hi all, some interesting points here.
I studied the business, and I do not have a lot of conviction on the 2 most important metrics -
Sales per square footage in case of pantaloons (cannot do this for Madura since it sells wholesale too) have been quite stagnant as can be seen from below -
| Particulars | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 |
|---|---|---|---|---|---|---|---|
| Total area under coverage (mn sq. ft.) | 1.7 | 2.0 | 2.3 | 2.9 | 3.2 | 3.7 | 4.0 |
| Pantaloons revenues (Crs.) | 1,285 | 1,661 | 1,851 | 2157 | 2552 | 2862 | 3194 |
| INR revenue per square foot per annum | 7,560 | 8,306 | 8,047 | 7,438 | 7,975 | 7,735 | 7,985 |
| increase by | 10% | -3% | -8% | 7% | -3% | 3% |
despite heavy ad spends and expanding store footprint, sales per square foot have not increased substantially over the years.
further, the reported SSSG too has been quite volatile for the short time that the company has made disclosures of -
| Particulars | 2017 | 2018 | 2019 |
|---|---|---|---|
| Pantaloons | 5% | 14% | 1.4% |
| Madura | 5.3% |
Here is my dilemma – what makes one apparel retailer better than the other - Is it cost control or better purchasing / design? If it is cost control, the likes of fashion trends, thoughtful sourcing and brand perception do not seem to be quite relevant. However, this defies the success of company’s own legacy brands like Louis Phillippe which have been maintaining a premium offering over last so many years. Yet, ABFRL continues pouring money on expanding value segment and opening newer retail outlets, while reducing sales mix through wholesale route, which is down to 58% from 65% in 2018. The wholesale route in my understanding was asset light and monetized brands, instead competing only on real estate).
Not only ABFRL, but the best company in the lot, V-Mart Ltd., also has been incredibly cost savvy, with rentals at 4% of sales compared to ABFRL’s 14%, while striving to sell through its own outlets eschewing wholesale completely in order to focus on the buyer experience. Does any apparel retailer then, ever have a competitive advantage? I think I have found myself in a place where an analyst often is – 10 feet away from the truth, one that probably only a business owner grasps, albeit instinctively. I for now conclude, that a good retailer has to have 2 essential ingredients – deft sourcing (non measurable) and cost control (measurable) to earn above average returns.
This analysis is a useful reminder of an important lesson that working capital requirements and uses are very specific to certain industries, and whether a company has good working capital management or not can be gauged only by comparing its peers from the same industry and not across sectors. In a similar vein, high cash conversion cycle does not tell us anything about the financial health of a business, some businesses simply end up having negative working capital, despite being lousy (case in point is PVR, the food vendor).
here is the link of my entire thesis on ABFRL -
happy reading!