With Fila in pocket, Metro needs to step into execution mode

Markets
Markets

Summary

The company aims to add 100 stores per year and enhance the share of online (including omni-channel) revenue from almost 8% in FY23.

Shares of footwear company Metro Brands Ltd have been an outlier so far this year, gaining nearly 21%. In comparison, during the same time, Bata India Ltd and Relaxo Footwears Ltd’s shares have fallen by 1% each whereas Campus Activewear Ltd’s stock has lagged the most, falling at a sharper rate of 29%. Metro’s sharp outperformance can be partly explained by the ongoing premiumization trend. For perspective, Metro’s average selling price (ASP) in the June quarter was 1,500 per unit while that of Campus was 629 per unit.

But what next hereon? On topmost priority for Metro’s investors is the turnaround in its acquired portfolio—Cravatex Brands Ltd, which has a presence in the sports and athleisure segment. Cravatex owns the sportswear brand ‘Proline’ and holds an exclusive license for sale of ‘Fila’ products.

“Metro believes the turnaround of Fila is at least 9–18 months away. The company is currently clearing the inventory, and plans to do so in year 1 and take the losses, year 2 will be dedicated to brand positioning while, in year 3, it would accelerate the brand," said analysts at Nuvama Research in a report based on their interaction with the company’s management.

In this backdrop, the progress towards extracting significant gains from the Fila brand is crucial. A disappointment on this front would throw cold water on investor’s hopes. To be sure, whether demand remains steady needs to be monitored. “One cannot rule out some fatigue in demand in the mid to premium segment. Hence, the sustainability of the new normalized growth rates is a factor to watch for Metro Brands," said Alok Shah, an analyst at Ambit Capital. Here, it augurs well that Metro plans to expand its footprint not just by opening new stores but also by increasing its online presence. The company aims to add 100 stores per year and enhance the share of online (including omni-channel) revenue from almost 8% in FY23. However, this could weigh on the overall ASP of the company as the online ASP is relatively lower.

For now, valuations are pricey. Metro’s shares trade at 56 times its FY25 estimated earnings, according to Bloomberg data.

As such, sharp upsides may be capped at least in the near term.

“Re-rating triggers ahead are outperformance on productivity and/or visibility of profitable scalability in Walkway and Fila," said the Nuvama report.

The ‘Walkway’ brand caters to the mass market where demand is still subdued.

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