Metro Brands Limited (METROBRAND) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Metro Brands 2Q FY '23 Results Conference Call hosted by ICICI Securities Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Aniket Sethi from ICICI Securities. Thank you, and over to you, sir.

Thank you, Kathy. Hi, everyone. A very good afternoon. Thank you for joining us. It's our absolute privilege to host the 2Q FY '23 earnings call of Metro Brands Limited. We have with us the senior management from the company, Mr. Rafique Malik, Chairman; Ms. Farah Malik Bhanji, Managing Director; Mr. Nissan Joseph, Chief Executive Officer; and Mr. Kaushal Parekh, Chief Financial Officer. I would request Mr. Nissan to share some perspectives on the quarter gone by as well as the recent acquisition, post which we can open the floor for questions. Thank you, and over to you, Nissan.

Thank you, Aniket, and good afternoon, everyone, and thank you for joining our Q2 FY '23 earnings call. We delivered another great quarter for Metro Brands, very much in line with our expectations. It is reassuring that we have now lapped a full year of operation in the post-COVID era, and the consumer demand continues to be strong. We had two major festivals in the quarter as we comped Janmashtami in the middle of the quarter and caught most of the Dussehra festival at the end of the quarter. To give you a quick overview of the quarter, Metro Brands has delivered consolidated revenues of INR 476 crores for the quarter, an increase of 47% against the corresponding quarter of the previous year with a PAT of 16.4% and EBITDA of 31%. Our consolidated gross margin for this quarter came in at 57.4%, which is in the range that we target of typically being between 55% to 57% and this despite the end-of-season sales that we typically run in Q2, along with the anticipated inflation to input costs that we had. We saw our biggest growth come from the over INR 3,000 price range, which continues to reinforce our strength as we cater to the affordable premium segment of the footwear market. On the growth side, Metro Brands continues to see strong growth in terms of volume and value across all formats and tiers. While we are excited about our growth in brick-and-mortar stores, our growth trajectory continued in e-commerce as sales grew by 50% year-on-year for the first 6 months of the year. We opened a total of 37 stores, we relocated 4 and closed 5 for a net growth of 28 stores for the quarter across all our formats. We are on pace to open the 260 stores over the next 3 years that we guided to in our RHP. Despite lapping sales that includes pent-up demand from last year, we anticipate demand to remain through the wedding season. Now coming to our recent share purchase agreement that we signed to acquire Cravatex Brands Limited. This is a very exciting and synergistic acquisition, which is aligned with our expertise of footwear retailing in India and fills the athletic and athleisure white space in our portfolio of brands. FILA is an international brand with a rich heritage in the athletic space, and Proline is a well-distributed sports apparel brand, also with a rich heritage in India. In the coming weeks, we will be working on integrating the companies to unlock the potential of this acquisition. With that, I will turn it over to our CFO, Kaushal Parekh, to take you through more details of Q2.

Thank you, Nissan. Good afternoon, everyone, and welcome to Q2 earnings call of Metro Brands Limited. As you all know, this quarter marks closure of 1 year of reopening of Indian economy post COVID-19 restrictions. Metro Brands started FY '23 on a strong note, both from operational and financial performance standpoint. During this quarter also, Metro Brands has continued to demonstrate strong resilience. Before moving on to the financial numbers, I would want to discuss two points which will help understand this quarter numbers in the right perspective. Although these points have been called out in our earlier discussions, I feel this is relevant to mention and repeat them again here. The first point is on the seasonality that we see in our business. In our case, Q1 is generally about 25% of the full year revenue. Q2 is the smallest with around 22% to 23% of annual revenue. Q3 is by far the biggest, around 27% to 28% of the revenue and Q4 is again around 25% in that range. Q2 generally is the smallest quarter, and hence, revenue number needs to be seen considering this point. Second point is on the gross margins. In our industry, we generally see two end-of-season sales, one in Q2 and another in Q4. Hence, gross margins for Q2 and Q4 gets impacted due to end-of-season sales. So if you are seeing absolute performance for Q2 and Q4 on a stand-alone basis, you'll see impact of end-of-season sales coming in. To summarize in brief, our revenue for this quarter is to be seen considering point number one on seasonality that is Q2 being the smallest and gross margins need to be seen in light of point number two, that is adverse impact that we see on account of end-of-season sales. With this, let me start with a quick snapshot of financial performance of MBL, starting with revenues. On a year-on-year basis, Q2 FY '23 revenue was up by 47%. On a half year basis, our revenue was up by 116%. Because of seasonality, as I discussed, on a Q-on-Q basis, quarter-on-quarter basis, revenue was down by around 6%. Now if you compare it with pre-COVID period, that is if you compare with H1 FY '20, our revenue was up by 66% on a stand-alone basis. Similarly, if you compare it with Q2 FY '20, our revenue was up by around 70% on a stand-alone basis. So the growth that we saw even in Q1, similar growth percentage continue even when it is compared for Q2 and H1 together. Also on a revenue front, a key highlight for the quarter has to be our performance of e-commerce sales. We achieved highest ever e-commerce sales of INR 41 crores, which was up by 21% on a Y-o-Y basis. Moving on to gross margins. This quarter, we delivered stable gross margins of 57.4%, which is more or less in line with margins that we saw in Q2 of last year. For H1, gross margin reading is strong at 58.6%. Lastly, moving on to bottom line performance. For Q2, we delivered EBITDA of 31% and PAT of 16.4%. If you see for H1 EBITDA is 33.6% and PAT was 18.7%, respectively. With this, I'll close and hand it over back to commence with our Q&A session.

Sir, should we open the floor for Q&A?

Yes, please.

[Operator Instructions] The first question is from the line of Tejas Shah from Spark Capital. The current participant has moved out of the queue. We take the next question from the line of Gaurav Jogani from Axis Capital. Ladies and gentlemen, thank you for being on hold. We will proceed with the call now. And we have the participant from Axis Capital, Gaurav Jogani on the call who would like to ask a question.

My first question is with regards to the store openings. So if you see specifically in terms of Crocs, the store addition there have been just 2 or 3 stores in the past 2 quarters that we see. So anything on that front?

Okay. I'll take that first question. So we typically try to open as many Crocs stores as we can before the monsoon season because the monsoon season is one of the largest for Crocs. And at the end of it, we don't want to be disruptive to our stores. We continue to want to expand and see opportunity for all our five concepts to grow as part of that 260 stores that we guided to.

Okay. Okay. Sure. And sir, my next question is with regards to, if you can help us out how the demand conditions are panning out in Q3? The reason why I ask this question is because unlike the normal year, this year, some of the festivities have fallen in Q2. So in that light, how do you see the Q3 panning out? And does your yearly percentage that Kaushal has mentioned earlier, does that changes in that light?

So we did have a shift of a couple of festivals into Q2. But actually, we only caught the starting of Dussehra and with the tail end of Dussehra fell into Q3. So there was not much of a significant shift. When we look at the shift in the total business, it's not going to be significant. We believe that the numbers -- the contribution of each quarter is going to remain about the same year-on-year. And we continue to monitor our business. This is not the first time we've gone through a shift in demand caused by shifting festivals or wedding seasons, and we're aware of how to measure through it. We believe that consumer sentiment is strong. However, you have to remember last year, this was the first time we came out of COVID. And there was some pent-up demand. That demand is fungible from the standpoint that you're not going to buy 3x the number of shoes just because you haven't bought shoes in 3 years. So we do understand that we are going to be looking at some very steep numbers. So we're able to read through that, and we continue to feel that our demand in the consumers in our segment, as I indicated in my opening remarks, the section over INR 3,000 saw the biggest increase. That premium consumer is still out there shopping and wants to shop and hasn't finished the pent-up partying yet from COVID.

Sure. And sir, just last question from my end is with regards to the other expenses and the employee cost line item. So if you see quarter-on-quarter, they have kind of increased around 8-odd percent. This against the revenues have not actually commensurately increased. And as you mentioned that Q2 is generally a lean quarter. So anything to read in that front?

So Gaurav, we have seen some increase in salary costs, both at the back end and the front end, there are specific reasons for the same. At the back end, obviously, this is also preparing for approval -- having talent right on time, for all the growth initiatives that we have. FILA, we have already announced one acquisition in this quarter. At the front end, we have seen some increase. This is predominantly on account of opening of new stores. Again, based on the opening numbers, the staff comes in a bit early. So these are one-offs -- these are basically two reasons we have seen some slight increase in cost. Obviously, revenue would start flowing from new stores, say, which opened up in the second -- later half of this quarter. We'll have full revenue coming in from next quarter and salary costs would start getting absorbed from the next quarter onwards for all the new stores.

Sure. And so likewise, that would be also used for the other expenses, I am guessing, maybe a higher marketing cost in Q2?

Yes. During COVID, I think we were very conservative in our marketing spends, in our travel spends. Those aren't sustainable, right? You have to do marketing, you have to travel when you have a geographically dispersed fleet of stores. So we have started instituting that back into our system and have been doing it for a little bit, but it has picked up considerably in the last few months, and we think that's important for whether it's scoping out real estate in different geographies, or if it's just ongoing supervision of our 672 stores.

Also, Gaurav, we opened 28 stores in current year. So obviously, when you open the store, the marketing cost goes on day 1. Also in current year, if you would have seen that Diwali is slightly preponed. So obviously, all the marketing activities just goes in time so that we hit the customer segment right on time, before the festivities sort of starts.

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

Sir, first question pertains to since we have COCO network across. And then you spoke about pent-up element of demand also visible in the last part of last year mainly. The number that we are generating now, what percent, and this is a slightly vague question, but what would you attribute to pent-up demand? Or do you believe that there's real demand buoyancy that you are seeing in the market and pent-up is behind us?

As I mentioned earlier, the pent-up demand was there, but it was really when COVID finished. If you hadn't bought shoes for 3 years and if you buy one shoe every year, you're not going to turn around and buy three shoes to make up for it. You're going to buy that shoe. It just all happened to be, I would say, it was more a concentration of buying more than it is really pent-up demand. That demand is over. And so when we look at our numbers and we see ourselves growing against those numbers, I think it speaks to both the strength of our business positioning and also the strength of our consumer.

Very clear, sir. Sir, second, you spoke about the seasonality between 1Q and 2Q. So just wanted to understand, is it that the realization drops because of the EOSS and mix change? Or even volume of pairs sold also drops dramatically between 1Q and 2Q in our business?

So Q2, Tejas, in India that's the peak monsoon season. So for us, we are not big in rainy shoes. And hence, for us, Q2 is slightly smaller. Obviously, in the end-of-season sale, we see -- because of the discounts we see volumes there. However, realization is slightly lower. But predominant reason for lower sales is the monsoon season rather than anything else.

Though it favors Crocs, which is only one of our five concepts, the other four concepts aren't favored by monsoon.

Fair enough. And the last one, if I may. On FILA and Proline, FILA in particular, the brand has a bigger aura than the revenue unfortunately generated in the country. So what are your plans in terms of route-to-market strategy and sourcing strategy? And what is the royalty that will have [indiscernible] in the country?

Okay. So I agree with you, Tejas. I think FILA is underpenetrated and under-indexed in the Indian market today. We see huge opportunities for that brand to grow and become a significant player in the athletic branded space. The other exciting part to it is it's not only a distribution agreement where we can distribute the global products developed by FILA. It is also a licensing agreement where we're able to make certain categories of FILA under license from them for the Indian market. So that's the two facets of it that is very exciting to us. To do that, you need scale. And fortunately for us, our fleet of stores are able to provide scale as you start expanding into the license business. We also see opportunities to build the brand from a mono brand, an exclusive brand outlet perspective. The brand is going to need to be catered and curated through the inception. So right now, we are focused on, first of all, integrating the two operations. As you imagine, any acquisition, any merger requires a great deal of integration to happen first and foremost, to ensure that you built the foundation for that business to grow, both from a technology standpoint and from a human capital standpoint, but also to figure out -- not to figure out, but to position it and then take it, start the march of the journey down towards where you want to position the brand over the next 10 years. And we see it as a long-term play. It is a long-term license. The licensing royalties, we believe, are more than competitive, and is in line with what we would generally see in such an agreement, but we believe it is even more advantageous than most.

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

Congratulations on the fabulous numbers. I have three questions. First is on, if you could just help us with -- in this year, what would have been a price increase versus 2Q FY '22? So out of the total growth, if you could help us with volume price mix.

So to answer your first question, our average price increase is somewhere in the 5% to 7% range. And that is a factor of two things. The factor one of inflation costs, but it's also a factor of the basket of goods that we're selling. So those are the two drivers to it. And I hope that answers your question.

Yes, that does answer. Just a quick follow-up there. So I mean you did speak about the market demand traction that you are seeing. But in the lower end of the market, we see a lot of players seeing a lot of pain. So are you also seeing at any of your lower end -- I understand that you are at a much higher ASP, but at any of your lower end any kind of pain? And I mean, if you could just help us understand the -- if this demand in the ongoing festive season does continue, or you see any kind of change in the demand situation on the ground?

So I think you've got to read between the lines in our business of the lower end of the segment. We vacated quite a few price points because of the GST hike that happened at the turn of the calendar year, right? So that was one reason for exiting some of those price points. We were forced to when there was a 7% -- 700-basis-point increase in the GST rates. So that was number one. But the second thing is our focus to become an affordable premium major player in that space and continue to hold that space. And we operate with a totally different client. So to give you a perspective, on the lower end of the pyramid, I don't think we're the right people to ask for that. What I can tell you is we continue to see the demand for our products priced at the mid to premium range to be very strong.

Understood. Second question is on your store additions. So during our IPO, we had guided for about, I think, 240 to 250 stores in the next 3 years. Now that we have Fitflop as well as contracts with FILA as well as Proline. Should that store addition pace accelerate significantly?

So just to clarify, we have guided to 260 stores without counting Fitflop in there, right? So that was the actual count. So Fitflop would be incremental over that 260. FILA will be incremental. However, I think the timing of that incrementality needs to be seen simply because we will rationalize stores that are either unprofitable and currently in the network or that don't add to the brand ethos that we want the brand to build to. So while you might see some initial fluctuations of store counts strictly attributable to FILA, net-net, it is going to be accretive to us to have both in value to the business and also in value of stores, in the count of stores. That's the short answer, Ali. But by quarter, we might be -- we might see a few fluctuations in which we will be transparent about where those fluctuations are coming from. So you people will have the sense of confidence that we continue to be on track for our 260 for our core base business.

Would you be able to quantify if this will go up by, what, I mean, probably 20, 30 stores? Or it could be significantly higher, given that FILA has a much larger opportunity in the market?

FILA has a significant opportunity in the marketplace, right? You look at our Crocs fleet, it is north of 180 stores. We believe that brands like Crocs and FILA and all of them play in about the same pace of demand and maybe even more like you rightly pointed out with FILA having a wider and a deeper demand than a Crocs might have in the Indian market. We are going to evaluate that very carefully. We, as you know, at Metro Brands, are very -- have a deep operational rigor and financial discipline. So we look -- and we also look at things from a long-term perspective. We have performed consistently over many, many years, and we intend that to continue. And we intend for FILA to be accretive to us at that same level of performance that we've maintained in the past. So whatever we feel is the best course of action to get to that point is what we will execute as opposed to try and hit a target number of stores that might be a little bit less informed at this stage of the game. Having said all that, there's definitely opportunity, like you said, in the FILA brand in India.

Got it. And just last question is, with this acquisition, we also have a play in the apparel as well as, I think, Proline also has equipment business. So how do you see that? Will this be a periphery business along with your footwear? Or you plan to kind of even expand in categories beyond footwear now with these brands?

So I think the easiest way to look at it is we don't think apparel play is a space in our Metro Mochi and Walkway stores, right? And we don't see that needing to come in to go at that space. In the other spaces, we believe that apparel has immense opportunity. The size of the athleisure and the athletic apparel market is considerably bigger than even the footwear market is. So we think there's an opportunity there. How we slice and dice that? And I'll be very candid with you. While we know what we're very, very good at doing, which is operating retail shoe stores in India, we also know that, that requires some talent and the team put together, and we're assembling our best way forward on the apparel business, but we do see that as an opportunity for India as well, both not only in direct apparel, but also the adjacent categories that go with a brand such as Proline.

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

So I have a few questions with respect to FILA only. So exist -- currently, how many EBO stores they have right now?

Well, I think -- Nikunj, thanks for that question. I think it's a little early to count those stores because we believe we need to rationalize that store number considerably. And to give you that number of stores today, we don't think would be a good representation of what we think it needs to be rightsized to before we set on our growth trajectory for it, right? So but in a rough number, if you want to know, it's about 20 to 30 stores. And I say that simply because we are in the process of rationalizing them.

Sure. Okay. No issues. And secondly, your like during your due diligence, did you find any inefficiency in the operation and -- or the low-hanging fruit, which -- because we look at -- when we look at the margin profile here, at the operating profit level, so still it's very low as compared to the other brands. So do you see any low-hanging fruits there, due to your expertise, you can easily bridge that gap?

Well, obviously, the low-hanging fruit that you mentioned is that they're under-indexed in India, right? So right there, you that's a low-hanging fruit of sorts. We have a big network of stores, our Metro Mochi stores are capable of selling footwear. As you know, we do a large business with Skechers and Adidas and now Puma as well. All of those are opportunities for FILA as well. And we believe we can grow the athletic business on our existing portfolio of multibranded stores. So that is something FILA didn't have before. So immediately, if you were talk about low-hanging fruit, we do have our own store chain and fleet that we can grow the brand in. I think there's numerous other low-hanging fruit that we are evaluating, and we'll continue to evaluate. And I think we remain excited for it simply because we know that we can have line of sight on some of the low-hanging fruit out there.

Sure. And when we look at the gross margin profile of the product, which they have and the similar to the other companies, that is lower to what we are enjoying right now, 55% to 57%. So from the margin perspective or the ROC perspective, do you think it will be dilutive initially till the time you integrate and -- or when you take over the entire business, you will reposition the brand to match your margin and the ROC expectation?

I'd rather speak to a long-term plan. I think in the short term, there might be blips, a little bit left, a little bit right. And I don't want to start commenting on every little blip that we might face along the journey. What you need to know is that we have a long-term view on FILA. We have a long-term view where it's going to be accretive to the value of the business. It's not going to be dilutive. We've done these kinds of things before, not to this scale. So we know what it takes to run a business that is at par or accretive to our existing business. The really exciting thing about the whole thing is it is speaking to a whole different consumer, but we believe that the financial fundamentals of FILA will be very much in line with our expectations.

Also, Nikunj, adding to the gross margins that you referred to for other players without naming anyone. They -- you also need to study composition of the sales that they do. See, our focus, as Nissan mentioned, over a period of time would be on EBOs, MBOs, our own .com website and obviously, marketplace sales. We'll also do selective distribution, which will be predominantly on the outright terms basis. Whereas if you see for others, they also have good quantum of franchisee stores. And when you have those franchisee stores coming in, obviously, it takes hits on -- a hit on the gross margins because you pass on certain margins to franchisee for them to run their operation. So that needs to be seen in that light. In our case, composition is -- we may continue to follow our COCO, company-owned company-operated store approach, and hence, they're strictly not comparable as such.

And any incremental investment have you planned for this plan, apart from the INR 200 crore acquisition? Like any rough work you have done on the incremental capital you would need to allocate here?

Right. We've carefully considered the capital allocation required for both the acquisition and also to reposition the brand. Repositioning of brand does cost capital. The good news is -- Nikunj, is all of this capital would be done without raising any more debt given that we do have cash as a company. So it's one of those things we'll continue to evaluate what is -- what gives the immediate payback, what gives long-term payback, and it needs to be a balance between those two as we do our capital allocations.

Sure. And lastly, just from the revenue perspective, how much -- how big would be the non-footwear revenue contribution in the existing INR 150 crores of sales, which they are doing?

It's about 50-50 -- 40-60, 50-50 coming from both the Proline business and the FILA business.

But also, you need to remember that once we take it on, this is a business that has a long gestation period unlike our current business. So for instance, in most sports brands and in imported brands, you see that they've already bought in for spring/summer. So really, you'll see the change in the third quarter of next year in terms of how we're going to run it and what we do with it. So that's something to keep in mind. And I think all these numbers will get fine-tuned once we can evaluate, dig deep and just take on and put our stamp on how we want to grow this business.

Okay. But from your perspective, your focus would be largely in footwear, or you also want to focus on the non-footwear part or build a team there, like just want to understand that.

Like I shared with you, once we evaluate -- we do realize there's a lot of opportunity in there. It would be too soon to comment on that. So maybe in a couple of months, once we have a little more clarity about how we want to run the business, we'll be able to sort of help you with that.

The next question is from the line of Prerana Amanna from Shome Partnership.

Am I audible?

Yes, Ma'am, you are.

Congratulations, especially to the management. Very few people are able to walk the talk, especially with the store additions. So congrats for being on track. My first question is based on Walkway. So last quarter, we saw that Walkway didn't perform well in Tier 1 cities and Tier 2 and Tier 3, it performed well. And even this time, we're seeing that growth has been more from the INR 3,000 range of our categories. So are we losing market share in that category like Walkway and below INR 3,000?

So I think the way that I would read that is even Walkway has seen price increases driven by inflation costs and driven by the GST increases, right? So that's what we're -- you're seeing a culmination of that. It is not that we are seeing the business dramatically differently in Walkway compared to the rest of it. We think it's a different business than our -- the rest of our business.

Okay. And how about this Fitflop? I know Fitflop is a bit premium range, but since it is priced extremely high, like how is the consumer demand over there?

We don't think it's priced extremely high. We think it's priced well. But the consumer demand on Fitflop has been very strong for us. We opened our first store in Chennai in Express Avenue Mall and it performed above our expectations. So we're pleased with that. We also are seeing Fitflop sell very well in our multi-branded stores of Metro and Mochi.

Okay. And my last question is based on price increase. I know last quarter, you had an average price increase of 7%. So have you taken any price increase in the last 3 months, that is between Q1 and Q2?

No. The price -- the good news is we're starting to see the input costs stabilize. And while there's always the possibility of a spike caused by some geopolitical macro reason, we don't see that as much of a threat today, though we are acutely aware of that threat. And we constantly try to hedge our inventory to make sure that we don't increase -- we don't have to increase prices right now.

[Operator Instructions] The next question is from the line of Ankit Kedia from PhillipCapital.

Sir, a couple of questions from my side. First is on the channel mix, if you can share for the acquisition, how much comes from EBO distribution and online?

So most of the business is a distribution business, followed by e-commerce, followed by EDO business.

Sure. And is it for both the brands, Proline and FILA?

I'm giving you the average between the two.

Sure. And Kaushal, a question for you. We see nearly INR 50 crores of inventory and INR 90 crores of debtors on the books. Would they also come with the acquisition to us?

No. So acquisition, we have just signed the agreements, obviously, post the completion of CP conditions only after that, that consolidation would happen. What you see currently is obviously built up for the upcoming seasons and the new store opening that you see, even from an e-commerce point of view, we were approaching the season and hence slightly higher debtors.

Yes. I was speaking more from the acquisition value sheet of Cravatex actually.

Okay. Sorry. Sorry, Ankit, if you can repeat your question, I just missed it completely.

If you look at their balance sheet, they have a INR 50 crores of inventory and around INR 90 crores of debtors on their books. Do they also come with the acquisition, or we need to...

Yes, yes. So obviously, since we're doing a 100% buyout, all the net assets that will be there in the business as of the closing date would come -- we will be taking it over.

And are all the 20 to 30 EBOs, which Nissan mentioned are FOCO EBOs or COCO EBOs for FILA?

It's a combination of both, predominantly franchise.

And do you think over the period of time, you want to convert those EBOs to COCO EBOs? Or you predominantly feel that franchisee model is good for FILA?

So we believe in relationships and partnerships and honoring partnerships that Cravatex might have entered into, right? So it's not a question of do we want to convert them to company-owned company-operated stores. The question is what is right for the franchisee? If it's right for us to do right by the franchisees to keep them on, we will be more than happy to support them. Having said that, though, the future models of the business, we will be strongly leaning towards the company-owned company-operated model. And having said -- I say that only because this is a different space to our other business. So we want to be acutely aware that we want to be open to different ways of slicing this, but we would be [ tempted ], if that is the word, to opening company-owned company-operated stores first and foremost.

And one last question. From a 3-year perspective, do you think the margins of Cravatex can be near the Metro Brands margins? Or it will take some more longer?

Within 3 years, I think the answer is yes, it will be accretive to our business, and we have no reason to believe that it wouldn't be, otherwise, we wouldn't be acquiring the company. I think we all know that FILA is a well-known international brand. A few years ago, FILA was actually the #1 selling athletic brand in our stores. So we do see the opportunity. We know that we have that customer in our store. It is a matter of positioning that brand correctly for the Indian market, given the competitive landscape in India as well.

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

My questions are on the margin front. So Q3 should see higher fresh sales versus Q2. So what is the reason behind the sort of gross margins remaining at 55% to 57% when we have already done about 57.3% in Q2?

So Devanshu, we like to run a financially disciplined business, right? And we believe that by setting our targets at 55% to 57%, it ensures that we are not missing opportunities of certain price points even in the premium segment. Even in the premium segment, we do have a key price points that we want to hit. Sometimes to hit those price points, you might have to move your margin point, a few points to the left. We think the best way to capitalize on the market share in the Indian economy is to not be rigid about trying to move our margin up and be more focused on ensuring that you're delivering value for every product that you bring out to the market and driving revenue and incremental sales through that. And hence, this position we've taken to say we are comfortable with 55% to 57%. We're comfortable with 30% range of EBITDA. We're comfortable with 15% plus of profit. And the three engines on that plane seem to work really well for us, have worked well for us over the last 10 years, and we believe will continue to work well for us going forward.

Got it. And sir, broadly, I just wanted to check on the EBITDA margin trend also. So for a longer-term, medium-term perspective, since your focus is on value -- sort of providing value to consumers, 30% is a good estimate with some operating leverage built in with scale?

Yes, Devanshu. I think that would be a correct assumption.

The next question is from the line of Vikas Jain from Equirus.

Sir, my first question, just to -- I heard in one of your comments, you mentioned that we are assembling -- in the process of assembling a team to run and operationalize our athleisure wear brand business, right? Is that correct? Is that we have recently acquired?

I'm sorry, we were keen to what? Because you have a little bit of voice -- we're keen to?

Sir, are we in the process of assembling a team to run athleisure wear business that will be coming out from these two new acquired brands. Is that correct understanding?

That is correct, yes.

Okay. Okay. And sir, one more thing. I was like reading the previous annual reports for the Cravatex. There I found that FILA, the date when it started into India's operations and till FY '20 numbers that I'm talking about, what -- according to you -- so it incurred EBITDA losses in FY '20 where it was largely a normalized year of operation. So means -- according to you, what is the missing part into growth strategy for FILA that we would actually fill in? Means what was wrong with it in the past?

I don't want to comment about what's right or wrong in the past specific to FILA. But I can tell you for a brand to be successful in India, it needs a couple of things. What it needs first and foremost is scale and velocity through door counts, right, profitable door counts. It can't be in doors that are costing you more to do business than you're making in business. And that's something that Metro Brands offers any brand in the footwear space is scale at a profitable level. So that's number one. Number two is to have a steady supply. And to have a steady supply of goods, you need to be well capitalized. You need to have sourcing capabilities not only domestically but internationally, right? And so for that, Metro Brands is positioned for any brand, to be capitalized and source products on a timely basis and make sure there's a good steady flow of products because if you don't have products for a season or two, the consumer migrates from you, and it's very hard to get them back. Number three, you have to make significant investments in marketing on a consistent basis. That's another thing that requires capital and Metro Brands has the capital to do that and the wherewithal to do that. So that's the third thing you need. So when you look at all the things that a brand needs, many brands stumble on a lot of these areas through their journey. And when they do stumble, it becomes quite a vicious cycle for them to try and pull out of it. And we believe that with a steady strategy after we evaluate the business, and we look at its potential and we put a road map together that we would be able to unlock the potential that FILA brings.

Sure, sir. Understood. And one last question. The products or the footwear that we are manufacturing -- the FILA used to manufacture, we will have these manufactured at our vendor base only, right? They won't be imported at least, right? Is that correct?

We're going to have a combination of both imported and localized products. Don't forget our consumer wants the global trends. And so that's why we want to give them access to the global trends and product. We also believe that there's a lot of elevated products that exist in the global range that we would like to bring to India to elevate the brand. At the same time, we do have good sourcing capabilities right here in India, and we're proud of those capabilities that we would continue to source that group of products that makes sense on the local-for-local production. But we want to have a holistic 360 brand that offers the consumers what they perceive an international and expect from an international brand.

The next question is from the line of [ Sagar Jethwani ] from PhillipCapital.

My voice is audible?

Yes.

Yes. Sir, what was the revenue contribution of discounted product during the quarter? This is my first question. And my second question is on that we have been focusing on the sports category, although we have other four brands in the sports category now. I believe that the revenue contribution of the sports category would be less than 20% of -- in our case. So we have been more focused on party wear, formals, casual footwear, et cetera. So now coming to the sports category, there are already established players. How do we plan to position ourselves in this category, sports category?

[ Sagar, ] I'll take the first question. The end-of-season sale or discounted sales contribution in Q2 was around 8%. And if you see for H1, it was sub 5%.

And to answer your second question, Metro does stand for a family footwear store, right? And that means, especially in the Indian market, we sell a lot of dress, ethnic formal wear and casual ethnic wear too, right? So we don't want to go away from that. Having said that, we believe that we want to own the footwear wardrobe of a consumer. And this gives us an opportunity to further increase the breadth of the wardrobe that we would command for our consumer. You are right. Today, actually, the sports contribution is less than 20%. But when I look at the growth that was first induced by COVID, it has been quite phenomenal. It has been very strong. For some of the other sports brands that we bring in from the outside, we're their largest customer in India. So Metro has the capability of selling athletic shoes. Having said that, we're not going to get far away from our DNA of being a family footwear store or a complete holistic footwear store in our Mochi stores as well. We believe the opportunity lies not only in our MBOs, but also in building the brand as a stand-alone. Now you rightly said there is competition in India, but there's also a huge growing market, a market that comes from two sources. One is the organized sector growing faster than the unorganized sector. Middle-class incomes rising and consequently, aspirations rising, the whole awareness of health among the Indian population and an overall leaning towards sports as a way of life as opposed to just a PT session in school on the fourth period, right? So all those things create tailwinds for this category. So while the competition is always something to be considered, let's not forget, it's a fast-growing wide category that has a lot of headroom left in it to grow. And we just want to make sure we position FILA correctly with a competitive advantage that can sustain that growth.

Yes. So any growth number that you have in mind that you achieve to clock in the next 2 years, only in the sports category. Any thoughts on that?

I think the financial discipline that we have doesn't go that way. What we go is the other way, and we say, how do we have healthy growth and what's the number for us to have healthy growth, right? Healthy growth, when I say healthy growth, I mean gross margins, I mean EBIT and I mean PAT. We start there first and said, what's the best we can make? How do we hit that triangle, that vortex the best? And then we figure out what kind of growth that can then lead to, and that's how we work it. So we come from financial rigor first as opposed to sales enthusiasm first.

[Operator Instructions] The next question is from the line of Sabyasachi Mukerji from Centrum PMS.

I have two questions. First, on the acquisition part, so I understand that you're kind of building a team for the athleisure apparel segment. And with this acquisition, do you intend to come up with your own brand, a new brand altogether for the apparel -- athleisure apparel segment?

Okay. So we are fortunate that it's not like Cravatex did not have a team in place, right? So they have a team in place that has been running the business, and we think we can support them better given our scale and given our operational capabilities. So that's number one. And we are adding talent to ensure that it is adequately -- has adequate fuel and firepower in that segment of our business. We do have the brand Proline, and we do now have the brand FILA, both of them, we believe, complete the spectrum of goods that you would expect to see in the athletic and the athleisure market. So as of today, there are no plans to launch another brand in that space.

Next question -- my second question is a bit of bookkeeping one. What was the ASP number, average sales price for Q2? If I may know.

It was around INR 1,450.

So the INR 1,450 number is for Q2, not H1, right?

This is for H1. So for Q1, it was INR 1,500. And for Q2, if you see because of the reduction sales, it was around INR 1,400. So on an average for H1, it is INR 1,450.

So the presentation that contains the average realization for each brand, all the numbers are for H1, right?

Right, right.

The next question is from the Akshay Kothari from Envision.

Sir, what would be the current ASP of FILA?

Probably somewhere in the INR 3,000 to INR 5,000 range.

Okay. And sir, I was just taking out the Cravatex website, and there are other brands like something called as brands of the world. These brands we have not acquired, right?

We're in the process of discussing that with Cravatex as to how to best migrate the other brands. But today, we are focused on FILA and on Proline because we know that we have a deep focus on those two. But we're not close to some of the other brands that they have in their portfolio, but we'll evaluate once we finish the due diligence and close the deal.

So this INR 202 crores is only for FILA and Proline?

No, it includes...

It includes all the brands.

And we've acquired all of them. It's just that we have to evaluate which ones we continue to grow and which ones we may change...

Okay. And the BB UK is one also?

Which one, sorry?

BB UK. It's something foreign -- 100% foreign subsidiary they are having.

Yes. So basically, we've acquired 100% shares of the company. So whatever comes with it. Yes.

And Paragon has, of course, taken the full exit.

Correct. That's correct.

Okay. Yes. And I think you mentioned, so there are certain obligations relating to license fee. So could you clarify something on that?

As with all brands, you have to pay some form of licensing fee or royalties, right? And so FILA comes with that as well. Proline does not. Proline is a brand that we will own outright, so we don't have to pay any licensing fees to anyone. But FILA has licensing fees. And from what we know in the market, the licensing fees are more than competitive.

The next question is from the line of Tanmay Gupta from Motilal Oswal.

Sir, we have studied that the cost to MRP for the international brand is near about 1:7 or 1:8. So what would be the cost to MRP for FILA?

So we have no reason to believe that it would vary. But as you know, to do it right, we would evaluate how do we position it from a price standpoint, from a position standpoint and ensure that we work on that from a customer backward lens as opposed to a markup lens going forward. But we believe, bottom line though, Tanmay, is that FILA, once we are able to set it on its course, will be accretive both in value on all our three segments of our -- how we count our business of margins, EBITDA and PAT.

And sir, any -- like what would be the cost to MRP for our Metro and other formats?

So a simple way to look at it is our gross margins are 57%, right? That gives you a good indication of what at least the range that we would be looking at. And we believe that FILA would fall in that range as well. And don't forget, when you have a wholesale business that moves the numbers a little bit to the left, a little bit to the right, but it also moves your costs equally in that same space. So if you have a wholesale business, all of a sudden, you have no retail costs associated with that sale. So what we really like you to take away from this, Tanmay, is we are committed to maintaining our performance of Metro of 55% to 57% that we've done for many, many years, and we maintain -- we intend on maintaining that going forward with both FILA and Proline in our mix in our portfolio.

And sir, is there -- like the margin for sports and athleisure brands are a little higher than the formal brands or the other categories, is that so?

Here you've got to understand those businesses tend to be a little bit more of a fashion business. So while it looks like it might have better margins on the front end, you may not have it on the exit. And having -- that's why I keep sticking them and trying to let you know that what we focus in on is, we want to make sure that they hit our price ranges and margin range of 55% to 57% and is accretive to what we're doing and not dilute it.

The next question is from the line of [ Rajiv ] from DAM Capital.

Sir, in between you said that FILA and CBL could have similar...

This is the operator, [ Rajiv, ] we're unable to hear you clearly. Can you speak a little more louder?

Is it better now?

This is better.

Yes. Sir, in between you made a comment that FILA and CBL could have a similar kind of sensitivities. So possibly in terms of store size, and also there is clear thing that Crocs, you basically have across India as an intermediary and in FILA, you won't. So what is that delta in terms of when you source via Crocs India and that will be accretive?

Yes. I think -- again, I have to really guide you back to the 55%. Because when we go from Crocs, though there is a margin in between for the intermediary, as you pointed out correctly, Rajiv. They also have costs associated with it, too, whether it's design, development, import costs, duties that they pay, running staff, running marketing. So you got to be careful that you don't get overly drawn by the sexiness of what a factory exit price is and what the MRP is. You've got to really consider the cost structure in between and the input costs that go in from when it leaves the factory to when it actually gets sold and actually to get it made at the factory even, right? So be careful is what I'd say in focusing on that. I want to assure you again that we believe we will be able to get FILA and Proline and run and be accretive to the three pillars of -- our financial pillars, which is our EBITDA, our PAT and our gross margins.

Sure. And so on -- in terms of distribution, so LFS is off the table, is it? Apart from doing MBO on Metro and Mochi, otherwise, LFS is not focused on the FILA distribution?

Overall, today, LFS is a big part of their distribution, right? So what we -- I spoke to our MBO and EBO business as the low-hanging fruit that somebody brought up. It's not that LFS is off the table. Right now, as we evaluate it, we look at all those opportunities to see what those lines of distribution would mean to position the brand correctly in India. And positioning also comes with the word access, right? We want to make sure that our consumers have access to the brand. So LFSs do offer access to many consumers that we need to respect.

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

Sir, just a clarification needed. When you talk of the ASP of INR 1,500, does this include accessories? Because if I look at your price range, more than 85% of your products are about INR 1,500, so if I exclude the accessories, then what could be the ASP of footwear alone?

So Ankit, yes, the number that you see is inclusive of accessories. If you just take footwear, the overall ASP would be in the range of INR 2,100 to INR 2,200 broadly.

And this ASP is including of GST, right?

This is on net sales.

Net sales.

So this is net of GST. At MRP level, it could be higher. You need to add approximately 17.5%, 18%.

Ladies and gentlemen, this was the last question for today. I now hand the conference over to the management for their closing comments. Over to you, sir.

Thank you all for being on the call this afternoon. We had a terrific Q2. Metro, our team has performed and delivered well in line with our expectations. We are excited about the FILA and Proline opportunity with the acquisition. We believe it has a runway. It's a white space for Metro Brands, and we believe in capitalizing on it in a strategic and careful method. Thank you all again. Happy Diwali.

Thank you very much, members of the management. Ladies and gentlemen, on behalf of ICICI Securities, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines.