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

The footwear retailer's stock is down nearly 10% so far this year.
The footwear retailer's stock is down nearly 10% so far this year.

Summary

Muted consumer demand and lower-than-expected Q3 performance have pushed the stock down this year

Metro Brands Ltd has begun 2024 on a dull note. The shares are already down 10%. This after the stock gained as much as 44% in 2023 riding on the premiumization trend. Muted consumer demand and lower-than-expected performance in the December quarter (Q3FY24) are the primary factors that have pushed the stock down this year.

The footwear retailer’s revenue per square feet fell by 10% year-on-year to 5,200 in Q3—its third continuous quarterly drop. Add to that, losses in its acquired portfolio, Cravatex Brands Ltd, weighed on Metro’s consolidated Ebitda margin, which has contracted by 296 basis points year-on-year to 31.3%. Overall, this meant Ebitda, excluding other income, fell by 3% to 199 crore.

(Cravatex owns the sportswear brand Proline and holds an exclusive licence for Fila.)

Analysts have trimmed their earnings estimates for Metro. Factoring the weak Q3 results and higher losses in Cravatex (Fila), analysts from Nuvama Research have lowered their estimate for Metro Brands’s profit after tax in FY24 by 16% (standalone profit after-tax by 11%).

 

 

Nevertheless, there are bright spots. Metro continues to expand and is on track to add 100 stores in FY24. Till December, it has added 87 stores, taking its total count to 826 as on 31 December.

Driven by store additions and same-store sales growth, Metro expects revenue growth to be about 18% in the medium-term. It helps that the company's revenue share from premium products is on the rise. In the nine months ended December, products priced above 3,001 accounted for 49% of its revenue, compared with 44% in the same period last year.

Further, Metro intends to liquidate Fila’s high-cost inventory by March or latest by June. Given this, Q4 would continue to see an impact. But Metro aims to reposition the brand and targets accelerated store expansion in FY25 and FY26.

Metro's recent partnership with Foot Locker, which is focused on the sneaker segment, is another positive. But Metro plans to open four-six of these stores only in Q3FY25. The productivity is expected to be similar or higher when compared to that of Metro's.

Analysts at Motilal Oswal Financial Services estimate Fila and Foot Locker to have a revenue potential of 1,500-2,000 crore over the next 3-5 years (i.e., 30-40% share of Metro). However, the brokerage has not factored Fila and Foot Locker earnings.

Meanwhile, Metro has front-loaded inventory to avoid any supply-chain disruption from implementation of the Bureau of Indian Standards's requirements. It expects to see higher inventory levels till the end of Q1FY25.

All said, to aid investor sentiment it is crucial that the demand conditions improve, along with a drop in losses in Fila.

As things stand, Metro’s valuations appear pricey with the stock trading at 63 times FY25 estimated earnings, according to Bloomberg data.

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