The relatively newer fashion business is finally adding strength to FSN E-Commerce Ventures Ltd, Nykaa’s parent company. This vertical put up a strong show on the margin front in the September quarter (Q2FY24), thanks to premiumisation, lower product yields and declining marketing spend. As such, the fashion segment clocked a multi-quarter high contribution margin (as a percentage of net sales value) of 4.7%. In Q1, this measure stood at 2.7%. Contribution margin refers to gross profit after adjusting for variable expenses such as executive expenses, marketing costs, and selling and distribution expenses.
Moreover, the fashion segment is expected to remain in fashion with a better margin trajectory. This would be aided by an improving mix of existing customers and lead to savings on marketing costs. Existing customers made up 46% of the gross merchandise value (GMV) of the fashion segment in Q2 versus 35% in the same period last year.
“We expect the segment to become profitable Ebitda as contribution margin crosses 11%. It appears that the segment has turned around and is on track to generate incremental value for shareholders,” analysts at JM Financial Institutional Securities said in a report on 6 November. Ebitda, a measure of profitability, is short for earnings before interest, tax. , depreciation and amortization.
However, it is not a pretty picture as far as Nykaa’s flagship beauty and personal care (BPC) segment is concerned. Competition is heating up in this category, led by direct-to-consumer brands as well as international brands that operate on Nykaa’s platform. To keep the market share, the brands are offering additional discounts, which is weighing on Nykaa’s margin. Further, ad revenue is still rebounding even though it showed a sequential improvement in Q2. Also, the change in the festive season of almost 20 days had some impact on the growth of BPC’s GMV in Q2, which was 23% year-on-year – the second consecutive time of fall in the growth rate.
The result: BPC’s contribution margin fell by 20 basis points (bps) year-on-year to 26.4%. The marginal outlook is not particularly encouraging. Analysts at Elara Securities (India) note that savings in compliance costs and marketing expenses have largely peaked in BPC. The brokerage does not expect any sharp improvement in the profitability of the segment due to increased competition from fast trading players and platforms like Tira. Tira is an omni-channel beauty retail platform under Reliance Industries Ltd.
But there are bright spots. The average order value of the BPC segment is increasing by more than 2% per year to ₹1,916, indicating an improvement in the quality of transactions and customer groups. Also, the mix of existing customers in BPC’s GMV is healthy. Further, tailwinds in Q3 from the festival season and the Hot Pink sale in November would boost BPC’s GMV.
Meanwhile, Nykaa’s Other business is still in the red at the contributory profit level. This includes NykaaMan, e-B2B platform – Nykaa’s SuperStore, international brands, Little Black Book and Nudge. Here, the e-B2B business sees an improvement in the contribution margin and that is positive. As the businesses gain scale, the loss is likely to narrow.
Certainly, progress towards profitability in the fashion business is key to monitor and can help investor sentiment. In this calendar year so far, Nykaa’s stock is down nearly 4%.