Ladies and gentlemen, good day, and welcome to the Q3 FY 2022 earnings conference call of Shoppers Stop Limited. I must remind you that the discussion in today's earnings call may include certain forward-looking statements and must be viewed therefore in conjunction with the risk that the company faces. Please restrict your questions to the quarter and yearly performance and to strategic questions only. Housekeeping questions can be dealt with separately with the IR team. As a reminder, all participant lines will be in the listen only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Venugopal Nair, Managing Director and CEO.
Thank you, and over to you.
Thank you, and good morning. Thanks for joining us today to discuss our financial results for the third quarter of this fiscal year, which ended on 31st of December 2021. We have shared our Q3 results, the investor deck and press release, and I hope you have had a chance to go through the same. I'll now talk to you about our Q3 performance, the progress on our strategic pillars and the way forward. At the very outset, I must say we had an extremely strong quarter, and we saw big forward momentum carrying on from the recovery that started in the second quarter. Consumer confidence has rebounded sharply, and as a result of this, we recorded extremely strong sales.
Our GAAP sales was INR 1,070 crore, a growth of 35% over Q3 of FY 2021, with margins growing by 170 basis points. Our non-GAAP sales was INR 1,190 crore with a similar growth. The business was strong with same-store sales driving the performance and was consistent throughout the quarter, seeing a high customer strength and a growth in the average transaction value. The growth in average transaction value has now been sustained over seven quarters, which is a clear engagement of the customers coming in and showing. It shows us that when they come to us, they spend a lot more, both offline and online. Apart from the strong sales in stores, our sales through the digital channels also continued to perform strongly and grew by 39% over FY 2021.
From a product point of view, athleisure and activewear have been in demand for the last 18-20 months and have been well talked about. However, in the past quarter, consumers have recentered their wardrobes for the post-pandemic life, buying in large quantities of different categories of apparel and beauty. We realized this trend very early, and our stores having an assortment that is in sync with this consumer taste, we benefited from this wardrobe reboot that is being done by our customers. After a short gap, we are also back to opening of new stores. During the quarter, we opened five new stores, three department stores and two beauty stores. On operational cost, we continue to save versus the financial year 2020. In Q3, we saved INR 40 crore, and we are back to being a debt-free business.
With the strong sales and tight control on costs, we reported an EBITDA of INR 197 crore as per GAAP financials, which is a growth of 57%. On non-GAAP reporting, the EBITDA was INR 100 crore, and our non-GAAP EBITDA grew by 5 x or 380%. We continue to invest into our business. The investments are to grow our digital commerce capability and on new stores, along with data analytics and marketing. We also refurbished some of our overall stores. Combination of all of this, so far we have invested INR 55 crore during the year. I now move on to our strategic pillars. As always, I will take you through each of these strategic pillars one after the other. We continue to make good progress in each one of them.
First Citizen, our customer loyalty program, continues to demonstrate a strong growth trajectory with offline sales accounting for 72% of its sales coming from our First Citizen customers, and online this was 42%, which was up 160 basis points. The First Citizen Black Card customers, which is our annual subscription program, performed exceptionally well, with enrollments growing by 85% year-on-year in this quarter. This subscription service brought in a revenue of INR 4.5 crore in membership, even as these customers bless us with a much larger share of their wallet, illustrated by the fact that this segment of our customers visit us four times more than our core First Citizen customer. In the omni-channel, our contribution for First Citizen grew, as I mentioned before, and these are customers we are engaging very closely.
Our unique service to our customers, personal shoppers, and the contribution from personal shoppers has been consistent, contributing to 10% of our sales. The average ticket size of the customers shopping with us with the assistance of personal shoppers is three times that of our core First Citizen customer. We also had styling festivals through our personal shoppers, both online and offline. A big focus for us in our stores is to have varied experiences for our customers week in, week out, so that every time a customer comes in, they see something different, there is something new for them to look forward to. The same we are doing on shoppersstop.com as well to make it far more engaging, increasing the number of visits that we get from our customers.
At this point, I am delighted to share that we have now a new Chief of Marketing, Shwetal Basu. Shwetal joined us from Metro Brands, where she contributed to the growth of their various brands. She has extensive experience of working in retail marketing, including a long stint with ABRL. She's spearheading our drive of customer engagement through the use of data and the information that we get through the spending habits of our First Citizen customers, enabling us to offer better service to them, both online and offline. We have now started using propensity models to be able to bring them a much more curated offer on a regular basis. I now move on to our second pillar of Private Brands. Our strategy for growing our Private Brands in apparel continues to work well.
Private Brands contributed to 14% of the total business, with it being 18% online. Specifically in apparel, our Private Brands contributes to 18% of the total apparel sales, which is a growth of 185 basis points. Within Private Brands, in women's Indian wear, our Private Brands now account for nearly 50% of our total sales from this category through our brands of Kashish, Haute Curry and STOP. In kids wear, our Private Brands of Karrot, STOP, and Life grew by 98%, which is absolutely delightful and spectacular. In the last call, I had mentioned to you about the launch of our first B2C online brand, Insense. I'm glad to share that this brand has now established an annual run rate of INR 55 crore and is growing strongly. Our third pillar is Beauty, and Beauty grew by 41%.
The sales from this category accounted for 17% of total sales, a growth of 75 basis points in the quarter. The growth was across both offline and online, with us having a record single-day sale on November 11, also known as Singles' Day. This quarter, we launched 28 new brands in Beauty, and so far in the year, we have now launched 70 new brands. Arcelia, our Private Brand in the Beauty segment, launched 40 SKUs of perfumes, deodorants, and sheet masks. This marks the entry of Arcelia into the fragrance and deo space. Another 75 SKUs of makeup and nails are to be launched in the fourth quarter this year. This would be our entry through this Arcelia into the makeup category.
Makeup accounts for 51% of the total Beauty sales mix, and hence we expect this to be a big contributor going forward to our sales. In the last call, I had also mentioned about launching standalone beauty stores. Today, we are doing the launch of our first SS Beauty store, with the second one slated to open in the next three weeks. This is a segment we intend to grow aggressively, both offline and online. At this stage, I would also like to share the good news of us having appointed a Chief Beauty Officer to accelerate the growth in this category. Biju Kassim joined us earlier this week. Biju has over 27 years of experience in international brand management, distribution, and retail operations in the luxury and lifestyle space.
For the most part of his career, he has been based out of Dubai and Mumbai, working with businesses across various countries in Asia, Europe, and Africa. He has held leadership positions at Intercraft, Baccarose, and Beauty Italia in his past roles. His understanding of the business, expertise in strategic planning and operational excellence, along with his forward-facing leadership, will add tremendous value as we look to grow aggressively in the beauty space. Finally, the fourth pillar of omnichannel. Digital sales grew by 39% on FY 2021 and continues to grow strongly quarter-on-quarter. Our sales on Amazon specifically saw a massive growth. We have transformed ourselves into an omnichannel retailer with shoppersstop.com firmly established as a shopper's destination for our customers. Consumers now have a metaverse mindset.
Adapting to this consumer behavior, we are focusing on social shopping that gives our customers a seamless experience from discovery to checkout. As mentioned before, we have been working on improving the customer experience online. The first upgrade of our Shoppers Stop app was done in December, and you would be seeing a much better visualization from before. The page load speeds have improved significantly, and the combination of these improvements is being appreciated by our customers, as is demonstrated by the fact that the rating of our app has now moved up from 3.4 to 4.5. The next phase of the upgrade is due later this month.
As you would appreciate, this is an area we are investing in, and a big part of our total investment is into digital to enhance the customer experience and to continue to drive our strategy of building a sustainable growth online. We have also been investing into data analytics and personalization, and this is an area which continues to help us engage with our customers in a much more sharp manner. We have now started to use propensity models, which we are able to derive through the data that we have of our customer shopping, especially with the history that we have of our trusted customer.
As you know, this is 8 million customer strong growth data, and these customers have been engaging with us consistently over the last many years, giving us a rich data for us to be able to use and mine. I'm confident this focus on data and analytics will help us to continue to reach our customers in a much more targeted manner online and also offline, where using the behavior that we are seeing of our customers, we are able to bring in much more sharper offering of brands that they are looking for, and it's more suited to their local needs. Finally, moving on to expansion. As I mentioned before, we opened three full line stores and two beauty stores of SS Beauty in this quarter.
We have another five stores, department stores that are fully ready and will open once the malls that they are in are ready to open. Most likely to happen in the third and fourth week of February. Majority of our new stores is in Tier 2, and we have a strong pipeline for the next year, which will be a big contributor to our future growth. In summary, we've had an exceptionally strong quarter and are demonstrating sustainable growth. This is a result of the strategy that had been put in place over the last two years and is working very well. We have a strong team that is in place with able leadership and capitalizing on the high loyalty and great trust that our customers have. We expect to see continued growth at Shoppers Stop. Thank you all, and we'll open up for any questions.
Thank you very much, sir. Ladies and gentlemen, we will now begin the question and answer session. Anyone who wish.
One second. We have received a lot of questions as Venu was speaking, and some of the questions we received this morning.
Should we take those first?
Yeah. What we thought, if we answer those questions, probably some of the questions would be automatically answered. I mean, we have almost 20 questions. Venu and I, we will take it through.
I'll start with the first one, what are the key growth drivers for the top line?
Expected like-for-like store growth in the medium term. I think that's two questions. Our growth has been across all our strategic pillars. The strong foundation that we have is of the brands, both national and international, across apparel and beauty, watches, sunglasses, home. All of these categories has seen good stable growth. Apart from that, we specifically the growth engines, and we have really two big growth engines which we have identified in the category space.
One is Beauty, and the other one is our own Private Brands across the apparel. These two are growing well ahead of the average growth that we are seeing. The second part of the growth comes from the channels, which is omni-channel, as well as new store expansion. Again, as I touched upon both of these areas, we have aggressive plans to grow. In terms of what is the expected like-for-like store sales, we expect to have high single digits or low double-digit growth in the immediate future. I would say more double digits in most of the quarters. Second question is on way forward on private label. Private Brand is a strategic pillar, and it is outgrowing our department store sales consistently for the last seven quarters now.
We started off by trimming down the number of brands, making sure that each brand caters to a specific lifestyle, and there is a clear brand definition, which we continue to sharpen as we go along. Our latest additions, Bandeya and In.Fuse, as I mentioned, have had a very robust start and look very promising. The way forward, our private labels will continue to grow by growing product categories and filling gaps within product categories that we have under each brand, as also by increasing space as the category starts to outperform productivity of the rest of the store. We will also invest strongly into building these brands through advertising and marketing and through sharply focusing on our specific customers who are buying our Private Brands.
Of course, also Private Brands gives us a massive opportunity to grow our margin, the margins in Private Brands being significantly higher than what we make in our business. Next question is on the margin profile for Beauty centers, especially do they have better margins than the rest of the formats? We have opened two beauty stores, and they are extremely profitable. As I said, we are opening two more in the next three weeks, and we intend to continue this drive over the next 12 months in key locations where we are not present. We are very confident that we will continue to recover our investment as we have seen in the stores that we have already opened. On margins, Beauty margins have always been higher and will continue to be higher.
The three-four -year growth strategy, I think I have already outlined that in my speech. If I were to just summarize that again, our growth is through our strategic pillars of First Citizen, Private Brands, Beauty and omni channel, building on the strong base that we have of our existing business being a house of brands and the partnerships that we have with our brand partners, both national and international, aided by growth through expansion of stores apart from like-for-like sales. Next question, discounting, how much of the sales takes place during the discount season? Have discount rates gone up? For this quarter, our sales during end of season was actually lower. It was marginally lower than the previous year.
As a result, the end of season sale has been reduced. How is discount shaping up in the last four months of December and beginning of January? How has the footfall been year to date, January 2022? Yes. I think as we know, there is a slight slowdown because of Omicron and the third wave that has come. There are multiple restrictions that are applicable across states, within a few states the stores being closed over a weekend, stores closing early during night curfew, etc. The good thing is that this time there has been no complete closure anywhere, so the stores are trading, but with significantly lower footfall. It has definitely impacted.
However, because of the double vaccination and the fact that the actual severity of Omicron itself is much lesser than what has been seen in the past, we expect this to be a short period, and we expect the footfalls to come back fairly quickly. Next one's on what is the company's strategy for In.Fuse? As I said, In.Fuse Is our D2C brand, fast fashion, young, trendy, and targeting the young customer in the 18 - 25 age group. We will continue to grow this online and grow this by expanding the choice that our customer has, the number of options that the customer is able to see. The customer, I am delighted with the way the team have grown this category or grown this brand.
Having had a preview of what is to launch in February and March, it will be a very, very sharp increase that we expect from this brand. Any details the company can share on the INR 40 crore investment done for digital? I think I again touched upon it. It's been twofold. One is the investment into the customer experience, improving the UI/UX on our app. Also, the data analytics and improving our capability to be able to analyze the trends and then using AI and ML to be able to retarget and reach our customers and engage with our customers in a much sharper way. Data is becoming a key part of what we do and fundamental to all our decision making.
This is being aided by the analytics capability that we are now being able to get through the investment that has been done in this area. The second part of the investment into digital is also in marketing and especially social commerce, which I mentioned. The whole metaverse mindset of our consumer and how we are able to adapt to that. Again, we are able to do that digitally, which is where our investment is going in. The next one I think again relates to a similar one on Omicron. Do you see a further threat of further delay in recovery for the retail industry? Overall, I think if you look at what we saw, the customer sentiment is extremely strong and buoyant. I expect the Omicron slowdown to be short and sharp.
It will be a short blip, which is what we expect. Next question is on the omnichannel contribution in city environments, which comes to around 6%. What are the plans to increase the contribution in the next four - five years? This is an area we continue to invest in and we continue to grow. Again, as with Private Brand, omnichannel sales has seen consistent growth quarter-on-quarter for the last seven quarters now. The growth here is coming with better engagement with our customers by being able to bring them back onto our app, as also through Amazon and nykaa.in and stillorder.in. Sorry, kimiss.in, which are the other platforms that we operate.
Specifically on shoppersstop.com, the First Citizen customer base that we have is extremely valuable, and I touched upon our ability to now use the shopping behavior, the buying behavior that we have of our customers to develop propensity models, which then gives us a power play that we are able to do that. The growth in omni sales will also come by adding more brands, and we now have a number of brands which are present only online and not in our stores. This gives an additional opportunity for our customers to get products and brands that they don't get in stores. Also by offering them, it becomes as an omni channel retailer, it gives customers an option of being able to shop at any point and do it as a competition of to us where.
Let's say example of a watch that they have seen online, and being a high ticket purchase, many customers would like to actually feel the product before they actually buy. The ability for us to be able to offer that experience is quite unique. If I take Beauty as an offer, and we have grown online Beauty very strongly, as I mentioned. But then makeup is an experience that I mean, it's an experience which you have to feel, and it's something only we offer. That's the point of difference which we have, which again, helps customers to be able to start their journey online, come to the stores, experience it, see the color, or feel the product before they actually buy. Multiple ways by which we expect our omni sales to go up. Improvements in the customer service.
I mean, just summarizing that, first one is improvement in the customer service. Second is the widest offer of brand and product. Third is the convenience and the ability to experience the product, feel the product before they buy, taking it through the omni. Next question. I think the next set of questions I'll request my colleague, Karuna, to take.
Thanks, Vinu. Thank you so much. The next question is, revenues have increased by 34%, while employee costs have increased by only 3%. Any reason for the same? We have been talking in the last four or five quarters. We have commenced a zero-based budgeting on costs, and that has yielded a significant result, not only in employee costs, in overall the other costs also. In addition to that, we have closed almost eight loss-making stores.
A combination of these two have kept not only the employee cost, the other costs also in check. That's the reason you can see the cost overall increase is much lower than the revenue increase. The next question is, what are the efficiency pockets we are targeting to drive up our operating margins?
Three or four things. One, we have been continuously talking with the brands to improve the overall margins. Second, Venu just spoke about our strategy both on Private Brand and the Beauty. Both are going to outgrow our normal department stores, and both Beauty and the Private Brand have a significantly higher margins as compared to our brands. That will improve the overall gross margin. Of course, there will be a blip due to Omni, but yeah, just a small one. Overall, we expect the mix to be better. I just spoke about our zero-based budgeting and cost savings.
Our cost savings will also help us to improve the overall EBITDA margins. The next question is, any impact on GST rate increase from 5% to 12%? What percentage of SKUs are priced below INR 1,000? Let me answer the first one. The impact would be very little if at all it gets implemented. We have seen a deferral, the government has deferred already three times. If at all it gets implemented, the impact is very little. We are working on two-plan strategy here. One, we are renegotiating the cost with the suppliers, and we will also take selective price increase on our apparel.
Yeah, of course, on the footwear, the GST has increased 5%, but that's very, very insignificant for, you know, the overall basket. The next question is, the gross margin continues to be at below pre-COVID levels. What could be the reason for the same? In fact, compared to pre-COVID, our offline gross margin has increased by 110 basis points. Because of the significant increase in eCom, there is some adverse impact, but overall, our gross margin remains flat as compared to the pre-COVID. We have published the results both for FY 2020 and FY 2021. If you still have, I mean, any questions, we are glad to answer that. The ASP has increased sharply by 20% over last year.
I really want to take that.
Yeah. I think this is a combination of two things. As I mentioned before, this time we have had a shorter end of season sale period, and this has resulted in lesser discounting as compared to last year. In the last year itself, it was after the second wave and there was a much sharper drive to clear inventory and hence a higher level of discounting had happened. It's the combination of the two that has massively impacted the overall ASP growth. This is something which we have seen with our brand partners as well as with our own brands, the lower level of discounting this year versus last year. The second factor is also the product mix.
One of the factors which helped us in our growth in the last quarter was the marriage season, which came back very, very strongly, given that marriages had been postponed from the earlier quarters and there was a big rise in shopping specifically for weddings and festivities. This leads to a product mix, which is of higher value, which again led to the higher pricing discipline and improve the ASP.
Okay. The next question is, how the investments in omni and technology of INR 55 crore has been capitalized or expensed out? Yeah, let me clarify. We have made close to INR 100 crore or slightly more than INR 100 crore investments as of year to date. Out of which INR 68 crore is an upfront of the physical stores, a combination of our CapEx and deposits. The CapEx will be capitalized, the deposits will be treated as deposits, and it will be lying as deposits in our books. In addition to that, we also spent INR 40 crore on omni, which again Venu spoke in his detailed speech. Out of the INR 40 crore, INR 20 crore is in marketing and the balance is in technology. Both the expenses in marketing as well as in technology we have expensed out.
The next question is the company in talks for the rent waivers? Of course, yes. With the lower footfall, the entire retail industry has been talking with the landlords for the rental waivers. We are at the beginning stage. We have been discussing with the landlords, and probably when we meet next, maybe we can come back to you. The next question is on the, what is the scope for further margin improvement? I just answered that. A combination of how we are going to grow Private Brand and Beauty and the cost savings. That just answers that. The last question is why depreciation is lower on a year-over-year basis? Two reasons. Rather three reasons. One, we took a one-time impact on depreciation in FY 2020 for almost INR 20 crore.
Second, in the last two years, we have closed almost 11 stores and that has resulted in lower depreciation. Third, what has also happened is, I'm sure we are following a straight-line method. When we do a straight-line method , at some point of time, the assets get automatically retired. I mean, there is not any further depreciation because those assets would have been fully depreciated. These are the three reasons why our depreciation is potentially lower on year-to-year basis.
Just one more question which is on Arcelia run rate. Arcelia is our Private Brand and B eauty, which I talked about in my speech. The current run rate on Arcelia is INR 1 crore per month. This is only with the bath and body range. For three weeks in the quarter, we had fragrance and deodorants as I elaborated. This is a brand which we expect to see massive growth and with makeup getting launched during the quarter. As I said, we are launching 75 SKUs of makeup and nails in the fourth quarter, and with more to come in the following quarters. This will become a large part of our CP offer. That completes the questions that we have.
We can now take questions from people on the call.
Thank you very much, sir. Ladies and gentlemen, we will now begin the Q&A session. Anyone who wishes to ask a question may please press star then one on their touchtone telephone. If you wish to remove yourself from the question queue, you may press star then two. Participants are requested to use handsets while asking a question. Participants are requested to limit their questions to one per participant. Time permitting, you may return to the queue for your follow-up questions. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Aliasgar Shakir from Motilal Oswal. Please go ahead.
Yeah, hi. Thanks for the opportunity. I had a question on your costs while you did, you know, give some indication. When I compare your, you know, cost with 3Q FY 2020 numbers, I see, you know, with the revenue recovery, your margins are actually nearly about, you know, 60-70 bps below. Yeah, well, employee cost is obviously lower, but, you know, rest of the costs are higher. Of course you know omnichannel cost is actually something I think I see, INR 40 crore increase.
Just want to understand, I mean, you know, whatever cost savings we have mentioned, should we expect this to now be, you know, utilized more towards our omni investment and therefore overall level, you know, costs should remain where they were at pre-COVID level or, I mean, how should your overall, you know, cost structure trend, now? Thank you very much.
Thanks a lot, Aliasgar. Actually the costs have come down as compared to FY 2020. In FY 2020, we had a total cost of INR 345 crore, and as of now we have INR 305 crore. If you remember what we said at an annual level, we will continue to save INR 200 crore, and we did save INR 40 crore in this quarter. We also said the INR 200 crore is excluding the investments what we will make on omni or any other marketing investments we will be making on our strategic pillars. As you rightly said, I mean, both Venu and I just about, we invested close to INR 40 crore in omni.
In spite of that INR 40 crore, of course, year to date, we could save close to INR 40 crore for the quarter. To answer your question, the cost savings should be. We should be able to sustain this cost savings, Alias gar.
Okay. Could you quantify? Because when I'm seeing Q3 like-to-like, there's about 70 basis points lower margin. So I mean, I'm just thinking that, well, if at all it's a large part got, you know, I mean, bulked up into this quarter, if that is the reason, that if you could quantify from that level, you know, what kind of margin saving we expect to continue from FY 2020 level?
The margins have increased as compared to FY 2020 level, Aliasgar . What I can do is, I mean, like I can give the breakdown in the interest of time. See, we saved almost INR 17 crore in employment and occupancy and across all the lines we saved the cost. Probably we should discuss offline, I mean, you know my number and I know your number. I mean, yeah, why can't we take it offline? I'm not too clear.
Sure.
To give the numbers. We can take it offline and then we can definitely close it.
Sure. Can you just share some outlook in terms of, from, you know, FY 2020 levels, what kind of margin saving post the omni-channel investments do we expect net of that?
See, our investment will normally continue to be dynamic .
Right.
Okay? Similarly, our marketing cost. While we would definitely save INR 200 crore, probably, if we are going to invest INR 30 crore-INR 40 crore in omni as well as in other marketing. Our net cost savings should be between INR 150 crore and INR 160 crore. As I said, Aliasga r, I mean, like, these are dynamics.
Right.
And It's a bit difficult to say.
Right.
These are the investments broadly we are discussing internally.
Got it. Thank you very much.
Thank you. The next question is from the line of Nihal Jham from Edelweiss. Please go ahead.
Yes, sir. Thank you so much, and congratulations on the performance, sir. Given this one question, the key question I wanted to check with you is that you're incrementally targeting majority of your store openings in Tier 2 and Tier 3 cities. Looking at your ASP, it is, I guess, a little higher than what a lot of the other retailers generally work at.
When you move into these cities, rather than, say, having a smaller store format, are you targeting a change in assortment also to maybe align to those regions? Or just your thoughts on how do you see yourself succeeding in those regions? What are the changes you plan to make?
Absolutely. I think you have nailed it when you say it's a combination of anchor stores and also our ability. Because as a house of brands, we have the ability to play up or play down depending on the catchment and the location. For starters, at most of these stores, we would have a higher percentage of Private Brands, because Private Brands in the hierarchy cater to the good and better segment of our customers, and hence are more attuned for our Tier 2 customers.
The second factor is, again, by being able to look at the data of our First Citizen customers who are shopping with us online from some of these places, we are able to get a better sense of which brands would be more suited for these, for these catchments, and accordingly bring those in. The third is also the split between categories itself, because unlike a number of our competition, we have a good mix of apparel, beauty, watches, sunglasses, travel, home. We are also able to tweak the category based on the catchment and the need of the customer in those places.
Very helpful, sir. I will come back in the queue for further questions. Thanks.
Thank you.
Thank you. The next question is from the line of Ankit Kedia from Phillip Capital. Please go ahead.
Thank you. Venu, my question is for you. You know, it's been more than a year now you are in the system. Just wanted to know, is the top management team according to you now fully set? Because last two or three quarters we have seen some replacements, some, you know, lot of new joinees at the top level now. Are you confident and which areas do you see you still need some leadership team members to join to take you through the next five years?
Thanks for that question. Firstly, our leadership team is now fully in place, and we have had, I would say, additional slots and replacements filling into key areas where we are driving growth and are strategic pillars for us. As I mentioned, Shwetal joined us and looks after our strategic pillar of personal and customer engagement. This is an area Shoppers Stop has always excelled in, and we continue to be ahead in that area. Biju joined us on Beauty, and again, it is a strategic pillar and would help us grow aggressively in this area.
The other new members who joined the team in the previous quarters were Sandeep, who had joined us as the Head of Retail, and this was a gap which we had in our leadership team. The fourth new member who had joined us earlier this year was Srikanth. Srikanth joined us as the Chief of E-commerce, which again is our strategic pillar, and hence having clear leadership in this area. As you can see from the additions that we have done, it is to spearhead each of our strategic pillars and make sure that we have good leadership for us to be able to grow in these categories. Other than that, our team is complete. We have an excellent team in place.
The team has settled in apart from the two new members who joined recently, all the others have settled in well, and these two new members who joined have also blended into the team very well. I'm absolutely delighted with the way that we are working as a team. This is clearly illustrated in the motivation that there is within the team, the confidence and the morale that is present within the team.
Sure. If I can just squeeze in a couple of questions from Karuna's side. Karuna, on the cost saving, while you alluded INR 200 crore will be on FY 2020 base. With the current inflation we are, you know, seeing across, be it on the manpower cost or be it in other areas as well, you know, three years out, with the aggressive stores opening as well, do you see, from FY 2022 base, our cost growing, in line with, our top line growth? Or, you see the cost will, you know, we can see some margins, apart from private label beauties and stuff, but broadly the cost growing, in line?
Ankit, thanks for the question, Ankit. What we said even at that time is INR 200 crore on a like-for-like basis. Of course, if we open, say we are opening close to eight-10 stores this year, and we are planning to open 10 stores next year. So all those inorganic expansion will definitely drive the costs. Okay. So that's one. Second, again, I repeat once more, we are investing in omni, and that has yielded significantly good results. We are being extremely conservative. Even our technology investment, we don't capitalize it, but we write off as and when we invest. So for all those investments will take some of the cost savings what we made.
I think on a like-to-like basis, we should be able to save close to INR 200 crore. Plus, whatever investments we are making, and probably we may make INR 30 crore-INR 40 crore on omni and some investments on the new stores. Those things will reduce the overall cost saving. On a like-to-like basis, we still maintain we will save INR 200 crore.
Right. My last question is on the ASP increase. While you know, when you alluded to the two parts of shorter year certain product mix, are you seeing raw material pressure being there with the way yarn prices are? In the next season, industry as a whole needs to take a double-digit price increase given the way you know inflation is in raw material.
Yeah, definitely. We are seeing price pressure, especially in the apparel category and also to some extent on beauty where bulk of the product tends to be imported. Given the pressures on raw material and the input costs, there is a price increase that we have already taken. What we do believe is that because of the strong offering that we have, this is something which will still keep us very competitive in the market. I wouldn't say it's a double-digit increase, but it is a high single-digit increase.
That's helpful, and all the best for the future.
Thanks, Ankit. Thank you.
Thank you. The next question is from the line of Percy Panthaki from IIFL. Please go ahead.
Hi, sir. I was looking at your gross margin, and for the quarter versus two years ago, they have dipped by about 200 basis points. Just wanted to understand the reason behind the same.
Percy, probably that could be. See, we have given both the non-GAAP results and the GAAP results. On the GAAP results, our margins are just flat. On the offline, we have increased significantly, but that has been offset by the omni. Overall, our gross margins remain the same as we were in FY 2020 in the non-GAAP. In the GAAP, what could have happened is because of Ind AS 115, the revenue recognition is based on consignment sales and non-consignment sales. That could be one of the reasons where the GAAP margin could have come down. My answer should be, take the non-GAAP, and then the margins absolutely remain the same.
Basically, I'm just trying to reconcile the EBITDA margin fall, and I'm looking at the EBITDA year three in the Ind AS 116. You mentioned earlier that you have actually saved some cost between the gross profit and the EBITDA. If the EBITDA margin has fallen despite the cost saving, that would mean that there is a gross margin compression, or am I missing something here?
No, let me, I'm not sure from where you're getting the numbers. I mean, we have our non-GAAP things. Okay. Our margins have remained flat. The cost savings are around INR 40-odd crore. Our EBITDA margin decreased by 55 basis points, which is a a safe range .
Okay. I'll probably take this offline with you.
Just take it off. Yeah, we can discuss offline, and then I can take you through the entire numbers.
Yeah. Sure. Thank you.
Thank you. The next question is from the line of Kaustubh Pawaskar from Sharekhan. Please go ahead.
Yeah. Good morning, sir. Thanks for giving the opportunity. My question is on your store expansion strategy. You mentioned that you will be adding another five stores, department stores, and these stores will be largely in the Tier 2 towns. In terms of size, should we expect the size of these stores to be, you know, lower compared to what it was earlier for you? Second question related is, now you are focusing more on your omnichannel, you know, omnichannel and digital platform. Considering that, even your department store sizes would be lesser in the coming years compared to what it was earlier?
Thanks. Thanks for the question. Our store sizes earlier used to be in the range of 40,000 sq ft-50,000 sq ft. As we go into Tier 2s and, as you rightly picked up, most of our expansion and focus is into the Tier 2 , where we are not present or even where we are present, where we have the opportunity to grow a second one, and I'll elaborate on that in a minute. The reduced store size is definitely a set formula that we are now using. Typically it is 25,000 sq ft-30,000 sq ft that we are now going with versus 40,000 sq ft-50,000 sq ft. What we are seeing in these places is the productivity and profitability both are significantly better.
Examples of Siliguri, Ranchi, where we have opened smaller stores and extremely profitable with a very high productivity. In fact, Ranchi, which I mentioned, where we already have one store, we are actually going with a second store in the Tier 2 city itself, given the adaptability that we have seen and the acceptance from our customers of these places. Similarly, there are a number of other cities where we are expanding into. There's Jaipur, Jodhpur, there's Guwahati, Imphal, all of these places where we are going into. The second question, sorry, I forgot your second question. Could you please repeat?
Yeah. Now since you are focusing more on the omnichannel.
Yeah, I remember now. On omni. I mean, see, if you look at the market penetration of retail, and if I just step back and look at macro numbers in retail, organized retail today is 29% of the total retail market. A large part of the growth that is being seen in online is unorganized retail moving into organized. A number of this migration from unorganized to organized also would benefit the organized physical retail, hence the opportunity for both online and offline. Second, the future of retail is omni. It's neither online nor offline. Customers will choose to start their journey online and then get into the store or vice versa as per their convenience. Hence, retailers will need to be present both offline and online to be able to fully service and cater to a customer.
That is the journey that we are on, and we are seeing that increasingly that whole engagement on the app and in the store going up. With this data and analytics, we are able to service and cater to that customer in a much better way.
Right, sir. Thanks for the understanding. Just one question on the consumer sentiment. As you mentioned that the consumer, despite the fact that there is an emergence of third wave, the consumers sentiment has been strong. Continuing that, even though you are going to see, you know, some kind of a, you know, temporary break on Q4 numbers because of few restrictions on various states and imports. Whatever, you know, should we expect the [indiscernible] regarding, one because the pent-up demand would be there and, you know, again, the marriage season is expected to be postponed.
Continuing that, and the overall improvement in the mobility, should we expect, you know, the quarter one sales to be better than if there is some kind of a break in Q4?
You're absolutely right. I think there is a pent-up demand which we saw come out after the second wave, and we expect the third wave to be much sharper, shorter, and the recovery to be equally strong and quick. As I said, I believe we believe there is a wardrobe reboot that is happening where customers are gearing up for post-pandemic life, buying large quantities and different categories across apparel and beauty. We were able to realize this trend early, and it's something that we will continue to review and make sure that we are offering the right product to our customers. That's something which plays to our advantage because of the large portfolio of products and categories that we carry and our ability to weave in and out based on what the consumer demand is.
Effectively, the wardrobe reboot combined with the availability of data and the agility that we have now to be able to cater to that stands us in good stead and would be able to help us grow our business strongly and sharply.
Thank you. Thanks for the understanding. I will get back in touch.
Thank you. The next question is from the line of Deepak Poddar from Sapphire Capital. Please go ahead.
Hello? Hello?
Go ahead.
Yeah. Thank you very much, sir, for the opportunity. Now, sir, just I wanted to understand first on the other income side. Now, so how much of the other income reported about INR 40 crore would be from maybe rent waiver or some those sort of income and what's the sustainable other income going forward?
You are talking about the GAAP numbers for Q3?
Yes, the INR 41 crore one.
That includes some of the consignment sales that we account only the margin income. The other than that, I mean, that fluctuates depending upon the contract what we have with our suppliers. I'm sure you know it varies from time to time. Other than that, there is nothing but what we said and how it is treated in accounting for the purpose of GAAP. We do expect the other income of anywhere between INR 10 crore-INR 15 crore this year per quarter, and it should marginally go up as we move on. The other income comprises of two large things. One, the rent that we get from our retailers. The second one is the subscription money that we get from the loyal customer base.
It has both the normal loyal customers as well as the Black Card customers. We have been seeing a significant increase on the subscription from our Black Card customers. In fact, when we speak, it's also said that the Black Card customers' subscriptions have almost doubled in the last one year. As we go through, I mean, we do expect a significant increase on that end.
Going forward, INR 10 crore-INR 15 crore per quarter is what is a normalized level?
Yeah, it should be slightly more than that. Probably INR 10 crore-INR 15 crore is right now. It should be slightly more than that.
Okay. Okay, fair enough. Understood. Sir, in the past, like on a little medium term, maybe four years, we have spoken about doubling our maybe the revenue from FY 2020 base, which is about INR 3,500 crore. FY 2025, our vision would be to have INR 7,000 kind of a top line target. Any comments on that?
Yeah, I think as we have said in one of the earlier calls, our aim is to double our business over the next four-five years, and I would expect it to be slightly higher than that.
INR 7,000 on GAAP sales is what we have put up, which is pretty much, I think, where we would end up. On a non-GAAP, it will be slightly higher. The engine for this growth is, as I said before, the growth of omni-channel, new stores, and from a category point of view, the strategic pillars of Private Brand, Beauty, and festivities.
The pillars that you have spoken about.
My final query is on your margin. How do you see margins going forward now? 19% margins that you reported, how sustainable is that one should look at?
Q3 is exceptionally good because of two reasons. One, our Q3 has always been the best quarter, not only for Shoppers Stop, across all the retail. The Q3 margins are always high. Again, when we discuss the non-EBITDA margins. Our non-EBITDA margins, EBITDA margins should be close to high single-digit in the next one-two years.
Yeah, it's like with our plans with the Private Brand and Beauty, it may go even, I think, low double-digit three years from now.
The non-GAAP, right?
Yes, the non-GAAP. Yeah.
Understood. That's it from my side and all the very best. Thank you.
Thank you so much.
Yeah.
Thank you. The next question is from the line of Prateek Poddar from Nippon India Mutual Fund. Please go ahead.
Yes, sir, just one observation. When I see within your private label, the mix of beauty is much lower than apparel. With you launching the new category which you just spoke about in the initial remarks and covering the entire category, is it fair to say that the mix of beauty within private labels will increase from here on?
Yeah. Currently, the mix of beauty is extremely small. I mean, it's because it started only in a couple of quarters back, and it's so far it's only bath and body and BB.
Very good.
This is a category as a percentage to the total in the Private Brand play, Beauty will play a much bigger role in the next four quarters.
The other?
Because we are launching from our lineup of new launches which are there.
Can you just help me understand the gross margin differential between Beauty Private Brands versus third party?
It is significantly higher. I wouldn't want to put an absolute number in there, but what I can say is that it's significantly higher, double digits.
Okay. Just to then add these two together, with the share of Beauty increasing, Private Brand, Beauty increasing and you know, the way you talked about gross margin differential, in the next four quarters, we could see, I think Karuna was also mentioning higher gross margins coming into the business on a structural basis.
Yes.
Got it. Thanks.
Mr. Prateek Poddar, do you have any further questions?
No, I'm done. Thank you.
Thank you. The next question is from the line of Devanshu Bansal from Emkay Global Financial Services. Please go ahead.
Yes, hi. Thanks for the opportunity and congrats on a good set of numbers. Sir, I wanted to check on how these growth investments are going to be funded going ahead. So would the internal accruals suffice or we may have to raise external capital as well?
As you would have seen, we are completely debt free and the internal accruals that we have are more than enough to be able to fund this.
Sir, on a net basis, I guess our cash reserves are at about INR 10 crore-INR 12 crore .
Right. See, this is a year in which the first quarter has been completely washed out. The second quarter we had almost 50% . Third quarter we've been close to 75%. From next year onwards, if there are, I mean, we do assume there will not be any COVID. Our investments, as you have seen in 2018-2019 and 2019-2020, all are completely internally funded, and we will continue to be internally funded for all the investments worth it.
Sure. Secondly, I wanted to check on you mentioned about increasing margins from the brands. Is this specifically for new brands that we'll be associating with or with existing brands as well? Also if you can indicate any ballpark numbers for the increase that would be helpful.
See, we have been continuously negotiating with all our trade partners for increasing margins. Particularly wherever we found that, there are specific reasons why we have to take a margin increase, we have been doing that. It's a bit difficult to give a particular number saying that what would be the margin increase from the brands next year. Yeah, that's ongoing and there has been an increase of say 10, 20 basis points, or sometimes slightly more than that on a year-to-year basis.
Also just to add to what Karuna has said, there are two other levers which help us. One is by jointly looking at and working with our brand partners to reduce logistics costs, which can be a significant portions. I mean, if I give a specific example with one of our large brand partners, what we did was to relook at our entire supply chain, and by moving it to a warehouse-based model, we've been able to increase our overall margin, at the same time reduce the inventory. So that's one lever. The other one is that we also are continuously looking at the performance of the brands within our stores and brands that don't perform, we have the ability and flexibility to be able to replace them with better brands.
As we bring in newer brands, we are also able to negotiate a higher margin with some of these. I might add two. Of course, the common one, which is the third one, is also consistently working on better buying and hence lower discounting. A better sell-through and being able to sell at a full price is something that we pride ourselves in, and our able buyers and merchandisers together are constantly looking at this to make sure that we are able to sell at a much higher full price and hence a much lower level of discounting that we need to do, which leads to a final margin.
Sure, that's helpful. Sir, last call you mentioned about slower pickup in some categories like ethnic and all. How has been the pickup during Q3?
Q3, I mean, Indian wear has had lower sales for a few quarters. However, in Q3, it picked up very sharply, aided by the festive season that we have in the normal quarter. Plus, as you mentioned, the number of weddings which had got postponed, et cetera, coming back, and obviously, all of these cater specifically to the ethnic wear and Indian wear. We saw a very sharp growth in both categories across women's and men's. Bandeya, which is our newly launched men's brand, contributed to 5% of the total menswear sale. Similarly, in Indian wear, our private labels of Kashish, STOP, and Haute Curry contributed to nearly 50% of our overall sales.
That if I look at absolute growth that we saw in women's Indian wear, it was disproportionately higher than the rest of the category.
Sure, sir. That's really helpful. Thanks a lot. With that said on mind.
Thank you.
Thank you. The next question is from the line of Binoy Jariwala from Sunidhi Securities. Please go ahead.
Yes, good afternoon, and thank you for the opportunity. A couple of questions for Karuna and one for you, Venu. Firstly. Second, Karuna, you know, can you give me the carry forward tax losses that are available to us as of date?
Finally, it should be close to INR 350 crore-INR 400 crore, Binoy.
Understood. By when do we expect this to be able to set off this completely?
See, we are, I mean, working on the plans. In the next two-three years, we should be able to completely utilize these tax losses.
Understood. Okay. Last one for you is on the omni-channel OpEx that we plan to do about INR 40 crore in FY 2023. Will this be ongoing or at the rate of INR 40 crore-INR 50 crore a year, or FY 2023 is the last year?
We have spent INR 40 crore as of now, okay? We expect the omni share to increase from 6%-10% over a period of time. If we want to increase the omni share to double digits, we have to continue to invest. I don't think without investing we can get a 10%. INR 40 crore is what has happened as of today. Probably for the full year it will be higher than INR 40 crore, which will be primarily in marketing and technology. If you ask me whether we will have it for next year, yeah, we will definitely have it for the next year also.
However, I think also just to add to what Karuna said, important to note that when it comes to omni, especially the technology investment, we most of our investment is an OpEx rather than a CapEx. While so the benefits of the investment would last much longer and hence the absolute spend overall will start to taper down after a period. Currently we are in the investment phase there.
Understood. The last question, which is specifically for you, Venu. You know, as you've reiterated on this call as well that we plan to double sales to about INR 7,000 crore from the GAAP numbers over the next four-five years. This means that we are targeting, we should be targeting close to 20% sales CAGR for this period, right? When I look at the disclosure that you've made for retail area addition in FY 2023, that amounts to roughly 7% of the total area. Right? So 20% - 7% = 13% has to come from same-store sales growth, ballpark. Right? First question is, do you see the need to revisit the timelines?
If not, then what is giving you the confidence of being able to deliver double-digit same-store sales growth?
Uh, over the?
Over the next four-five years consistently.
Yeah. Binoy, couple of factors here. One, same-store sales and average, touched upon, we expect it to be high single digits, low double digits is what we would expect year-on-year. The second is the expansion that we have taken of new stores. We expect to add around 10-12 stores every year. It would be slightly higher than the 7% that we are factoring in because I mean, today we have 86 stores and 10 stores on that is around 11%-12%. I appreciate that even if we were to maintain that same trajectory and the absolute percentage to the overall will taper off, but it'll be broadly around 10%. The third factor is online growth, as we talked about extensively during the call.
A big part of our expansion or growth will also come from online sales and digital sales. Those three factors is what would help us, and this is something which has been detailed out, and we expect to be able to achieve that.
Understood. I was actually saying retail area addition in terms of square footage. In the presentation you've mentioned that you plan to add roughly about 0.3 million sq ft in FY 2023, and we have a base of 4.2 million sq ft-4.3 million sq ft as of now. That's how I got the number of 6%-7%. I understand. I understand.
It needs to be taken along with the statement that the productivity in these stores tends to be higher.
Understood. My last question, if I may, this question is on gross margin Venu. So you know, when I look at the cost structure, you pretty much sorted. Now you are in the mode of expanding your retail area footprint as well, right? All in all, this gives us the confidence in the business model. When I look at the gross margin you're operating on non-GAAP basis, you are operating at 20%-33% gross margin. When you are operating at such a thin margin, you know, the flow through benefits that you have on to the bottom line is limited as well, right? You have a CapEx plan of roughly about INR 100 crore a year, which you want to fund it through internal accruals.
Do you feel that there is a need to improve upon a gross margin? There's 200 basis points improvement on INR 3,500 crore turnover or INR 3,000 crore turnover would mean a lot, right? 100 to 100 basis points even would mean a lot.
Yes. I think on first point, absolutely agree. One of our key focus areas is to grow our overall margin. The tools that we are going to use is first and foremost, of course, Private Brands, which is obvious. Also within Private Brands, it is the growth of the total sale as well as the overall margin within Private Brand as well through better buying and lower risk content. That's the first one. The second one, we talked about Beauty and the growth of Private Brand in Beauty and also the mix of Beauty itself because the overall margin that we get in Beauty tends to be higher.
The marginal increase also coming in from national brands and within national brands, owned as a specific category where we are making a sharp increase in the share of Private Brands within them.
Understood. Can I expect that the gross margin could look up to closer to 34- odd% or do you think 32%, 33% is steady state for the business?
Binoy , normally we don't give any guidance on the gross margins, but we are in fact both Venu and I have addressed separately. There are three or four levers where we are working on gross margins. One, we are discussing with the brands. Second, Venu has probably reiterated more than three times that both our Private Brand and Beauty, the margin will increase, so overall the mix will increase. Of course, the online margins are lower, partly it's an offset, yeah. Our plan is to increase the gross margins to the levels whatever you are saying about, Binoy .
Sure. Appreciate. Thank you so much.
Thanks, Binoy. Appreciate it.
Thank you. Participants who would like to ask questions, please press star then one. The next question is on the line of Vivek Gautam from GS Investments. Please go ahead.
Yeah. Sir, I would like to know about the sustainability of the growth in the current quarter and are they really one-off like inventory adjustment and exceptional gains contributing to good numbers there?
First, the growth that we saw in Q3 is based on strong consumer demand, based on the performance of each of our strategic pillars, as well as the core foundation of national brands that we have. Each of this is on very firm footing, and we expect this to be consistent and sustainable. Over and above that, the new areas where we are growing into especially omni-channel and also in Private Brand and Beauty, these are areas where we have got a very high headroom for us to grow as we have detailed out earlier.
Given the investments that we are making into each of these areas and also the strong offers that we have in terms of both for the customer as well as the product portfolio that we are offering, it's something which will definitely sustain in the medium to long term. Lastly, I talked about the investment into data, and this is something which we are going to double down on constantly going forward, with moving and transforming ourselves into a data-led business using AI and ML to be able to derive the benefits of the vast amount of data that is available with us. All of this makes it extremely sustainable going forward, and we are very, very confident of the growth.
Thank you. Ladies and gentlemen, that was the last question. I now hand the conference over to Mr. Venugopal Nair for closing comments.
Thank you very much. I would just like to once again thank everyone for their participation, for the questions and the active engagement that we had. Just to summarize once again, delighted with the strong quarter that we had, and we are now demonstrating sustainable growth. This is a result of the strategy that we had put in place over the last 18-24 months, and we are delighted that it is working very well. We have a strong team in place with able leadership for each of our key areas. As we continue to capitalize on the high loyalty and the great trust that our customers place in us and on the Shoppers Stop brand, we expect to see good growth in the coming quarters. Thank you very much, everyone.
Thank you very much, sir. Ladies and gentlemen, on behalf of Shoppers Stop Limited, that concludes this conference. We thank you all for joining us, and you may now disconnect your lines.
Thank you.