Ethos Ltd Q4 FY2023 Concall Summary

Key Takeaways

• Strong quarter, supply easing: Revenue grew 30.8% YoY to INR208 crores, with growth now broad-based across all price segments rather than concentrated at the very top.
• Currency hit masks stable unit economics: Gross margin dipped solely on temporary INR-CHF depreciation; price corrections beginning Q1 FY24 are expected to restore margins to the 30%-31% range.
• Store rollout accelerating with discipline: The company opened or re-entered multiple cities and remains on track for 40 new locations in two years, with new stores turning profitable within their first year.
• Adjacent bets are being placed, not yet paying: Pre-owned watches grew 61% YoY to INR50 crores, while Rimowa and jewelry are in early build-out; real impact from jewelry is two to three years away.
• What to watch next quarter: Whether price corrections restore gross margins as guided, the pace of new store openings versus the two-year target, and any announcement on exclusive brand partnerships currently under discussion.

Revenue Growth & Demand

• Broad-based growth: Unlike two years ago when growth was concentrated in very high price segments, Q4 saw expansion across all price bands, with ASP continuing to rise. The company has exited the fashion watch segment below INR25,000-INR40,000.
• India in global focus: International and Swiss luxury brands are now giving India more attention, which management expects will translate into better allocation of hard-to-find collectible and high-demand pieces. Supply constraints are easing but not yet normal for these variants.
• SSG momentum: Same-store growth for the full year stood at 30%, and the steady-state target for the next three to four years is 12%-15% SSG.

Saboo: "While I said that, supplies are constrained, I believe that, India as a market is now much more in focus of all the international, & Swiss luxury brands. And we believe that, in the months and years to come, we will get the due importance, which essentially means, an allocation of hard to find pieces."

Margins & Currency Mechanics

• Q4 gross margin dip is transient: The decline was driven by significant INR depreciation against the CHF, with many brands yet to correct their Indian MRPs. Price corrections happen once or twice a year and began in Q1 FY24, so the drag is expected to phase out.
• Old inventory provides a cushion: Stock purchased at older, lower prices carries a higher effective margin because it requires lower discounts to sell, partially offsetting the currency headwind in the near term.
• EBITDA margin trajectory: EBITDA grew 33.4% YoY to INR30.6 crores in Q4, and management expects margins to stay stable or increase slightly for the full year as operating leverage kicks in from corporate overheads not rising proportionately with store count and from maturing stores where costs grow slower than revenue.
• Gross margin steady state: Management projects staying within the 30%-31% range, which it calls comparable to large luxury watch retailers globally, though it sees potential for a slight inch-up in coming years.

Store Expansion & Unit Economics

• Rollout pace: The company now has 56 stores across 22 cities, having recently entered Surat, Bhubaneshwar, Indore, and Siliguri, and re-entered Bhopal with a larger format. Raipur is next. The two-year target is 40 new locations.
• New store profitability: Stores opening before Diwali or wedding season turn profitable from the first quarter; those opening in lean periods like March or April may take one to three months. The stated target is profitability within the first year, and management is confident of achieving it, with standard ROCE expected within the first month of operation.
• Large-format strategy: Flagship stores like Surat (4,000 sq ft) are expected to deliver comparable ROCEs to smaller formats. Large stores in Calcutta and Hyderabad have crystallized buyer behavior and lifted purchase frequency.
• Inventory lumpiness: The INR100 crore inventory addition against INR200 crores of sales growth partly reflects new store stocking and new brand signings, which require starting with a certain number of doors and create a natural lag between buy-in and sell-out.

New Verticals & Adjacent Bets

• Pre-owned watches: Revenue reached approximately INR50 crores, up 61% YoY, and management expects similar or better growth in FY24. The binding constraint is finding enough mechanical watchmakers with the expertise to refurbish, a skill India lost after HMT's decline decades ago. The company has built servicing facilities it calls equal to the best globally and aims to structure the service business as a profit center.
• Rimowa (luggage): The first boutique is expected to open when Mumbai's Jio World Plaza launches, with fit-out in progress. A repair center is already operational and drawing inquiries. Management expects a strong start and plans rapid expansion of the segment.
• Jewelry: The Messika brand is beginning to generate sales, with a couple of additional points of sale planned. Real impact is expected only two to three years from now, once the learning curve is complete.
• Other segments: Management remains open to ideas but says the watch industry will remain the focus for at least the next couple of years while luggage and jewelry need to realize their potential first.

Saboo: "I'm very sure that when the store starts, it will take off like a cracker. It's going to be a cracker of a start and we hope we will be able to plan a rapid expansion of this segment soon."

Saboo: "India has, lost the tradition of mechanical watches after HMT died 50 years ago or 40 years ago. So, therefore, the constraint is to find enough watchmakers."

Brand Strategy & Investments

• Exclusive brand share: Exclusive brands contributed 27% of revenue for FY23, and management is in active dialogue with several brands for exclusive partnerships, with announcements promised when finalized. These dialogues typically take over a year, including encouraging brands to visit India.
• Swiss investment: The company invested CHF 125,000 (under INR1 crore) in a Swiss-headquartered brand, Haute-Rive, and formed Silver City, a foreign subsidiary intended for further brand investments and other activities better served by a Swiss presence.
• Own-brand ambition: Management signaled intent to follow the path of large global retailers like Bucherer and Wempe by developing strategic influence or ownership over select brands, though the company will remain primarily a retailer.

Saboo: "The fact is that the large retailers everywhere in the world do have brands over which they either have strong influence on or they own. Examples are several. Bucherer has Carl F. Bucherer. Wempe has its own brand, Wempe watches of Switzerland similarly, has done strategic brands on which we have significant influence in the future."

Guidance & Commitments

Key Metrics