PANTALOONS’ REVIVAL FIRES UP ABFRL
Lower losses in fast fashion brands and other businesses should help boost bottom line
The Aditya Birla Fashion and Retail (ABFRL) stock has gained 36 per cent since the start of this month, on strong June quarter numbers and upgrading by brokerages. The key trigger for the stock was a turnaround in Pantaloons, which houses its value fashion segment and is a little over 40 per cent of revenue.
It had been reporting a muted performance over the past few quarters. For the June quarter, however, Pantaloons posted its highest ever margin of 9.6 per cent, up 330 basis points (bps) over the year-before period, led by a better product mix within private labels, store rationalisation and various cost reduction initiatives.
In fact, the record high margin and 71 per cent growth in operating profit meant twothird of overall operating profit was contributed by Pantaloons. The gain was despite the high base of the year-ago quarter.
Margins for Pantaloons could get a further boost due to higher share of the more profitable private labels, a better price to value equation, fashion refreshes, lower rentals and a rising share of new stores, says the management. Most analysts believe these measures, beside expansion into tier-II and tier-III cities is expected to help the company register stronger like-to-like growth.
Performance of the Madura segment, which has the lifestyle brands of Louis Philippe, Van Heusen, Allen Solly & Peter England and the fast fashion brands of Forever 21 and People, has also seen an uptick.
The firm was able to bring down losses at its fast fashion business to ~60 million in the quarter, as compared to ~140 million in the year-ago quarter.
Revenues in this business, however, fell 27 per cent to ~88 million, on account of rationalisation of unprofitable stores in Forever 21. The lifestyle brands reported a 12 per cent like-to-like revenue growth over a year before, led by departmental store sales and commerce channels. A higher wholesale channel mix helped the company post a margin expansion by 90 bps in this segment.
Garima Mishra of Kotak Securities expects the lifestyle segment, which saw a slowing in revenues, as well as store expansion over the past three financial years, to see a revival in fortunes. To be led by improvement in product offerings to cater to casual wear demand (improved ones from Allen Solly/Peter England), as well as event wear (Van Heusen, Louis Philippe), store additions and online presence. That last category contributed about 10 per cent in the quarter to segment revenue, from insignificant sales a year before.
Finally, the innerwear and luxury brands also saw momentum, led by scaling up of the former business. While losses at at the operating level have increased, given brand investments, the management says these are expected to peak out in 2018-19.
Analysts at Spark Capital say ABFRL has been one of the few companies to overcome the trilemma of growth, profitability and capital efficiency. It has also bridged all possible price and aspiration point gaps in its portfolio, tying up with western brands (Forever 21, Ralph Lauren, etc) and acquiring Pantaloons in the past. At the current price, the stock is trading at 58 times its FY20 estimated earnings per share. While there is significant potential, investors could look at it on dips, given the recent run-up.