Nykaa Shares Fall 10%: Key Reasons Behind the Decline After Q1 Results

In an unexpected turn, FSN E-commerce Ventures, the parent company of Nykaa, witnessed a significant 10% plunge in shares, unveiling a compelling story fueled by several key factors. With trading volumes soaring and market activity surging, Nykaa's performance in the June quarter has brought to light five pivotal elements that have ignited this captivating narrative:

1. Missed Expectations in GMV Growth:

Nykaa's Gross Merchandise Value (GMV) growth of 24% during the June quarter fell short of market projections. Notably, the fashion segment, once a star performer, experienced a modest 12% growth. The unexpected 1.6% sequential dip in fashion GMV raised concerns about the trajectory.

2. Setback in Ad Revenue:

The company faced a setback in generating ad revenue due to reduced ad spends by Direct-to-Consumer players and the challenges associated with transitioning to a new ad platform. This decline in ad revenue has inevitably impacted investor confidence.

3. Margin Contraction:

A strategic shift towards the eB2B vertical, Superstore, resulted in an 89 basis points contraction in Gross Margin. While this move holds promise for future growth, the immediate impact on margins has sparked investor apprehension.

4. Analyst Caution:

In response to disappointing results, well-known brokerage firm Nomura downgraded Nykaa's stock to a neutral rating and lowered its price target to ₹163. This cautionary step reflects a guarded outlook on Nykaa's growth potential and highlights the potential for higher costs associated with sustained growth.

5. JPMorgan's Bearish View:

JPMorgan's underweight rating and reduced price target further underscore the disappointment in earnings, suggesting a potential downside of 27% from the stock's recent closing level.
Among 23 closely monitored analysts, a range of opinions prevails, with 13 advocating a 'buy' rating, five suggesting 'hold,' and five indicating 'sell.' This diversity underscores the complexity and uncertainty surrounding Nykaa's path forward.

Fast-forward to the present, Nykaa's shares have experienced a 7.7% decline, trading at 
₹135. The year-to-date drop of 13% signals the ongoing challenges the company is grappling with.

Q1 FY24 Results: Beauty's Triumph and Fashion's Revival

Nykaa's Q1 FY24 results unveil a tale of resilience and resurgence, despite a 27% dip in net profit. The company's robust performance in the beauty and personal care segment was a major driver, with revenue surging by an impressive 24% to ₹1,421.8 crore. While slightly below the projected estimate, the positive momentum within this domain remains a standout.

A remarkable highlight was Nykaa's operating profit, soaring by an astonishing 60% to ₹73.4 crore, surpassing analysts' predictions and enhancing the margin.

Gross Merchandise Value (GMV) Surge:

Nykaa's GMV growth stands out as a testament to its success. The beauty and personal care segment experienced a significant 29% increase, reaching ₹1,850.8 crore. Simultaneously, the fashion segment displayed a commendable 12% rise, accumulating ₹ 653.7 crore in GMV. Notably, other categories, including NykaaMan, SuperStore, and more, witnessed an impressive 92% surge, amassing ₹163.3 crore in GMV.

Nykaa's in-house proprietary labels within the beauty and personal care segment contributed significantly, with a remarkable 39% surge to ₹231.7 crore. The fashion segment's in-house brands also saw impressive growth, ascending by 30% to ₹91.6 crore.

Customer Loyalty and Fashion's Resurgence:

Customer loyalty remains a driving force for Nykaa's success, as evidenced by the beauty and personal care segment's 58% surge in annual transacting customers, reaching an impressive 10.3 million. Brick-and-mortar outlets also saw a commendable 40% surge in annual unique transacting customers over the past year.
A notable success story emerged from Dot and Key, a brand strategically acquired by Nykaa in 2021. Achieving profitability and an annualized GMV of ₹300 crore, Dot and Key's exponential growth serves as a testament to Nykaa's ability to nurture acquisitions.

Fashion's resurgence took center stage, with a remarkable 160% surge in annual unique transacting customers. This resurgence, catalyzed by the 'Hot Pink Sale,' propelled the count to 2.6 million in Q1. Impressively, the platform's average order value surged to beyond ₹4,400, showcasing Nykaa's ability to captivate its audience.