Every year some new stores are being opened, so there is an ‘incremental’ lease payment pertaining to these new stores. That is the one I am talking about. You are right that while evaluating such business models, textbook ratios will have to be adjusted to account for this accounting quirk. Whether to use upfront capex or lease is a call each business takes based on the respective pros & cons of the two options. But we shouldn’t assume lease is inferior just because my ratio goes down after adjustment. Otherwise, the businesses won’t use it. But as rightly pointed out by @harshu0618 above, it is a very common mode of financing growth.
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The actual cash capex for new stores primarily includes the expenditure on furnishings and other fit-outs required to make the showroom operational as a retail space. Lease payments, if classified as operating leases, reduce cash from operations since they are recurring operating outflows (as was the case before Ind AS 116). Therefore, the sustainable cash flows from a store can be viewed as: CFO minus furnishing capex.
At the unit level, a store’s free cash flow (FCF) can be defined as ** cash from operations (after deducting lease rentals) minus furnishing capex/maintenance capex **. If this is positive, it indicates that the store is generating free cash.
Currently, growth is being driven primarily by the opening of new stores, while same-store sales growth (SSSG) remains in the mid-single digits — barely keeping pace with inflation. The key question is: once the pace of new store openings slows or halts, can the existing store base generate positive FCF? That remains to be seen, in my view.
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I think, the metrics being used by you is wrong, for retail business where the business is supposed to do capex either in form for lease or owning new stores, free cash flow is not a great option, but i would suggest you to try “Residual Income” method, and if you are not sure about what is exactly residual income method let me tell you.
Imagine a business, its equity share holders are expecting an income of 15%, now company generated 18%(ROE not ROCE). this 3% extra income is residual income, now if you discount all possible future residual incomes by cost of equity, then you would have the right valuation metrics
I’m trying to isolate the impact of Ind AS 116 to better understand its implications. If we treat the lease as an operating lease, it represents an immediate operating cash outflow, thereby reducing free cash flows. On the other hand, if we treat it as a capitalised lease, I would prefer to view the related payments as part of capex in the cash flow statement.
Currently, these leases are reflected on the balance sheet as Right-of-Use (ROU) assets with corresponding lease liabilities. The P&L shows depreciation and interest expense, while the actual lease payments appear under financing activities in the cash flow statement.
These adjustments are purely for financial analysis purposes and do not pertain to business-specific KPIs.
I agree. Take the CFO (net of lease payments) and that should owner`s earnings if I ignore itsy bitsy furnishing maintenance capex
so the owner`s earnings are 16 cr per year on an average.
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Strong results by Cantabil. 24% revenue growth, 29% net profit growth. If anything, just that new store count has slowed a bit - added 6 store in quarter vs double digit stores in earlier quarters.
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Still the stock is down by 5%, do anyone have any reason behind it. I can’t find out.
Growth in store count is low.. 6 stores added in the quarter.
They have a target of 725 by FY27. They have 605 right now.
Store count growth shows the future growth potential. The market discounted that. Lets see, what the management tells about slow growth.
I generally feel, they are too conservative on growth. Growth only by accruals, no loans, etc. While it makes the business safer, it is slower also. Leverage is a double edged sword.
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The store count is declared on the 1st of every month. There was no surprise in the store count, so that cannot be the reason.
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I independently analysed this company and just now saw this discussion. Especially the part about free cash flows by @Chandragupta and @Omkar_Ranjan. I agree with your thoughts.
I just want to add few things:
- You haven’t accounted the one time capex for the warehouse cum office building done in last 3y. Total outflow planned was 85cr, out of which 20cr is left to be finished in this year concluding the building capex. This is actually a one time capex unlike furnishings capex for stores. I suggest look at the breakdown of fixed assets in the financial stmt. of FY25 (annual report). FCF will look better in FY27 because this item won’t be present. There’s one catch here though, after this huge 85cr investment if their profit margins don’t expand, it will imply mangement misused capital. If you are investing into the business, it will translate into profits at some point, i’m watching this.
- Every year they open 70 new stores (net), each requires capex of 50lakhs including inventory and furnishing/interiors of store. Totals to 35cr. This is largely non-recurring capex. The moment they decide they don’t want to increase store count further, this outflow will stop. However since annual SSSG is only 5%, they have to do this to reach 1000+ revenues in 2y (managemet’s vision) from current 700 (20% CAGR).
- Focus should be on CFO (after deducting leases of course) and its growth rate. Also since interest cost is completely lease, use PBT/Capital to calculate ROCE (not EBIT).
- My biggest concern would be defending market against competition. SSSG, rev/store and rev/sqft will only increase if they can defend customers from competition. I don’t know how maybe via better quality fabric and designs.
Zudio’s grows its OCF much faster because its SSSG is very high. Cantabil can’t grow faster than 15-20% because their SSSG is only 5%. I’m still not invested but closely watching. My thesis is if somehow they can get SSSG to even 8-9% OCF can grow faster than current expectation. Market is very competitive, I don’t think it’s easy though.
Also if PBT margins expand after fy26, then I’ll be confident in management’s decisions. I can then invest even at slightly higher valuations.
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As per Moneycontrol estimate, company could do EPS of 13.6 in FY27 against 9 in FY25, implying company is trading at 18x FY27 earning
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Even though the short-term liabilities were less, the inventory levels were high, the change in fashion trend, and running the store accordingly make the high footfalls in this business model, right?
How can they grow, I think the budget fasion brands are only growing at fast pace.
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After slow store addition in Q1, company is catching up; added 27 stores in Q2.
In october, it further added 11 stores
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Result looks okeish.
Starting with sales, 16% is slight bad, but not disastrous. There seems to be some seasonality effect usually Q3/Q4 have higher sales.
EBIDT has improved YoY, however it is reduced QoQ mainly due to increased material costs.
Both interest and depreciation have dragged net profit and EPS down.
They need to grow sales faster to get the operating leverage.
Disclosure: Invested
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