– Stores are being added under Central and Brand Factory
– Efficiencies and benefits of scale should aid margins
– Growing competition a big risk
Future Lifestyle Fashions (FLF) is among India’s biggest retailers. It operates stores under two formats – Central and Brand Factory. In the case of some of its brands under both segments, it also runs EBOs (exclusive brand outlets). The company’s retail area spans 7.2 million square feet.
We are bullish on the company because
– The store network is expanding
– A diverse set of brands gives it an edge
– The stock has corrected in recent times
Q1 FY20 review
– Sales growth was healthy on the back of store additions.
– Brand Factory sales grew 23 percent year-on-year (YoY).
– Central stores reported 7 percent YoY same-store sales growth.
– Gross profit margin expanded YoY due to better product sourcing terms.
– Overall same-store sales growth was 5.2 percent YoY.
– Brand Factory’s same-store sales growth was 2.5 percent YoY. This was because of extended product discounts.
– On a pre-Ind AS 116 basis, EBITDA and PAT margins were flattish YoY mainly due to higher administrative expenses and lease costs.
Why consider FLF?
FLF’s financials have been improving in recent years. In FY19, the company reported a noticeable uptick on almost all parameters, as seen below:-
Apart from the moats mentioned below, efforts to optimise the working capital cycle and reduce debt further are under way.
The management plans to add 5 Central and 25-30 Brand Factory outlets every year. Most of these would be based out of tier 2 and 3 regions, given the immense headroom for growth.
To complement the brick-and-mortar stores, the company is investing in building up its digital platform as well.
Strong operational metrics
For FY19, here are a few important benchmarks that FLF achieved:-
– Sale of products (in volume terms) was close to 77.9 million
– Central, Brand Factory and EBOs (Exclusive Brand Outlets) jointly attracted over 66.2 million footfalls
– More than 7,000 styles were available in the power brands segment (In FLF’s parlance, power brands are ones that enjoy a strong recall and have a major bearing on the overall financials)
– Revenue from power brands stood at Rs 1,400 crore
– Sales from own brands amounted to Rs 2,245.5 crore
– In connection with Central and Brand Factory stores, same-store sales growth was 8.7 percent
Given the large scale of operations which will only keep growing further, the company remains strongly positioned to reap benefits of scale.
Central, FLF’s flagship format, covers premium lifestyle products. Such stores display over 500 brands spanning more than 25 fashion categories. In FY19, revenue from this segment stood at Rs 2,859 crore.
To increase market share, the focus areas will be as under:-
– High single-digit same-store sales growth
– Take advantage of growing customer loyalty base
– Improving conversion-to-footfall ratios
– Personalised shopping
– Undertaking store refurbishments and advertising campaigns
Furthermore, to improve margins, impetus will be laid on:-
– Shrinkage reduction and higher inventory turns (Shrinkage represents stock that is written off due to damage or heavily discounted because of difficulties in selling the same)
– Zero-based budgeting
Brand Factory is India’s largest chain of fashion discount stores. It sells Indian and international brands at 20–70 percent discount throughout the year. Value-seeking and aspirational buyers are the target audience. More than 200 fashion brands are available across 20 fashion categories. In FY19, revenue from this segment stood at Rs 2,160 crore.
To boost sales, the initiatives to be taken are as under:-
– Open stores in smaller regions
– Set up customer service hubs
– Target last-mile connectivity
– Introduce new fashion and fast-fashion products/brands at reasonable prices
– Partner with regional and international brands
– Invest in marketing
Steps taken to enhance the margin profile would be as follows:-
– Keep overheads limited by opening more medium-sized stores
– Streamline warehousing operations
– Achieve and sustain cost leadership
Same-store sales growth (SSSG)
By virtue of its brand recognition, FLF has been able to generate good SSSG over the quarters.
Even in case of individual store formats, SSSG has been pretty decent, notwithstanding some quarterly disruptions.
Healthy SSSG trends suggest that both formats (Central, Brand Factory) have a strong brand recall and existing stores can contribute meaningfully towards operating margin expansion.
FLF has owned 30 brands (i.e. private labels) in its product portfolio across a wide range of price points. By virtue of its diverse range of brands, the company possesses the capability to meet buyers’ requirements across all classes.
In the coming fiscals, a big chunk of FLF’s top-line growth would be driven by its power brands. Management will also emphasise on scaling up smaller but fast-growing segments such as casual wear, women’s ethnic wear and athleisure.
In case of investee brands, investments towards high-end and profitable businesses will continue to gain momentum.
Foray into footwear
FLF aims to leverage its expertise in fashion to tap the high growth potential that this segment has to offer.
The company will leverage its existing wide distribution reach to enter new markets, while simultaneously exploring cross-selling of footwear products with apparel.
Most of the product launches would be undertaken in between the mid and premium categories. Footwear will be primarily sold under the following brand names:-
– Lee Cooper
What are the major risks to this business?
– India’s branded apparel industry is subject to a high degree of competition from organised and unorganised players.
– The ongoing consumption slowdown may result in sluggish revenue and same-store sales growth in the near-term.
– Lease rentals at marquee locations have been rising.
– If product discounting goes on longer-than-anticipated, margins would be hit.
Outlook and valuation
FLF’s next leg of growth will be driven by the following:-
– Experience-led shopping
– Online-offline synergies
– Brand extension strategies
– Aggressive store expansion
– Favourable prospects of value retailing
– Growing urbanization and style-awareness pan-India
FLF’s stock closed above the Rs 400 levels for the first time ever on 28th February 2018. Post this, despite some bouts of downsides, it has been able to trade fairly consistently in the Rs 400-500 range. After reaching its lifetime high closing price of Rs 493.55 on 3rd May 2019, the stock has primarily been on a downward path.
After 20th September 2019 (the date of FM’s tax cut announcement), FLF’s shares rallied at the bourses only for another trading day (ie 23rd September 2019) before correcting again.
Prima facie, FLF, valued at 32.6 times its FY21 estimated earnings, is an optically expensive pick. However, it is pertinent to note that the stock has seldom corrected significantly from its existing price point (Rs 414.35 as on 4th October, 2019). Therefore, in the wake of the share’s underperformance since the last 8 trading sessions, we advise investors not to overlook this branded lifestyle player.