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We visited multiple Go Colors (GO) stores across Mumbai to validate our thesis around the bottom-wear category and its TAM. Our conviction on category relevance got strengthened when we saw customers walking in with their tops to find their perfect color match. GO’s expanding portfolio (>50 styles) enables a strong cross/up-selling opportunity and TAM expansion with focus on Active/Denims/Girls/Plus categories, reflecting in healthy units per bill of ~2.3. We were pleasantly surprised with the kind of traction GO receives in both premium locations (Lokhandwala/Linking Road) and mass hubs (Borivali/ Dadar), suggesting that its consumers are across income brackets. In line with evolving consumer preferences, the stock allocation to non-core categories has now increased to >70% in its stores. Demand trends (SSG) and store expansion are also improving, providing confidence on ~30% PAT CAGR over FY24-27E. The stock is currently trading at attractive valuations and further WC optimization/pledge reduction should be potential triggers. We maintain BUY

Diversification of portfolio should expand TAM: In line with evolving consumer preferences, the stock/space allocation has been shifting toward non-core categories like Pants, Jeggings, Active/Yoga/Joggers, Denims, Linen, and Girls (age group of 8-18 years). Our store visits suggest that stock of core categories (leggings/churidar) is now <30% of overall stock at the stores. With these new innovations, we believe that GO is positioning itself as a complete bottom-wear solution in consumer minds vs a leggings/churidar player earlier. Such diversification should help it address more consumption occasions and bring millennials/GenZ into its customer base.

Early signs of SSG turnaround: Our recent Go Colors store visits suggest early signs of demand reversal in Jun-24 and an increasing mix of premium non-core categories, which should reflect in improved SSG trends beyond Q1. While SSG would remain muted in Q1, the outperformance vs peers should continue. WC optimization has been significant, resulting in a pre-Ind AS operating cash flow of >Rs1bn in FY24. There is scope for further improvement which should drive healthy cash flow generation in FY25E and beyond. Store additions are also expected to pick up, with 120-150 new stores expected in FY25, after 84 additions in FY24.

Women bottom wear (WBW) is a tough nut to crack: WBW involves more than 50 styles with some requiring 80-90 color options and 4-6 size variants, making the supply chain highly complex. Additionally, women are relatively more price sensitive. Maintaining equilibrium between working capital optimization and prevention of stockout situations is a key moat, along with remaining relevant to evolving consumer preferences and maintaining attractive pricing. We believe GO’s ahead of the curve technology investments and strong understanding of consumer behavior are helping it ace this category and shield it from entry of new players.

Valuations comfortable vs peers: After a dream listing (90% premium) in Nov-21, the stock has since given muted returns. We believe the sluggish performance is due to muted demand, medially elevated working capital, and delay in reduction of pledged shares. In our view, we should start seeing improvement across all these fronts in coming quarters, providing scope for a healthy re-rating. We expect GO to register ~30% PAT growth over FY24-27E. We retain BUY with TP of Rs1,350/sh (30x Jun-25E EBITDA).

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