Shift To D2C And Celebrity Collaborations Will Boost Brand Visibility

Key Takeaways

• Strategic pivot to D2C channels and retail footprint expansion is expected to enhance consumer experience and sustain revenue growth.
  
• Emphasis on marketing and inventory management improvements aims to boost brand visibility, improve cash flow, and diversify revenue streams.
  
• Challenges in wholesale channels, regulatory impacts on footwear, and increased receivables threaten revenue growth, working capital, and profitability despite plans for B2C growth.

Catalysts

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

• Arvind Fashions is focusing on direct-to-consumer (D2C) channels like brand stores and online B2C marketplaces, with a shift away from B2B wholesale channels. This strategic pivot is expected to enhance consumer experience and reduce discounting, improving revenue and gross margins.
  
• The company is investing heavily in marketing, including collaborations with celebrities for exclusive collections. This is aimed at strengthening brand visibility and premiumization, which could lead to increased revenues and improved net margins.
  
• A strong emphasis on expanding retail footprint, with a projected net expansion of around 15% in square footage annually, is likely to support sustained revenue growth.
  
• The company is advancing in inventory management, with improvements in stock turns and reduced inventory days, leading to better cash flow management and free cash flow generation which could improve overall earnings.
  
• Arvind Fashions is witnessing strong momentum in adjacent categories, like womenswear and innerwear, which are growing faster than traditional categories. This diversification is likely to contribute positively to the company’s revenue growth trajectory.

Arvind Fashions Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Arvind Fashions's revenue will grow by 11.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.9% today to 5.0% in 3 years time.
• Analysts expect earnings to reach ₹3.2 billion (and earnings per share of ₹23.83) by about April 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 41.7x on those 2028 earnings, down from 67.0x today. This future PE is greater than the current PE for the IN Specialty Retail industry at 35.5x.
• 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 15.17%, as per the Simply Wall St company report.

Arvind Fashions Future Earnings Per Share Growth

Risks

• The company has faced challenges in the wholesale channel, including the strategic destocking of B2B online wholesale channels and a partner deciding to shut down a department store format. This could potentially impact revenue growth if the wholesale business does not recover its underlying growth potential of 8% to 10%.
  
• The footwear segment has been affected by government BIS regulations, impacting inventory levels and product assortment. Although there are signs of recovery, continued issues in this segment could weigh on overall margins and profitability.
  
• Inventory and receivables have increased, with receivables rising by 17% due to a change in the business model with some partners. This could exert pressure on working capital management and affect free cash flow generation.
  
• While transitions from B2B to B2C in digital channels are planned to drive growth, the 10% to 12% decline in B2B could mean slower revenue growth if B2C does not scale as projected, potentially impacting overall revenue and earnings.
  
• Despite improvements, Arrow and Flying Machine brands are still on a recovery journey. Continued underperformance in these brands could delay reaching PAT positivity, affecting overall profitability and net margins.

Valuation

• The analysts have a consensus price target of ₹653.6 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 ₹63.2 billion, earnings will come to ₹3.2 billion, and it would be trading on a PE ratio of 41.7x, assuming you use a discount rate of 15.2%.
• Given the current share price of ₹420.95, the analyst price target of ₹653.6 is 35.6% 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.