Metro Brands Limited (METROBRAND) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q4 FY '22 Post Results Analyst Conference Call of Metro Brands Limited hosted by AMBIT Capital. We have with us today, Mr. Rafique A. Malik, Chairman; Mrs. Farah Malik Bhanji, Managing Director; Mr. Nissan Joseph, Chief Executive Officer; Ms. Alisha Rafique Malik, President, E-commerce and Marketing; and Mr. Kaushal Parekh, Chief Financial Officer. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mrs. Farah Malik Bhanji. Thank you, and over to you, ma'am.

Thanks a lot for that introduction. Investors, this last week has been exciting for Metro Brands Limited and we shared our fourth quarter and annual FY '22 business results. I'm pleased to share an update with you on the key highlights for our company. Metro Brands Limited announced its fourth quarter financial results, delivering consolidated revenues of INR 403 crores for the quarter, a year-over-year increase of 26% for the quarter and INR 1,343 crores for the year, an increase of 68% over FY '21. This growth is a testament to the underlying strength of the brands that we bring to the market and our passionate team. All our formats under the new leadership have continued to show strong growth, both in terms of volumes and value. Despite a challenging global operating environment with supply chain disruptions, our brands and our fundamentals are strong, contributing to growth across all regions and channels. The growth has been driven by higher pricing, less discounting and greater volume. Digital channels posted high double-digit growth of 92% for the year. We look forward to continuing to execute on the long-term vision of all our 4 brands and now Fitflop added to the mix makes it 5 brands and remain extremely confident in our future. As always, we thank you for your continued support and investment. I will now hand over to our CEO, Nissan Joseph.

Good afternoon, and thank you, Farah. In building on the overview by Farah, here are some key points to share with you. We had the highest Q4 in the history of Metro Brands, both from a top line as well as from a bottom line perspective. This despite the fact we had some closures in January related to the Omicron impact. For the full year, we posted our highest EBITDA, our highest PAT, both in amount and in percentage. We see robust customer demand continue in all our concepts of Metro, Mochi, Walkway and Crocs, even though some of them were impacted the supply chain challenges. We also saw a continuation of all categories showing growth in the different tiers that we operate in. While we are pleased to see that the customer is ready again for the offline experience, we are equally pleased to see that the investments in our e-comm initiatives continue to perform as our digital business achieved a 3-year CAGR of 79% and continues to grow both in revenue and in share of business. On the supply chain front, we anticipated early in the quarter that there would be challenges and consequently made the decision to hedge on raw materials and inventory with deep rigor and analysis to maximize sales and gross margins, which is reflected in our Q4 performance. This also allows us a little headroom in the timing of cost and price increases. We continue to monitor the input costs to our sourcing ecosystem and alert for a protracted cost increase environment. On the store opening front, we made a strategic decision to exit our Walkway shop-in-shop business in the DMart chain to focus our efforts on opening company-owned, company-operated along with franchise stores for the Walkway business. The impact of these closures were minimal to the sales of the company, impacting us less than INR 5 crores. Moving to the overall store growth numbers for Metro Brands. We closed the 21 DMart SIS stores I mentioned. We relocated 12 other stores of the chain to better locations and opened 75 new stores in our multiple concepts of Metro, Mochi, Walkway and Crocs through the year. So 75 new and 12 relocated stores for a total of 87 new stores last year. Consequently, we ended the year at 624 stores versus 586 for the previous year. In April, we also opened the first Fitflop store in India. We're very pleased with the consumer demand and look to open 5 additional Fitflop stores in this fiscal year. We remain confident of our previous guidance of opening a total of 260 stores by FY '25. I will now hand over to our CFO, Kaushal, to take you through more details on the quarter and the year.

Thank you, Nissan. Good afternoon, everyone, and welcome to Q4 earnings call of Metro Brands Limited. The quarter under review saw a phenomenal recovery despite of adverse impact of COVID-19 third wave seen in the month of Jan. Metro Brands delivered its best ever fourth quarter, both in terms of top line and bottom line growth. This was led by higher sales and store count, improved gross margins and overall efficiency in expense management. Let me now start with a quick snapshot of financial performance of Metro Brands Limited starting with revenues. On a year-on-year basis, Q4 FY '22 revenue was up by 26%. Even if you compare with pre-COVID level, that is the Q4 FY '20, our revenue growth was up by 40%. On a full year basis, our revenue was up by 68% versus last year. We're happy to confirm and inform that robust sales growth momentum in our e-commerce channel, which includes our omnichannel sales is continuing. Our full year e-commerce revenue was up by 92% over last year. Moving on to gross margins. At a consolidated level for FY '22, we delivered strong gross margins of 57.9%. We achieved higher gross margins primarily due to lower contribution of discounted sales and improvement in the overall sales mix. Our in-house sales contribution has increased to 73% versus average of 70% seen over the last many years. Historically, over the last 3 years, we've seen our gross margins ranging around 55% to 56% level. Even in this volatile environment, we are confident to maintain or improve on the margins, which we have delivered over the last many years. Lastly, moving on to EBITDA and PAT. In Q4 FY '22, we delivered strong EBITDA margin of 32.3% and PAT margin of 17.2%. Similarly, for the full year, despite adverse impact of COVID-19 second and third wave during the year -- during last year, we delivered best-ever EBITDA and PAT margin of 30.6% and 15.9%, respectively. With this, I conclude and hand over to our Chairman, Mr. Malik for his closing remarks.

Thank you, Kaushal, and good afternoon, everyone. I'm very proud of the performance delivered by Metro Brands team. This has been an exceptional year for our company, and we believe that this is a decade for India and our team is poised to take advantage of it. Thank you all for your support and interest in Metro Brands Limited. I'll now hand it over to the operator for question and answer.

[Operator Instructions] The first question is from the line of Bhargav Buddhadev from Kotak.

Congrats on a very strong performance. My first question is, is it possible to sort of share what has been the revenue growth on a per square feet basis in FY '22?

So as we mentioned, our overall growth for the quarter was 26% and for the year, full year growth was 68%. So even when you see it on a per square feet basis over last year, overall numbers would reflect the similar percentages.

And what has been the SSG like, is it possible to highlight?

So we will -- we generally don't give our SSG trends. But as I said, even if you compare our growth with FY '20 -- Q4 of FY '20, our growth was around 40%. And versus last year, our growth was around 26%. If you see our ASPs, they've grown by around 10%. So broadly, you can sort of calculate in terms of what sort of growth you would have seen on an overall basis.

So ASP in FY '22 has grown by 10% Y-o-Y. Is it correct?

Yes.

And what is the absolute ASP?

It's -- Just give me a minute, please.

It is INR 1,450 roughly in FY '22, which is also the highest that we've seen in our history.

Okay. Okay. My second question is, if you look at your share of Tier 2 cities in your overall revenue, that has gone up from about 21% in FY '19 to about 27% in FY '22. And despite this, the ASP seems to be rising. So is it that the revenue per square feet or the average realization across these geographies don't have much of a difference?

Yes. What we're finding is that our Tier 2, Tier 3 cities contribute about the same as our Metro and Tier 1. So we're able to maintain our ASPs as we go into the new tier markets. What's different, however, is in the Tier 2 or Tier 3 markets, we may not have all of the brands of Metro, Mochi and Walkway, and Crocs, right? We may only have a Metro or we may only have a Mochi. Whereas, when you get to Tier 1s and metro cities, there's this whole influx of a lot of our own concepts, not to speak of the competition. So I mean, our Tier 2 city business, as you rightly said, is about 25% of the business, and that's about also the amount of the number of stores that we have in our Tier 2 -- Tier 3 cities -- Tier 2 cities, sorry, the 25% number is a Tier 2 number.

Also just to add to that, it's important to understand that the ASP increase has not been on account of different merchandising, but because of the supply chain disruptions, raw material price increases. So it's been standard across the board, across regions, across channels.

Okay. And is it possible to share some of the key markets where we have made inroads within the Tier 2 cities?

Yes. So we added -- to be very precise, we added about 9 to 10 cities in the last full year. But as Farah mentioned, growth is overall across Tier 1, 2, 3 cities when we see the overall canvas.

And my last question is, was there an element of end of season sales in the fourth quarter? And if so, what could be the percentage of revenue coming from full price sales in FY '22?

So yes, in fourth quarter, we had our second reduction sale as we always do. And if you see our discounted sales contribution to the overall sales, it was less than 5% in the last year -- last financial year, whereas on an average, we generally see it ranges around 8% to 9%.

The next question is from the line of from Gaurav Jogani from Axis Capital.

Congratulations on the great set of numbers. So, my question is with regards to the online and offline channel contribution. So while for full year basis, we see the contribution is around 8.5% to 9%, but if you see for Q4 specifically, we see some decline in that. So do we expect that to get steady stage one, given as the economy is opening and the stores are opening, what sort of a standard contribution can we expect from the online and the offline channel, as a percentage of stand-alone fees?

Thanks, Gaurav, for the question. And if you see Q4 growth in e-commerce revenue was around 41% versus the overall growth that we saw was around 26%. So obviously, e-commerce channel is growing at much faster pace as compared to offline. Good news is even in spite of strong recovery in the offline channel, growth in online channel continues. And this can be seen from the overall contribution of the e-commerce sales, which used to be about less than 2% in FY '19 has now increased to 8.4% in the current year. So sales is growing, e-commerce sales is growing at a much faster pace as compared to offline.

Yes, sir, but my question was more like what was the overall economy opens up and all brick-and-mortar stores are ready to full function, what kind of a steady contribution can we expect from e-comm and the offline together?

So I think as we look at our e-comm business, we've distorted our investments into the e-comm space. We've had high double-digit growth in the e-comm space. What we're really excited about is a lot of our growth is coming from the omnichannel business, which is a full-price business. E-commerce is one of those businesses that you could do pretty much as much as you would like to. So we are very, very cautious in managing our brands and managing our ASPs and managing our image. So we're excited that e-commerce is growing at a very strong clip, and it's not slowed down, as Kaushal mentioned, despite our offline business coming on strong and the lifting of all the COVID quarantine measures that we had. Seriously, I don't know if there's a number that we're ready to disclose going forward, but we can see, we don't foresee this slowing down in the near-term future as far as the growth of our e-commerce business. And the good news is it's not kind of -- it doesn't seem to be cannibalistic currently, and it's definitely not discount led.

Sure. And my last question with regards to the discount thing that you’'ve you mentioned that during the year, this was just 5%, less than 5% vis-a-vis 8% to 9% of the previous year. So a positive function of conscious strategy from the company then. And do we expect this to remain [indiscernible] in the future as well?

I'm sorry, Gaurav. I'm not sure I even understood your question. All I heard was 8% to 9%.

Yes, so I'll repeat, Nissan. What my question was that the discounted sales for FY '22 and also as Kaushal mentioned that it was 5% and in the previous year, it was 8% to 9%. So is there a conscious strategy by the company to lower the discounted sales? And can we expect the same range going ahead?

Well, no, I don't think it's as much of a conscious effort. Obviously, we don't want to sell anything at a discounted price, Gaurav. I think a lot has to do with how we plan our inventory. We would like to -- I think we would be more comfortable guiding to a range there as opposed to a number to say that's going to go down. We're already one of the most enviably low numbers in the -- in our industry. I don't see a lot of upside to it. But it's going to be somewhere between 5% and 10% on an average month, depending on the season, depending on the type of year we've had, depending on what we see with trends going on in the marketplace. But the key thing is obviously to sell as much as we can at full price, and that's why you've seen our margins steadily hold. We are comfortable thinking our margins will hold somewhere between the [ 56% ] kind of range going forward.

The next question is from the line of Devanshu Bansal from Emkay Global Financial Services.

Congrats on a good set of numbers. Sir, our stand-alone revenues have grown by 24%. If I look at retail space division, that's about 20% in my estimate. ASP, you indicated another sort of 10%, and there is some contribution from lower discounts as well. So what I infer here is that volume growth was largely flattish. Is this a correct inference?

Volume as in quantity?

Yes.

So we have not guided on the volume, but on an overall basis, obviously, our volume growth has increased significantly as compared to what we saw in the last year. Broadly, as you broke out, if you compare Q4, our growth was 26% and our ASP has grown by around 8% to 10%. So balance is on account of, obviously, volume and a few stores that got added during that period.

Sure. And if I look at -- can you quantify the amount of price hikes that you have taken? And when was that taken?

It's not been one swelled price hike. We're very cautious and thoughtful in how we raise our prices, Devanshu. So we've been raising prices steadily as needed through Q4. I would say we've averaged in and around the 5% area. We've guided that we would be raising it somewhere up to 15%, but that's really a guidance, and it's more of an alertness on our part and being prudent in saying we need to be prepared for these kind of price hikes. But it's not something we hope to actually achieve. But having said that, I think there's some volatility in the input and the supply chain out there that we are very cognizant of, we are very alert to it and we're going to do everything we can to mitigate it through our deep relationships with our suppliers onto the operational rigor that we have in managing our inventory across the country.

I would just like to add, Devanshu, over here. Since our average price points are upward of INR 1,400, 15% inflation or higher cost does not translate into the same percentage increase in MRP even if we were to pass 100% to the customer. So say the 15% increase in cost may translate into the 5% in MRP growth, if we were to transfer 100%, then we are relatively comfortable with that.

Sure. That's helpful. Secondly, I wanted to check in terms of operating -- other operating expenses, that's down about 22% sequentially. Was there a one-off in Q3?

No, there were no one-offs.

So what is the reason for this 22% drop in Q4 versus Q3?

So it's also proportional to the sales that you see, right, because our other expense includes rentals and various other expense that we pay, which are also -- which also align to the sales that we hit in the store. So if you see versus Q3, Q3 obviously is a seasonal quarter and it's the best quarter for us as a retailer. And if you see that reduction in expense, it is in line with the sales trend that you see.

Okay. Lastly, I wanted to check our unit metrics for Fitflop similar to Crocs in terms of store size, revenue per square feet, margins, etc.

So the store size is about the same. The average ASP is considerably higher for Fitflop. One of the amazing things about the Fitflop brand is that it's able to command an INR 7,000 ASP. So that helps in terms of matching Crocs stores in terms of productivity, overall productivity, but it obviously comes with smaller -- lower units sold. But overall, the metrics are very similar to that of Crocs.

Sure. And last one bookkeeping question. So both our other current assets and other current liabilities have grown by INR 50 crores. So what is the reason for that if you can elaborate?

Devanshu it includes certain portion of IPO entries, which are -- which would get concluded in the coming quarters because as you would be aware, we listed in December. We have made provisions for all the expenses which are related to IPO, but we are still in the process of getting all the final invoices from the bankers and the banks and other people that are involved. So these numbers include a portion of some impact of IPO-related numbers, which should get settled in the coming quarter.

The next question is from the line of Videesha Sheth from AMBIT Capital.

You have given an overall store opening guidance of 260 more stores by FY '25. So could you also give some sense as to what would the broader mix look like between all your 4 to 5 brands?

Yes. So just to confirm that I heard you right, our guidance was 260 stores by FY '25. So that's the total guidance that is net of closures that we would have. Every year, we do close stores that are either the mall has died, the street is not performing. So we do prune our stores from time to time. It's a very small number, but that is net of closures. The 260 stores, loosely, the target is to open them pretty much evenly across the 4 concepts of Metro, Mochi, Walkway and Crocs. The Fitflop was actually not included in that number, which is an additional 5. But I would say that there is not a single chain that we would see a big growth in. As a percent of the chain, it probably might be a Walkway business because it is our smallest number of stores.

The next question is from the line of Ankit Kedia from PhillipCapital.

Sir, in January, we had experimented in one store of Miss Metro, given that 50% of our volumes come from women's store. Just wanted to know how is the traction in that store? And what is the game plan to have dedicated women inventory store?

So the women's business is very potent for Metro. In terms of units, we sell more women than men. In terms of volume, of course, it tends to be just a tad less. However, Miss Metro was a test. We're quite excited by it. We still continue to evaluate it. I think I've said it many times, we don't operate on vanity metrics. We operate on financial metrics. So we're really careful in how we proceed with the Miss Metro concept. But needless to say, women's is a big part of our business, and it's also a part of the business that we see as important for the future. So we would watch that and see how we grow with it.

Sure. Sir, my second question is regarding our inventory. Our inventory days continue to be higher than pre-COVID levels, which used to be around 105-odd days, which allow 117 days on sales. So how much excess inventory are we carrying because of RM increase? And going forward, when do you think with the inflation, we need to take another round of price increase?

So Ankit, correctly pointed out. And in fact, this is one of the point that we highlighted in our business update. We as a team were expecting to see some sort of supply chain disruptions and inflation rearing its head in the coming months. So we had, in fact, front-loaded our inventory buying to a certain extent just to make sure that in the upcoming strong season, we don't sort of lose out sales. This has worked out very well for us. With this slightly higher inventory, we were able to ensure that we don't see any disruption in our supply chain that is from our warehouse to stores. And this helps us avoid any loss of sales. This number, we expect this will normalize over the next 4 to 8 months. This will also sort of, in a way, hedge us to a certain extent with respect to the inflation risks that we are seeing. So it has played well for us, and we expect this slightly higher inventory to normalize over the next 4 to 6 months.

And do you think you need to take further price increases or this inventory cushions you to not take price increases given the RM inflation?

No, I don't think we're immune to price increases. The reality is our business has done very well in Q4, which means that the product is selling, which means you have to rebuy. And that means that we will, at some point, bump into price increases. Now we have a little headroom left because of our inventory situation. But in certain products, certain styles, we're going to have to take price increases almost on a constant weekly basis. We evaluate everything very closely. Having said that, what you do need to know is we don't do a blanket price increase, right? We're very, very methodical, and we're very, very analytical on how we do it. And then once we do raise a price, we watch it very carefully to ensure that there is no demand erosion. At the same time, we -- if we see the price increase getting too much that we think is not right for the market, we would work very closely with our supply chain and our ecosystem to see how we can mitigate some of those cost increases. So it is not a swoop of a pen. It takes a lot of work behind before we make price increases. But at the same time, we're acutely aware that we, as a business, have the need to be relevant to what's going on in the market.

Ankit, I would just want to add one point, reiterating what I said earlier, but there is slight distinction because of our higher price point, quantum of price increase that we might have to take even if we were to cover 100% on the cost inflation, it may not be significant. So the percentage that you see at say, INR 2,000 MRP versus percentage that you may see at say, INR 200 MRP or at INR 700 MRP, it would be significantly different. So for us, there will be slight increase, but we don't see that as a significant challenge in terms of managing it effectively.

Sure. And my last question is on Crocs. Crocs is the only brand where our ASP Y-o-Y has actually declined by 2%. So is it a mix change? Or is there something different in the Crocs? Why has our ASP for Crocs declined?

Well, it's very simple. What it is, is the Crocs business has seen a tremendous uptick in the personalization quotient, which comes in the form of this little plastic piece called Jibbitz that goes inside the Crocs. We've seen consumers not only in India, but globally respond very well to the Jibbitz piece. The retail on that is INR 250. On an average, we would sell about 1.5 to 2 Jibbitz per Croc shoe that we sold. That has been bringing down our ASPs on the Crocs business. Overall, if I were to pull out just the shoes, the shoes continue to show ASP increases, but the mix of goods is what's causing that to look like it's declining.

The next question is from the line of Aliasgar Shakir from Motilal Oswal Financial Services.

If you could share what is the share of sportswear and the growth we've seen there against our overall 26% growth? And if it's possible to just help us understand what is the contribution of in-house gear?

Just to make sure I understood your question, you're asking about the growth in the different categories?

Particularly sportswear.

Okay. Sports has continued to match our growth in the categories as we've grown. We don't see it being accelerated. At the same time, we don't see it in any way slowing down. Don't forget, we've had significant growth in FY '22. So it has kept up with it. The casual business equally has, if I were to compare it to -- if I were to compare the casual and the sports business as a percent of our business going back to 2019, I would say there's a good 300 to 500 basis point improvement. But that's combined between the 2. Between the 2, between casual and sportswear, we do almost 60% of our business in that category.

Got it. That's really interesting. Can you also share how much is the share of in-house gear, sportswear?

In sportswear, I would say the share of in-house is considerably smaller because what we do is we do, do outside brands where we see a reason for -- to elevate our stores at the same time, complete the consumer journey. In the sportswear category, specifically, the outside brands would probably be somewhere in the 70% range, outside brands. But as a total, the outside brands are less than 30% of our total business.

Understood. So just want to understand, given that, I mean, Metro is known to kind of position itself as a large in-house brand portfolio, where sports we may be slightly lower. Do we plan to continue this way? Or I mean, do we plan to kind of leverage this opportunity in sportswear through any other in-house or partnership program that the way we have done in Fitflop, Crocs?

So I think the athletic opportunity is big. I think it is an opportunity that like many other opportunities, Metro will consider very, very closely. We think we are poised to take advantage of such opportunities in the footwear space. Our breadth of 624-odd stores, our pan-India presence makes us a good -- puts us in a good position to leverage any such endeavor we would do. So I can just leave it at that without any future-looking statements that we will not be in any rush to do the right thing or the wrong thing, but we will, at the same time, not drag our feet where we see opportunity.

The next question is from the line of Nikunj Gala from Sundaram Asset Management.

The 21 stores, which you have closed with DMart in FY’19 or '20?

I'm sorry, the stores that we closed at DMart?

Yes, which you have mentioned in the presentation that approximately INR 4.5 crore contribution in FY’ '22. What was the contribution in 2020 or FY’ '19?

Nikunj, this was in FY '21, it was similar, less than INR 5 crores. And a year before that, the number was around INR 8-odd crores. So that number was not significant even then.

So just want to understand even from the footfall or the DMart perspective, we are pretty robust in that way. So the poor performance itself is the reason or is there more to it?

So I think it's a combination of factors, not the least of it. We believe we are very good at operating company-owned, company-operated stores and a potential franchise model for our Walkway business, right? When we looked at it, it was just another node that we had on our processes that did not make much sense. So I think DMart has been a great partner to us. At the same time, that's strategically not where we saw how and where to grow Walkway business. We see opportunity in a lot of other avenues for Walkway.

Okay. And from the inventory perspective, is it possible to channelize this inventory in your EBO stores?

It has been very easy to simply because as I mentioned before, the supply chain disruption that we anticipated and we've had our share of it, all it did was meaning we had to throttle down a little bit on our other buys and we were fine. There was no issue with the inventory from the DMart stores closures.

Okay. And the shop-in-shop concept, is it possible to give some number to other brands? Like in the Crocs, are there any similar concept out there into the other LFS format?

We don't operate any LFS outside Metro Brands as a stand-alone entity. Our partner does, but those brands are so varied and I'm not -- I don't -- I wouldn't feel comfortable guiding to a number one way or the other. I'm not sure what you're asking, but the reality is we believe we are very strong store operators. We believe we know how to operate stores, and we want to stay focused to that.

So are there any shop-in-shop concept in Crocs, Metro or Mochi?

There are shop-in-shop concepts in Crocs that we do not operate. It's operated by somebody else. Today, we have no Metro or Mochi shop-in-shop concepts.

Okay. Now secondly, I just want to understand in the employee line item -- employee expense line item, so is there any variable part into this employee expense or whatever commission which we give to employees is captured in the other expense?

So Nikunj, in the employee benefit cost, it predominantly covers costs for employees that are on payroll and the commission part goes into the other expense line item.

Okay. Sure. So if I just compare our employee cost of '22 versus '20, it's marginally lower than that. So is it a fair assumption that are we working with lower number of employees in FY '22 versus FY '20?

I'm trying to get -- go ahead.

We don't see -- I don't know which numbers are you referring because the numbers are not lower as compared to FY '20.

The full year. I'm saying, say, employee expense of INR 121 crores in FY '22 was INR 127 crores in FY '20, right?

Nikunj, let us get back on this because we don't see the number going down. There could be some impact of reclassification that happens once the accounts get audited. But let me recheck the numbers because the numbers have not gone down. It's gone up slightly.

But as a percent of business that would have gone down.

Not as a percentage, but absolute I was asking. I'll get back on that. So I just want to understand, is there any pressure you are facing from the wage inflation on the employee side going forward?

So I think India is going through an entire talent shuffle, and that is raising our human capital costs. So we definitely anticipate that to be part of the mix. However, we also think since most of our workforce is on a variable pay linked to sales, and one would assume that sales would go up with inflation, which means their incomes would also go up with that inflation that it would be covered, at least most of our employees would be covered in line with inflation, so to speak. So we think it's a way to mitigate it.

The next question is from the line of Tejash Shah from Spark Capital.

I have a couple of questions. You spoke about the business model of the store closure decisions or opening decisions not aligned to any vanity metric. So in that regard, I just wanted to understand what are the top 3 financial metrics that you monitor to decide on a store closure? And what is the threshold of that decision or trigger to that decision?

Sure. So obviously, it's really not similar, but it's probably the con -- the vector between sales volume, the rents that we pay and the margins/employee costs that we run in that store. So that's the first brush. If that vectoring comes to a positive place, we are willing to consider it. And if it's negative, the question is, is it because that mall, that street hasn't matured and do we see a future. We also ask ourselves, are we doing something wrong in there? So we put it on what we call an infant store program to ensure that it has every chance of being successful. So there's many things we do before we close the store. When we close a store, we are pretty much convinced that there's no way that we can do business in that store and make it profitable. So those are the 3 broad numbers we look at when it comes to it. The other thing, too, is sometimes we close a store because we remodel in that same mall, we relocate in that same mall. So that's number one, or that street in a particular town has now become a different type of zone for shopping and the shopping zone that would be relevant to us might have moved over a couple of streets. So closing a store is not just for a singular reason, there's a multitude of reasons. But the bottom line is we look at those 3 factors, where sales meets gross margins meets expenses. If that's not comfortable, then we have to take it to the next level.

Just adding to what Nissan said, we internally track all the stores, which are doing, say, operating profit less than 5% at the store level. So all these stores are sort of considered as infant store. And then we plan for specific action be it in terms of reviewing the merchandise that goes into the store or say, reviewing human resource that may not be adequate or appropriate for that particular catchment. And mostly what we have seen is between these 2 and marketing push, we are able to make sure we get the store out from the infant list to the normal list. In spite of all these actions if the store doesn't come up and if we conclude that maybe it was the wrong selection, then that's when we decide to sort of close. Any new store, we would give a time limit of at least 1 year to 2 years to make sure we evaluate all the avenues before we sort of take the decision to close the store.

Just a couple of follow-ups on the same. Usually, what is the store closure cost that we incur per store?

So generally, our fit-out cost is about INR 50 lakhs. I'm just giving a broad average. For Metro, Mochi, it ranges around INR 50 lakhs. For Crocs and Walkways, it should be around INR 30-odd lakhs. We also invest just in terms of cash flow in terms of inventory and security deposit, but those are fungible. So if we decide to close a store, those we'll get back our security deposit and that inventory can be routed to any other store. So technically speaking, exposure would be around INR 50 lakhs for Metro, Mochi, and INR 30 lakhs for -- broadly INR 30 lakhs for Walkway and Crocs. And generally, obviously, if we see written down value, as I said, we would make sure we take about around 2 years' time to sort of decide if a new store has a concern. So basically, if you look at written down value, it would be lower than this number.

Sure. And the last one on the same. Since we don't have a like-to-like comparison in the industry, there's only one another listed similar model format available. Is our closure rate in line with the industry rate or better than industry rate? And usually over a period of time, what interventions as a management team you can make to improve the strike rate here of reducing the store closures?

I just want to make sure we know we closed, I think, 24 stores over the whole year last year. Don't forget that's coming out of a COVID year, right? So there's a lot of communities. There were a lot of streets. There were a lot of shopping zones impacted by it. 24 stores on a base of 600 stores is less than 5%. Now I don't know what the industry average is, and I'm not going to speak to an industry average because it depends who you talk to when you talk to them. But the reality is it's not a significant number when you have a 95% success rate. And I think I'm giving you probably one of our highest numbers simply because we had a lot of disruptions. As I mentioned, the whole COVID closures caused a lot of shopping zones to disappear. So I think 95%, can it be improved? Absolutely. Is there a lot of low-hanging fruit there? Or is there a lot of headroom there to go get after? I think it's a matter of you are going to make mistakes if you're an aggressive retailer, right? I mean as prudent as we are, as financially disciplined as we are, we are going to make mistakes. And I think we would -- we're okay with that as long as they were all made after careful evaluation of site and we followed our processes well, and we're okay. We're quite all right with that.

The next question is from the line of [Priyam Khimawat] from BSK Investment Managers.

You highlighted that most of the rentals which we see are aligned to our store revenues. So two questions here. First, what was the total rent which we paid in FY '22 as a percentage of revenues? And if you could please break that up into variable and fixed?

So broadly, I'll just give you a ballpark range that we sort of see for our rentals. We are comfortable with rentals ranging between 12.5- to 14-odd percent and that's the broad range that we sort of see. With IndAS 116, obviously, all those classifications have changed, but I'm just giving you a ballpark number in terms of what average rental cost that we sort of see in our business. In terms of pure revenue share, broadly 15% of our stores would be on a pure revenue share model. Others are a mix of fixed rent as well as fixed plus minimum guarantee predominantly with malls.

Okay. Sir, my second question is on our ASP. You alluded to an average ASP of INR 1,450 for FY '22. I just wanted to understand what would this number be in, say, FY '19 or FY '20? And what part of the ASP growth during the last 2, 3 years has been due to price increases and how much is due to mix improvement or say lower discounts?

So back in 2019, the ASP was INR 1,321 and in '22, it's INR 1,456 just to give you the spread of it, right? So the growth has been a little bit erratic because of COVID. But otherwise, the trend is overall the same. It's obviously a combination of price increases and the mix increases. But it's not so much the mix increases as it is the price increases because our casual business has grown, our sports business has grown, and they're not significantly different on an ASP model.

Okay. So going ahead, how should I try and look at this ASP? Because we've already highlighted that price increases will not be very swift and high going ahead as we want to try and stay relevant to the consumer. So is there more scope for ASP improvement on account of mix change or most of that has already been captured?

No, I think it will continue. You'll see the same trend continue. I think if you -- we've probably average out the 5%, 7% of ASP increases. We're going to keep bringing on brands like Fitflop that has a high ASP, but they are not enough to move the needle overnight. So I think you can model it out at somewhere between the 5% to 7% range. I mean, unless there's a serious blip in the supply chain, which we would still keep it in line with inflation is what we feel.

Fair enough. Sir, one last question on the Crocs SIS part, which you mentioned that it is being managed by some other entity. So how is the pricing and other elements of this control between you two?

So Crocs actually controls the pricing. We all adhere to it. There are different assortments that we get compared to those smaller SIS or multi-brand stores. So there are lines that Crocs delivers only for the exclusive brand stores that cannot be found anywhere else in India. And so we benefit from that. But the pricing on a similar item would be identical in an SIS or a multi-brand or any exclusive brand store.

The next question is from the line of Anuj Sehgal from Manas Asian Equities Value Fund.

I have two questions. My first question is, as a single category retailer, why is it that we don't disclose same-store sales growth and volume growth? And my second question is your EBITDA margins were in the 27.5% range pre-COVID, now they are at 30.6%. So how should we think about sustainable EBITDA margins for the business for the next several years?

So let me take the second question first. As you said, historically, if you see last 3 years, our EBITDA margin has been quite consistent around 27%, 27.5-odd percent. As I mentioned earlier, during the current year, despite of COVID-19 second and third wave impact, we delivered EBITDA margin of about 30-odd percent. I would avoid giving any forward-looking statements, but this is the range and inference can be drawn in terms of where the number should lie. We will obviously try our best to make sure that the number is strong and consistent as we go on. In terms of same-store growth, it's just a call that the company has taken because last many years, India was impacted on account of various speed bumps as we call it, be it the GST, be it demonetization and various other impact, COVID now that has started coming in. So we feel that number may not be relevant to see because of all these underlying disruptions that have happened over the years. And hence, those numbers have not been disclosed. We have disclosed our overall sales number, our overall ASP, our overall store growth. So from -- if you connect all the dots, broadly you will come to know in terms of what sort of growth the company is experiencing.

The next question is from the line of [Akhil Paresh] from Centrum Broking.

My first question is on the office footwear category. So has the category been back to the pre-COVID level or it is still below that FY '19 level?

No, we've actually seen it climb compared to the pre-COVID level. However, because our -- it hasn't kept pace with the rest of the business, it is a slight -- it has declined as a sheer business. But in absolute value, it has grown and come back to pre-COVID levels for us.

Okay. And this is on a like-to-like basis, right, not including the store expansion what we have done because we have added stores over the last 2 years or 3 years. Is it true?

Correct.

So at store level, office category has grown.

Correct.

Okay. Second question, is it possible to share what would be our segmentation on open versus closed footwear?

So we don't break it out quite like that. But like I mentioned, sports and casual form about 50% of our business. Formal technically would be somewhere in the range -- I'm just trying to make sure I give you a good number. It's about 1/4 of our business. The others made up between kids and accessories.

But roughly, it would be 40-60, open being about 40 and closed being about 60. Again, seasonal, given the fact that in summer, obviously, the number will be skewed towards open and in winter, towards closed.

Got it. Got it. And my last question is on the store opening front, right? We have -- so just to clarify, 260 new stores what we are saying is at a net level, right, not at a gross level?

Correct.

Okay. So that implies every 4 days, we have to open 1 store basically. If I just divide it by 3 and divide by 365. So does that -- do you think this is feasible? I mean is it feasible or viable basically to open 1 store every 4 days by next 3 years?

Let me answer that question in 2 ways. So can the market bear it is the first question, right? So we are at about 140-odd cities today in India. Just as a point of reference, Raymonds is in 500 cities. Titan, I think is north of 300 cities. If you would assume that we could at least be in half of Raymonds cities, I would say we had a possibility of being into 250 cities, right, which we're at 140 today. So that's about a 70%, 80% growth of just cities. Now with that 70%, 80% growth of cities, don't forget, some of them will be able to take multiple concepts from us of Metro, Mochi, Walkway, Crocs, Fitflop. So when you look at the market, the market definitely exists for us to be able to shoulder that kind of growth and has the space and appetite for that kind of growth. If you look at it internally, we made significant adjustments to our corporate structure here over the COVID years to be better suited for it. We've absolutely revamped and expanded our business development team. Today, we have -- what used to be a team of roughly 4 people is now 12 people in-house. There's also an additional 32 people out in the field, not full time, but who also have a responsibility of delivering real estate to us. So when I look at both those factors working in our favor. The other thing, too, is we've been very pleased with the Tier 3 cities we've opened, but there's a lot of cities that are also going from Tier 3 to Tier 2, Tier 4 to Tier 3. So the market seems to be able to bear that kind of growth. In fact, we probably wouldn't even be scratching the surface at that point still. We, as a company, have invested resources both at the office and out in the field to ensure that we have that kind of growth. We've also made sure that we've revamped our manager training programs because you need managers to run these stores. And at the same time, we are implementing various programs with our key suppliers to ensure that they're able to grow and deliver product as we grow.

And then just to add, even historically, we have added more than 80, 90 stores in a particular financial year. So we don't see this as a challenge at all.

Got it. And if I can just squeeze in one more question. In terms of brand equity, are there any specific geographies where we are weak if at all?

Well, I don't know if the word would be weak. I think the word I would use is where we are maybe a little underpenetrated, right? So today, the East has the lowest penetration of Metro Brand stores. However, that does not in any way imply that when we open a store out in the East that we're not extremely in line in performance with the rest of it. So it's not a question of brand equity. Fortunately, for us, I think we are well known in most geographies throughout India. But from a penetration standpoint, the East is where is our least penetration. From a success standpoint, we are probably the most successful in the South in terms of penetration and sales, which goes hand-in-hand. But it's also a big open footwear market. So that also tends to drive multiple usage and multiple occasion wear.

Our next question is from the line of Madhu Babu from Canara HSBC.

Sir, just on online, how do you see it over a 2-, 3-year perspective? And currently, I mean, any incremental thoughts on which are the subsegments where you are seeing good traction on the online consumer segment? And second, on the D2C brands, I mean, though too early, how do you see that being a threat if at all for us?

Okay. So as far as the growth in the e-commerce space, as I mentioned before, we are extremely excited that -- of 2 things. One is we don't see it as being cannibalistic to our brick-and-mortar business. In fact, we see it as being additive. Number two, the biggest growth is coming from our omnichannel segment, which is full price sales, which also helps our inventory get liquidated throughout the country, so it's not locked up in stores once it gets shipped. So from that standpoint, we're very excited to see the growth in e-commerce. A lot of it is curated by us and pushed to that. E-commerce can pull you into that discount vacuum really quickly, but we're very disciplined about how we come across on e-commerce. So it's not like there's not discounted products out there, but we keep it to a minimum. The second thing is we are a D2C brand. We are a direct-to-consumer brand ourselves. We were direct-to-consumer before the term was coined. But 70% of what we sell today is our own home brands. It's sold under 3 different labels of Metro, Mochi and Walkway, but it is our own brands. We are a D2C brand. We only bring brands in when they complete the customer journey, first and foremost, so we give a consumer a better experience in our stores. And number two, they're able to elevate our stores and the consumer experience. So that's the only reason we bring outside brands in. Like everything else, 70%, as I mentioned, roughly, is our own brand.

Sir, I meant to say the online -- direct online D2C brands which are launching, they are very small on the footwear as well. But do you see that -- I mean, it's more like a long-term question that can be threat or something. I mean there are some footwear brands which are directly coming online, right, without having physical stores.

Absolutely. And I think it's always good when that happens because it increases awareness of categories. It increases awareness of materials. It increases awareness of technologies in footwear, right? So in general, those kind of things are good because they expand the market. And it also captures people moving into the aspirational segment of footwear buying. As incomes grow in India, we're going to get more and more aspirational buyers. We've not seen anyone get scale there yet, not saying it couldn't happen. But scale, what we are finding is very hard for an exclusive digital native brand to get without a brick-and-mortar presence. So it's not -- it's easy to do the first so many crores online. But once you do that, you hit some kind of a point where now you've got to figure out how you're going to do the next set of crores, where you need a combination of online and offline, the consumer wants that. They've shown that they prefer that. And it's also shown by people that were online only trying to try and open stores, right? So we're not threatened by it, but I think it's actually exciting that they do that because innovation, creativity helps the industry. And like I said, I've yet to see one of them get scale of any sort in the footwear space.

Sir, last one, what is the ex-IndAS margin? 32% is the reported margin, but adjusted for IndAS?

You can reduce broadly 8% to 8.5%, 9% to arrive at pre-IndAS margins.

21%, 22% is a more realistic, sustainable margin, I mean pre-IndAS post taking the rent out.

Yes, broadly in that range.

Ladies and gentlemen, this was the last question for today. I would now like to hand the conference over to the management for closing comments.

Thank you very much for your interest and participating in the call today. We remain excited about our future. We remain confident that we will be able to execute against the things we mentioned in our DRHP. I think a big thanks to the Metro Brands' team for a stellar quarter and an absolutely stellar year. And I thank you all, and we look forward to speaking with you more closely in the future. Have a great evening.

Thank you. On behalf of AMBIT Capital, that concludes this conference. Thank you for joining us and you may now disconnect.