Near‐term issues taken care of but re‐rating journey might not be all that smooth; prefer Trent and V‐Mart over ABFRL
*Quarter Highlights – Revenue saw some progressive recovery after falling to 16% in 1Q to 45% of previous year in 2Q driven by creation of new products (masks, work from home wear, athleisure) and channels (multiple digital channels); 58% revenue decline in Madura, 60% in Pantaloons, +ve in innerwear; strong margin expansion in Pantaloons; 95% stores operational by 2Q‐end but footfalls still low; EBITDA breakeven achieved given aggressive cost optimization with 417crs of cost savings; PAT loss of 188cr vs 410cr in 1Q; advancement of new store openings in both Madura (100) and Pantaloons (7) in the quarter; 1500cr capital infusion from Flipkart and 1000cr from rights issue; net debt 3159 crs and WC 1277crs; target net debt of 2000‐2200 cr by year‐end before Flipkart capital.
* Outlook – Expect consistent recovery in business to continue and with full normalcy expected by 4Q21; focus to remain on product innovation, inventory freshness and channel innovation; aggressive cost optimization and capital raise will strengthen balance sheet and drive growth.
* Reasons for lower than expected sales – Pantaloons had impact of high base (Durga Puja sales in 2Q last year) and Madura wholesale sales were intentionally slowed down to help liquidate channel inventory.
* Madura update – Came up with new lines of products like premium masks; strong cost optimization; added 100 new stores and another 100 in pipeline; own website business grew 3x; hyperlocal model also doing well; retail sales very strong indicating brand strength and ability to innovate and adjust the offering to consumer requirements.
* Pantaloons update – Digital marketing campaigns, addition of new categories and strong assortments drove high traffic to e‐commerce channel (avg daily orders up 4.2x) ; higher average bill value; 7 stores added; launched new store identity; private label share has jumped to 67% led by entry in new categories like sarees, home and increased kids wear sales.
* Innerwear/others update – Positive growth led by athleisure and home wear segments; international brands doing well on e‐com channel inching towards profitability.
* Cost reduction sustainability – Key elements were overheads (salaries, store operating expenses) and rentals which will continue to some extent in 3Q but at a much lower level; selling expenses to come down by 30‐35%; employee cost reduction of 20%; ad spends reduction of 70‐80%.
* Current demand trends ‐ Had a broad target of doing 20% of last year sales in 1Q, 50% in 2Q, 70‐80% in 3Q and 100% towards end of 4QFY21 and remain broadly on track to achieve that; smaller cities and towns doing much better.
* Flipkart deal – Had a strong existing relationship with Myntra; current deal is a pure financial investment; started omni‐channel initiative 4‐5 months back with Myntra and other online retailers which will continue; money should come in 4Q which will be used to pay down debt.
* E‐commerce share ‐ Traffic increasing significantly on own websites; Madura online share should increase to early double‐digits from 8% and Pantaloons share should increase to 4‐5% from 1% currently over next 12‐18 months.
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