Celebrity Partnerships And Retail Expansion Will Drive Future Brand Visibility And Customer Engagement

Key Takeaways

• Strategic focus on premiumization and celebrity collaborations aims to enhance sales and margins, reducing reliance on discounting.
  
• Shift to higher-margin direct channels and retail expansion is designed to boost profitability and improve customer engagement.
  
• The company faces revenue and profitability challenges due to strategic shifts, regulatory impacts, and dependency on economic conditions, impacting diversification efforts and channel stability.

Catalysts

Engages in the wholesale and retail trading of garments and accessories in India and internationally.

• Arvind Fashions is focusing on premiumization and has launched new collaborations with celebrities to create exclusive collections, which is expected to drive higher sales and reduce discounting, positively impacting revenue and net margins.
  
• The company has increased marketing investments, leveraging local celebrities to improve brand visibility, which should enhance revenue by capturing consumer attention and driving higher sales in various channels.
  
• There is a strategic shift towards higher-margin direct channels, including retail brand stores and online B2C platforms, anticipated to increase EBITDA margins and revenue share from more profitable channels.
  
• Arvind Fashions is expanding its retail footprint with plans for significant square footage growth, which, coupled with retail renovations and new large-format stores, is expected to boost revenue through enhanced customer experience and increased store traffic.
  
• The brand is optimizing its online channel by pivoting away from lower-margin wholesale B2B sales towards more profitable B2C sales, which should increase overall profitability and contribute to a favorable sales mix in the long term.

Arvind Fashions Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Arvind Fashions's revenue will grow by 12.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.9% today to 5.5% in 3 years time.
• Analysts expect earnings to reach ₹3.5 billion (and earnings per share of ₹26.38) by about February 2028, up from ₹837.7 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 38.3x on those 2028 earnings, down from 66.7x today. This future PE is greater than the current PE for the IN Specialty Retail industry at 36.3x.
• Analysts expect the number of shares outstanding to decline by 0.26% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 15.44%, as per the Simply Wall St company report.

Arvind Fashions Future Earnings Per Share Growth

Risks

• There is inherent risk in the company's shift from B2B to B2C online channels, which may face unanticipated challenges that could impact revenue growth during the transition period.
  
• The closure of a significant wholesale partner and dependency on economic conditions for wholesale channel growth, affecting overall revenue stability.
  
• Emerging categories such as kidswear and womenswear are still being piloted and may not yield expected gains timely, potentially affecting the revenue diversification strategy.
  
• Regulatory changes like BIS impacting inventory levels and assortment, notably in the footwear segment, may strain revenue consistency and net margins.
  
• The revival journey of brands like Arrow and Flying Machine being prolonged could dampen overall profitability improvements and delay PAT margin expansion.

Valuation

• The analysts have a consensus price target of ₹659.0 for Arvind Fashions based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹710.0, and the most bearish reporting a price target of just ₹579.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹64.0 billion, earnings will come to ₹3.5 billion, and it would be trading on a PE ratio of 38.3x, assuming you use a discount rate of 15.4%.
  
• Given the current share price of ₹419.2, the analyst price target of ₹659.0 is 36.4% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.