Markets
Fashionably late: Consumption hype skirts Go Fashion stores as wait for pick-up in discretionary spending continues
Summary
What’s got investors really worried is that same-store sales growth is showing no signs of a pick-up despite all the buzz around an expected revival in consumption.While many fund managers have hyped up discretionary consumption stocks, Go Fashion (India) Ltd has nosedived 46% in the past six months. The stock is also 47% below its listing price of ₹1,310 on the NSE in November 2021.
Mutual fund ownership in the company plateaued at 25% from September to February, a sign that investor interest may be stagnating rather than gaining momentum, according to data compiled by Abhilash Pagaria, head of Nuvama Alternative & Quantitative Research. This was a slight uptick from August, when mutual funds held a 24% stake in Go Fashion, he said.
However, what has investors really worried is that there are no signs of a pick-up in same-store sales growth (SSSG) – a metric used to gauge the performance of a company’s existing outlets – even after all the buzz around an expected revival in consumption. The apparel company was the first to launch a brand – Go Colors – exclusively dedicated to women’s bottom-wear.
“Lifestyle brands are battling weak demand and so is Go Fashions. The company has been witnessing slowing SSSG, with almost 0% SSSG for the past seven quarters," said Prerna Jhunjhunwala, VP and research analyst at Elara Capital.
Go Fashion’s revenue from operations for the first nine months of FY25 grew by 11% to ₹643 crore, with a 9% growth in Ebitda to ₹206 crore. Its SSSG remained little changed, reflecting the subdued market environment as heightened inflation prompted customers to postpone discretionary apparel purchases, Gautam Saraogi, promoter and chief executive officer, said on 27 January during an analyst call.
Lower discretionary spending
He added that apparel retail demand remained weaker than expected, driven by an underwhelming festive season and decreased consumer spending on discretionary items.
Finance minister Nirmala Sitharaman said in the Union Budget on 1 February that annual income up to ₹12 lakh would be tax-free starting 1 April. This move was aimed at easing the tax burden on the middle class and putting more money in their hands—potentially driving up household consumption, savings, and investments.
Despite government efforts to boost spending, Jhunjhunwala worries that consumers may focus on tackling inflation and their loans before splurging on fashion.
Even with some relief from rising gross margins of about 180 basis points in the first three quarters due to favourable raw material prices and improving product mix, the company’s margins have been under pressure due to rising employee and other expenses, she explained.
Go Fashion dialled back its FY25 net store opening guidance to 80-90 stores from 120-130 stores, signalling a more cautious approach.
However, the company has a cluster-based expansion plan, targeting 120-150 new stores, with 60% of them in newer markets—up from 50% earlier. Clustering refers to building a strong presence in specific areas by opening multiple stores there before expanding to new regions.
According to Jhunjhunwala, newer cluster stores would improve SSSG only after two or three quarters.
JM Financial Institutional Securities recently caught up with Go Fashion’s management executives, who highlighted that repeat purchases were holding steady, but getting new customers had been tough in the current demand slump. This put pressure on SSSG and brought down volumes per exclusive brand outlet (EBO).
“EBO consolidation, which was the pain point in FY25, will be largely over by March 2025," JM Financial said.
Go Fashion is setting its sights on double-digit revenue growth next fiscal and mid-single-digit SSSG. However, for Q4, it is keeping expectations in check, targeting a modest low single-digit SSSG.
Uneven footfalls
The branded womenswear segment in India is dominated by large national and regional players such as TCNS (W, Aurelia, Elleven and Wishful), BIBA, Global Desi, AND, H&M, Zara, M&S, Fabindia, Soch and Twin Birds, the company said it its IPO documents, citing Technopak. Go Fashion also faces competition from private in-house label brands launched by large-format stores and online-only fashion brands.
The broader trend of a weak consumer demand environment that continues to weigh on discretionary spending was evident for other apparel companies as well.
Vedant Fashions clocked a 2.6% year-on-year SSSG in Q3 of FY25. Chief revenue officer Vedant Modi noted on an earnings call that “at a macro level, there are some headwinds," with middle-class consumers still not back to their usual apparel spending levels.
Raymond Lifestyle posted a 2% YoY revenue uptick in Q3, touching ₹1,796 crore. The company pointed to global challenges—volatile commodity prices, supply chain hiccups, and shifting consumer trends—as key drags.
Jagdish Bajaj, chief financial officer of Aditya Birla Fashion and Retail Ltd, said on the company’s latest earnings call that while the festive and wedding season brought in strong demand, the rest of the quarter saw uneven footfalls.
“The overall consumption remains subdued this quarter as well with periods of high to moderate consumption," he said.
Stock valuation
The stock currently trades at a price to earnings multiple of 43.6, according to Bloomberg data. JM Financial has cut its target multiple for the stock to 38, mainly driven by slower growth projections.
It estimates revenue and profit after tax will increase at a compounded annual growth rate of 11% and 12%, respectively, over FY24-27, compared to 22% and 20%, respectively, over FY19-24.
Profitability metrics are expected to weaken, with return on equity and return on capital employed declining to 16% and 13%, respectively, by FY27. Another factor contributing to the downgrade is the increase in promoter pledges from 17.4% to 19.8%, triggered by a decline in share prices, JM Financial pointed out.
A better SSSG and release of promoter pledges would be the key catalysts for the stock price movement. A bounce-back in SSSG would be the green light to start snapping up the stock, market experts said.
