Metro Brands Q1 FY'25 Concall Highlights: Navigating Headwinds & Maintaining Growth Trajectory
Metro Brands Limited's Q1 FY'25 performance was marked by a slowdown in sales due to several factors, including industry headwinds and the end-of-season sale period. However, the company showcased strong operational discipline, maintaining gross margins at 60% and a PAT of 16.4% for the standalone business, exceeding guided ranges. Management expressed confidence in the company's ability to navigate the current environment and achieve long-term growth, driven by strategic initiatives such as the New Era partnership and the upcoming Foot Locker rollout.
a. Financial Performance:
Q1 FY'25 witnessed a muted sales performance compared to the strong growth witnessed in previous quarters following the COVID-19 pandemic. While Q1 FY'23 saw a 294% increase, and Q1 FY'24 exhibited a 12% growth, Q1 FY'25 faced headwinds that impacted certain segments.
Despite the softer topline, Metro Brands demonstrated resilience. Gross margins held steady at 60%, and PAT remained robust at 16.4% for the standalone business and 16% for the consolidated entity. EBITDA stood at 32% for the standalone business, comfortably within the guided range. The company also highlighted its strong premium product performance, with over 54% of sales coming from goods priced above INR 3,000, a notable increase from 49% in the previous year's Q1.
Nissan Joseph, CEO, commented on the performance, stating: "While I'm not pleased with the overall sales for the quarter, I am proud of the team for the operational discipline as we maintained our gross margins at 60% and our PAT at 16.4% for the standalone business and 16% for the consolidated numbers."
b. Operational Updates:
Metro Brands expanded its store network by 15 net new stores during the quarter, bringing the total store count to 851. The company remains on track to open approximately 100 new stores this year and 225 over the next two years. The Fila liquidation efforts are progressing as planned, and the company anticipates diminishing losses from the brand. The BIS extension for core business units has concluded, but the company awaits clarifications regarding implications for the sports segment, particularly concerning high-end technical footwear production in India.
The company announced the appointment of Mohit Dhanjal as COO, bringing decades of retail experience to the management team and aiming to bolster operational efficiency and growth. Further, Metro Brands signed an exclusive distribution agreement with New Era, a global leader in headwear, to be sold across various channels, including Foot Locker stores.
c. Management Insights:
Management attributed the softer sales to several factors, including the lingering impact of the end-of-season sales, industry headwinds, and a normalizing growth trajectory after the strong growth witnessed post-pandemic. They highlighted that consumption patterns have begun to turn around, with categories unaffected by the headwinds demonstrating continued strength.
Nissan Joseph emphasized, "Overall, though, we are pleased to see that business has turned. That's not saying it's back to the net levels we expect it to, but it has turned."
Regarding the future outlook, management reaffirmed its long-term CAGR guidance of 12% to 15%, acknowledging potential volatility in the retail environment. They expressed confidence in their ability to navigate the near-term challenges and deliver on their long-term growth objectives.
d. Strategic Initiatives and Future Plans:
The New Era partnership is a significant strategic initiative, aimed at expanding the company's product offerings beyond footwear into the accessories segment within the Foot Locker stores. Management expects this to create a point of differentiation and enhance the customer experience.
The upcoming launch of the Foot Locker stores is another crucial initiative that has the potential to drive future growth. While the BIS regulations for high-end sports footwear pose some uncertainty, management is actively working to mitigate potential disruptions to the launch and subsequent replenishment of inventory.
Post-stabilization of Fila operations, Metro Brands will restart opening new Fila exclusive brand stores, signaling its continued commitment to the brand.
e. Q&A Session Highlights:
Consumption Environment & Footfall: Management highlighted that the consumption environment is showing signs of recovery, with a sequential uptick in sales. They noted that the EOSS period can impact overall trends but expressed confidence that the business has turned around. While they observed some geographical variation in performance, there was no significant difference across different consumer tiers.
New Era Partnership: Management clarified that they will be buying inventory from New Era and assuming the associated risk, not operating on a consignment model. They believe the market for the brand is relatively clean and there is a significant opportunity to capitalize on the demand for lifestyle products.
Walkway Format: While the Walkway format is still undergoing improvements, management emphasized that it was less impacted by the headwinds faced by other formats and is showing signs of progress. They plan to continue working on improving unit economics and expect to see positive results in the future.
Fila Business: The company has significantly reduced losses from the Fila business, with a reduction of approximately 45% in Q1 FY'25 compared to the previous quarter. Management plans to relaunch the brand's apparel and footwear range in late August or early September.
Key Takeaways and Outlook:
- Metro Brands demonstrated strong operational discipline despite challenging sales conditions in Q1 FY'25.
- Management remains confident in the long-term growth prospects, reaffirming a CAGR guidance of 12% to 15%.
- The New Era partnership and the upcoming Foot Locker launch are expected to be key drivers of future growth.
- The company is actively managing the impact of BIS regulations on the sports footwear segment.
- Management expects a stronger H2 FY'25, with a recovery in sales and improved performance.
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