Metro Brands is losing its mojo, but its stock remains richly valued
Summary
- The stock is trading at a lofty 87 times FY25 earnings, which shows investors have high expectations. These aren’t in sync with reality, though.
Metro Brands Ltd continues to tread on shaky ground. The footwear retailer's June quarter (Q1FY25) results were once again full of challenges, with the company caught between aggressive expansion and weakening demand. Unsurprisingly, it's paring down its own expectations, cutting FY25 revenue growth guidance from 15-18% to 12-15%.
Despite adding 15 new stores in Q1 (for a total of 851 at the end of June), the company’s ambitious expansion plans are yet to bear fruit. Sluggish demand due to heatwaves, elections and fewer weddings translated to 1% lower revenue year-on-year to ₹576 crore, which was below estimates. Rapid store expansion caused standalone revenue per square foot to drop 10% to ₹4,500.
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A silver lining is the shift towards premium products, with 54% of sales now from products priced above ₹3,000, against 50% in the March quarter. Losses from both Fila and Proline have narrowed, and Metro is on track to complete the liquidation of excess Fila inventory by the end of September. Post-liquidation, Fila will be relaunched under the umbrella of the Metro and Mochi distribution network. While this has bolstered the gross margin, the overall picture is cloudy. Consolidated Ebitda fell about 3% year-on-year to ₹180 crore and margin contracted by 70 basis points due to higher manpower costs and operational inefficiencies.
Great expectations
Metro’s ambitious expansion plans, which includes the acquisition of New Era and a target of 225 new stores in the next two years, signal a desire to dominate the market. However, the current performance raises questions about the sustainability of this approach. The company's valuation, at a lofty 87 times FY25 earnings, shows investors have high expectations, but these are in stark contrast to the current reality.
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“With management’s continued focus on product penetration, we reckon top line growth will be 14% CAGR (compound annual growth rate) over FY24-FY26E, which will be driven by 9% CAGR growth in volumes supported by continued store expansion and 4% CAGR growth in value over similar period," said Yes Securities. The broker expects Ebitda to grow at a CAGR of 15% over FY24-FY26 as operating margins should come in at 30% for FY25E and 30.5% for FY26E.
Metro’s medium-term outlook may be positive, led by factors such as store expansion, a growing premium-product portfolio and the potential of brands such as Fila and Foot Locker. However, there are short-term challenges due to industry-wide issues such as weak consumer demand and regulatory hurdles.
Amid this, Metro’s shares are up about 5% so far in 2024. The company’s immediate focus must be on improving operational efficiency and driving sales growth. Key risks include potential delays in store additions and rising competitive pressure, especially from regional players.
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