Nykaa’s 1Q EBITDA fell short of our projections due to several factors, including increased discounting, decreased advertising revenue, and a disappointing gross margin (GM) performance, among other reasons.
The challenging macroeconomic environment has had a notable impact on the fashion industry’s growth, while the Beauty, Personal Care, and Cosmetics (BPC) sector maintained its position with industry-leading growth. Management remains cautiously optimistic about growth prospects across various segments, and the primary focus lies on enhancing profitability. This will be achieved through strategic measures such as optimising the portfolio mix, implementing cost-saving initiatives, and other efficiency-enhancing strategies.
Nykaa’s revenue growth was robust, achieving 24% y-o-y, but it slightly missed expectations due to increased discounts and lower advertising income in the BPC segment, although Fashion revenue met expectations. Gross margin faced a decline of 70-90 bps, both quarterly and yearly, primarily from a higher eB2B sales mix and lower GMs in Fashion. Despite this, the contribution margin improved by 80 bps y-o-y, mainly due to reduced fulfillment costs.
Operational leverage played a key role, leading to a significant rise in EBITDA margins, surpassing the 100 bps mark and reaching 5.2% y-o-y. However, these margins remained below the target due to the GM miss. Ebitda exhibited strong growth, increasing by 60% to Rs 735 million compared to the previous year, but it fell short of expectations.
Net profit, on the other hand, faced a sharp decline of 27% y-o-y, reaching Rs 33 million. This decline can be attributed to higher depreciation and finance costs, stemming from investments in stores, warehouses, and offices. Additionally, lower other income further contributed to this significant net profit miss.
The fashion industry faced a sluggish 1Q due to subdued consumer sentiments and a shift to offline shopping, although Nykaa managed to gain market share. The situation improved in July with the EOSS, and management is cautiously optimistic about growth in Q2FY24. Strategies to enhance profitability include introducing platform fees, cost control, improving product assortment, and focusing on high-margin categories, prioritizing profitability over growth.