Metro Brands Limited (METROBRAND) Earnings Call Transcript & Summary

Ladies and gentleman, good day, and welcome to Q1 FY '23 Earnings Conference Call of Metro Brands Limited, hosted by DAM Capital Advisors Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Rajiv Bharati from DAM Capital Advisors. Thank you, and over to you, sir.

Good afternoon, everyone. Representing DAM Capital, it's our absolute pleasure to host Metro Brands Limited for its Q1 FY '23 Results Conference Call. We have with us Mr. Rafique Malik, Chairman; Ms. Farah Malik Bhanji, Managing Director; Mr. Nissan Joseph, Chief Executive Officer; Ms. Alisha Rafique Malik, President E-commerce and CRM; and Mr. Kaushal Parekh, Chief Financial Officer. I now hand over the call to Mrs. Farah Malik for the opening remarks, post which we will open the call for Q&A. Thank you, and over to you, ma'am.

Thank you for welcoming us. Good afternoon, and welcome to all the investors on the call. The first quarter of FY '23 has been very exciting for Metro Brands Limited. I'm pleased to share with you that this has been the best quarter in Metro Brands history in terms of revenue, EBITDA and PAT. So thank you all for your continued support. The structural changes in the economy, including formalization and urbanization and significant reinvestments that we have made into our business in terms of people, product and technology have allowed our company Metro Brands Limited to show strong sustainable growth. Over the last few months, we have definitely seen some trends and opportunities arise out of the current crisis that make us strongly believe that this is India's decade. These include global supply chain diversification from China, recent government reforms and initiative, India's increasing cost competitiveness and our strong domestic markets. We continue to see improvement in consumer sentiment due to the lifting of COVID restrictions and offices opening. I'm glad that consumer footfalls have increased across the country as customers have returned to stores for shopping. Our team at Metro Brands are fully geared to leverage this opportunity via the 5 pillars of growth identified by us. Having said the above, we are aware of potential risks due to growing inflationary pressure and possible disruptions in the supply chain due to an ongoing geopolitical scenario. During these uncertain times, we continue to hold strong on our values of prudent capital allocation, financial rigor and strong corporate governance. Once again, thank you for joining us on this call. I will now hand over to Nissan, our CEO, to take you through the business update.

Thank you, Farah, and good afternoon, all. As shared earlier, this has been the best quarter in Metro Brands history in terms of revenue, EBITDA and PAT. Given that Q3 is typically our strongest quarter, it is a testament to the efforts of the team to deliver a record setting performance in Q1. Metro Brands has delivered consolidated revenues of INR 508 crores for this quarter, an increase of 287% against the corresponding quarter of the previous year, with a PAT of 20.6% and an EBITDA of 36%. I would like to highlight, however, that Q1 of FY '22 was impacted by COVID disruptions. Our consolidated gross margins for this quarter stood around 60%, which is the best we have witnessed in recent times. As mentioned by Farah in her opening address, there are concerns around inflation, coupled with expected supply chain disruption. The company has taken appropriate measures to hedge itself against the rising raw material prices, including, but not limited to hedging our inventory. As we guided in earlier meetings, we expect margins to typically fall in the 55% to 57% range. We continue to monitor the market both in terms of supply and demand and remain alert to any demand erosion or supply challenges. On the growth side, Metro is witnessing a strong growth in terms of volume and value across all our formats, all our tiers and regions and our price points. Our growth momentum at the same time in e-commerce sales continues as e-comm sales grew by 106% in this quarter as compared to Q1 FY '22. We opened a net 20 stores in this quarter across all formats, and I reiterate our goal to open 260 new stores over the next 3 years. We anticipate demand to remain robust through the festival and wedding season, and it is exciting to see that off-line retail is strong despite the growth of e-commerce at Metro Brands. With that, I will turn it over to our CFO, Kaushal Parekh to take you through more details of Q1.

Thank you, Nissan. Good afternoon, everyone, and welcome to Q1 earnings call of Metro Brands Limited. As you all know, first quarter of last 2 financial years were impacted by COVID. However, we've started this financial year on an exciting note. Pickup in customer sentiment, which began from mid of last year, continued in Q1 FY '23, and this helped us register our best quarter ever in terms of quarterly sales, EBITDA and PAT. Let me now start with a quick snapshot of financial performance of MBL starting with revenues. On a year-on-year basis, Q1 FY '23 revenue was up by 287%. Even if you compare it with pre-COVID levels, that is with Q1 FY '20, our revenue was up by 63%. Growth in our e-commerce sales channel continues with e-commerce revenue up by 106% over last year. Moving on to gross margins. At a consolidated level for Q1 FY '23, we delivered strongest ever gross margins of 59.7%. We achieved higher margins -- gross margins, primarily due to lower contribution of discounted sales and improvement in overall sales mix. This improvement was also due to effective inventory buildup, as Nissan mentioned, which we use as one of the tools to hedge against the expected price rise. For the full financial year, we expect our gross margins to normalize back to our historical levels or maybe slightly higher in the range of 55 to 57 odd percent. Lastly, moving on to EBITDA and PAT, in Q1 FY '23, we delivered strong EBITDA margin of 36% and PAT margin of 20.8%. With this, I'll conclude my financial summary. We are now open to Q&A.

[Operator Instructions] The first question is from the line of Tejas Shah from Spark Capital.

Congrats on very good set of numbers. Just 3 questions from my side. First of all, the demand scenario looks very, very good at least on the numbers. Just wanted to get some sense on your read on the demand drivers are. Is this a lot of -- are there a lot of pent-up element and wedding-related tailwinds, which we are seeing in the quarter numbers? Or this demand momentum is sustainable as we enter into 2Q and the rest of the year?

Thanks for your question. I think the way I would answer that is we're seeing demand across all formats, all tiers of cities and all our categories of products that we sell. That would indicate that the demand is pretty robust. We don't see this as necessarily being pent-up demand when you try to look at the fact that Q3, we posted our best quarter ever last year, best quarter ever in the history of Metro Brands and then you turnaround again in Q1 and do it. It definitely is impacted by the fact that we had no COVID closures at all. But overall, we don't see it as a diminishing demand going forward. This wedding season, this festive season looks as promising and as much of a celebration provided there are no surprises on closures. But overall, the demand remains robust.

Sure. And there's one interesting comment made on your presentation that there was adequate inventory, which helped us to avoid any loss of sales. So is it that because of our prudent stocking policy, we would have gained market share and some competitors would have lost market share because of them ongoing out of stock? Or is this a very general comment to extrapolate?

What we did, and I can't speak to what our competitors did or didn't do. What we did was to ensure that we anticipated not only short-term supply disruption, but also protracted challenging times for our supply chain. So we took a decision at that time to hedge our inventory and to forward buy more than we normally would, more than what we would consider a good inventory operating number, which has come to pay off itself. The fact that we were able to generate the high margins that we did shows that not only were we able to pick the right product to hedge our inventory in, but we were also able to meet consumer demand in that space. So -- and then we also talk -- do you want to speak to reducing payments?

Right. We also Tejas, this is going back 6 to 9 months, when we were expecting the supply chain disruptions to happen. We sort of decided to pay our vendors slightly earlier. And this made sure that we get adequate clarity in terms of whatever orders that we place and we get our orders on time. And I think that has worked well for us.

Understood. And if you can help with price increases that we would have taken? And if you can say, 3-year CAGR, if it's possible?

So Tejas, price increases, if you see if you correlate that with our ASPs, we have seen highest increase over last 3.5 years come in last 6 to 9 months. So if I compare for current quarter versus last year, our average ASP increase is about 7%. And if I were to extrapolate it to last 3 years CAGR, it could be in that range of 12% to 14% for 3, 3.5 years taken together. So if I compare, say, FY '19 ASP versus now, overall growth would be somewhere around 13% to 15%. Obviously, this has an element of mix as well.

Sure. And last one on store expansion plan. So looking at the robust demand that we are witnessing, would you like to accelerate our growth in store expansion plan or kind of prepone it or you believe that the current run rate is actually keeping in line volatility, which will come in between?

Well, it's neither. What we try to do is maintain our financial discipline and operational rigor as we open stores. It is not about being opportunistic as a company. We are very, very planned and, thoughtful, Tejas, in how we go about our store openings. Having said that, looking at our numbers, what I can leave you with is that we are absolutely confident that we will achieve, meet or exceed our goal that we set forth in RHP very confidently. But we, as a company, tend to be very, very measured in how we do things. We have deep financial discipline as reflected in our numbers. So you're not going to see a spike and then crater, we would rather keep a very steady, reliable growth pattern going for the company and thereby also securing value and safety for our shareholders.

The next question is from the line of Vinayak Mohta from Stallion Asset.

Congratulations on a great set of numbers. The first question I had regarding the margins, you said that it will fall back to the 55% to 56% range. But in this quarter, the margins are higher on back of lower discounts and production mix. So I was just trying to understand what would lead to the gross margins coming down? Would it be a relatively higher -- relatively higher discount or would it be the product mix shifting back to the normalized range? If you could just help us understand what is this product mix that is aiding the margins in a qualitative way which you expect to come back? Or is there some other reason because I believe that raw materials would also be at a relative higher end right now, given you're hedging and everything, so how will the positive impact of the raw material prices coming down aid to negative margin. So just you're trying to add up these positives and negatives together?

Thanks, Vinayak. Thanks for asking this question. As you are aware, in our industry, we have 2 reduction sales, 2 end of season sales as we call it. One is in the quarter 2, generally starting around July and August and second in quarter -- in the last quarter, it starts around Jan and Feb, okay? So this quarter, this was, in fact, a quarter where we did not have -- or we rather had a very, very small amount of discounted sales or the EOSS sales. Hence, you're seeing a very strong margin. As we move to next quarter, we'll see some normalization happening on account of EOSS sales and that impact coming on to gross margins. See, historically, if we see we have maintained discounted sales. Products, which are sold on discount in that range of 7% to 9%. We are pretty confident that it would remain in that range. But due to normalization and due to this EOSS discount, gross margins would sort of get normalized. Also, if you see third-party contribution, if you see our in-house contribution to third-party brands, historically, it has been in that 70%-30% range, so 70% for in-house and 30% for outside brand. In the current quarter, we have seen that ratio to be 75% to 25%. We expect it to normalize around in between these numbers. So both this number with EOSS hit coming in, slight normalization in this ratio and now with an outside brand would lead to slight normalization of margin. Having said that, we are still very carefully evaluating this inflation scenario. It is not completely behind us. We are keeping our eyes and ears open to make sure that we protect our gross margins adequately without increasing our MRPs significantly. So with all these moving parts, we feel our historical range, and I covered this in my comments, our historical range of gross margins we guided at 55% to 56%. But we feel that with the first quarter numbers that we have seen for the full financial year, we expect this to be in the range of 55% to 57%. So slightly better than our historical average, but we would want to keep that range open for us because of this moving variables that we just discussed.

Understood. So the second question is majorly I want to understand what kind of growth are we envisaging for the next 2 to 3 years, maybe from an internal point of view. And can we expect any more international brand tie-ups coming through in the current year as well? And lastly, how are you seeing the traction on Fitflop, given you've opened an EBO and you plan to open 3 to 5 more in the current year?

Okay. There's a lot of questions in one there, but let me try and answer them. So as we look to the forward, I think the best way to evaluate our performance is to look at our past history for the last 10 years. We've been a very stable, profitable and growing company. We've had a CAGR growth over the last 10 years of 18%. Our profits have kept up the same. So I think going forward, it would be safe to say that would be a good benchmark. And of course, if there's ups that come in the market, we're well poised to take advantage of that, right? So that's the first point. As far as external brands, it has been identified as one of our pillars of growth that we will continue to evaluate and add brands that make sense to our portfolio. We're very keen that we add brands that add value to the customer journey in our stores. Everything we do is customer backwards. So we're not going to add a brand for the sake of adding a brand. We're going to be very choosy. We're going to be very selective in how we add brands from a global portfolio. Good evidence of that is when you look at the 2 brands that we do have Crocs and FitFlop, they're definitely unique brands in the market and command a certain consumer that we know is impossible to get otherwise. So that will continue to happen. We will continue to evaluate global brands as we go forward. We did announce that we formed a partnership with the Canadian brand called Biion that we're introducing here in the next few months. They've already started the introduction. And these are brands that we incubate. Some of these brands are big the day we bring them in. Some of them take a few years to incubate and we're okay with that if it brings something unique to our customers. So that's the second point. The third point is we are quite pleased with the performance of our Fitflop store that we opened in Express Avenue in Chennai. And we believe that our earlier direction that we will open 5 stores in the next 9 to 12 months, it's something that we can and will execute towards. The 260 number that I mentioned earlier on does not include Fitflop stores, so this would be in addition to the 260. And we will evaluate this very closely as time goes on, and we'll probably give further guidance on where we see Fitflop go. But we feel very positive about the performance of Fitflop, not only in the mono branded store that we opened, but also in the 100-odd doors that we're selling it currently in our own stock Metro, Mochi stores.

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

Congratulations on a very strong set of numbers. My first question is with regards to the gross margins again. I mean, pardon me to ask on this matter again. But given the fact that we have already almost 60% gross margin in Q1 and even considering that we would have EOSS sale in Q2, and there will be some inflation that will also hitting us, but still, don't you think that the guidance for the gross margins to go as low as 56% odd for the entire year seems to be very low on a very conservative side?

Well, here's the thing, Gaurav. Thank you for that question. Here is the thing that you need to know. We're very financially disciplined as a company, right? And one of the things we maintain and often -- well, we're one of the few companies that seldom do the stock write-off if ever. And the reason we're able to do that is we will ensure that the product is sold in a season or within a realm of seasons within 2 or 3 seasons, so we don't have to carry forward and write it off at some point. As I mentioned before, we've hedged some of our inventory. While the hedging for Q1 looks extremely good, thanks to our merchants, this is a fickle business at some part. And we would rather guide to the way we've trended that we're very comfortable guiding to then try to say we're going to stretch a number. And given the supply chain challenges that exist out there, given the volatility with few events that may or may not happen, in the near future, we don't want to commit to that number yet. We feel comfortable doing business the way we've always done it in that 55% to 57% range, ensuring that we don't carry any old stock over, ensuring that we have enough product for our growth trajectory. And I think it's an astute way to run a business.

Sure, sir. Sir, just a follow-up on this. If you see the contribution from the products that are priced above INR 3,000 and above, they have seen a steady increase in the contribution and now they contribute roughly around 43% odd, and this has been a trend that has been continuing. So is trend very much sustainable? How do you look at this then in that light in terms of the premiumization?

Yes. So twofold. One is inflation is a way of life for us in India, as you well know, running about 7% a year on an average. So it's not something that you're going to see us go backwards and just to keep up with inflation to ensure that we're keeping market share with the units we sell as well. So that's number one. The other thing is when it comes to the pricing, we are premiumizing our product. We are trying to cater to an affordable premium consumer. We've always stated that that's the space we play in, in the pyramid. And it just proof to us that we're doing well in that pyramid space. And the other reason you also see a strong ASPs, this is -- the monsoon is typically Crocs' season and Crocs launched some new footwear at a slightly higher price point than last year, that is doing extremely well, the LiteRide too. So there are factors that we hope will continue, and we hope we can see more of those opportunities for us to raise our ASPs. Costs are going up constantly. All our input costs, whether it's salaries, wages, fuel, rent, they're all going up constantly, and it's critical that we continue to improve our ASPs, so we can keep pace with profit CAGR as well as our growth CAGR.

Gaurav, just wanted to add one point. The number that you see on the Slide 19, increase in products above INR 3,000 from 40% to 43% that will normalize slightly in this quarter when the EOSS impact comes in. So this is just the first quarter where we don't see any discounts. So it would slightly come back to the numbers for full year that we saw in last year. So let's say 40% for products above INR 3,000.

Okay, sure. And just one last question from my end is in terms of the other expenses line item. So if you see, while the revenues are above 65% odd versus Q3 FY '22. However, the other expenses line item is actually lower in totality. So is there anything that you need to call out or is just the cost savings that we see there?

So it's a combination, Gaurav. As you would know, this other expense would have some expense, which are variable in nature and some which are semi variable, some which are fully fixed. So with this, high quarters in which we see higher revenue, obviously we see better absorption of fixed cost, and that leads to some sort of efficiency getting reflected in the numbers that you see. Having said that, obviously, initiatives that we took in and around COVID period, we are building to the same. So some bit of it would continue. And in a big quarter like this, you will generally see expense -- other expense trending in a better way as compared to revenue.

The next question is from the line of Rahul Jain from PhillipCapital.

This is Ankit here. Just a couple of questions from my side. First is on revenue per square feet. This quarter, we have done around INR 5,700 revenue per square feet. What -- since you don't have the pre-COVID numbers, should we annualize this number going forward? How is the seasonality in the business we should look at revenue per square feet?

Ankit, let me answer this question. If you see seasonality-wise, Q1 generally is about 25% of the full year revenue. Quarter 2 is slightly lower than 25%. Quarter 3 is by far the biggest, around 27% to 28%. And again, Q4 would be in the range of 25%. So as you said, we have shown our historical sales square feet in FY '20, that was around INR 17,500. For this quarter, it's about INR 5,700. So I don't want to give any forward-looking guidance, but I'll just give you numbers, which can be sort of co-related.

Sure. My second question is regarding Walkway. We have seen the steepest price increase in Walkway, which is a value fashion brand. How is the customer response for Walkway? Are we seeing the growth in Walkway equal to the company average growth or there are some pain points in Walkway today?

So part of that price increase, just so you know, is driven by the fact that we had the GST increases, right, from 5% to 12% in goods under INR 1,000. Fortunately, as Metro Brands we had roughly about only 13% of our inventory at the time the GST was implemented in that price range. Walkway obviously had a substantially higher sum. We've been able to increase pricing in Walkway's really well. They have performed extremely well across the cities they operate in. If there was anywhere they did not do as well, it was probably the Tier 1 cities. They did well, but not as well. But they did extremely well in the Tier 3 cities, which is where we think we would have felt inflationary pressures and price sensitivity, but we're very pleased to see that the Walkway stores, despite us raising their prices had a good run, good increase in Tier 3 cities.

Sure. And my last question is on the gross margins. And I just wanted to understand how much is the low-cost inventory still remaining in the system for us? And along with that, if you can just give a breakout between the gross margin expansion because of the premiumization and on the low cost and hedging?

I would say we have low-cost inventory. When you lose the most money in margins is the retailers when you sell it at a discount. So it's not about having low-cost inventory, it is all relative to the sales price. So if you're able to sell more of your goods at full price, you're more likely, Ankit, to have a better gross margin. As Kaushal mentioned earlier on Q1, we hardly see any discount. Q2, we run into an end-of-season sale. So the gross margin improvements that you see are not because we have low-cost inventory. Having said that, though, we do have hedged inventory for the future at the same rate that we planned on running our business. And a lot of it will be dependent if the consumer responds to it. The other reason we've seen an increase in our gross margins is also -- though it is small, but it's significant. 25% of our offline -- of our online business, 25% to 35% of our online business comes from the omnichannel sales. And all those omnichannel sales are predominant like 97% of it is done at full price. So we're able to offer our products to a much wider range of consumers because of the omnichannel initiatives that we have taken in place. So you're seeing a number of factors play into our gross margin improvements. And I don't think we should take it as just low-cost inventory. There's a number of operational rigor items that we do that create the opportunity for us to constantly maintain our margins at industry high standards.

And sorry, if I can just squeeze in one more. Does Crocs help us increase our takeaways in the inflationary environment or takeaways with Crocs remain the same?

I'm sorry, what is the takeaway in your description?

Ankit, margins remain the same.

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

My first question is to Kaushal. Kaushal, what was the working capital in this quarter if you can help me with in terms of number of days?

So approximately around 60 days.

Then Kaushal, if I look at your FY '22 working capital days in earlier years, this number looks lower if I look at your comment on the early payment to the vendors, increase in the inventory on account of the anticipation that you saw that there is some at our end, in that case this working capital number should have been higher, right?

But Nikunj, we also need to see it in light of the sales that you have generated. Since your -- since we've registered the best quarter in terms of sales that is helping, although on an absolute term, we would have seen increase in inventory, payables would have remained around the same range because we are building up for the season period coming up in Q2 and Q3. So from that, because of that increase in sales that days is sort of needs to be seen in that light.

Okay. And is it fair to assume that large part of gross margin improvement is probably on account of lower like negligible discounted sales, large proportion, I'm seeing improvement in the margins?

Two main elements, Nikunj, simply said discount -- lower proportion of discounted sales is certainly a very important pointer. Even improvement in the overall mix, as I said, 75% in-house and 25% outside brand, that is also one of the reasons that led to sort of improvement in the margins that we sort of see. Also, as Nissan mentioned, a slight inventory buildup, what effectively that helped us was we could moderate our MRP increases, just to maintain gross margins, we were not supposed to take aggressive or, say, higher price rise. And if you see our ASPs they've increased by around 7% to 8%, which is predominantly on account of that inventory hedging that worked for us.

Okay. And at any point of time, like in normal environment, what proportion of your portfolio you -- comes under your discounted sales or end of season sales? Or it's the entire portfolio goes into the discounted sales?

So not sure, if I got your question right, Nikunj, but historically, if you see not more than 7% to 9% of our realized sales have come from discounted sales. So we obviously evaluate our entire portfolio just to make sure that anything that is old or slow moving is taken out. We have an internal threshold of ensuring that any inventory above 18 months is taken out in the end-of-season sale. And for this evaluation, we see entire inventory that is there in our ecosystem.

But to answer, I think your question is also about by format. Let me try and answer it, Nikunj. By format, what percentage of the stores come under the sale. Is that what you're asking?

No, no, sir. If you have 100 units in any particular store, 100 units as goods in terms of finished good inventory. Out of this 100 units, how much proportion would be under discounted, because there will be a few articles which -- where you don't want to give the discounts to the consumer, right?

Around 15% to 18% of these goods will come under reduction sale. We start our EOSS with 50% and aggressively increase it to flush this inventory out quickly. So average realization would range between 40% to 50% of the MRP of that product. So if you see it in terms of volume, say, 15% to 18% of the inventory will get covered in EOSS sale. And if you see it in terms of realized price, around 7% to 9% of the sales would come from EOSS sales.

Okay. Okay, sure. And then lastly, what will be the ASP for this quarter. As you mentioned, I think the 15%, if I consider 3 years ago your ASP, that was increase of 15% in this quarter. So what is the absolute ASP for this quarter?

So we have given INR 1,500, exact number is INR 1,494 is the average selling price for the current quarter.

At the company realization level, right?

Yes, this is company realization level. If I see this number for FY '19, FY '20, it was in the range of INR 1,320 to INR 1,340.

Okay. Okay sure.

Nikunj, as I said earlier, this element of ASP, it's an impact of both the mix as well as the absolute price increase.

The next question is from the line of Vicky Punjabi from UTI Mutual Fund.

Just one of the aspects that I was trying to understand here was the sharp increase in revenue per store, which if I annualize for the quarter, it looks like greater than INR 3 crores, I mean, which is, which was, I think, around INR 2.6 crores, INR 2.7 crores previously. I mean one of the aspects I just found interesting was that your mix has changed a lot. I mean, if I compare to 2019, FY '19 versus FY '22, the unisex and the accessories they have moved from 6% to 9% and 9% to 10%, I mean, now 9% to 11% in this quarter. Is that anything related to addition of categories or changing assortment that's clearly helping revenue throughputs in stores? And how sustainable are these throughputs?

Yes. So one of the things that we see with the unisex growing is most of our Crocs product falls underneath the unisex range, and Crocs has done a very good job growing their unisex range both in their mono-branded EBO stores, but also in our Metro, Mochi stores, right? So we carry Crocs in almost 300 of our Metro, Mochi stores. So any time you see a category get focused and do well that impacts 300 of your mono-branded stores -- I mean, 300 of your multi-brand stores and 180-odd monobranded stores, it is going to shift the needle. As from where we sit today, that Crocs remains committed to growing their e-commerce -- to growing their unisex business. So we don't see any reason why you should see any significant shift from those -- that category split.

Sure. Okay. And secondly, just on to that Crocs thing. I mean the number of store expansion, I think, in Crocs in this quarter was a little weaker actually I mean, the expectations was much sharper. Is this just a quarterly phenomenon phasing? Or are we seeing some kind of moderation in terms of store openings for Crocs?

No. So I think what you're seeing is we had massive focus and expansion in Crocs in the last 3 years. I think what is really exciting about our 20 store growth in this quarter is that it's across all formats, Vicky as opposed to being focused on any singular format. All the formats that we carry today have legs to grow in India. All the formats that we carry today are profitable and have opportunities to grow across many tiers. So we're not looking at opening just one of those concepts and growing it. We're looking at opening all of them. So the way I would see it is not a lack of focus on Crocs, I would see it as we're being focused on growing our Metro, Mochi, Walkway stores as well. And as you know, we opened up a new Fitflop store in the last quarter, too.

Okay. Sure, sure. Okay, just on -- just lastly on this Fitflop, I wanted to understand how -- I mean when I look at the variety, I mean, of course, in fashion element, it could be very different, but it looks more on the comfort range like Crocs. So how different could be the opportunity for Fitflop versus Crocs. Can this also scale up to that kind of level?

I think the opportunity is very different in the sense that one is average INR 7,000 for footwear, where Crocs average is closer to INR 3,500 to INR 4,000. So that's two different price points that you're speaking to. Fitflop has a huge market share in women's. But in certain markets, they're also very strong in men's, where as Crocs is more across the board. Overall, though, I don't think Fitflop has the same legs as Crocs, but that's not to say it doesn't have big legs left to go yet, especially after we've seen the performance of the first store and the performance of Fitflop in our own multi-brand stores now that we've taken control of the distribution and are able to somewhat stabilize our inventory position, which has always been an issue in the past. So we see a long, good runway for Fitflop going forward. And I think to compare the two and saying they're anyway alike is probably from a footwear space, we don't see that, we see this as two different consumers. We see a need for a person to wear a Fitflop and also wear Crocs, depending on who they are.

The next question is from the line of Bhargav Buddhadev from Kotak Mutual Fund.

I have 2 questions. First is, is it possible to highlight what has been the SSG over the last 2 years for stores, which are more than 2 years old? That's my first question?

Well, as you know, we don't guide to SSG. And we don't disclose the SSG number, Bhargav, but I think you're capable of putting a calculator going. Our SSGs are strong. And let me reiterate and answer your question this way. We have not seen a decline of growth outside of what we would expect from any aging of stores. Having said that, we expect our stores 2 years and older to grow at a slightly lower pace than our stores that are, let's say, just 1.5 years old. That's normal in retail as stores open up, they start to hit a certain velocity and they grow and grow for a couple of years. And then, of course, the comp stores slows down a little bit. All of that has been within our -- actually, it's been beyond our expectations because this quarter was quite spectacular. But nothing has stood out as causing a concern from an aging of stores and their performance.

Okay. The second question is how much of the management bandwidth is spent on achieving success for the Walkway brand, given that the DNA for success here is very different from the other brands where Metro is strong?

Yes. You're absolutely correct. Walkway is a different business, which is why we have been not as quick to grow. Having said that, it is not a matter of bandwidth, it is a matter of two things. One is finding the formula for it that's appropriate and works well, and the geographies where it might do really well, that's number one. And then also having focused leadership in managing the business. So I think we shared in the past, Bhargav that all our concepts are individual stand-alone with P&L business units, right? So we call them our strategic business units. The question really comes down to, do we have the resources in the SBU leadership to manage that business. And today, we feel very confident about that leadership, being able to take us and grow that chain. But like everything Metro does, we're not going to rush and do things. We believe that Walkway is showing some very good ROCE numbers and it's going to be a slightly different game than a Metro, Mochi, absolutely. But that doesn't mean that it's taken up a lot of bandwidth or in any way distracting. All businesses take a bandwidth, no doubt. But having said that, we believe we have capable leadership leading all our different SBUs, all our different concepts to lead them to capitalize on the opportunity in India.

And would we also consider getting into the distribution mode for pushing Walkway or will continue with opening own stores?

We're very focused. I think that we've shared our vision in the past to be the largest specialty footwear and retail chain in India, right? And that does not include having distribution as one of our core strategic initiatives today. We believe that the runway for a strong retailer in India is immense. We believe that we would take up all our energies and investments to capitalize on that opportunity. We believe that, that's the way we want to play the game, and we believe it has a lot of opportunity for us to continue our 10-year performance of CAGR and profitability. So as of today, retailing is our prime focus.

No, I was more referring to Walkway as a brand in terms of pushing into the distribution channels?

Well, Metro is a great brand. Mochi is a great brand. Walkway is a great brand. But our play is to continue to build it. We have the capital. We have the resources to grow as much as we want to directly. A lot of times when you start distribution, controlling your pricing, controlling your distribution, controlling how your brand comes to life can be challenging, and we don't want to get into that space. We want to protect our brands.

The next questions is from the line of Urmil Negandhi from Narottam Sekhsaria Family Office.

Thanks, my question has been answered.

The next question is from the line of Gopal Nawandhar from SBI Life Insurance.

I wanted to understand what is the frequency for repricing for our contract vendors in terms of their conversion charges and the pass-through of raw material?

So in the footwear business, Gopal, we're constantly iterating and evolving our product, right? So it's not a matter of how many times do they have a chance to reprice the goods. Every time we design a new collection that has its own set of input costs, that we evaluate. And when we get those input costs, we see if the multiplier of margin makes that price point meaningful and attractive to our consumer that we believe we closely understand. And if it does, then we go ahead with the product. If it doesn't, we see if we can reengineer the product to meet those price points without in any way diminishing the quality or the premiumness of that product. So there's multiple factors that go in. It's just -- we're not an FMCG business where we have a contract manufacturing, we say you're locked in for prices for 2 years and you're making the same thing for 2 years, right? It's a fashion business. And it's understanding the inputs of cost as we go to design product, as we go to develop product, as we also deciding what is that fashion going to play out as in the coming quarters. So to answer your question, it's not a contract manufacturing set pricing at any given point. The other thing is we have close relationships with our suppliers, right? If in case there was a supply -- there was a raw material price hike right in between sourcing it, of course, we would work to them to see how we could mitigate that for them, how we could take other costs out of the production to maintain a price that we think is good for our consumers. And that's why we don't see much demand erosion as we change our pricing.

Okay. So when we say that we have planned our inventory well or we've what ahead of because of volatility on the pricing side, what do you mean -- do you mean on the raw material side or we are saying on the finished goods inventory we have procured ahead?

On the finished goods, as reflected on our inventory holdings that we've shared, it is on the finished goods side.

Sure, sir. Second question was on employee costs. We've have seen only sequential increase of 12%, and whereas the sales are up 20% plus. So what I understand that there are some incentives also which are based on the sales. So we did not see a corresponding impact of those in the employee costs. Is there any change in the incentive structure or reclassification of heads between employee costs and other expenses?

Gopal, a portion of our variable commission that we pay to the sales team also goes into the other expense where you would see that increase going up. So employee benefit expense predominantly has back-end and fixed salary costs, and other expenses, a portion of commission that we pay to our store managers and our back-end sales team and staff who are on commission.

This has been like this or there has been a reclassification?

No, this has been like this since many, many years.

The next question is from the line of Manish Poddar from Motilal Oswal Asset Management.

Just 2 questions. First one is like you mentioned roughly 63% growth versus Q1 '20 on an overall basis. Can you just help me for the 3 formats, what this growth number would be?

So Manish, we are not disclosing numbers by format. Unfortunately, we'll not be able to give you the numbers. But as you rightly said, 63% overall growth versus Q1 FY '20. If I had to further dissect that number in terms of number of stores increase, we have increased from 510 stores to 644 stores now. So around 26% growth in terms of number of stores versus, say, Q1 '20. So basically, this will help you sort of tie up overall growth scenario that we are looking at.

So pricing actions would be similar across the brands? Is that how one should look at it?

Across the brand, across the concepts, you mean, right?

Yes.

No, we're seeing growth across the concepts.

Just one more data point which you can help me. So FY '19 overall in the other expenses, advertisement and commission on sales that number was INR 88-odd crores. What is this cumulative number in Q1 FY '23?

I'm sorry, I don't think I understood your question. I apologize, Manish. Can you ask that question again, please?

So, I'm just trying to understand there are 2 line items in DRHP, advertising and sales commission and commission on sales, these 2 items together was roughly about INR 88 crores in FY '19, let's say, which was a full year -- normal year. I'm just trying to understand what is this two number cumulative in Q1 FY '23?

Manish, let me come back to you. We don't have FY '19 numbers handy. But if you are in the queue, we'll come back to you after we answer other question.

The next question is from the line of Abhishek Maheshwari from SkyRidge Wealth Management.

A couple of questions. So first is you had mentioned that Q3 is still your best quarter, but you've outdone yourself in Q1 itself. So do you see that enthusiasm in shopping retain in Q2 also or this type of exuberance reduced somewhat during this Q2?

So sorry, you question, Abhishek is about future growth, right, then because Q1 is typically not as strong as Q3. Is that...

Right. Right. So I was just generally asking, if this is the new normal sort of thing? Or do you expect the exuberance to reduce in Q3 and Q2?

So I understand. Sorry. I apologize. I wasn't able to understand your question the first time around. The -- we've seen growth in our business starting in Q3 of last year, continued in Q4. And as you know, Q1 has shown nothing but growth. From where we sit today, we feel confident that, that growth demand has no reason barring any kind of significantly negative events happening. We don't see that happening, so the growth demand should continue through the quarters. Having said that, though, we start lapping some strong numbers in Q3, but that doesn't mean we can't exceed those numbers either. And our plan is to continue, as I mentioned before, we have a CAGR of 18% over 10 years, Abhishek. And we plan on continuing that CAGR for the next 10 years to come.

Okay. Great. And secondly, if you could just let me know how many stores do you plan to open this financial year and the CapEx budgeted for that?

So Abhishek, as we guided in our DRHP, we plan to open about 260 stores in next 3 years, that is till FY '25. That brings us to about 80, 85 stores for the current year. Overall CapEx for it broadly would be in the range of INR 50 crores, INR 60 crores because the numbers sort of vary by format. For Metro, Mochi, overall investment that we do in terms of fit-out, inventory and security deposits to our landlords, that ranges between INR 1 crores to INR 1.1 crores, INR 1.2 crores for Metro, Mochi. For Walkway and Crocs, this number would range between INR 70 lakhs to INR 80 lakhs -- INR 65 lakhs to INR 80 lakhs. So broadly, for 80 stores, we expect that CapEx to be in the range of INR 50 crores to INR 60 crores.

The next question is from the line of Akshay Kothari from Envision Capital.

I just had questions on the loyalty points. So the loyalty points are available on three brands like Mochi, Crocs and Metro, right?

Well, the loyalty program is available on the 3 brands, the loyalty points are differently done on Metro and Mochi compared to Crocs. Crocs has a little bit more gamification. But those 3 brands are available for our loyalty program.

Okay. And could you give -- what were our loyalty points outstanding as on 31st March and as on 30th June?

So the total loyal -- you are seeing absolute amount of loyalty points?

Yes.

It's in that range of around INR 40 crores to INR 50 crores closing points. Obviously, redemption that we see out of that is factored as per the applicable Ind AS, and that is shown as deferred revenue, which is reduced from the revenue.

Okay. So ideally, we have done much revenue, only thing is as per Ind AS 115, we have accounted for it, we'll be doing it later or at later stage?

So as required by Ind AS, what it says is based on your historical redemption trends, you need to make deferred revenue provision, which gets reduced from sales. This Ind AS was implemented 4, 5 years back, and they have been accounting it as required by Ind AS.

Okay. Sir, what would be our redemption rate, around 50% because you given 53%, that would be it?

So 53% is the total contribution of, say, out of our total sales, which are done to loyalty, our loyal members. So that is that number, that would be net of discounts that they burn to make that sales.

Okay. But what I'm asking is out of INR 40 crores, INR 50 crores, how many of them would go unredeemed as per your Ind AS projections?

Broadly, if you say a redemption rate, it would be in that range of 15% to 18%. And it is provided for as per the requirement of Ind AS.

The next question is from the line of Sabyasachi Mukherjee from Centrum PMS.

Congratulations on a very strong set of numbers. Firstly, if you can help me with the volume numbers for Q1 FY '23 and also Q1 FY '22 and the Q1 FY '20 quarter?

Sabyasachi, actually, we have not disclosed our volume numbers, but I can just broadly tell you our monthly overall volume is about 10 lakh units month-on-month. So we have not given numbers for historical periods. Unfortunately, I will not be able to share further details on this. We've given average price point. So broadly leads you to the number.

Okay. So INR 1,494 is the ASP you quoted for Q1 FY '23. Did a number -- volume number is somewhere around 3.4 million. Okay, I got it, 10 lakh units per month. And secondly, you have closed down and shut down 5 stores this quarter, reason behind it? And do we expect more closing or shutdown of stores in the coming quarters?

So we're constantly evaluating all our stores. Here are some of the reasons we close stores. If the store is underperforming, and we figured there's no way it can be profitable, we have a lot of reasons to close it, then we'll move on. But let me point out to you that out of the 5 stores that we closed, 3 were actually relocations. So we feel good about the business that we want to relocate it to a better location and expand our stores. In net, the true closures in that number is only 2. So if you look at it for a 640 store chain, 2 stores closing a quarter is just normal business because malls die, high streets die, traffic shifts, cities change. So that happens a lot.

I'm sorry, but the FY '22 end store count number was 624, and if there is a net closure of only 2 stores and you added 25, then how come the...

We relocated 3 stores, right? So out of the 5 closures, 3 will be located it. So they're counting as new stores. We count them as a closed store. The minute we relocate a store the old store closed, so it goes in our closing stores and there's a new store open. So 5 closed, but 3 of the 5 that closed actually relocated to new spots.

Okay. Okay. Okay. I got that. Last question. On the slide that you have presented that we have been increasing our presence in Tier 2, 3 cities. There, I can see that the store count contribution has been kind of going down for metro cities and it has been going up for Tier 2, 3 cities. But if I look at the revenue contribution, which is mapped just beside the number of store count contribution, I see that the Tier 2, 3 contribution is lower than a metro store contribution, which means the throughput of a Tier 2, 3 cities, of course, lower than a similar metro Tier 1 store. So how does the store economics stack up for a metro Tier 1 store vis-a-vis a Tier 2, 3 stores?

You're correct. Obviously, sales throughput is say Tier 2, 3 would be slightly lower as compared to what you see in metro cities, prime metro cities like say Mumbai, Delhi and others. However, what we do is evaluate any store from a overall store profitability and store ROCE point of view. When we move to Tier 2, 3 towns, obviously, as you know, rentals and all other expenses are significantly lower than compared to, say, metro cities. So just to give you an example, in metro city a store doing INR 40 lakh sales per month may generate 10% PAT, whereas a store in Tier 2 or 3 generating, say, INR 15 lakhs, INR 20 lakhs sales per store per month, may generate higher PAT. So it all depends on a specific store wise details. And also, if you see historically, we have given trends for last 3 years as well, the trend has remained the same. As we obviously increase our penetration logically, we will grow much faster in Tier 2, 3 towns as compared to, say, metro cities where we penetrated slightly earlier than them.

So essentially, you mean to say that even if you increase your presence in Tier 2, 3 cities, your store economics doesn't get impacted and your ROCEs remain intact, am I correct?

Yes, that's the endeavor, yes. So sales sold per month may be lower, but we see each store in terms of specific store profitability. What is the PAT percentage? What is the ROCE?

Any broad ballpark number, how much the throughput is lower percentage-wise?

It all depends. We see Tier 3 cities, some of them surprising us positively and they do sales as good as, say, some of the metro cities. So it's very difficult to give a number. But logically, on -- if you see a trend line, logically, metro cities would have higher sales throughput, Tier 2, 3 cities would have slightly lower sales throughput. However, as we said, we see each store's profitability to make sure whether we want to go ahead with that particular store or not.

Okay. Lastly, if I can squeeze. On the demand scenario, one of the previous participants also asked, how has been the -- we have been hearing that urban and semi-urban markets have been very good in terms of demand, but the rural has been kind of struggling due to this inflation and affordability issue. How has been your experience in terms of urban and rural demand?

Well, so the most rural we get is a Tier 3 town, right? So I want to make sure we qualify that sentence. But we're not seeing, as I mentioned earlier on in my opening remarks, we're not seeing any change of demand and any change of performance depending on the tiers of cities, all our tiers of cities that we operate in are showing good growth.

Ladies and gentlemen, with time constraints that was the last question for today. I now hand the conference over to the management for closing comments.

Well, thank you all for joining us for this call. As I mentioned before, we are very excited that we finished our most exciting quarter in the history of Metro Brands. and Metro Brands continues to operate with great financial discipline and operational rigor, ensuring that we continue to add value and perform for all our shareholders and our employees. Thank you for your support of Metro Brands. We'll talk to you next quarter.

Thank you. On behalf of DAM Capital Advisors Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.