BATAINDIA - Bata India Limited Share Price

During the Q1 FY "˜26 Earnings Call for Bata India Limited, management provided an outlook characterized by cautious optimism amid challenging market conditions. Gunjan Shah, the Managing Director and CEO, indicated that the quarter had relatively better operational efficiencies despite achieving only a flattish growth of -0.3% in revenue, totaling Rs. 942 crores. The gross margin declined by 133 basis points, while the EBITDA margin stood at 22.9%. The management is focused on three primary initiatives: enhancing store growth, evolving the product portfolio, and improving inventory agility.

For store growth, the Zero Base Merchandising (ZBM) project has been implemented in approximately 200 stores, with a target to maintain a pace of adding around 50 stores per quarter. The ZBM initiative has resulted in a 33% line reduction and a 22% inventory reduction in participating stores, improving turnover and customer experience as indicated by better NPS scores.

Management highlighted that they are pushing for a stronger value proposition, particularly in the lower price segment, where price points of Rs. 399 and Rs. 499 saw checkout rates doubling to 8%. The strategy includes enhancing the premium product lines, such as Power and Hush Puppies, which have shown positive responses, particularly in athleisure.

Regarding inventory agility, total inventory reduced by 16% year-on-year, and the company aims to improve stock turn from 2.1 to over 2.5 in the next year. They expect franchise store expansion to maintain a momentum of 30 to 40 new stores per quarter, with a focus on enhancing profitability and customer experience.

Overall, management emphasized the need for sustained focus on operational efficiencies and innovation in product and store offerings to drive future growth despite a challenging macroeconomic environment.

Here are the major questions and their detailed answers from the Q&A section of the earnings transcript:

1. Question: "With regards to the gross margins in the quarter around... however, still we see that the gross margins have declined. So, if you can highlight what has really led to this?" Answer: "Partially, the gross margin decline is due to the clearance of inventory, both aged and discontinued, which we are tightening under our Customer First initiative. We're hopeful that with reduced aged inventory, we can improve gross margins as we begin to realize benefits from this. Some inventory might get redeployed in value proposition initiatives without significantly diluting margins."

2. Question: "If you can dissect... what is it that despite a very low base, we are not able to take the revenue growth to even mid-single digits?" Answer: "The roadblock to revenue growth stems largely from lower price points where we see critical revenue growth. This quarter, we noticed sluggishness in the distribution business, but we've observed encouraging signs at lower price points. We aim to accelerate growth in the less than Rs.1,000 segment while also pushing the premium segment as part of our strategy."

3. Question: "Is there a guardrail in terms of margin... in terms of margin that this is the bottom and we will not allow the margin to go down from here?" Answer: "We aim for margin protection across gross margin, same-store growth leverage, and corporate fixed costs. While we don't provide specific forward-looking margin guidance, we believe tightening cost structures can significantly aid margins. We're focused on driving same-store growth, which is essential for margin recovery."

4. Question: "Given that despite flexi manpower initiatives, Bata stores are significantly understaffed leading to lower conversion...what initiatives are you doing to tackle this?" Answer: "We run a centralized template for staffing that correlates to conversion metrics. While fluctuations may occur, we aim to react quickly to address pockets of understaffing. If you have specific feedback on gaps, we would appreciate that input as we continuously work to improve service levels."

5. Question: "Despite the outlook being bullish, the top line seems stagnant. With the B2C brands rising, what is aiding the company despite several initiatives?" Answer: "The consumer pinch from inflation affects our core middle-class target. We must ensure our products provide value. Our initiatives, such as Zero Base Merchandising, aim to enhance our value proposition. Additionally, we're focusing on e-commerce growth, having recently launched our app to improve customer engagement."

6. Question: "We have slowed down our pace of implementing Zero Base Merchandising...any kind of hindrance that you want to highlight?" Answer: "While we aimed for 300 stores, we are at 194 due to a cautious approach to ensure a seamless transition and optimize performance metrics without interruptions. We plan to maintain the pace of around 50 stores per quarter, with hopes to push to 65-70 as we stabilize the system."

7. Question: "How does increasing franchise mix and e-commerce penetration impact both gross and EBITDA margins?" Answer: "At an EBITDA level, franchise growth is accretive. However, the gross margin may slightly dilute due to the business model structure. We're seeing that our franchise business, being low cost and high turnover, contributes positively to our overall EBITDA."

8. Question: "How has the contribution of the franchise network changed post-COVID, and is the throughput number improving?" Answer: "Franchisees now contribute around 12% to total turnover, significantly up from less than 3% pre-COVID. We're also seeing repeat franchisees, with 60% of new additions coming from existing ones, indicating strong relationships and confidence in our brand."