Authentic Brands Group and ABFRL Announce Strategic Partnership for Reebok in India
ABFRL to take on Reebok’s operations in India; aims to build India’s leading sports athletic lifestyle brand.
- Deal: ABFRL has signed a long-term licensing agreement with ABG (NY based) to acquire exclusive rights to sell the Rebook brand in India and other ASEAN countries.
- Rebook globally : So just to give you a sense of the global scale of these large sports footwear brands: Nike US$35bn in sales, Adidas US$20bn, Rebook US$2bn (see chart below for how the global sales have evolved).
- Rebook was a thriving brand until the late 90s, and later, ran into trouble. Adidas acquired Rebook in 2005 to turn it around but after failing to do so for 15 years, divested it very recently to ABG (Authentic Brands Group). A quick search suggests they sold at a loss.
- ABG is a US-based brands conglomerate. It seems they are looking to sell out non-core non-US parts of Rebook on a piecemeal basis.
- By buying Rebook, ABFRL hopes to turn around and scale a brand which even Adidas failed to do. The deal itself looks cheap, Rs400cr sales bought for Rs100cr. Rebook topline has been growing mid-single-digit which is nothing to write home about. Though I do not have the numbers, my sense is Adidas, Nike and Puma do about Rs800-100cr in sales each and may be faster growing. Never ignore the fact that they get access to the latest global lunches, fast fashion trends and leverage on global brand equity (need very deep pockets). I am not sure of the profitability for Rebook India, but this may be either very low margin or even loss-making for now. Why else would ABG sell it so cheap to ABFRL.
- Why has ABFRL bought it then ? 1) Allows them to enter the branded footwear category. They have certainly decided to enter as many categories as possible, the most recent being ethnic wear. 2) Rebook is an indirect play on athleisure wear (currently play this through VH innerwear), which now makes a fair share for their traditionally footwear brands. My sense is ABFRL would now expand EBOs aggressively and work on reducing the cost structure by using their scale and reach. This will add about 5% to the CONSOL. topline and about Rs100cr to net debt taking it back to Rs1000cr, not a major worry but investors would have rather liked to become net debt-free first. The concern remains that are trying to do too much too fast and across multiple categories, segments, and price points. Sales can come but ROCE, dilution, leverage would remain concerns over the next year or two. Also, a case in point here is ABFRL’s acquisition of Forever 21 in India, where the intent was to catch up with Zara and H&M. That has not gone well and the brand struggled for years until very recently when some green shoots have emerged. Zara and H&M do sales of ~Rs2000cr each with Forever 21 still below Rs200cr with anemic growth and has barely reached breakeven after 5 years with ABFRL.
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Company has acquired 52.4% stake in Brand ‘Masaba’
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Have been tracking this co. for the past 1 year now but still unable to understand the reason behind underperformance. The kind of portfolio company holds is unparalleled and considering the trend of premiumisation. Co. has all the major brands that one can think of in the apparel industry, still the company is unable to deliver growth and profitability upto the mark. One factor can be that co. is focusing on more and more acquisitions but less on growing profitability of the brands.
Can anyone tracking the co. explain what am I missing?
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Barring ZARA and H&M, I don’t think any apparel brand any brand loyalty associated with them.
Madura missed bus by focusing on professionals (white collar office goers) while brands such as MUFTI and US POLO targeted youth.
They have rectified this mistake with brands launching in women’s and kids wear as well.
They also completely missed Ethnics Wear market.
They do have maximum number of EBOs and MBO but franchise are not happy as company keeps shifting business model every few years.
Also ground level support to these channel is also very poor.
Disc - I am apparel retailer selling AL and VH and I am dealing with ABFRL for last 15 years. I have also ran PE EBO for 8 years
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So it means that although company has a wide brand portfolio, the unit economics and efficiency is a big problem in the company.
Thanks… scuttlebutt can’t be more accurate than talking to a person of the industry himself.
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Every consumer company posting highest ever or at least pre-covid level results and here is this company. Management is still blaming Macro economic environment and discretionary income of population for its losses! Also, management is mentioning that slowdown in growth is also due to the lack of demand from rural tiers. Can’t understand if it makes any sense for a mid to high segment clothing retailer to blame rural population for its bad numbers.
I guess the main problem i.e. unit economics needs to be fixed before anything.
Disc. Not invested
Looks really interesting! Just want opinion of the community as to which business are you more interested in? Tried reading views of a few and most are excited about ABFRL’s high growth strategy and brands which will benefit from premiumization but personally I am more interested in Madura’s part of the business. The reason? It is luxury retail segment. ABFRL, accoriding to the management will be focusing on value segment which has become cluttered in the past 3 years. Every other person wants to enter the value clothing market. Snitch is becoming famous day by day, then there are brands like Zudio, Zara, H&M, reliance is also a new entrant in this segment. I think it will become really hard for brand to establish itself in this segment. But on the other side, Madura owns almost all the luxury clothing retail brands and this segment has close to no competition as customer preferences usually don’t change based on prices in this segment. But it remains to be seen that what valuation of Madura will be offered for listing in the market.
Just my view… Open to criticism
Disc.- Tracking since 2 years but never got the confidence to invest
An additional view to inform your decision:
Summary: I am a shareholder for ~4.1 years in ABFRL and despite a decent return, am losing confidence in the management’s capital allocation (specifically ability to exit portfolio companies where they are unable to demonstrate right to win) which is hurting shareholder returns (and will likely continue to do so). My interpretation is that the management is focused / remunerated (?) on top line growth and therefore have taken their eye off shareholder returns.
The net effect is that the share count has increased by 38% through multiple fund raises (Rights, Flipkart, GIC, TCNS), have been destroying Net Worth since FY20 excl new shares issued (ok some of this can be attributed to covid) and have increased debt >2x (and have been put on negative watch by credit rating agencies - although credit rating is still strong).
I suspect the demerger was driven by new shareholders who converted their shares at Rs 288 when the market price was ~Rs 200. This is certainly a step in the right direction and will probably ensure that the new demerged company (ABL) will not get diluted further - but with slower revenue growth (low single digits and should they be in Forever 21?). ABFRL will continue to be diluted (already stated in the press release), will continue to grow fast and questions remains on whether all the businesses make sense (TMRW?)
Discussion
The management has built an excellent portfolio of some brands that promise good growth. As part of any brand portfolio development, it is important that the management reviews areas where they are unlikely to win. So they may grow revenues - but if they cannot make profits they need to exit. By their own classification - this is applicable to their segments of Sub-premium and Value
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Forever 21 is an example of a business which has been struggling to make money since FY19. There is always some new plan that they are unable to execute on.
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Pantaloons - FY23 seemed to be a turnaround in terms of EBITDA, but they are back to struggling. And they entirely missed the Zudio wave. This business feels very fragile in a competitive environment
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TMRW: This is an area of real concern as they seem to be running this like a valuation driven start-up - grow revenues to build scale - at a loss for the next 2-3 years, bring in new investors. Aryaman Birla has been inducted as a director on this - so can’t really see they exiting this business. From my limited understanding, this is probably the most competitive part of the market with the lowest brand loyalties and barriers to entry. Their own forecasts of loss in Q2FY24 for the full year were already exceeded in Q3 - a quarter later. This feels like a bottomless pit with no clear advantage
Unless they are able to demonstrate that they can exit businesses from their portfolio - this M&A led growth is unlikely to be effective. There has been no evidence of this in my view and remains the biggest question mark on capital allocation
Of the two companies, ABL seems a safer bet (although that does not imply a good bet). There is demonstrated profitability in the Lifestyle business, there is a base effect challenge in the Innerwear (among other challenges) but hopefully can turnaround and some very strong growth businesses - Reebok, Collective, American Eagle). If they exit Forever 21, this should be a clean business. Please do see discussions above on whether the Lifestyle brands have a moat though Aditya Birla Fashion and Retail Ltd - #95 by nikhildoshi
ABFRL is a real mixed bag with a lot of uncertainties. Premium and above ethnic has promise - Sabysachi seems to be doing well (revenue and profit) - disclosure is limited though. Taasva will require ongoing investments. Unclear on the smaller brands S&N, Jaypore, Masaba. Pantaloon is a question mark though has improving revenue and ebitda metrics (on a per sqft basis) - but still far from industry standard. TMRW feels like a hole.
Conclusion: The TAM is very large and they have good brands. But if they do not exit brands where they are unable to create a sustainable business (in my mind sub-premium and value segments), they are unable to invest sufficiently in strong businesses because the balance sheet is so stretched. For me it makes sense to hold until the demerger, as that should create value. I am watching for more signs on better capital allocation (driven by new investors) before making a final decision on whether to stay invested in this business. I could not find anything on management KPIs for remuneration - but I hope this is not only top line.
Disc: Hold a fully invested position so am likely to be biased. Am not a registered financial advisor and none of the above should be interpreted as financial advice
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I will endorse your views as i am also holding this for 4 years now, we need to keep holding and see value emerging after demerger. Lifestyle will get a good traction and valuation. I still believe post demerger combind market cap may be in range of 40-50 K INR. Demerger is in a right direction to create shareholder value. Debt levels have reduced to 2700 cr. Debt split may be between 35% and 65% after demerger where ABFRL will hold 65% of debt. ABL balance sheet will be clean and with future Sales of 10000 cr with EBIDTA margins of 14% -16%. Fair market cap may reach 28-35 K. ABFRL may be valued at 8-12 K market cap. Ethnic portfolio will do well for ABFRL.
No doubt we may see further demerger to seperate ethnic portfolio including TCNS, Tasva, Sabyasachi, Masaba, Jaypore, N&S etc.
I will still give this a chance till Dec 24.
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