Brand Concepts Limited (BCONCEPTS) Earnings Call Transcript

Ladies and gentlemen, on behalf of Kaptify Consulting Investor Relations team, I welcome you all to the Q1 FY '26 Post-Earnings Conference Call of Brand Concepts Limited. Today on the call from the management team, we have with us Mr. Abhinav Kumar, Whole-Time Director and CEO; Mr. Nabendu Chakraborty, COO; and Mr. [ Manish Peshwani ], VP, Commercial. As a disclaimer, I would like to inform all of you that this call may contain forward-looking statements, which may involve risks and uncertainties. Also, a reminder that this call is being recorded. I would now request the management to brief us about the business and performance highlights for the quarter that went by and the plans and vision for the coming year, post which we will open the floor for Q&A. Over to you.

Hi. Very good afternoon, everyone, and thanks for joining our post-earnings call. See, there were a lot of positive developments in the quarter. We had -- we signed a good brand, a marquee brand in our portfolio, which had promised that we would be signing a few brands in this year. So first quarter, we've signed Off-White, a very, very proud moment for us because it is a very marquee brand recognized for its streetwear fashion into the luxury space, and that marks our foray into the luxury space. It's a franchisee agreement. So it's not a license agreement where we will be designing, developing the products. It's going to be more on the import model. And hence, we'll be opening stores here and obviously also distributing the brand across various channels. So that's Off-White for us. It opens up a whole lot of possibilities for us from a future perspective. Then in terms of, again, new brands, we launched Juicy Couture, primarily the launch campaign and everything happened in this quarter. So we've launched Juicy Couture, which we had signed last year. And touch wood, I'm happy to say that the response that we are getting in Juicy Couture as a brand is very, very encouraging. We're getting a very good response in the Juicy Couture line, both online as well as offline. Then we've also expanded our footprint. So we opened more stores. We are taking marquee locations. We also launched our first airport store. So we launched our first airport store in Bangalore and the Bangalore Airport T1. And as recent as last weekend, as in this week, rather, we've opened Bombay T2 as well. So we've opened a store in Bombay T2. We've expanded our footprint in Bombay. So we've also opened the Oberoi Goregaon store in Bombay, that also operational. So we are securing these marquee locations. We're getting good locations, and we've expanded our footprint over there. Then Q1 also marked the successful trial of the hard luggage manufacturing facility. So all trials were successful, even the lab for our quality control, that also is completely functional, fully operational, and we have a state-of-the-art facility even for our quality -- internal quality control. So all that became operational. And we've commenced on full-fledged production in the month of July. So full-fledged production has commenced. Though we've not yet reached our maximum capacity, we might take another couple of months to reach our optimum capacity, but we've begun well. So, and then, of course, reflecting on the results I think after COVID, this is the first quarter where we've showed losses. And part of it was already budgeted. We had expected the quarter to be a little slow, looking at the overall market sentiments. So just answering on the result, I think it has been on two or three counts. One, obviously, sales taking a dip and there were margin pressures as well. So, and cost of operations on the account of new stores, new hirings, strengthening the talent pool further, marketing. All of this, obviously, the costs have gone up and the revenue has come down, and that's the primary reason for the losses that you see. We also experienced that in April and May, we were still sort of holding on to our pricing and the pricing strategy of the competitors in the market continuing to operate at a very low price point. The price points did not sort of come back. And generally, what happens is we took this call, had informed everybody that we're taking this call of not participating in this. So we waited. But what happens is this entire thing had started in September 2023, right? So this September, October will be almost two years when such kind of pricing has prevailed in the market. And 1.5, 2 years of time is a good enough time for the consumers to start sort of relating to a certain price point of the product. And hence, in the month of June, we said we will also have to rationalize our pricing. And from June onwards, we've rationalized our pricing. We've corrected certain prices in the market, and we've started seeing an uptick. We've started seeing -- in fact, just to share a figure that June alone contributed to more than 40% of the entire quarter sales, right? So, and we saw a jump from last year June to this year, June. So it was a positive. So while we were degrowing in April and May, overall at a company level also, we grew in June, and I'm very happy to share that we are continuing to grow even in July. And hopefully, we should be able to continue to grow now at a healthy pace, and we should be able to sort of bounce back and overcome whatever the dip in performance that has happened in Q1. So the team remains very optimistic that we should be able to sort of annualize, we should be able to come back on a growth trajectory. Having said that, if I remove trolleys luggage per se from the picture, we also see that we have grown in all other categories, including one hero which has come out is probably backpack with manufacturing coming as a backward integration, our supply chain improved. Our margin intake also has improved. And because of which we've seen a very, very good jump in our backpack business in terms of the overall sales volume, both volume-wise as well as value-wise. Apart from that, from a channel perspective, I think it's the traditional trade which is still sort of...

Really under pressure.

It's really under pressure. However, all the other channels have shown a positive trend. So we've grown in all the other channels, right from e-commerce to modern trade to our own stores. We've grown over there. So overall, from June onwards, I think the trajectories have changed. And I hope that we are able to sort of post good numbers from Q2 onwards. Yes, that's it. I think we'll have a lot of questions. So we'll open the session for Q&A.

[Operator Instructions] We'll take the first question from Naysar Parikh.

My first question is that till -- like you mentioned, I think till last quarter, we were very adamant on pricing. And we were hopeful that pricing will correct to where we are. So what -- do you think looking back, was it a mistake that we made? Was it an error on part of judgment to say that maybe prices will correct and we didn't bother to change our assortment to kind of match the pricing that was prevalent. And now that we have to reduce the prices, then we have to take a hit on the margins as well. So how do you look at this whole situation?

I would say partly, yes and no. Partly, I would say, yes, probably it was -- what I had expected was that such kind of pricing will not last for too long. So we were expecting that probably once players who had unsold inventory and we wanted to sort of clear out all those inventories. And once that scenario sort of eases out, things will start looking better. How long can you continue on such kind of pricing. But -- so partly because of that, yes, it was -- I had expected that it will bounce back earlier. It didn't matter, right? The consumer sentiment also remained tepid and hence, it did not really help the overall cause. So partly, yes, I admit that it was probably a judgment error as well. But at the same time, we also feel that like right now, once we've reduced our pricing, it has created a margin pressure. But now I'm very, very hopeful with my manufacturing kicking in that we'll be able to negate these margin pressures in the very near future, right? Once your plant is fully operational and things start happening and you start localizing your production, we should be able to offset this margin pressure. So taking this call one year back or six months back would have not been very easy for us considering the fact that we did not have our own manufacturing. So now with the back of that and where we are looking at further expanding also in terms of manufacturing, PC is the one that I told you about that we've done the successful trial everything. We've already ordered a PP machine also. So we sort of very soon, another few months, and I'm very hopeful that we should be able to start PP manufacturing as well. So as we are strengthening the back end, taking such calls become a lot more easier.

Right. So I mean, just are we doing anything bottoms-up level from design and sourcing and ensuring that we are able to fit into this pricing and still get back to our 11%, 12% margins. Manufacturing is one thing, but the hope with manufacturing was we'll push our margins even up. My point is that, that added benefit of manufacturing still should come through. But other than that, also, shouldn't we be doing something so that our blended margins actually get to a 14%, 15% level where that we were thinking after in-house manufacturing?

You're absolutely right. And we are working towards that. However, it will take a little time. When we set up a manufacturing in-house, it's not only that you've got the machine and you have the workers and now you have the mold and you start manufacturing. There are at least 40 different components which go into a bag, right? So setting up the entire component base, the supply chain, getting those components directly, what happened was earlier when you were going to a manufacturer, a lot of these components were sourced by those manufacturers, right? So you never knew what kind of pricing they have, what kind of margins would they have. So now when we are setting up the entire supply chain ourselves, for example, we'd be probably the first factory in the country to get into a direct sort of an arrangement with wheel supplier, which is Hinomoto wheels. We were the first ones to use Hinomoto wheels. It's a Japanese patented technology. Today, new age brands, for example, Mokobara advertises Hinomoto wheels a lot. So we are the first ones who now have a direct tie-up with Hinomoto, right, to us. So they opened a canopy, they opened a mold for us. And now those shipments are starting to come in. So to sum it up, yes, bottom level grounds of work is happening. And you will see these things bearing fruit in the next six to eight months, six to nine months.

But we've been hopeful for this since like two years. And every time we are hoping that next six months will be different. Now versus that, you look at Safari, they grew at 17% this quarter with 15% margin at a INR 500 crore base. So I mean, the success that we had initially, I'm just hoping that, that is not coloring us or keep making us over confident where we are not making fundamental changes, which should be necessary in this environment and just being more hopeful than I don't know. But given our base is so small and given we are adding so many brands, we are adding so many stores. And after that also, when we are not able to show growth, when leader is growing at 17% at a INR 500 crore base, I think that there is -- maybe something is wrong, which we should kind of try and accept and find some real solution to it rather than hoping that markets will get better.

No. See, if you talk about Safari, Naysar, one thing is very clear that if you look at any sort of segment, you will realize that segment at the bottom end of the pyramid is the biggest pie, right? So comparing ourselves to them probably might not be the right sort of balance, right? You have to look at it from a price perspective. Like, for example, if I talk about certain other premium brands, one of the largest brands in the country, and they have degrown, and they have degrown by a mile, right? And I'm not saying something which is not common knowledge. It's been published. It's been in the papers, interviews happened and all of that, right? So considering them, if you look at our performance, I think we've still fared well. This is the first quarter where we've sort of degrown, right? And as we speak, from June onwards itself, we are back on a growth path. And we are very, very -- I have to say a word hopeful because I can't say that, okay, we will do this much. We are all trying for that. But at the end of the year, I think we should be on a good growth path.

We'll take the next question from Resha Mehta.

So the first question is that most categories, if we see the essentially -- the premium end -- the premium segment of different categories are growing -- have been growing much faster than the mass side, right, for most categories. While luggage is something that has bucked this trend over the last two years, especially post COVID, right? And that's why we see the likes of Safari, they've probably done better versus more premium players in this space. So why is it that luggage in luggage, the premium segment has not grown unlike a lot of other categories. Is it that we've not done a lot of product innovation or given reasons to consumers to upgrade? Or what is the problem? Because premiumization otherwise is a trend across.

Correct. So this is a very, very relevant question, Resha. Because we -- being in this premium segment, we keep asking ourselves these questions. See, if you look at whether it is apparel, whether it is watches, whether it is footwear, whether it is whatever, there we're seeing a trend that it's not that the mass is not growing over there. Zudio is a great example over there of what they've done. But at the same time, premium end of the market, it's sort of growing, right? Where -- so you have to understand why is the premium end of the fashion market growing. The acceptance of branded and the aspiration level of that branded merchandise and owning a premium brand and -- or wearing a premium brand, that aspiration level is pretty high, right? When it comes to luggage specifically, while we say that, okay, yes, people are becoming brand conscious, but luggage, you're not carrying every day with you to your office, right? You're only carrying it while traveling. More often than not, you check in the luggage, right? So the acceptance of brands over there or the aspiration level of carrying a premium branded luggage is -- the acceptance level is a little lower than the other categories. One day, it will be, probably eventually, it has to. But -- and on top of it, so one, as it is the acceptance level was lower. On top of it, suddenly with this price war, the gap between the premium and the entry was almost threefolds, right? So three years back, the gap difference between various different players was to the tune of somebody being higher by 10%, 15% and the next player being higher by another 15%, another 15%. And we were probably at a 40% jump to our -- the next player. Today, we suppose we had -- during the period of time, we moved to, say, INR 9,000 average ASP. So last year, my luggage ASP was INR 9,000, okay? INR 8,700 to be precise. Now the consumer perception now is that you get a cable luggage or you get a luggage for INR 1,500, INR 2,000, which two years back, the average pricing was INR 4,000, INR 5,000, right? [Foreign Language] extra you paid and you purchased. Now if you're getting a luggage for INR 1,500, INR 2,000 and then you're getting something for INR 9,000, the price gap is so much that the consumer today -- that's the only answer that we can come across with, okay? It's not that -- I'm not saying I'm right, wrong, whatever. But my perception is that for the consumer to trade off, this price gap is too huge, right? And hence, considering all of this, we've also sort of lowered our pricing, taking rates and all of that. So yes, that's where it is. At the same time, I would also say that we launched a new product, which is priced at almost INR 33,000 for a set of three, right, INR 32,000, INR 33,000 for a set of three, which is almost INR 11,000 per product. We've not reduced also the pricing over there. It was launched. And surprisingly, it is -- it features in one of our best sellers for last month. So really hard to pinpoint on one thing, Resha, but that would be the reason that I would believe why this is.

Yes. What has happened at the same time to, let's say, product innovation or added new funky, attractive appealing features. Is that something that's a focus area for us, especially with Tommy? And how do we go about it? Like do we have a team? Or how does it work here? Because ultimately, consumers would want to premiumize if they see some added value in the product as well.

Yes, for sure. And we also -- so for example, very recently, we've launched the lightest luggage yet, right? It's a very, very lightweight luggage. So we've launched the lightest luggage yet. We keep innovating in terms of design, in terms of consumer experiences, in terms of the inner constructions, trollies, wheels, all of that. So while we have all that approach, there was another factor that once we saw that the overall market conditions were not so favorable. We had also last year, for example, we had slowed down on new product launches. Looking at the predatory pricing, which was being operated, we had slowed down on our product launches which this year, we've -- and we had to, again, work on a ground-up approach, tweak things here and there so that we get a better pricing. So we've done that. And this year, almost every month, we would be having new launches. So we're coming up with a good -- we have a pipeline of good eight new launches only in Tommy.

In luggage.

In luggage, yes.

Right. And our channel salience is getting more and more skewed towards modern trade and e-commerce. So where do we see this settling? And what does that do to our margins?

See distribution, which is the traditional trade, as I said, it still continues to -- because these are small mom-and-pop stores, we were sort of making a very, very good headway. But with this kind of a pricing, it is very difficult for us to sort of sustain that. So I would say that that's a channel which would continue to be a little struggling...

Under pressure.

Under pressure. For the next couple of quarters. But we are seeing a very, very good uptick when it comes to modern trade, when it comes to e-commerce, our own stores. So net-net, we'll be able to negate that entire that pressure from the other channels.

And any impact on margins? Overall, the margin structure gets impacted?

Because of the traditional trade you say or?

Yes, yes, because traditional trade reducing and modern trade e-commerce increasing at an EBITDA level, does that materially change your margin structure?

Yes. It actually -- when it comes to e-commerce, it actually betters it. So any sales increasing in modern trade also would better our margins because somewhere your cost of operation in modern trade is also sort of fixed, right? So a secondary sales growth over there is going to better your margins. Similar is with e-commerce. It's going to better your margins. Distribution would from a margin perspective, I think the only factor over there would be that your sales to your fixed overheads, if your sales are not growing as much, it will create some pressure. But from an overall perspective, I don't think it will impact so much.

Right. And on the manufacturing side, so do we -- so what is our sourcing for the small leather goods or ladies handbags and the other products basically for all the brands like including Tommy, UCB and Juicy and all these brands?

So small leather goods is 100% India. And we have contract manufacturing facilities with various factories in India, which manufacture for us. And so that is completely India. Women handbag is, I would say, 90%, 95% it is China. Juicy, for example, is 100% China. But a few brands, we will be doing some programs. We've started doing some programs in India. But women handbag continues to be a product category segment where we sort of still rely on China.

Right. And the -- are we expecting more talent addition, headcount addition? Basically, just trying to understand the employee costs that was INR 12 crores for this quarter. Can this be assumed to be the quarterly run rate? Of course, inflation will keep adding over a period of time. But broadly, talent addition is behind us.

No, no. Yes. So a few people here and there, but majorly, our team is in place now. And I think, yes, INR 12 crores a quarter, I think you can safely assume that it's going to remain in this sort of vicinity.

Just the last one. So on the marketing spend, so we were at 3%, 4%. We were planning to ramp it up to 5%, 6%. But on already subdued margins or what would that do to our margins? So do we have actually enough room to kind of expand the marketing spends?

See, we have, in Q1 also, we have expanded our marketing. And we are seeing green shoots of marketing also, Resha. So see, as a company, I think marketing is something that I would say that you don't have a choice of not spending over there, right? So there are new age brands which are coming in every day. People are setting a lot of funding, money to be burned. And all of this ultimately creates a pressure on -- for that share of voice. So marketing is something that I think we are taking it very, very seriously. We would continue to invest. But as I said, from a margin pressure, we will have to negate all of this with...

Sales.

Sales with the top line growth. And hence, we're gearing up, as I said, be June or July, we've done a good growth.

Just on the margins front again, so at least by the end of Q4, do we expect to touch a 10% or double-digit kind of a margin or that looks difficult for this financial year?

You're talking stand-alone quarter or for the year?

For the year. So the Q4 exit margin. So at least Q4 exit margin, can reach -- can that touch 10%? Or do you think for the full year, also can we do 10% considering Q1 was 4%.

I think for the full year, I wouldn't be able to comment right now. I'll be definitely working towards it. But exit, yes, 10% for sure. Probably we should be able to hit that in Q3 itself.

We'll take the next few requests from the chat window. Jatinder Agarwal?

I have a couple of questions. I may take some time. The first is of this revenue, is it possible to share how much is just luggage and how much is all other categories?

Yes. Trolleys of '25, '26 is INR 22.29 crores.

Sorry?

INR 22.29 crores.

Okay. Perfect.

And which is a 30% degrowth from last year.

Okay. This is luggage, you said?

Yes.

Okay. And this is only Tommy or this is all other -- all brands included?

All brands included.

Okay. And one thing I want to understand on unit economics, right? So now at least for the time being, it seems like the dust has settled, right? I last week checked Safari, whatever, pack of three was available anywhere between the range of INR 6,000 to INR 8,000, right? And when I checked our prices, we were in the range of INR 14,000, INR 15,000 plus all the way to about INR 18,000 is what I could see, right? So I'm just trying to understand unit economics from the retail price point. So if I assume that retail margins or dealership margins at a blended basis, not category-wise, is, let's say, about 1/3, right? So your realization would be, let's say, about INR 10,000 then for a set of three.

So you'll have to sort of -- add a general to this thing, you will have to assume 50% realization. So the margin, as you rightly said, is anywhere between 32%, 34%, 35%. And then you have to take into account the 18% GST on top of it.

Okay. Okay. Got it. Perfect. So you're saying -- so the INR 15,000, INR 16,000 that sells, then at a company level, we should have a realization of about INR 8,000, right?

Yes.

And now because this moves in-house, right, in terms of production, if not today, but over a period of time, let's say, 18, 24 months?

Yes.

What should be your normalized cost of production for this that you realize INR 8,000.

So it really depends from style to style. But I can tell you that on an average, we would be able to produce a three piece set from, say, INR 5,000, around INR 5,000 going up to -- no, INR 5,000. Let's not go below INR 5,000. I think it will be around INR 5,000 with all overheads and everything taken into account. And then it can go up to INR 7,500, INR 8,000 also depending on what kind of material, what kind of add-ons you are putting on to that particular luggage.

So in this business, right, the way I understand is the brand commands a huge premium, right?

Right.

And the commodity then sells at a 10%, 12%, 15% margin, right? So the gross margins in your business should ideally be much higher than someone who sells the same product as a commodity business.

Right.

Right. If that is true, then where is -- where will the leakage happen? One is the leakage that you will actually pay out as royalty, which is about 10-odd percent, right?

Right. Slightly higher in case of time.

Perfect. Yes, 10%, 12%. Would that still not compensate for your higher gross margins that you shift the production inside?

Yes, that's the reason I said, Jatinder, that right now, probably for, say, the last quarter or at best till this quarter, even with lowering the pricing, we might have a margin pressure. But the day as and when we move more and more products into our own manufacturing, we'll negate this. Hence, I'm pretty confident that we will negate this entire margin pressure.

No. What I'm trying to understand is now it is more like an apples-to-apples because we will -- I'm not saying today, but I'm saying on a normalized basis, it is more like an apples-to-apples because we will have production in-house. And then we are just selling it again at the store level. My retail selling price is almost 2x of someone who's already earning a 15% margin, right? And I pay a 10% royalty, right? So what I'm trying to understand, theoretically, your operating margin should be way beyond 10%, which was the previous high that we used to have, right, on a normalized basis...

13%, 14% of EBITDA asset.

Sample which is taking say only INR 15,000 a set which is an entry price point. [Foreign Language] INR 6,000 in-house manufacturing and INR 15,000 retail price to INR 8,000 realizations hours. [Foreign Language]

So what is the question? [Foreign Language] I'll be able to answer it better.

No. So basically, earlier, right, there was a -- so what you call as someone else sharing your margin, right? Because you were sourcing the product from someone else. So the manufacturer is having his own margin that is sitting outside your company margins. We still posted at that time in very good year quarters, whatever, something like 13%, 14% margin. Now production has moved inside, right? So for my cost of production, let's assume if I was having a gross exactly like you said on INR 100, if INR 50 is my realization, then on INR 50, there was some margin that I've left for the manufacturer. So let's hypothetically assume that was INR 5. That INR 5 has to move in-house, right? Because now it is internal. So what I'm trying to understand is why can this margin now not move in a very blue sky scenario to 18% to 20% because production has moved inside? Or is it because that we don't have the scale benefits because of which we will never get to those margins?

Yes. So see, what we are actually comparing over here are two different things. One is we're talking about EBITDA margins, right? It's a function of GP less your operating expenses. So the product pricing, we need to understand at the GP level. So at the GP level, suppose if I was making, for example, 50% gross margin, right? Now I have reduced my pricing by, say, 10%, 15%, whatever. So now instead of making a 50% GP, I'm probably making, say, a 45% GP. However, my cost of production earlier because I was procuring from some other factory, right? So there -- and bringing it to my own factory, I will get a 15% sort of a benefit, right? Now earlier, what we were calculating is this 15% benefit ideally in a blue sky kind of a scenario should be additional to my current margin, right? Whereas in the current market scenario, what has happened is because of that pricing pressure if we have also corrected our pricing, for probably one quarter, you might see a 1% dip or a 10% dip in your gross margin when it comes to the luggage business. You see a 10% dip in your gross margin. But as and when you move most of your production in-house, you gain back that 10% or 15%. So net-net, it remains same. Now over the period of time, your economies of scale also comes into picture. inflation also comes into the picture. Again, pricing going a little up premiumization also comes into the picture. So over the period of time, we will be able to gain this back as well. This, we are talking only at a gross margin level, right? Now the moment we come to an EBITDA level, your operating expenses today are at a certain level where it is more like a hygiene level, right? It's not -- we're not overinflated. Any cost scenario, we are not overinflated, right, where we have an overinflated employee remuneration or we have an overinflated marketing. No. Everything is within the standard parameters, a percentage or 2 here and there, correct? So this should pan out the moment you are -- again, we are back into that whole sales and growth and everything, you will automatically start seeing goodness over here, right? So if we are able to -- for example, this year, from a 270, if we are able to grow at annualized, if I say that if I -- if we cross a 20% kind of a growth, you will start seeing those kind of numbers happening in the bottom line.

We'll take the next request from Amit K.

Yes. So just -- is it possible if you can provide some color on the demand from the owned stores and franchisee stores, how it has been in the past quarter and in the first 10 days in the last July month?

So I think, as I said, see, April and May were not very good months for us. But from June onwards, we've started seeing an uptick. We are, in fact, like-to-like also there was a healthy growth. We grew upwards of 10% in terms of like-to-like. If I come to retail sales, for example, our large format stores, Q1 as in the first quarter, our secondary sales is much higher than our primary sales. So that goes on to prove that there is a strong secondary momentum. [Foreign Language] In Q2 you will fill that space up. So we're seeing a good positive uptick from June onwards and hope that it continues.

And I mean, is the same for matured stores as well as the new stores? How has been the demand panning out?

Actually, see, the new stores which are your marquee locations, like, for example, an airport, right? It will not be right to compare airport store with any other store. The numbers over there touch wood are amazing. But it's our first airport store. Now it will be worthwhile to see whether how is the Bangalore store doing and how is now the Bombay airport store doing. But if you compare an airport store to any small city store, the numbers will not be sort of justified.

No. I mean new store, I mean to say the stores which opened in the past 6 months to 18 months, that's what I mean to say.

Yes. So the way we track sales, Amit, is one is like-to-like. So any store which was operational in the same month of previous year, we will track a like-to-like number on that. So we've seen a strong momentum in the past two months. And it continues in August as well till now.

Great. And secondly, on the production, I mean, you commenced the production. So how much is the utilization levels as of now? And what would be the incremental margin increase we may see in this year and next year?

See, till now, we've come to almost 50% to 60% sort of utilization, but we commenced only in July. So basically, we can support three lines over there with depending on the style to style on an average basis, this particular line can give us about 25,000 units a month. We've come to a run rate of about 14,000 to 15,000. But by next month, we should start crossing 20,000 upward.

It has 40,000 capacity, right?