Metro Brands is treading on soft demand track after dull Q4

Metro’s shares have fallen by almost 10% so far in 2024, but are still up about 20% over the last one year.
Metro’s shares have fallen by almost 10% so far in 2024, but are still up about 20% over the last one year.

Summary

  • Metro’s FY23 was categorized by strong consolidated revenue growth of 58% year-on-year led by solid pent-up post pandemic demand. In FY24, revenue growth dropped to 10.8%.

Metro Brands Ltd is grappling with persistent challenges, making it difficult for the footwear maker to navigate the path to its future.

The delayed implementation of Bureau of Indian Standards (BIS) regulations is particularly impacting the repositioning of the Fila brand, with the delay expected to continue for another two quarters. This has led to elevated inventory levels, currently at 17 crore, which the company aims to clear by the end-of-season sale in the September quarter (Q2FY25). Metro is optimistic about realizing higher-than-carrying value from this inventory.

Read More: Metro Brands drags its feet in December-quarter; recovery awaited

As such, Metro has been trimming the fat, shutting down many Fila stores with just three exclusive brand outlets (EBOs) operational as on March-end. It expects to close one more Fila EBO in Q1FY25 and reintroduce the brand through the existing Metro/Mochi network.

Amid this, it is not encouraging that the management anticipates demand softness in Q1FY25 thanks to fewer wedding dates compared to last year and store closures due to the general elections. Remember, the base is relatively high now.

Metro’s FY23 was categorized by strong consolidated revenue growth of 58% year-on-year led by solid pent-up post pandemic demand. In FY24, revenue growth dropped to 10.8%.

To be sure, these issues haven’t dissuaded Metro from store expansion. After a net addition of 97 stores in FY24, taking the total count to 836, Metro is gearing up to launch 225 stores over the next two years across brands. Leveraging its exclusive rights for operating Foot Locker stores in India, the company plans to begin store additions from Q3FY25, with a view to capture the growing athleisure and athletic market.

And This: Metro Brands sprints ahead of peers, but premiumization is key

To some extent, store additions aided the modest 7% growth seen in the recent March quarter (Q4FY24) given that standalone revenue per square foot continued to fall, down 5% year-on-year to Rs4,800 (Q3FY24: down 9.5% year-on-year to Rs5,200).

Ebitda margin in Q4 was a bit of a bright spot, expanding by 83 basis points (bps) year-on-year to 27.2% even as the parameter for the full year FY24 fell 223 bps to 29.7%. Cost-control measures and rising share of sales of over 3,000 average sale price products along with a growing contribution from own-brand products helped margin. Looking ahead,the management has guided for a long-term Ebitda margin target of 30%.

Against this backdrop, Metro’s shares have declined almost 10% so far in 2024, but are still up about 20% over the last one year. Valuations are steep. The stock trades at about 70x FY25 estimated earnings, as per Bloomberg data. Competition and potential delays in store additions are key risks. Moreover, should the demand weakness prolong, there is a threat to growth.

Also Read | Best foot forward: Will local sizes help?

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