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Profits back in black…

Driven by festive season demand, TCNS Clothing reported strong QoQ growth with revenue recovery rate reaching 72% in Q3FY21 vs. 45% in Q2FY21. The recovery rate is broadly in line with industry revenue recovery rate (fashion retailers). Revenue for Q3FY21 fell 28% YoY to | 237.9 crore (up 65% QoQ). Non-metro cities continue to recover at a swift pace with Tier I cities reaching 70% and Tier II, III cites recovering at ~80% of pre-Covid levels. Stores in metro cites are lagging behind with 55% recovery rate. Gross margins continued to stay under pressure (down 670 bps YoY to 61%) mainly due to change in channel mix (higher online sales) and provision towards inventory dormancy (~400 bps). Sharp rationalisation of operating overheads, recovery in sales led TCNS to report EBITDA of | 38.5 crore (down 43% YoY) vs. EBITDA loss of | 16.3 crore in Q2FY21. PAT for Q3 was at | 12.7 crore (down 77% YoY) vs. net loss of | 27.6 crore in Q2FY21.

Reinvigorating accelerated store expansion plans

As on YTDFY21, the company, on a net basis, shut ~34 unviable and nonperforming stores (EBOs: 561 as on Q3FY21). The company has embarked on accelerated store expansion plans and is targeting 60-70 EBO stores in FY22E. Capex/sq ft expected to be in range of | 2500-3000 with average store size of 800-1000 sq ft. TCNS is also focusing on enhancing its LFS touchpoints through addition of 200-250 touchpoints. We believe higher focus on offline space coupled with strengthening online sales will fuel growth from FY22E onwards. Online sales continue to dominate distribution channel with 15% growth in Q3FY21 (secondary sales tracking at 1.7x of preCovid levels). Its own branded website recorded robust 150% growth in Q3, with December posting highest ever sales. Share of e-commerce to overall sales was at 23% vs. 13% in Q2FY21. The management indicated that gross margins for online sales are relatively lower (~64%) but are on par at EBITDA level. During the quarter, the company has resumed primary sales through the MBO route with Spring Summer (SS) 21 season launch.

Valuation & Outlook

TCNS has redeployed SS20 merchandise to SS21 resulting in inventory reduction and working capital release. Subsequently, cash reserves increased from | 110 crore in Q2FY21 to | 155 crore in Q3FY21. It has secured significant fixed cost reduction for the year through rationalising unviable stores, rental waivers (secured full year saving of ~35%), rationalising staff overheads (annual salary savings at ~20%) and curbing discretionary spending (ad-spends). We expect certain cost saving initiatives to have long-term positive impact post pandemic also. Accelerated store addition plans, coupled with diversification into newer categories (footwear and Aurelia Girls) are expected to fuel growth, going forward. Being a net cash positive company, TCNS would be better positioned to tide over the current turbulent market scenario. We broadly maintain our estimates and expect TCNS to generate healthy RoIC of ~25% by FY23E. We reiterate BUY on the stock with an unchanged target price of | 540 (29.0x FY23E EPS).

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