Spencer's Retail Limited (SPENCERS) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to the Spencer's Retail Limited Q1 FY '21 Post Results Earnings Conference Call hosted by Batlivala & Karani Securities India Private Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Akhil Parekh from Batlivala & Karani Securities India Private Limited. Thank you, and over to you, sir.

Thanks, Shivangi. On behalf of B&K Securities, I welcome you all to Spencer’s Retail 1Q FY25 conference call.From the management team, we have Mr. Anuj Singh, CEO, MD; Mr. Saket Sah, Group Head, IR and ESG; Mr. Sandeep Banka, CFO; Mr. Pankaj Kedia, VP, IR; and Mr. Harshil Gathani, Chief Manager. Without taking much time, I'll hand over the call to Mr. Anuj Singh. Sir, over to you for your opening remarks, post which we'll open the floor for Q&A session.

Thank you so much, Akhil, and good morning, everyone. Welcome to Spencer's quarter 1 FY '24/'25 earnings call. What I'd like to do today is basically talk about 3 things. Number one, talk about a brief commentary on the Q1 results. The Q1 results were announced on Monday, the 22nd and I'm sure you would had time to glean through some of that. Number two, I'd like to spend some time talking about the decision, which was taken and approved by the Board on ramping down of our operations in a couple of clusters where we were operating earlier. And number three, spend some time in terms of talking about how this decision impacts us from an operational level and helps us towards an accelerated turnaround achievement. So those are the 3 things, which I'll briefly talk about before I open it up for questions. Starting off with the Q1 results at a consol level. Quarter-on-quarter, there were flat sales at about 0.3% quarter-on-quarter growth, a slight decline over Q1 of last year. If you look at the percentage gross margins, there was an improvement, significant improvement, 90 basis points versus last quarter and about 100 basis points versus last year. This helped us achieve an absolute gross margin of INR 112 crores in quarter 1 of this year, which is up by INR 5 crores versus last quarter and at the same level of what it was in last year quarter 1. The cost optimization efforts, which we spoke about in our last call, which we initiated in the last quarter have started going through in quarter 1. Therefore, you see a good improvement in our operating costs. Our operating costs are lower by INR 8 crores at INR 111 crores versus what they were in the last quarter, which is quarter 4 of last year. And they're about INR 5 crores lower than what they were in last year quarter 1. All of this has resulted in a slightly higher EBITDA for us, INR 29 crores versus minus INR 8 crores reported in quarter 4. This is the post IndAS EBITDA number. At the PBT level, we were at INR 43 crores loss in quarter 1 versus INR 81 crores in the previous quarter and INR 61 crores in quarter 1 of last year. So that was a quick kind of a snapshot on quarter 1 at a consol level. If we look at the 2 distinct businesses, Natures Basket, we had a good growth, a growth of 4% quarter-on-quarter and an 8% growth compared to last year quarter 1. This was driven by good performance and addition of new stores. The margins were up 98 basis points Y-on-Y as far as Natures Basket is concerned. The EBITDA was INR 23 crores versus last year INR 6 crores. This was, of course, helped with a onetime exceptional other income, which was recorded. PBT was plus INR 6 crores versus last year where it was minus INR 12 crores for the quarter. As far as Spencer’s is concerned, we had a flat top line versus quarter 4, but we had a good improvement in our gross margin despite no significant change in the mix between food and nonfood, which means that in our core categories, food, FMCG, staples, we did deliver better margins. Our gross margins we were up 120 basis points quarter-on-quarter. Our operating expenditure was down by INR 10 crores versus last quarter and versus INR 12 crores versus the same quarter last year. This is on account of planned operating efficiencies driven at both the store level and the optimization which we did at the corporate office. The EBITDA, which is, again, the post IndAS EBITDA was plus INR 8 crores for this quarter versus minus INR 8 crores in the previous quarter and the INR 1 crores, which was there in the last year quarter 1. So that was the commentary as far as consolidated and the Spencer's and Natures Basket results were concerned for Q1. In summary, a quarter marked by realizing efficiency and cost optimization, which was initiated across Spencer's, that is flowing through, a quarter marked by improvement in gross margins across both formats and a quarter where NBV saw growth. So overall, improvement at the EBITDA level as well as the PBT level, with still miles to go to where our journey is. Moving on to the second point, which is related to the decision, which was taken and approved by the board to exit from 2 of our operating territories, which is NCR and AP and Telangana. I just want to start by saying that, look, while these stores -- we have about 49 stores accounting for close to 22% of the business. And therefore, it is -- it was a very well thought through and considered decision. However, the point to note is that these 49 stores accounted for close to INR 56 crores of losses at a regional EBITDA level. And they obviously are at what a drag when we look at it in comparison with the other clusters. Also, in these stores, in these territories, we had lower growth. We had higher competitive intensity and there was a fragmented presence. These 49 stores were across 18 cities. So an exit from these does impact the top line. But what it does is it significantly reduces the drag on the store level EBITDA. I mean, we estimate looking at the numbers that just without contextualizing this without these INR 49 crores, our store EBITDA would double from the current level. So I think it's a significant impact which has. And while the top line is something which does get impacted in the short term, it does help us to significantly improve our EBITDA. what it also allows us to do is it allows us to focus in the 2 geographies, which is East and UP, where there is a sizable consumption opportunity. Roughly INR 25 crores of population resides in this geographical area. And in both these areas, our brand presence is quite strong. The brand recognition is strong. Our competitive performance is strong, and our operational performance, whether it comes to things like sales per square feet, the margin, our operating costs, our store EBITDA, they are markedly better than what we were experiencing in the other 2. So focusing on these 2 territories makes a lot of sense for us. As far as the trading area is concerned, it does come down from the 1.3 million square feet trading area we have today to 800,000. But we are very, very committed and we see enough and more opportunities in these 2 geographies, which is East and UP, to add on trade assets. We have a pipeline, and we are very confident that in over the next 12 to 18 months, we will be able to add at the rate of 100,000 square feet per year to bring back our total trading area to close to 1 million square feet in 24 months. So that's a bit in terms of the rationale in terms of why we are looking at exiting or why we are proposing an exit from these 2 clusters. It is, like I said, it is something which allows us to consolidate, to focus and double down in our operating territory. What it also does is it allows us to further simplify and optimize our distribution and support structure. We've done a lot of work in the last quarter in terms of optimizing. At this level of operation now, we believe that there is further streamlining and simplification of our support structure. We expect close to 20% reduction in overhead costs on top of what we have already done. Just to contextualize, last year, we had our operating costs, which is a combination of distribution costs, infrastructure as well as support. We were at about 8% to our turnover. Today, we are -- with this round of further organization, we will get to a level of close to 6.3%, which is, I would say, a respectable number as far as the overhead cost as a contribution to total sales would be. We are confident that by doing this, we will achieve the EBITDA, which is, again, the pre-IndAS EBITDA level breakeven in a much more accelerated manner than what was earlier given as guidance. If you recollect, we said our endeavor is to, in the next 12 to 18 months, move to an EBITDA breakeven positive level. And we believe by doing this, by focusing on these 2 geographies by streamlining our corporate costs and other operating costs, we will be able to achieve consistent level of EBITDA, pre-IndAS EBITDA breakeven positivity as early as the next 6 months. And we believe that this significant operating turnaround, where we're talking about a swing of roughly INR 100 crores EBITDA improvement will provide us options for capital raise, enabling recapitalization of our balance sheet. So tough decision. The decision allows us to focus and still consolidate and expand in those geographies, streamline our operating structure and significantly accelerate our journey towards getting to EBITDA breakeven in 6 to 9 months. So that was the brief commentary which I had. And now I'd like to take a pause and open it up for questions.

[Operator Instructions] The first question is from the line of Akhil Parekh.

First of all, congratulations on improving set of numbers, accelerating our pace of improvement on EBITDA, which what you're guiding for. My first question is on the store expansion for Spencer’s. In the last call, I think what you guided for is 10% of store expansion in FY '25. I think we have opened around 3 odd stores on Q-on-Q basis. First, if you can give some color like which are the some of the geographies which we are targeting? Are they within the East and UP? And second is do we still maintain this guidance of 10% plus of store expansion for this year or can we even accelerate for those things?

Yes. So Akhil, I think the guidance which we have given on addition of stores still continues in the sense that we would be focusing on the geographies of East and UP to add. Even in the last quarter, the three stores which we opened were Barabanki in East and UP, which is on the outskirts of Lucknow; Bhadohi, which is outside of Banaras; and we opened Sevoke Road in Siliguri. So we see opportunities, we have open three stores in the East as far as Spencer’s was concerned and we have a pipeline of more stores in Calcutta, in Bengal and in East and UP where we will open it up. So clearly the guidance continues in terms of we are looking at measured and focused opening of new stores in the geography of East and East UP and UP when it comes to Spencer’s. The numbers as the percentage will change, but I think in terms of absolute numbers, we are looking at adding 8 to 10 stores in a 12-month period on a year-on-year basis focused on East and Uttar Pradesh.

And you had also guided for SSG of 5% to 6%. First, if you can give some color on SSG number for 1Q and will you think this 5% to 6% SSG growth is feasible for this?

Yes. So I think with the -- like I mentioned, the clusters where we are exiting from were lower growth clusters as compared to the clusters where we are going to remain. So both in East and in UP, we continue to experience relatively better growth than the other two clusters. And therefore, we would continue our guidance of mid-single digit SSSG in the geographies of East and UP where we will continue to operate from quarter 3 onward with obviously a better level of profitability at a store level and at the regional level.

Okay. And like how did we do in [indiscernible]?

Sorry?

My other question was how did we perform on SSG level in first quarter?

Yes. Like I said on SSSG, we are not breaking up by clusters, but like I said, we've done -- we have had better performance in terms of growth, in East and UP as compared to South and NCR, the regions where we are exiting from. And it varies from region to region, but overall, we are at the level of mid-single digit SSSG growth in East and UP in quarter 1.

Okay. And second on the gross margin plan for Spencer’s format, do you think this 19% plus of gross margin is sustainable for remainder of 3 quarters for this year?

Yes. So I think, look, that is where we have a unique kind of a portfolio. Our breadth of categories from FMCG, fresh, staples, general merchandise and apparel does give us a good portfolio presence to drive this. We strongly believe 19.5% is a sustainable level of margin, given the fact that our -- we are not positioned as a value discounter. We are a format where we are positioned on having a wide assortment and a very good store experience. So we believe that the 19.5% gross margin is absolutely sustainable. And in fact, if you look at the construct of how we would want to drive the P&L for the business, I think a 19.5% gross margin allows us to have an operating cost structure of 13% at the store level, which is between rent and store OpEx, so that you made around 6.5% as far as your store EBITDA is concerned and you have 6% as your overhead cost is referred to. So that's how we get to a kind of a breakeven level and we are confident that 19.5% is a sustainable level of gross margins. We have done that in the past. So we have no reason to doubt that we can continue doing this.

Sir, just one clarity, you said operating margins can be at 6% if we operate at 19% to 19.5% of gross. Is that correct?

No. I said overhead support. So I said 19.5% gross margins, 13% is your store operating costs so you get about 6.5% store EBITDA and then you have 6% support overhead, so that you get to a breakeven. That is the broad math.

The next question is from the line of Bharat Gupta from Fair Value Capital.

Couple of questions from my side. So particularly if I look at the other income, so you have sold off your packaging on business to one of the group companies. So can you provide some further colors like what was the reason behind the sale? And secondly is there any other offering which is there in hand where we can leverage our brand value?

So, I think what you are referring to is the assignment of trademark of the Gift Studio. I wouldn’t call it the packaging arm. This was a business which was in the business of gifting, started a couple of years ago and the rationale for that was TGS was not core to the operating business of Spencer’s and Natures Basket. It was incubated with the store presence and with the categories which were present at Spencer’s and NBL. As the format and the proposition have gained traction, it is poised to grow and we believe that this growth will be beyond what are the categories which are stocked in the Natures Basket or Spencer’s. So the categories which can go into gifting is much broader. The geographies could be much broader than where we operate. It could be pure, it could be a very high omnichannel mix in this, all of which means that this business is now ready to be scaled up, which would require capital, and we believe that is best done through assigning the trademark to another entity while we remain focused on doing what we have to do to turnaround the Spencer’s business and to grow the Natures Basket business. So in some senses, I think it was driven out of the need to fuel growth in TGS, which we cannot afford to do from the Spencer’s and Natures Basket and focus on what we have to do and allowing the TGS proposition to expand beyond stores geographies and the categories which are currently being serviced through our retail operations.

Right. So like other than the TGS, is there any other offering where we can leverage our brand value currently?

Sorry, I didn't understand. Any other current offering where we can leverage. Are there any more like TGS.

Right.

No. I think we continue to operate in our core lines of businesses are Natures Basket, Spencer’s. In Spencer’s, we have Wholesale Bazaars and I think that's -- I mean those are the core parts of it. So I -- we don’t have any other lines of business which can be leveraged, monetized, et cetera, at the moment.

Right. And also in terms of the fundraise, like in terms of the capital allocations, have you finalized anything like in terms of a planning for reduction on the debt side. So like what is the structure like if we lease INR 300-odd crores which is our plan, so how we like to particularly utilize it?

So at the moment, we haven’t finalized the quantum or the timing of fundraise. As I mentioned, doing what we have -- the decisions which we have been taking will allow us to get to a position of EBITDA breakeven and positive EBITDA level by Q3,Q4. And I think that is the right time where we will have -- it'll generate more options for us to look at ways, means and quantum of capital breakdown. And we will definitely look at it at that point of time.

Right. So the INR 100-odd crore improvement which we are targeting, so that we are targeting over the next one year if my understanding is correct.

Yes, it is on an annualized basis, yes. What you will see is the guidance by quarter 4 exit, so quarter 4, we endeavor to be EBITDA breakeven, pre-IndAS.

[Operator Instructions] The next question is from the line of Rishikesh from RoboCapital.