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Brand factory leading growth; capex intensity remains high
Key takeaways from our recent management meet with Future Lifestyle Fashion Limited (FLFL) are: i) festive period sales across formats have been strong; ii) huge response to BF ‘free shopping weekend’ (FSW) event in mid-Dec’18 as revenues during FSW have almost doubled YoY; iii) maintained its medium-term guidance of 15-17% revenue CAGR with 40-50bps EBITDA margin improvement and RoCE expansion at 450-600bps over next three years; iv) revenue growth to be majorly led by Brand Factory (BF) with likely double digit SSSG and aggressive store network expansion; v) targeting to more than double BF stores over next five years with 25-30 store additions p.a.; while expansion of Central stores will be in a calibrated manner with 4-5 stores p.a. We believe capex intensity is likely to remain high in the near-term given expectations of acceleration in BF store additions, which may impact return ratios. We maintain our estimate of 17% revenue and EBITDA CAGR over FY18-FY21E. Maintain ADD rating with unchanged target price of Rs425/share based on 14x Jun’20E EV/E.
* Management re-iterated its medium-term guidance of 15-17% revenue CAGR by maintaining close to double digit same store sales growth (SSSG) and network expansion. Despite increasing share of low margin BF business, management expects to improve overall EBITDA margins by 40-50bps led by increasing share of owned/ licensed brands, premiumisation, increasing store maturity (~80% stores are less than five years old), supply chain optimisation and other cost efficiencies. Coupled with margin expansion and working capital improvement, management expects to improve RoCE by 450-600bps over next three years.
* BF is expected to lead growth with aggressive store addition plans given huge scope for penetration, positioning as liquidation channel, launch of online platform by Mar’19, increasing customer footfalls (30% CAGR in BF vs 2.4% in Central over FY16- FY18), higher stickiness and conversion rate (36% coversion in BF vs 27% in Central in FY18) through various marketing offers and low price points for brands. Adjusting for shift in festive days, Central/ BF have registered SSSG of 5.2%/14.0% in H1FY19 which has increased share of BF revenues by 400bps to ~35%.
* FLFL targeting to more than double BF stores over next five years with 25-30 stores addition p.a. While expansion of Central stores will be in a calibrated way with 4-5 stores addition p.a. FLFL added net four Central and 26 BF stores in 9MFY19E with 44 Central and 89 BF stores as at Dec’18-end. Management mentioned that Central stores attain break-even in two years with payback period of 4-5 years, while BF attains break-even within a year with a payback period of three years.
* Huge response to third BF ‘free shopping weekend’ (FSW) event which is hosted for one week (12th Dec’18 - 16th Dec’18) as revenues during event have likely almost doubled YoY. The event has been conducted in 88 stores across 37 cities and more than 200 national and global brands have participated offering heavy discounts on a range of apparels. FSW is India’s only national ticketed shopping event where shoppers need to pre-book their entry passes at a minimal cost of Rs250 (premium passes for two: for early entry to the store from 8AM) and Rs100 (classic passes for two: for entry post 11AM). The pass value was redeemable during next purchase between 18th Dec’18- 31st Dec’18. In FSW, customers can buy any merchandise worth Rs5,000 (any multiples thereof) and pay only Rs2,000 and also get this amount back through free apparel worth Rs500, gift vouchers of Rs1,200 and Rs300 cashback through Future Pay Wallet.
* Net debt in H1FY19 increased by Rs400mn to Rs7.3bn as at Sep’18-end coupled with 2% equity dilution (Rs1.7bn invested by L Catterton Asia) as the company incurred capex of Rs2.4bn and invested Rs500mn in an online venture, Koovs. FLFL plans to invest a further Rs0.9bn in Koovs and expects to incur capex of Rs4bn-4.5bn during FY19. We believe capex intensity is likely to remain high in the near-term given expectations of acceleration in BF store additions, which may impact return ratios.
Details in our report ‘Brand factory leading growth; capex intensity remains high’ dated January 10, 2019.
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