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25-05-2024 09:55 AM | Source: JM Financial Services
Buy Go Fashion Ltd For Target Rs.1,285 - JM Financial Services

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Go Fashion’s 9MFY24 performance has been below expectation, especially on the SSSG front, which, we believe, is more a function of the weak macro environment. Having said that, the decline in SSSG has been arrested and the company has outperformed peers in the fashion retail segment. Moreover, Go Fashion continues to sharpen its focus on areas that are under its control – for eg: store expansion, new product launches and strengthening the balance sheet. While the company is beefing up its business development team to accelerate store expansion to 150 stores p.a. from the current run-rate of 120 stores p.a., the execution on refining working capital is quite commendable as it has resulted in positive FCFF generation. Further, the raw material situation is benign and the benefit of that is now seen in gross margin (which wasn’t reflected in earlier quarters as the company was optimising inventory), which should help cushion some of the impact of weak SSSGs in the near term on operating profitability. While the near-term market context remains challenging, SSSG decline has been arrested and recovery here will also bring back scale efficiencies. We believe it’s more a question of when and not if. We continue to like Go Fashion's execution machinery and recommend that investors not get too carried away by short-term weakness

* Store economics intact with majority of stores being profitable, management confident of acceleration in FY25E…: In terms of EBOs, net addition in FY24 is likely to be c.100-110, lower vs. guidance of c.120 stores; primarily on account of higher store closures (closed 13 stores that were not profitable). Currently, barring a few stores (airport stores), most of the EBOs are profitable; hence, store closures are unlikely to be higher going ahead. Further, the company has been beefing up its business development team and, given the strong store economics, the management remains confident about acceleration in store expansion to 150 stores p.a. from FY25 (which is higher vs. our estimate of 120 stores).

* …which, along with gradual recovery in volumes and uptick in ASP, will drive revenue growth: Go Fashion's ASP growth has seen healthy improvement (+4%) in 9MFY24 predominantly driven by improved mix. Further, full price sales haven’t seen any moderation and accounted for 96.3% of EBO sales in the same period, despite the challenging demand scenario and moderation in input costs. Currently, ASP is INR 752 and there is enough headroom to grow it closer to the targeted level of INR 1,000. While the market context remains challenging, the volume decline has been arrested, as is visible from flattish volumes in 3QFY24.

* Healthy execution on working capital optimisation: Post sharp increase in WC in FY22, Go has been optimising the same especially through better inventory management. The results are visible with inventory days down from 151 days in FY22 to 127 days in FY23 and down further to 102 days (on TTM basis) in Dec’23. Also, in FY24, a large part of the optimisation is through reduction in warehouse inventory – especially the FG inventory and not because of fall in fabric prices or by compromising on store level inventory. Better WC management has led to strong uptick in CFO (INR 1bn in 9MFY24 vs. INR 195mn in FY23). Pre-Covid, it has operated at 90 days of inventory levels, and the same is likely to be achieved over FY25/26E, which will boost CFO & help fund store expansion.

 

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CIN Number : L67120MH1986PLC038784

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