MANAGEMENT DISCUSSION AND ANALYSIS REPORT Future Lifestyle Fashions (FLF) in its second year of operations has continued to build and strengthen its portfolio as a lifestyle fashion arm of Future Group. With the clothing & apparel retail market worth Rs. 324,500 Crore growing at 20-21% it is expected to be worth around Rs. 564,800 Crore by 2017, as per Images Retail Report 2015. Modern fashion retail is estimated at 43.00% of this total market and is expected to grow by a much higher growth rate. FLF is poised to capture major share of this fast growing and evolving lifestyle fashion market in the country. The Company has built its position in three integrated areas: fashion brands, fashion distribution and investments in fast growing fashion companies. During the last few decades with growth in modern retail, there are certain sub-segments under each category which have shown high growths such as denim, casual wear, women western wear and kids' party wear. FLF with its broad portfolio of fashion brands covers the entire gamut of categories including formal men-wear, casual wear, active or sportswear, women's ethnic wear, women's denim wear, women's casual wear, footwear and accessories and are brsent across various price points. The Company has exclusive tie ups with international / global brands for manufacturing and marketing the products in India. The portfolio of fashion brands are distributed through own retail chains, exclusive brand outlets (EBOs) and multi brand outlets (MBOs) across the country. The Company also operates national retail chains viz. Central, Brand Factory, Iamin, and Planet Sports, that is sbrad across 4.90 million square feet of retail space. These chains are backed by strong sourcing network, in-house trend-spotting and design teams, coupled with robust logistics and warehousing network. The Company also focuses on investing in fast growing fashion companies and building the portfolio of fashion brands. During the year, the Company invested in fashion brands like Pepperone (12.00% stake), a leading manufacturer & distributor of handbags and accessories and Spunk (60.00% stake) engaged in manufacturing, supplying and distributing leather footwear and accessories in India. FLF also increased its stakes in existing brands like in Famozi from 11.00% to 30.00% and Mineral from 22.70% to 37.00%. With the aim of capitalizing FLF's balance sheet, on June 13, 2014, the Company allotted 1,55,27,950 Equity Shares of face value of Rs. 2 each at a price of Rs. 80.50 per Equity Share aggregating to Rs. 125 Crore to a venture capital fund on brferential basis and further on November 7, 2014, 1,59,34,065 Equity Shares of face value of Rs. 2 each at a price of Rs. 91 per Equity Share aggregating to Rs. 145 Crore and 32,96,700 Compulsory Convertible Debentures (CCDs) of face value of Rs. 91 each aggregating to Rs. 30 Crore, on brferential basis to the Promoter Group of the Company. This funding has enabled investments in growth of the business and in debt reduction. Further, the CCDs issued to promoter group company got converted in equivalent number of Equity Shares on April 01, 2015. Operational Overview FLF follows a vertically integrated business model encompassing trend spotting, brand building, product development, manufacturing and distribution. FLF keeps track of customer brference and emerging trends in the lifestyle fashion market. These trends lead to creation of new brands, products or offerings to meet the consumer needs. Based on consumer needs and business opportunity, FLF creates, develops and nurtures brands to make the product offering for lifestyle needs of consumer. The brand portfolio meets the needs of different customer segments in lifestyle fashion business. At the end of the year, FLF operated through 4.90 million sq ft of retail space across its retail formats. The Company undertook modest store expansion during the year adding around 0.71 million sq ft of retail space. Apart from own store network, the brands are also retailed through national mutli-brand outlets and leading e-commerce sites. In May 2014, Central completed a decade of fashionable success; from that solitary store in May, 2004 to 25 stores in 15 major cities of the country by May, 2014 lays a journey which is full of hard work, challenges, joy and hunger to achieve more! As of year ended March 31, 2015, the Company operated 29 Central stores, 39 Brand Factory outlets along with 290 sport stores and exclusive brand outlets. With the aim of expanding the reach of its fashion brands, in October 2014 Future Group announced a strategic alliance with Amazon.in leveraging the strong product knowledge, extensive brand portfolio and sourcing base of Future Group, and the e-commerce platform, customer base and reach of Amazon.in platform and their respective websites. This partnership will focus on FLF's fashion brands Lee Cooper, Converse, Indigo Nation, Scullers or Jealous21, among others which will be retailed exclusively online through Amazon.in platform. This partnership will promote existing and new brands in markets, explore co-branding opportunities and accelerate new product development in categories which are currently not served by retailers. During the year, the Company completed the divestment of its 31.50% stake in Celio for Rs. 75 Crore. However, FLF continued to invest in fast growing fashion brands by acquiring stakes in brands -Pepperone (12.00% stake), a leading manufacturer & distributor of handbags and accessories and Spunk (60.00% stake) engaged in manufacturing, supplying and distributing leather footwear and accessories in India. FLF also increased its stakes in existing brands like in Famozi from 11.00% to 30.00% and Mineral from 22.70% to 37.00%. The Company received awards in categories like Central's lingerie category team bagged two awards at Triumph India's Annual Awards Ceremony, first award was for Excellence in Business Innovation and second award was for highest LTL growth for the year 2013-14. FLF's licensed brand Converse was awarded the 'Best Men's Footwear Brand' at the Myntra Brand Summit 2014 held in September 2014. Customer and Marketing Overview The process of brand building includes activities like branding, in-store display and promotion, mass media communication through print, hoardings and electronic media, event sponsorships and associations. This creates mind share for the brand and market share follows. FLF witnessed new product launches across its brand portfolio; Indigo Nation launched STREET.IN collection with a range of denims and tees range. Jealous 21 extended fashion line to club wear with a range offering monochrome, pastel, bohemian dress and tops along with embellishments. In addition, FLF also carried out various customer engagement and promotional activities. Jealous 21 launched a TV commercial across national channels in India with its Butt Out campaign. The brand also tied up with a women's biking group called The Bikerni to create the Butt Out Brigade. The Butt Out Brigade rode around Bengaluru to raise awareness about gender discrimination and to mark Women's Day. FLF brands now have more than 15 lakh fans collectively on Facebook and are reaching out to almost 2 lakh people on a monthly basis. During the year, outdoor campaigns were conducted in Tier 1 cities such as Bengaluru, Mumbai, Pune as well as Tier 2 Cities such as Agartala, Indore, Cuttack, Bhubhaneshwar, Mysore, Nasik, Aurangabad, Kanpur, Lucknow, Vijaywada and Erode to name a few. Urbana the brand focused on men formal wear entered the TV space with CEO of Life on CNN IBN! featuring top CEOs from India, it also installed brand hoardings across major airports in India. During the year, Central launched 'Men of Style', a very unique promotion of the latest in men's fashion wear. This activity promoted the latest trends across men's categories through in store activations and also by engaging with the brand's fans online. Brand Factory launched its Ethnic Festival with the widest range of women's ethnic range. The store brought together more than 2.5 lakh different products with more than 200 options in tops and 20 plus options in bottoms. Competition The Company operates in a competitive market environment. The Company faces competition from other fashion brands and national retailers. Further, it faces competition from online retailers who market similar products. Additionally, we may face competition from international players if foreign participation in the retail sector is further liberalized. The Company's vast experience in fashion, strong sourcing abilities, a strong portfolio of fashion brands and loyalty programs are expected to provide a fundamentally stronger position to face competition. FLF is also tapping into other multi-brand retailers and signed an exclusive partnership with Amazon to distribute its brands across India. The Company's fashion formats have established a strong brsence across major metropolis and also expanding beyond the top 8 cities like Nagpur, Patna, Hubli, Kanpur among others. Human Resource Initiatives FLF employs around 6,828 employees located at head office, zonal offices, retail stores and EBOs across the country. The People Office takes care of acquisition, development and retention of right skills and talent in a way that best supports the accomplishment of the Company's goals and objectives. FLF believes in creating a culture and environment that allows its people resources to best utilize their skills, knowledge and leadership abilities and collectively excel in serving the customers. The Company runs a number of learning and development programs for employees at each level. Business Outlook In FY 2015-16, FLF will emerge as a brand company with an extensive distribution network, both offline and online. Revenue growth will be driven by store additions, exploring new channel of sales for the brand portfolio and increasing consumer spending within the stores. The focus will be on achieving disproportionate growth of the brands business which will lead to margin expansions. The product portfolio will be expanded through extending lines of existing brands. FLF is on the path of creating significant stakeholder value through conservation of capital employed and generation of free cash flows thereby maximizing returns. Additionally, FLF plans to expand its retail network to newer cities and also penetrate existing cities. It will expand its EBO network to towns and cities in order to capture newer markets which are currently not serviced by multi-brand outlets. The brands will be continued to be nurtured by dedicated teams capturing trends, moods and aspirations of the customers. FLF will also launch and extend its brand portfolio to new fashion lines and categories, footwear and accessories, in order to capture larger consumer spending. With the surge in demand for readymade branded apparel in semi-urban areas, rising income levels and youth population, the Company expects to deliver higher same store sales growth along with higher operating margins. In addition, the rollback of excise duty on branded apparel has worked in favor of containing high prices. FLF will undertake various initiatives to increase footfalls, store productivity and consumer ticket size. FLF will continue to explore opportunities to partner and invest in fast growing labels managed by designers and entrebrneurs. Risks and Threats The state of external environment, including factors like interest rates, inflation, quick changes in fashion, growth in economic activity, job creation, consumer sentiments and consumption have been identified as key threats as well as opportunities for the Company. Increase of interest rates, inflation, quick changes in fashion, slowdown of economic activities in the country, changes in government policies, reduction in consumption can impact growth of the Company. However, the Company has identified each of the risks and ensured measures to mitigate such risks. These include deleveraging the balance sheet, deployment of dedicated teams to capture trends, moods and aspirations of the customers, widening the customer base to ensure consumption even in the case of slow down of economic environment, multiple format business to ensure that the Company remains in business even with changes in policies. The Company has also considered further equity expansion to increase financial capabilities and counter threats emerging out of financial dependence on external funds. In addition to the above, the management's efforts in increasing per store efficiency and improving product margin will ensure better profitability for the Company and enable it to sustain in adverse scenarios. The management team has set standards and policies for each of the identified risks and responsibility of management has also been defined to ensure that appropriate risk mitigating measures are implemented, if any identified threat / risk causes' further concern. The risk register is reviewed periodically and appropriate risk mitigating measures are implemented for the new risks identified in the review and extensive use of technology is implemented to ensure minimization of risk of execution. Internal controls and their adequacy The Company has identified key external and internal risks associated with the operations as well as control process to mitigate such risks. Further, regular review of identification of risks and control process to mitigate such identified risks ensures new evolved risks are identified well within time and appropriate control process to counter such risks is established. The Company also makes appropriate use of its ERP system, SAP, to put checks and controls to strengthen the internal control framework for financial reporting, organization structure, authorities and procedures, which are also reviewed and validated by the external experts. All such internal controls and their adequacy, financial and risk management policies, significant audit findings, compliance with accounting standards are regularly reviewed by the Audit Committee. Review of Financial Performance of the Company for the financial year ended March 31, 2015 Sales During the financial year ended March 31, 2015, the Company's Revenue from Operations was Rs. 3,134.09 Crore. The Company had also recorded Same Store Sales growth of 6.30% for financial year ended March 31, 2015. Profit before Tax Profit before Tax of the Company for financial year ended March 31, 2015 stood at Rs. 23.48 Crore. Interest Finance Cost was Rs. 158.33 Crore for financial year ended March 31, 2015. The interest & financial charges cover for financial year ended March 31, 2015 under review was 2.2 times. Net Profit Net Profit for financial year ended March 31, 2015 stood at Rs. 18.55 Crore. Dividend The Board has recommended a dividend of Rs. 0.40 (20.00%) per Equity Share of Rs. 2 each. Capital employed The capital employed (net of cash) was Rs. 2,784.46 Crore as at March 31, 2015. EBITDA return on average capital employed (net of cash) for the financial year ended March 31, 2015 was 13.10%. Surplus management The Company generated a cash profit of Rs. 189.11 Crore for financial year ended March 31, 2015. The balance amount, after cash outflow on account of proposed dividend, is ploughed back into the business to fund the growth. The growth of the Company has partly been funded by the cash generated from the business as well as from equity infused, during the year under review. Equity Share Capital Equity share capital of the Company has been increased to Rs. 37.24 Crore during the financial year under review. Debt-Equity Debt-Equity ratio of the Company was 0.78 as at March 31, 2015. Earnings Per Share (EPS) The Company's Basic and Diluted EPS was Rs. 1.07 & Rs. 1.05 respectively for financial year ended March 31,2015. Cash Earnings Per Share (CEPS) The Company's CEPS was Rs. 10.93 for the financial year ended March 31, 2015. Investment The Company's investment portfolio was Rs. 343.69 Crore as at March 31, 2015. |