and thanks for taking my question. Firstly, on the net also, we saw 23 closures on a full-year basis. So just a little bit of clarity. At this point, you're still maintaining your guidance on store additions? Or I mean, if there is little revival in demand, should we expect a downward revision to this number? And any clarity on closures? Do we foresee more over this and this 120-150 addition? I believe this is a net number. Please correct me if I'm wrong.
Yeah, this 20, yeah, this 20 is a net number. And we are sticking to our guidance of 120 to. We have this project for delay from a timeline perspective. So as management, we are very confident that we will open 120-150. The concern to just close about three stores this quarter, I think for the full year, it will be no significant. It will be in single digits. It might be around 6-7 stores for the full year.
Any revision to this target if demand doesn't revive or that still stays?
See, as of now, difficult to comment on it. As of now, we are maintaining the same target of 120-150. I don't see a reason why we should change.
On the EBITDA margin pre-Ind AS, I believe the, based on my calculation, it is around 19.2% this quarter. This is also a seasonally strong quarter for us. Ad spends are reasonable at 2%. LFS also saw higher growth. So unless there is a meaningful uptake in SSS going forward, would it be fair to say that overall EBITDA margin for the full year should settle at par or below this level or?
Will improve in the coming quarter. See, at the same time, we are also as a company doing a lot of cost-cutting at every channel. We are very confident, and our internal target is to achieve an EBITDA of about 19%-20%. I'm quite confident that we should be able to get it.
Got it. And you did mention that gross margin benefit should continue for a few more quarters, right?
Which is.
For any problem.
Thank you, Sameer.
Thank you. The next question is from Prakash Kapadia from Spark PWM. Please go ahead.
92% during the quarter. Seen that quarter-on-quarter improvement in SSG growth, what factors will contribute to that? Is the base now low enough, or are we seeing some consumer sentiment being changing towards more demand? That was on the demand side. And what is the contribution of leggings currently, and over the next few years, how will this shape up? Those were my questions.
Yeah, so on the SSG front, Prakash, I think, look, our idea is obviously to get to at least about 5% of SSS, so that from a cost perspective, our margins stay intact. So our idea is to at least by the end of the year reach to that number. Our target is that we are working very hard to get to that number. What gives me confidence that the SSG improvement will happen is based on what I've seen in June and a little bit of July. I have seen no single-digit SSGs happening, and I'm confident that once we are entering festive, this momentum should pick up. So the current trend of June-July gives me a little promise that Q2 and Q3 should be good.
So if we are able to get to that kind of a number of about 4%-5% by the end of the year, if things go well, then we should be back on track as far as sales growth is concerned from a cost perspective.
Right.
What was your second question?
Product mix?
Leggings? Yeah, leggings is right now about 40%-45% of our overall leggings. Leggings and hoodies together should be about 40%-45% of our leggings.
Okay, 40%-45%. The cluster sales growth, if you can help me understand?
Yeah, yeah, I'll explain. See, these are two different data points. So sales or sales growth is any store which has completed one year of sales. Post its completion of one year of sales, it comes into the SSG bracket. So we compare our like-to-like period for that one store and see how much it's grown. So that is the SSG definition we do. As far as the same cluster sales growth is concerned, we take one particular micro area and compare the sales of that micro area for a like-to-like period in respect to the number of stores that micro area has. Just to give an example, in Bombay, let's look at Bandra area, right? So Bandra is one micro cluster. Last year, say Bandra would have had 3 stores. Now Bandra has 5 stores. So we don't consider the number of stores.
The total sales of that micro area in respect to the number of stores, we compare and then arrive at the Same Cluster Sales Growth number.
Okay, okay. This could differ from quarter to quarter. This is just a representation to give some perspective on some specific area.
Basically, for us, the kind of business we are in, if you want to track the hygiene of the business, whether the business is doing well in a particular city or a micro area, the same cluster sales growth is a very, very important data to track. Because it basically tells me that in that micro area or in that particular city or territory, whether I'm losing market share to any competitor. So that's what same cluster sales growth tells you. Our same store sales growth perspective is purely from a cost perspective. So we, as management, track both data points. SCSG more from a sales hygiene perspective and same store sales growth more from a perspective of cost perspective.
Right, right. And the last question from my side is, historically, we've always maintained we are a metro-centric brand, not really rural, but we've been increasing presence across the country. So if you could give any sense of what is the contribution of top 10, 15, 20 cities in our sales as of now, and given the expansion and the kind of store additions we are looking at, how will this shape up as we scale?
So, Prakash, actually, we are not a metro-centric brand. Though our stores are very heavy on the top eight cities because of our cluster-based expansion model, the way we have positioned ourselves, we sell very, very even in a metro city, even a tier two city, and a tier three and tier four city. Because our price points are very sharp. So we, from a positioning perspective, we reach out pan-India from tier one to tier four. It's just that metro cities and the top 10 cities have been more dominated for us because of our share presence. So as we keep moving forward, our growth in tier two, tier three, tier four will happen. But see, even after five years, once we have gone more, we have penetrated a lot more, we still see our top 10 cities contributing to 50%-65% of our sales.
We don't see that much changing because even the top 10 cities are growing at a very fast rate for us.
Okay. That would be what, around 75% as of now in sales?
No, see, today my top 8 cities, so out of my 734 stores, about 55% of my stores are in the top 8 to top 10 cities, which should contribute to about 60%-65% of the business.
Okay. Understood. That is very clear and helpful. Thank you, guys. All the best.
Thank you, Prakash.
Thank you. The next question is from the line of Mehul Desai from JM Financial. Please go ahead.
Yeah, hi sir. So one question, firstly, on this SSG that you are alluding to of low single digit in June and July, and obviously 4%-5% that you are targeting to pay in the second half, how do you see it between volume? Will it be ASP-led, or do you think volumes are also picking up?
See, I think because our ASPs have been growing at a slow pace, I think currently, if we do reach that 5% number, I think volume will be 2%-3%, and the total will be 5%. So volume will be half based on the current trend what we see.
The store additions in LFS have been pretty strong. You expect that trajectory to continue?
No, no. See, the reason one of why we've had a good number of store additions in Q1 is because we've added more than 30 stores of Lifestyle. We've entered almost all of Shoppers Stop stores, and the lines also of penetration have got deeper. Thankfully, we've added most of it. So I think this is a very unique quarter in terms of number of stores what we've added. I think this will normalize in Q2, Q3, and Q4. So on a year-to-basis, in a normalizing situation, in a year-to-basis, we look to add about 100-150 LFS stores.
Understood. Got it. And any guidance on how one should look at A&P spend for full year? You look at that 2%-2.5%?
It's going to be at 2%. It's not going to cross because.
Understood. And correct, I think, on the gross margin, is that 40-50 basis points expansion possible that I think which you had highlighted last quarter also, that stays, right? Or is there any?
Yeah, sure. See, we and management are confident that it should maintain or maybe even get better.
Okay. Understood. Got it. Thank you so much.
Thank you. The next question is from the line of Rahul Jain from PhillipCapital. Please go ahead.
Good afternoon, sir. Just wanted to get a quick sense on the pledge releases. What is the timeline on this, and is there any update on the sale?
Yeah. So we are looking to clear the pledge between the window of August and December. Most of the pledge should get released between this window.
Okay. Thank you.
Thank you. The next question is from the line of Binoy from Sunidhi Securities & Finance. Please go ahead.
Yes, sir. Thank you for the opportunity. This time that we have with Apparel Group, so will we be investing in store openings, or will they only open? I mean, will there be any investment from our end?
Binoy, there's no investment from our end. It's going to be a completely FOFO model, franchise-owned franchise operated. The entire investment, operations, running of the store, management, everything is going to be done by them.
Who will control the inventory management and pricing?
Pricing, inventory management will be controlled by us based on what is selling. Pricing is going to be something decided by both parties. So because they know the local market very well and we know our product well then, it's going to be decided by both parties. Even if there are going to be any discounts also, it's going to be mutually discussed between both parties. The supply chain perspective, we are going to be deciding based on how the sales are happening.
Okay. So essentially, we will be.
From a consumer perspective, Binoy, suppose there's a consumer who's shopping in India in a company-owned company-operated outlet, and they happen to go to the Middle East and see a local outlet, the experience, the look and feel will be completely different. The consumer will not see any difference between an Indian store and a UAE store from a look and feel perspective.
Understood. So essentially, what you're saying is that it will be over the same small store format between 300-500 sq ft?
Correct. Absolutely. Absolutely. It's going to look identical to what we have here in India.
Okay. Gautam, you've always been averse with franchising. You've always wanted to maintain control over your front-end retail operations, right? So what is the thought process behind having a FOFO model from the Middle East? I mean, there are other franchisees structured as well. Just curious to understand let's say, why didn't you go using the other franchisee structures instead of completely FOFO?
No, no. So I'll tell you. So first thing is why we wanted to franchise and not do company-owned company-operated. Look to be we've run stores in Dubai in the past. If you know our history, we've done a little bit of local stores about 7, 8 years back to 7 years back in Dubai. We were operationally not able to manage sitting here in India. And when we consulted with other brands and what feedback we got is that when you're going international waters, you should be looking to franchise because it's not possible for us to sit here and manage that. You need a local player to help you with everything. Now, when we wanted to look at franchising, the most effective model what we explored was FOFO. Because any other model would not be suitable for the kind of model format we wanted to do.
For example, we could have done a joint invest. We had to invest. We as a company didn't want to invest. Apparel Group, as a company, was very confident on our brand. So they were very comfortable taking FOFO. So we went with this kind of model which suited both parties.
Understood. Fair enough. Second is that, Gautam, that over the past two, three years or so, our store addition, net store addition, has been around the 120, 130, 140 mark, right?
Correct. Correct.
So I was just understanding that while in the interim period, I think in one of the con calls, you did mention that you'd be looking to accelerate it to about 150-170 stores a year in one of the con calls. But then again, it's back to 120-140 mark. So I was just wondering that is there a constraint in terms of evaluating the number of store properties that we can evaluate internally?
No, it's not like that. I think the store options are available and plenty. So it's about what is relevant and right for us. And look, once you cross 100 we have such a big network of stores, every time what we have to do, we have to be very careful. So I think, look, we have just adopted a very qualitative approach rather than a quantitative approach. See, for us, if we do 10, 20 stores less also, it does not matter. The quality of stores, what kind of revenue it could give, unit economics, whether they are selling or not, those things matter more than just looking at sheer number of store additions in a year. So I think as management also, we are more quality conscious in the quality of stores we are selling rather than quantity.
That's why that 10, 20 stores less also does not really matter to us.
How large would our real estate, let's say, our business development team would be?
No, we have a pretty decent-sized business development team. We would be having a 15-member team.
Okay. Okay. And my last question, Gautam, is that SSSG, you're targeting about 5%-6% by the year-end or year, and right now it's flattish. So I'm just wondering what are the levers that we would have in order to manage our pre-Ind AS and EBITDA margins? Because right now they've been drifting down.
Correct. No, okay. I mean, look, there are three things here. One is obviously improving the efficiency so that margins maintain. Second thing, see, as a company, we have been doing this for a very long time, and we are continuing to do it; it's cost actualization. So we sit every week on the subject, and we've been reducing costs over a period of time. And when we are doing this, we have seen a lot of benefits in our P&L through this exercise. That is the second way of doing it. The third way is that because our gross margins have slightly increased because of low cotton prices, and we feel that this will further improve our [net work] that will also keep our overall EBITDA margin steady. So first is pushing efficiency closer to the 5% mark.
We're hopeful that by the end of the year, we should be close to it. Second, continuous efforts on cost reduction. And the third is the GM benefit which we might get in the coming quarter.
Okay. Just a last question, if I may. What was the volume growth this quarter on a YoY basis?
On a YoY basis for the full company, it was very similar because we've not had a very large ASP growth. 15% was our overall company revenue. Our volumes also were in the similar range of 14%, around that.
Likewise, the volume growth for the same store sales growth in volume terms would also be flattish, right?
Yeah. So +0.22% was our efficiency in value, and in volume, it was -0.4%.
Okay. Yeah. That's all from my side. Thank you so much.
Thank you, Binoy. Thank you.
Thank you. The next question is from Priyank Chheda from Vallum Capital. Please go ahead.
Hi, sir. Sorry to harp again on the margins, right? Right now, given the muted demand that we are witnessing, and our guidance is that we would like to end near 19%-20% for the full year. And on the contrary, if I have to revise back my notes for the last quarter, where you did mention that you need to incentivize your store managers. In fact, the CapEx per store has gone up. There have been no more renovations of the stores happening. So all this would lead to a furthermore cost pressure in case SSSG has the support to remain at this level. So just wanted to understand what are the levers within the cost cutting measures that you are looking forward to?
No, I mean, look, from an incentivization perspective, it has got rolled out from Q1 as well. When we are giving slightly higher revenue incentives, as a percentage, the cost does not increase, but because that pushes the revenue also. Your incentive percentage to sales does not really change because the higher incentive you've given the sales also has increased that much. So there's no cost pressure as far as incentive is concerned, as far as the P&L is concerned. Yes, it definitely boosts sales. For us to keep our margins intact, look, the gross margin definitely would help, which I mentioned. But just overall, we've always been looking at cost control from an overall bottom-line expenses perspective, and that cost optimization will continue. So I think that will help us to keep our margins steady even when the same store sales growth is slightly weak.
Right.
See, I can give you an example. One example of cost cutting we have done is many of our stores what we have in high streets and in malls, we have been able to renegotiate rentals and bring down certain rentals in many stores wherever the SSGs are flat or negative. So I think those kinds of effective measures have helped us to maintain the margins in the future to a certain extent.
Okay. So the rental negotiation is one of the levers for SSG.
One example like that. Just an example. It's one of the levers of your fees.
Right. And in fact, look back into the gross margin expansion at scale. We are at low gross margins, right? So do you think any nudge is required on the product pricing for us to get back the volume SSG growth?
No, I don't see any need for us to change the pricing. I mean, look, at the end of the day, if we change our pricing, it will change the perception of our product, and that is very dangerous to do. So we are not really changing the pricing. They neither going to decrease it, neither going to increase it. So whatever GM what we are having, I think that will benefit the P&L to that extent. We are not looking to change the pricing to drive revenue.
Perfect. Perfect. Perfect. And on the value-added non-leggings part, which is 55% of our portfolio, 50, 55, any particular categories you would like to highlight which are the larger ones within that basket?
No, I think the trousers and pants categories have relatively done very well for us. I think if we have to try to see from a contribution perspective, the pants category and trousers are a material contribution to our sales. I think in the value-added products, that category does well. Even the bottom category, even the bottom category does really well for us.
Okay. Okay. Thank you.
Thank you, Priyank.
Thank you. 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 Nishit Rathi from CWC. Please go ahead.
Hi, Gautam. Just a couple of questions from my side. Just wanted to understand, Gautam, how are you thinking about new cluster additions, and what has that been in the last in this particular quarter? What would that number be like, and how are we thinking about that? Because our cluster, same cluster growth is around 8%, and our overall EBITDA growth is around 9%, which kind of makes me believe that we are not really adding new clusters, right? Is that a fair assumption?
No, not really. Because see, that's not an apples-to-apples comparison because see, the clusters are having only X number of stores, whereas the overall EBITDA growth is on the overall base of 734 stores. So it's not an apples-to-apples comparison. See, we as a company, we don't set a target for ourselves that we should add so many clusters. For us, our target is our number of stores. And with that number of stores, organically, the clusters also will grow because that's our expansion strategy. So from a cluster perspective, we don't set ourselves X target that we want to add so many clusters in a year. For us, just keeping the store count as a target does the job. I'm not having the current number of clusters handy. I'll share it after the call. But I'm sure there is an increase compared to last year.
I'm just trying to understand, Gautam, how should I think about it, right? Because if we have added around 100 stores last year, which basically means that you increased your net worth by about 15-odd %, right? And the year before that, you increased your net worth by about 20%, right? And so we have these flat-ish SSGs, right? So when do we start getting the full benefit of the network expansion, at least in the?
Yeah. Yeah. See, I'll tell you the problem. See, in the network expansion, what happens in a good market, even the newer stores in a bad market, even the newer stores tend to underperform below the new stores' average. So I'll give you an example, right? A new store usually grows at about 15%-20% plus on a YOY basis. And right now, because of the sluggish demand environment, the newer stores are growing at less than 10%. It's actually in low single digits. So even when the demand is sluggish, when the environment is sluggish, the maximum impact actually happens on the newer stores because the newer stores are not secondary. In a second store, you still drive footfalls in a bad market, but in a new store, it's even more difficult to drive footfalls than the overall consumer sentiment is here.
As the consumer sentiment improves, the new store growth also will start, the network expansion will start reflecting in the SSG.
This is very helpful. Basically, you're saying is whenever the demand turns, not only will you get SSG in your current stores, but the stores which you have added in the last couple of years, which possibly could be below potential, could see normalization, and which also gives you, in a good environment, the ability to expand will also increase dramatically, which means that the aspiration of 150, 170 also becomes a lot more viable at that point of time. Is that the right way to?
No, not only. No, not only. For us, expansion is very clear. It's not that we are cutting down expansion because of the overall outside market. That is one of the smaller reasons. But for us as a company, we want to target qualitative selling so that the EBITDA metrics and the overall economics of the business don't change. So if I was able to do quality selling today where I was able to get about 150-170 stores, I would have done it. So we are very on track to do qualitative selling. So as far as new stores are concerned, when the market improves, the SSGs of those stores will improve, and that will be part of the blended 4%-5% what we are targeting.
Priyank, isn't it fair to assume that in an improved environment, the qualitative signings, the ability to find qualitative signings will go up also materially, right?
I'm definitely sure it will.
Got it. Okay. That is one. Second, just wanted to understand, so when you say that you started seeing these shoots in June and July, so is it fair to assume that going forward, at least, how should we think about your EBITDA growth? How are you thinking about your EBITDA growth on, let's say, on an FY25, FY26 kind of basis? If there's any, how should we think about that number?
See, my target internally is to grow the EBITDA margins to more than 15% of sales on a YOY basis with an SSG push of about 4%-5%. That's what we target internally. See, right now, it's very difficult to predict what will happen in Q2. So you're asking me what is going to be the SSG number in Q2? I don't know because it's very difficult to predict. But internally, we have set ourselves a target of saying that, okay, we need to get to that 4%-5% number of SSG and an overall growth of more than 15% of sales as far as EBITDA is concerned.
Correct. Gautam, this 14%-15% target that you have is only because the current environment is what it is, right? But eventually, your longer-term aspiration over a longer-term horizon.
It's to do with 20%. It's to do with 20%. That does not. I'm just trying to understand. That has not changed.
That has not changed. Yes, I'm just very, that is very helpful. Okay. And the last thing is I just want to understand how should I think about this Apparel Group opportunity, right? Not right now, but over a three- to five-year period, how large is this opportunity? How are you thinking about it? How material could it be from a perspective? Some kind of sense or understanding.
See, I'll tell you, it's early days. Our idea is to open the first store. If it doesn't happen, probably another two, three stores. So I mean, look, if it clicks, not only does our presence become very vast in the Middle East, but it gives us a proof of concept that our kind of product can do very well overseas.
In the long-run perspective, it will open doors to other geographies as well. I'm talking about very long-term. From an immediate plan perspective, our idea is to open the first three stores, see how it does well. If it does well, then the entire GCC and Middle East is up for expansion. And see, a company like Apparel Group also, which is very large, they also want to take a brand on board which can be multiplied in terms of number of outfits across a particular region. So they also see that there is a very good potential of Go Colors expanding very well within the countries of the GCC.
Priyank, so I'm just trying to understand, let's say, over a 5-7-year perspective, is it fair to assume at least 150-odd stores with much?
No, very difficult for us to estimate that because we are right now taking our first target in place. Our first target is to open those 3 stores and drive it to success. So I'm not even thinking about any expansion in the GCC till we open those first 3 stores and see what happens.
Understood. Very helpful. Thanks.
Yeah. Thank you.
Thank you. The next question is from the line of Varun Singh from ICICI Securities. Please go ahead.
Yeah. Thanks for the opportunity. So my first question is the current 734 EBO stores that we have, what is the ratio of franchise owned franchise operated and company owned company operated stores as of today?
It's not changed a lot. I guess 14-15 stores out of the 734 would be franchisee.
Okay. Incrementally, 120-150 stores that we wish to open, it will largely be franchisee-owned, franchisee-operated?
No, no, no, no, no, no, no, no, no, no, no. Whatever stores now we are going to be opening, it's going to be largely company-owned company-operated. That's our primary strategy as far as EBITDA is concerned.
Okay. Okay. Okay. Understood. And then the franchisee part is more for the UAE, for the Middle East, the UAE, not for India. Oh, I see. Understood. Sorry. Yeah. Understood. Right. Understood. Priyank, so secondly, I think you mentioned that internally, the target for the [distorted audio] revenue or retail area is to grow more than 15%. Yeah. But when I look at the store addition guidance, which is 120-150, and the base of maybe FY2024 base, if I see 714 stores, so the most conservative assumption, which is if we end up adding 120 stores, is roughly 17% retail expansion. So does this not imply that we have toned down our store addition guidance, and maybe the incremental store addition will be less than 120 stores?
No, no, not like that. I mean, see, look, the 120-150 stores what we have targeted, we should be able to achieve it. In Q1, it was a little less because many of the projects what we had planned got delayed to Q2. So I don't see a reason why we should not be able to achieve that target of 120-150. So I think that is why that is pretty much increased.
Okay. Okay. Fair point, sir. Understood. Yeah. That's it. Answer one last question that in the medium term, what is an ideal mix of revenue from EBITDA and large-format store? We kind of envisage in the medium term, if you can help us understand this case.
No, EBITDA will continue in the short term and medium term. EBITDA will continue to be at around 75%. The other challenge will be the balance 25%.
Understood. Understood. Okay. Yeah. That's it from my side, Gautam, sir. Thank you very much.
Thank you.
Thank you. The next question is from Rajiv Bharati from Nuvama. Please go ahead.
Yeah. Good afternoon, sir. Regarding this Apparel Group opportunity, so have you given exclusivity to them? Let's say, let's say, 4 years, 5 years down the line, if you were to figure out, because anyway, we are doing inventory management and managing the supply chain, can you open your own stores there?
No, no. Currently, we are not looking to do that, Rajiv, because like I mentioned in the call, we have done it in the past 15 years, 17 years back. We realized that when it comes to international, it is always better to do it with any franchisee. If you see, most international brands that have come to India also, right, most of them have actually gone through the larger franchisees in India. So it's not any different for Indian brands going overseas as well. So when you are going to another country, the strategy of COCO does not work as well. COCO works better. As far as Apparel Group is concerned, look, we have obviously when we have signed an agreement with them, we have given them the exclusivity. It's a 5-year agreement what we have signed with them.
They are a very, very strong, solid retail house in the Middle East. I think, look, giving them exclusivity is a very good chance for us to enter the Middle East. I don't see any issues there.
Is there a milestone which you have set in terms of store target and which you can share?
No, right now, I'm not actually, honestly, I'm not setting any target for us in the Middle East because we are going to be opening our first store maybe in this financial year. When the first store opens, we'll see how the economics of the store are. Apparel Group also should be comfortable with the unit economics what is happening. So once those few stores open and there is proof of concept in that particular region, only then we can actually sit and draw our entire plan for the next three to four years.
Sure. Secondly, on the working capital bit, so say, let's say, the growth revives from the momentum you have carried from June, continues in the remaining part of the fiscal, then will the working capital also start growing instead of the number you're sharing that close to 90-95 days?
Honestly, see, this quarter, we are at about 87 days. But on a steady-state basis, we see ourselves maintaining a 90-95 days of inventory. So even when sales pick up, obviously, inventory also will slightly increase in proportion to sales. So with 87 days, we'll stabilize between 90-95. So we see our working capital base, which is at about 113 days right now, it will be between 115-120 days, between that in the short term.
Sure. Lastly, on the depreciation line item, which is, I think, regarding these liabilities, and you mentioned that you have reduced some rentals, are there more levers to that end because there is a QOQ reduction there?
Sorry, please come again? I lost my list. Please come again.
On the depreciation line item for the quarter, on a sequential basis, it has come down. So you mentioned that you have renegotiated some contracts, right? This is largely leases.
No, no. That would not have made a very big impact on the depreciation, honestly. So anyway, the depreciation what is reported is rental and also the fixed assets depreciation together, the line items together. Because of Ind AS 116, the rentals will be part of depreciation and finance cost. The depreciation will be a combination of rental and as well as the actual depreciation of the fixed assets of the company.
No, fair point.
So the renegotiated rental wouldn't have made a very big impact on that.
Okay. Fair point. Yeah. That's all from my side. Thank you.
Yeah. Thank you. Thank you.
Thank you. The next question is from Prerna Jhunjhunwala from Elara Capital. Please go ahead.
Hello.
Yeah.
Hi, sir.
Hi, Prerna.
Hi. So just wanting to understand this inventory reduction to 87 days, what will be the major component of reduction over here?
It was at the warehouse, Prerna. Actually, my system is off, otherwise, I would have told the exact line item number of what is there at the warehouse. But it is the maximum reduction that actually happened at the warehouse level across FG and Fabric.
Okay. Across FG and Fabric. Okay. Understood.
Fabric. I'll share the specific number post the call. My computer is off. It's not switching on. I'll share the exact inventory number to FG.
Okay. Which means that, right, are we at the lowest level of inventory that we would envisage as?
Yeah. I mean, from a number of days perspective, yes. But I see ourselves at around 90-95 on a steady state.
Yeah. That's all. Okay. So now going forward.
Yeah. But it is the lowest where we would have aimed. We are probably at the lowest right now.
Okay. Going forward, will this also be because the demand is low and we've not been increasing our inventory to just rationalize everything?
No, it's nothing to do with demand except. It's just the obligation to see. See, our entire inventory total and the calculation happens based on sales. If the demand scenario was good today, our inventory also would have been higher. So it's not that my inventory base would have been lower if the demand was higher. My absolute inventory would have been higher if the demand was higher because it's completely linked to sales.
Okay. Okay. Understood. So which means you will start procuring given that you are expecting?
Yeah. Exactly. As the demand and the sales improve and we keep growing as the company is on the side, the absolute inventory also will keep improving.
Okay. And so you mentioned your SSG in June and July was better. Could you share some numbers or perspective on that? I mean, how better they were and?
See, July is yet to close. It's coming. It's very difficult to comment on July. June, we were at about 5%-6% SSG.
5%-6%.
Yeah. But again, there's a tax.
Sales everywhere and all that.
No, no. But there's a catch. See, what happens is if you compare one month versus one month, it becomes very misleading because this June had five weekends versus last year, June had four weekends.
Okay.
The number of weekends plays a very important role in the overall sales also when you compare. We reported a 5.6% SSG. We'll have to see steady-state how it goes into July, August, and September.
Okay. Understood. So which means weekend versus weekday performance if there's a weekend?
100%. Weekends obviously tend to be a lot more because there's more footfall and high season. So the number of weekends plays a very important role. See, that's why when you compare quarter-over-quarter, the weekends average out when you're doing a comparison. When you're doing one month-over-month, it becomes very misleading.
Sir, will it be fair to say that June was better when you mentioned that you saw some green shoots? Just trying to understand that way.
No, no. June, of course, was better. It's just that we have to see the consistency over the next few months. But if I take active June, it was definitely better. That's why we've been able to see a positive reaction.
Okay. And how has been the end-of-season traction, which would have begun in July this year?
Too early to say, Prerna. We are just halfway through. As of now, things are looking good. Footfall in the malls also has been pretty decent. But difficult to comment right now. We'll probably be in a better situation to know in August first week.
Okay. Okay. And so your other income has been higher this quarter. Any particular reason for other income to be higher?
See, on a pre-Ind AS level, our other income, I think, would have been about, I don't know that number here. But it's gone up because of our cash balance, because of our higher cash balance compared to Q1 last year.
Because of FD income. Okay. FD income.
Because of FD income. Yeah. Because of FD income and because of the cash balance being higher, we got higher in FD income.
There's no role of rental renegotiations or some?
No, no. Like I mentioned, the rental renegotiation wouldn't have made a very big impact on the depreciation or the other income line item.
Okay. Okay. Understood. Understood. Sir, when you are saying that for the year, you are targeting 4%-5% growth on SSG terms. In Q2, if the sales remain flat, still you would be in a position to maintain that target?
I will have to see. Probably we'll have to relook at that post-Q2. Very difficult to comment right now. See, because right now, the way how the overall retail scene is, it is very difficult to predict what will happen the next month and month after. But we are quite optimistic with what we see in the market.
Okay. Understood. So you are seeing demand scenario improving even from Q2?
It has definitely improved to what it was in April and May.
Okay. Understood. And on a steady-state basis, I mean, last year was a weaker year. So on a steady-state basis, do you think the demand is improving further, or is it just normalizing right now?
We will know by August, Prerna. I think, look, June has been good. July also looking decent. I think once we enter August, and probably by August end, August, look, we'll know how it's shaping up. So we'll have more clarity and colors by then, for sure.
Okay. That is helpful. Thank you and all the best.
Thank you, Prerna. Thank you so much.
Thank you. As there are no further questions, I would now like to hand the conference over to the management for closing comments.
I'd like to thank everyone for being on this call. We hope we've answered your questions. If you need more information, please feel free to contact Mr. Deven Dhruva from SGA. I'll make arrangements that guide you. Thank you.
On behalf of Go Fashion (India) Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.