Metro Brands Limited (METROBRAND) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Metro Brands Q1 FY '26 Earnings 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. Manoj Menon from ICICI Securities Limited. Thank you, and over to you, sir.

Hi, everyone. Representing ISec, it's an absolute pleasure to be -- to take you to the Metro Brand's 1Q FY '26 Conference Call. The management is today represented by Mr. Rafique Malik, Chairman; Ms. Farah Malik Bhanji, Managing Director; Mr. Nissan Joseph, Chief Executive Officer; Mr. Kaushal Parekh, Chief Financial Officer; Mr. Mohit Dhanjal, Chief Operating Officer. Over to Nissan for the opening remarks and post which we'll open the floor for Q&A. Over to you, sir.

Thank you, Manoj. Good afternoon, everyone and thank you for joining and welcome to our Q1 FY '26 earnings call. As you all are probably aware, we posted a 9% growth in both our stand-alone and consolidated numbers. In the quarter, we had an offset Eid, a strong season for us that fell into the previous quarter and the early onset of monsoon, which though is key for our Crocs business, does dampen shopping in the markets. The 2 major markets with early monsoon were Gujarat and Maharashtra, where we have a significant dispersion of stores. Nonetheless, we were able to have an almost double-digit increase in top line sales. Our EBITDA grew 8%, coming in at 31%, slightly behind last year due to increased spends in marketing to enhance our brand positioning for our various business units. Our PAT grew 7% to maintain our mid-teen performance of 16%. Gross margin remained consistent and healthy, running in the high 50% range as we achieved almost 60% margin for the quarter. Our e-commerce business stayed its course and delivered another 45% growth. Fortunately, monsoons don't dampen online shopping. We're seeing traction in the quick commerce space, though it is very limited to a handful of metro cities today. For the quarter, we opened 23 stores and closed 3 stores. We have been working on repositioning Walkway and are now beginning to open stores for that banner. We opened 4 Walkway stores just in the last quarter compared to 4 for the whole year last year. We had delayed the opening of Foot Locker and Fitflop to allow for stabilization of sourcing, given the BIS regulations that impeded imports for most of last year. We're starting to see that supply chain gain stability and have started opening Foot Locker stores in this quarter. We still plan on opening Fila stores later in the year as we continue to reposition the brand. As we announced mid-quarter, we are excited about the new partnership with Clarks shoes. This premium brand of dress and casual footwear fits very well within our Metro, Mochi business and also has the brand recognition to have its own mono-branded stores. We now have a long-term exclusive agreement for India and surrounding countries like Bangladesh, Nepal, Maldives, Sri Lanka, et cetera. This agreement makes us the exclusive supplier and seller of Clarks in India in all channels, online and off-line. We will have more updates on the plans for Clarks in our next earnings call. One item I mentioned in our last call that's worth repeating is on the ESG initiative of Metro Brands. We may be the only footwear retailer India or in the world, for that matter, that recycles 1 pair of shoes for everyone that we sell. Let that sink in for a minute. I'm really proud of the ESG team that has worked so hard to build this ecosystem for us and we hope to continue to increase our recycling efforts to consistently exceed the pairs that we sell. With that, I'd like to turn the call back to the operator and open it up for Q&A.

[Operator Instructions] The first question is from the line of Videesha Sheth from AMBIT Capital.

So Nissan you touched upon this repositioning of Walkway. Can you please elaborate on that? What are the moving parts involved in the outcome that you're expecting over here?

Well, it's not -- we're repositioning Fila, Videesha. But we are actually repositioning -- we're not repositioning Walkway. We're kind of getting into -- we're getting into that whole value footwear chain piece. We've been working on it, looking at it from a store presentation standpoint, how we come to life with our products, what the cost structure is for that business and to ensure that it starts to get set up for profitable growth. As you know, we have not grown a lot of Walkway stores in the last few years. And I believe we're at a point now that we can start adding Walkway to the list of banners that we can continue to expand.

Okay. So just a follow-up to this. If you want to own the lower price point range in the entire pricing ladder, do you believe there's still some more work involved or to be done around the supply chain part of it? Because -- I mean because to those consumers, you have to offer a combination of both pricing and design and front end is something that you guys are anywhere on the top of. So just wanted your thoughts over that.

In the business, the supply chain, the design, all the way down to the consumer accepting your designs and pricing is an ongoing battle. It's an ongoing thing. It's not a magic formula that you can apply and just sit back at it. We're very confident that we see inroads and traction in the initiatives that we have taken that we will now be looking at it much more closely. As you know, over 80% -- almost 80% of the footwear sold in India is below INR 1,000. And that's the space Walkway plays in. And I think it has an opportunity to really take us and continue its growth.

Got it. And the second question would be around store addition. Considering that consumption has not yet picked up full-fledgedly, would you expect store addition to remain relatively lower at 80,90 or would you be crossing 100 this year?

Where I'd leave that is we're seeing traction in the deals we're getting, which is a good sign. I think if you remember, a few calls ago, we talked about rentals starting to spike. Rentals are never coming down but we've definitely seen them come off the spike that they have been on. So we feel pretty optimistic that we can continue now our trajectory of growth in stores. How many stores we open, it's really a matter of what the right opportunity is out there, Videesha. We're not here to hit a number. We're here to capitalize on as many rental deals that make sense for Metro come our way.

The next question is from the line of Saurabh Kundan from Goldman Sachs..

Nissan, my first question is to you. While we understand that the retail environment has been weak this quarter, a lot of companies have spoken about early monsoon and a few other factors as well. But the growth that we are seeing in your case, would you say that it is only the result of these one-off factors? Or is there anything specific to Metro Brands as well? Also, I wanted you to share with us, do you feel that these initiatives, let's say, Walkway or even addition of Clarks, mono-brand stores, et cetera, now become important or they really need to fire for you to hit, let's say, a mid-teens growth? Or do you think the existing scaled-up brands are enough for that mid-teens?

All right. First of all, thanks for your question. But let me anchor what you're saying to some numbers that might put it in a little bit more perspective, right? If you go back -- if we talk about there'll be a muted demand and whatever else you have. If you go back to FY '20 Q1, which is calendar '19, which is the last quarter we had before COVID, we're up 101% over that quarter, even after last quarter of muted demand as we -- as you called it, right? So just to give you a perspective, if I were to CAGR that, it would still come to a 12% and I'm including the COVID year in that. I'm not pulling that out, I'm including that year, we would still have a 12% growth, right? So what you're really seeing is us coming off some of the lumpiness caused by COVID for our business. We're not seeing any fundamental cracks or gaps in the business that alarm us. On the contrary, as I mentioned earlier, we are starting to see rental start to make more sense. So we don't see that being a core issue internally. There is a certain lumpiness. You always have dates going back and forth. The previous quarter, for example, didn't have a leap year day. You're always going to have these kind of things in retail. And despite all of those things, I do want to double down and say that it's a 12% CAGR, including the COVID year. If you look at our PAT, it has a CAGR of 15% over that same period of time. And our PAT margins back in 2019 were 13%. And last quarter, as you know, we almost breached 16%. And these are the things we're guiding to. What's really important to look at here is, we've guided to 15% CAGR growth. We've guided to about mid-teens in PAT. We've guided to 30% plus in EBITDA. And we're never straight from those numbers, not through the highs and not through the lows of the lumpiness of COVID. So we see really a constancy of business. It's really things settling down for us. And as far as the new banners go, that's -- there's going to be 1 of the 3 levers of growth we have. We have same-store sales growth. We have new store expansion. And of course, we have new banners that will come in. And so we don't add brands for the sake of growth alone. They have to have a significance to our consumer. We look backwards from our consumer, if they're significant and meaningful to our consumer as we quest to try and take more of the footwear wardrobe of a consumer, they have to make sense in there.

Saurabh, just adding to what Nissan said, to your second question, we expect close to about 15% to 18% CAGR. I'm talking long term. I'm not a short term here, not only through our new formats but ideally for each of the formats that we have. So individually, each of the formats, we would expect that kind of growth to come in. Metro, which is our biggest format is just 350 stores. So there's a huge room for growth. And we feel each of our formats can grow 15% and upwards over a long period of time.

Very clear. Just one follow-up. This is to you, Kaushal. This INR 4,350 per square feet that you've reported this quarter is obviously impacted by calendar shift, et cetera. Have you done an exercise where you can give us a number purely because of this calendar shift? What would this number have been if it was a normal quarter without this Eid festival shift, this INR 4,350 would have evolved?

Broadly, if we see our sales, we would easily be -- would have been higher by about 2% to 3%, if Eid was to -- if Eid was to be in Q1. So approximately around a similar percentage would get added to the sales per square feet also, the number that you see.

But Saurabh, the other thing you have to consider is the annualization effect of almost 100 stores that were opened in the last 12 to 15 months, right? New stores never have the same productivity as your existing stores. You're not supposed to, right? If they did and there's something wrong with the existing stores. So as you see those annualization numbers come, so that's #1, depending on the mix of formats that we open, all our different formats contribute differently to the sales per square foot. We don't break it out. But some are definitely more accretive to it. Some are dilutive to it. That is probably a bigger effect than just 1 quarter of whether it's an Eid -- not that it doesn't affect it but the bigger effect is the annualization of 100 stores, which is over 10% of our chain that happened in the last 12 to 15 months. Yes. But Saurabh, you can rest assure that it doesn't in any way detract from our profitability, our margins, our EBITDA. So that's a number that doesn't change, showing that it's healthy growth and not growth coming at the cost of those things.

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

Just building up on the demand thing. So we are clearly noticing that preference of consumers is moving towards casual products, as well as channels like online, right, so where our presence is currently lower, albeit it is building up. So wanted to, is this changing consumer preference also coming as a hinderance to our growth? What's your sense on that?

I don't believe it's necessarily just casual. There's a lot of consumer preference changes, right? There's personalization, there's comfort. These are all changing landscape of the consumer. That is not the big driver of what's going on. What I believe is it's just a normal change, the lumpiness of post-COVID. I must remind you, our growth has not -- if you look over a period of time, like we always guide to, we're always going to have a quarter here and a quarter there that doesn't seem to totally be in line with what we'd all like. However, when you look at our performance compared to the industry, compared to our space that we operate, we continue to lead the way in growth and maintaining profitability. So I would say it's not so much the consumer preference is changing, albeit we know that consumers are adopting more into athletic footwear and casual footwear, as you mentioned. But our stores are geared to be able to pivot to take care of those consumers. It's not like we don't sell casual shoes. Casual shoes and casual and athletics are over 50% of our business today. So it's not like we've been absent in that market at all, Devanshu.

Interesting. And Nissan, so Q2 typically is a slower quarter revive to the first quarter. But this time around, festive is relatively early, which is in Q2 itself. So versus historical trends, can we expect a better traction this time around? Or what's your view here?

Yes. I think you'll see some dispersion of those sales into Q2. And then you have to come back and maybe offset some of that in Q3. It's just a normal cyclical nature of the business. Everything is getting early and earlier, right? So is Eid, gets earlier every year. It's just -- what's important to know is that the foundation of the business, the growth levers that we have in place are all working and going in the right direction.

Understood. Lastly, on Walkway, there is an uptick in expansion. Annually, if you could just provide some guidance on store additions here? And the related question is how the unit metrics of Walkway stores sort of defer from Metro, Mochi stores in terms of revenue and margin front?

Yes. So we don't guide simply because we want to open as many stores as it makes logical sense for our business. As far as the revenue numbers go, obviously, it's not as profitable from a percentage standpoint as a Metro and Mochi business. However, it is an amazingly good deployment of our capital that we have from a ROCE standpoint. It definitely stand-alone will make a profit. So that's not an issue. While it might be dilutive, it's not in any way negative by itself. So without divulging too much, the sales per square foot are not as much as the Metro, Mochi, for example. So you will see some dilution but you will -- what we aim to do is have top line growth without compromising on any of the key numbers that we've guided to.

Devanshu, our long-term targets for Walkway is, take for example, for our core formats like Metro, Mochi, our ROCEs at store level, they are upward of 40%, 45%, For Walkway, for a long period, if you think from a long-term perspective, ideally, we would like them to deliver somewhere around 30% and upwards.

The next question is from the line of Rahul Agarwal from Ikigai Asset.

Sir, could you talk about a little bit on same-store sales growth for Metro, Mochi and Crocs please?

We don't break out same-store sales growth. But in the 15% CAGR that we guide to, a good portion of that will come from and has come from SSG. The other portion will come from ASP growth and the other portion will come -- I mean, unit growth and the other percent will come from new store annualization and new store growth, right? So we don't break it out. We expect all the stores to hit good SSG depending on their aging. The newer stores tend to have a higher percentage of growth on an SSG basis, whereas more mature stores tend to have a little bit of a flattening out but still will show growth.

Yes, I understand that. I was actually more talking about, let's say, the past 12 to 18 months trends. Looks like most of the revenue growth is now essentially coming from new store additions. Hence, I was just bit concerned on what's really happening on the same-store sales growth. So just from that perspective, anything qualitative also is helpful.

Yes, Rahul. As Nissan earlier mentioned, at times, this -- in retail, we see slightly lumpy cycle, right? FY '23 was one of the best years with, obviously, pent-up, et cetera, revenge buying, whatever you call, all clubbed into that year. So in light of that, when you see FY '24, you will see as if FY '24 was muted. If we see versus Q1 of FY '20, Nissan mentioned, right, we see a 16% growth, which would come to a CAGR of around 3%. If we see slightly longer period, say, 10 years, we have generally seen overall SSGs for all our formats ranging in that mid- to high single digits. So that is our long-term target. For any retailer to ensure that profitability doesn't get impacted, that's a minimum SSG that you would want to target over a long period of time.

And Rahul, while it's an important metric and we continue to gun for it, don't forget sometimes we open our own stores on top of our own stores, right? So we have a very successful Metro store. We will backfill it, which is part of our growth strategy, we will backfill it with another Metro or we will backfill it with another Mochi store. If we see a very good Metro store -- Metro or Mochi selling a lot of Crocs, we will backfill it with a Crocs stand-alone store. So some of the mutedness -- the reason we wouldn't hit high double-digit SSG growth by itself is because we cannibalize ourselves to some degree. But it's good because in overall, we gain market share without losing profitability. And that's the ultimate goal is to keep gaining market share as much as we can. And if you look at the numbers over the last few quarters, as you alluded to, if you compare how we perform versus our peers, we've definitely gained market share. And if you look at our profitability, we have not compromised on our profitability at all.

Perfect. Get it. Related question also was that the margins, which are anyway, I think, best-in-class, I would imagine, purely from a SSG perspective, looks like the contribution, assuming that's a bit lower than what it should be, the margins would actually have some upside from here, right, if you have better SSGs across your Metro, Mochi and Crocs. Is that understanding correct? Or you think these margins are at a peak here and we should actually sustain there and we're not looking for incremental margins?

Yes. What we're really looking for here is to have a business model that sustains over many years, right? It's not about increasing a number because at some point, it will come back to pay itself. It will not be a profitable way to grow. So what we want to do is to continue to grow along the way we've guided. And we've been guiding this since we went public. And I think you should be pretty pleased that especially when it comes to profit, PAT and EBITDA, we've always been in our guidance, if not better. That's more important to us than talking about just one singular number.

Got it. And lastly, one smaller question on U.K. FTA. Is think is there any benefit do we expect on the business purely from India-U.K FTA signed up?

No. We're 100% India. We source almost 95% of our goods in India. We sell 100% of our goods in India. So we don't see that impacting us, benefit or otherwise in any way.

The next question is from the line of Gaurav Jogani from JM Financial.

My first question is with regards to the marketing spend that you alluded to in your PPT in Q1. So would you say that it is kind of front-ended and whatever we spend on the annual basis, that would remain? Or this year, we could see a higher marketing spends for the year?

No. We target around 3.5% to 4% in that category. And last year, if you looked at it, we did not spend that much in the quarter. So we really want to continue to invest in our brand-building efforts and making sure that Metro continues -- all our brands continue to be top of mind. So we're not going to see that level off. However, you will definitely see that we are going to invest in marketing.

Sure. So if I understand it right, Nissan, it would be in the 3.5% to 4% range, right?

Yes, which if you were to do a comparative basis, it will probably be slightly higher than last year.

Okay. Okay. Sure. And Nissan, my next question again is with regards to the same-store sales growth only. Now, I'm not taking a 1-year, 2-year view. But even if we look at from FY '23 onwards, I mean still, we are lagging on the revenue per square feet number. Now there could be 2 parts to this. One is because of the store additions has been higher. And second would be that we are also opening stores in Tier 2, Tier 3 towns, which kind of would be impacting the revenue per square feet. So which one would you allude to a larger portion, the demand slow down or the other bit?

Gaurav, if you see FY '23, that was our highest sales per square feet, right? Because we all know that year had quantum of pent-up buying, et cetera. Ideal way to -- ideal number to compare would be FY '20. If I memory serves me right, it was somewhere around INR 17,000 and we are trending higher than that. And also, this is a blended number and it depends on -- since we have 8 formats now, it becomes slightly difficult because based on if we increase Walkway significantly, obviously, we'll see some impact on this numbers. Certain formats would have upward impact. So best way to see is compare sales growth and see how the profitability of the company is moving rather than just being fixated with this particular number.

And Gaurav, we are very keen on -- well, we're very keen on continuing to grow, keeping in mind that our costs grow as well. And that's what we focus on to make sure that our growth covers our cost and gets beyond it as well. And that comes in many different ways, right? And again, I think we might read too much into this square -- sales per square foot. If it indeed it was affecting our business like a lot of people would think, you would see that in the other numbers come through very quickly.

Sure. Understood. Appreciate that. And my last question is with regards to the Fila format. I mean there were certain losses that we had incurred when we had acquired the brand. Also so if you can help us out where are on the -- that journey? Are we breakeven in that format? How much losses are there? Anything here would be helpful.

Gaurav, in the first year, FY '24, losses in Fila format was around -- were around INR 58 crores. Last year, we reduced it by around 40-odd percent. And this year, it will further go down. Sometime next year is when we feel we should breakeven with respect to Fila.

The next question if from the line of Shraddha Kapadia from SMIFS.

So my first question is usually regarding the ASP. Would it be possible to give the ASP excluding the accessories, majorly for the footwear, would that be possible? And also if you could help with the current ASP for Clarks.

So ASP, if you take ASP only of footwear at our stores, it is somewhere around INR 2,700. And we have seen growth of around 3.5%, 4% in that. Overall ASP also, we have seen growth of around 3%.

I mean if you look at our premium business, it represents almost 56% of our business today, Shraddha. And to give you just -- while we try not to give too many forward-looking statements or give too much information on our business for competitive reasons, Clarks would definitely be north of INR 3,500 to INR 4,000 as an ASP.

Okay, sir. That was quite helpful. Also just continuing with the statement, which you said. So currently, if we take a look then our premium mix, which is there is 56%, do we have any target or do we have a target so as to reach, say, 60%, 70% of total, which would be there?

No, we don't have any target. If you even see our last 3 years trend, right, this number has gone up by 1% year-on-year. So FY '24, if I remember correctly, our contribution of sales upward of INR 1,500 was around 86%, 87%. Last year, it was around 88%. And this year, it is -- for first quarter, it is around 89%. So it's been very stable. We are already at a very high number. Obviously, with the addition of formats like Foot Locker, Clarks, et cetera, we will see upward movement. But yes, broad -- we are also planning to increase Walkway. So it will sort of balance it out.

So we fully understand that certain banners of ours to a premium segment, Shraddha and certain banners play to the value segment, right? So each of those segments, each of those banners needs to stay in the lane and perform in their lane and that's what's important to us.

The next question is from the line of Prerna Jhunjhunwala from Elara Securities.

Sir, last year, wedding season was weak and that had impacted our sales in Q1. And this year, Eid moved in Q4. How would you see consumer sentiment between both the periods?

I think it was quite consistent with what we would have expected. I think though they were wedding dates in this quarter, most of that shopping was done previously. But we also had to offset some other things in there. Consumer sentiment for us, what I can look at is slightly longer term. You've seen us go from flat sales to now being at almost double-digit growth for 2 straight quarters now. Obviously, we're leveling off again and getting back on our growth trajectory, which is really the consumer telling us what they're doing. We're not seeing anything that causes us great concern. When we sell out of products we expect to sell out of and we sell out some that we didn't expect to sell out of and there are some others that don't do well, which is just par for the course. We're not seeing a consistent trend that points that the consumer is shying away from this or that.

Okay. Any color on urban versus -- I mean, Tier 1 versus Tier 2, Tier 3, where the demand is really showing? Up any region-specific comments that you would have for consumer sentiments?

Yes. So from time to time, we do see certain regions perform -- not perform, rather, I should say. So for example, we had early monsoons, as I mentioned in Gujarat and Maharashtra that impacted our sales in those stores there. We're seeing some slowness in the South from time to time. We see some erraticness from even states like Punjab. But it goes up, it comes down. And for me to categorically say that there's 1 continuous offender, so to speak, would not be a fair statement.

Okay. So my second question is on premiumization. We're seeing ASP growth coming in now every quarter. Would you please share, which brands are contributing to this premiumization?

So we are seeing ASP growth across our banners. Only exception would be Walkway where obviously, we have reintroduced price points below INR 500. So there, we will see slight downtick in terms of overall ASPs. But otherwise, all the banners, we are seeing normal ASP growth of anywhere between 2% to 5%.

Okay. And any price hikes that you have taken, which could help us understand whether it is premiumization or it is the price hikes?

Nothing out of the ordinary. It's really -- sometimes it's more of a mix of goods, Prerna, because we also have Foot Locker now. We have other brands that are now kicking in. Fila is also at a much higher ASP than the average that most of the other businesses run. It's really a mix of goods more than it's anything. Of course, we do take price increases in a steady way but we've not had to because of any spikes in supply or input costs.