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Q4 EBITDA came 9% below estimates, led by lag in price revisions by brands, resulting in lower gross margins. However, Ethos expects margins to recover completely, once the ongoing price revisions get completed. Q4 revenue grew strongly by 31%, of which 27% was contributed by SSG and the remaining came from addition of new stores. Ethos expects strong momentum to continue in FY24, with best-in-class outlook of 25-30% topline growth (upon 37% growth in FY23) and operating leverage-driven margin gains. Targeted growth is a combination of 12-15% SSG and new store additions, as Ethos targets to take its store count to 90 stores by FY25 (vs. 54 stores currently). RoIC (posttax) improved by ~300bps to ~13% in FY23, led by strong margin gains (+280bps in FY23) and stable working capital (148 days). Given strong execution and outlook, we are increasing our margin estimates by 70-90bps, leading to a 7-8% increase in our EBITDA estimates. We maintain BUY with a revised TP of Rs1,540 (22x Jun-25 EBITDA vs. Mar-25 earlier).

Luxury categories seeing stronger results due to low demand elasticity

Revenue grew strongly by 31% to Rs2.08bn in Q4FY23, led by 27% SSG and new store additions. Gross margin declined by 80bps YoY to 29.4% (-160bps QoQ), owing to lag in product-price revisions by brands. Ethos expects the impact to be temporary, which should get phased out through price revisions in Q1FY24. EBITDA margin (Pre-Ind AS) declined by 80bps to 8.1% in Q4FY23, led by lower gross margin. Store additions pickedup with 4/6 additions in Q4/FY23, taking the total count to 54. Despite new store additions towards the end of FY23 and signing of seven exclusive partnerships in FY23, working capital remained stable at 148 days (vs. 145-150 pre-Covid). The CPO business grew by 61% YoY to Rs0.5bn (gross billings of Rs0.53bn) in FY23; Ethos expects similar or higher growth rate for CPO business in FY24.

Earnings Call KTAs:

1) Ethos has ventured into four new cities, taking the total city count to 22; the new cities are Surat, Bhopal, Bhubaneswar and Siliguri. The company plans to enter Raipur as well in FY24. 2) Ethos expects its gross margins to remain within 30-31% range, in line with global luxury watch retailers. EBITDA margin will continue to improve going ahead, led by operating leverage. 3) Ethos indicated that absolute price hikes taken by brands were in the range of 6-9%, most of which were taken in Q4. 4) Supply chain constraints have reduced relative to prior periods, albeit some constraints remain for certain in-demand models. 5) Ethos entered into an exclusive agreement with Laurent Ferrier in Q4FY23, taking its total to seven exclusive partnerships in FY23, with several more in the pipeline. In FY23, the share of exclusive brands was ~27% (vs. ~28% in Fy22). 6) The company's share of repeat sales rose to 46% in FY23 vs. 41% in FY22, suggesting improving brand loyalty and superior consumer experience. 7) The share of luxury and high-luxury watches remained elevated at ~66% in FY23 vs. 48% in FY20, as Ethos has almost exited the fashion segment

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