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Lower throughput & gross margin impact operating performanc

Go Fashion’s 3QFY23 earnings print was below expectation. Weaker sales per store growth for both EBO & LFS channel, largely due to moderation in demand seen post festive period as well as lower throughput from newer stores coupled with higher than expected compression in gross margins, on account of marketing offers in LFS channel, resulted in overall earnings miss for the quarter. On the positive side, EBO store addition remains on track and management commentary remains sanguine in terms of growth plans, demand traction in December/January and medium term SSSG (maintained guidance of 10% with volume growth of 4-5%). An in-place execution template, lack of formidable competition and the company’s focus on newer growth drivers (online channel and new product extensions) provide assurance on the future runway for growth. Maintain BUY rating with DCF based target price of INR 1,360.

* Healthy network expansion, sales per store growth below expectation: Go Fashion’s 3QFY23 sales grew by 24.5% to INR1.77bn, reported EBITDA and net profit grew by 13.6% and 2.6% to INR592mn and INR243mn respectively. Revenue and EBITDA performance was 2-3% below our forecasts. Management indicated that revenue performance was INR60-70mn short of their internal expectations. Post festive, there was moderation seen in November; however, December saw recovery in sales & similar momentum has sustained in January so far. EBO sales grew by 28.1% yoy to INR1.3bn with SSSG of 10% yoy (volume de-growth of 2%) and 18% vs Q3FY20. Store count grew by 26.9% yoy. The company added 35 EBOs QoQ, taking the total store count to 604 stores at the end of Q3FY23 and run-rate is in line with the guidance of 120-130 stores to be added for the year. Sales per store for EBO channel grew by 2.1% yoy (flattish qoq) to INR2.2mn, below our expectation, due to lower throughput from newer stores in the network. LFS sales grew by 15.5% yoy (door additions +29% yoy while sales/store down 8.7% yoy) and online channel sales grew by 24.5% yoy.

* Higher than expected gross margin compression & scale deleverage impacts EBITDA despite lower A&P: Gross margins (incl sub-contracting charges) compressed 167bps yoy and 58 bps qoq to 59% (vs our estimate of 60.4%), impacted by marketing offers (netted from revenue) in the LFS channel. QoQ moderation in GPM is negative surprise, can be attributed to weaker channel mix (higher salience of LFS channel vs EBO). ASP for 9MFY23 stood at INR 724 (vs INR 709 in 1HFY23), implying better realisation in Q3FY23 aided by value added products. While cotton prices have corrected in past few months, management expects the benefits of lower prices (assuming the prices remain stable) into gross margins after few quarters given large part of their inventory are high priced. Staff costs & other expenses were up 38%/26% yoy, led by higher store additions. Resultant EBITDA grew 13.6% to INR592mn, 3% below our estimate. EBITDA margins were down 319bps yoy but were up 371bps qoq to 33.5%, aided by 20% qoq drop in other expenses due to lower A&P expenses which were front loaded in 1HFY23 (9MFY23 A&P spend stood at 3.5% of sales vs 4.6% in 1HFY23).

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