Metro Brands Limited (METROBRAND) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to Metro Brands Limited Q2 FY '27 Earnings Conference Call hosted by ICICI Securities Limited. [Operator Instructions] I now hand the conference over to Mr. Ashutosh Joytiraditya ICICI Securities Limited, thank you, and over to you, sir.

Yes. Thank you, Saurya. Hello, and good afternoon, everyone present on the call. I, on behalf of ICICI Securities, I welcome you on Metro Brands Limited Q2 FY '27 Earnings Call. I would like to thank the management to give this opportunity of hosting the call. From the management, we have Mr. Rafique Malik, Chairman; Ms. Farah Malik, Managing Director; Mr. Nissan Joseph, Chief Executive Officer; Mr. Kaushal Parekh, Chief Financial Officer; Mr. Mohit Ranjan, Chief Operating Officer; and Ms. Alisha Malik President, Sports division, e-comm and CRM. I now hand the call over to Nissan Sir the opening remarks. Thank you.

Thank you, Ashutosh. Good afternoon, everyone, and thank you for joining our earnings call. On a stand-alone basis, second quarter net sales grew by 12% year-on-year to INR 712 crores, while profit after tax increased by 14% to INR 73 crores and EBITDA grew 15%. On a consolidated basis for the second quarter, revenue grew by 12.2% to INR 730 crores. EBITDA increased by 15.9% to INR 198 crores with EBITDA margin improving to 27.1% compared to 26.2% a year ago. Profit after tax grew by 11% and almost 12% to INR 77 crores with the PAT margin unchanged at 10.6%. E-commerce, including omnichannel sales grew by 12% in the second quarter and contributed 14.2% of revenue. For the first half, it grew by 11% and contributed to 13.6%. We continue to connect our stores with our online platform, giving customers more ways to discover and purchase our products. As search behavior evolves, we're also working to maintain our brand visibility across marketplaces and emerging AI-driven discovery platforms. When assessing this performance, it is important to recognize that a large share of festive demand shifted into the third quarter compared with last year as sales demand moved from September to October. Gross margin improved to 58.4% for the first half compared with 57.3% a year ago. However, several costs offset that improvement further down the income statement. These included continued investment in talent and brand building, higher frontline staff costs following minimum wage revisions and a modest increase in occupancy costs associated with incubating new formats. Lower treasury income also against the prior stronger year also affected PAT growth. We recognize the difference between our revenue growth and bottom line growth. Our focus remains on developing the embryonic businesses of athleisure and investing in marketing and talent while maintaining discipline around that cost of growth. During the second quarter, we opened 21 stores and closed 9 stores, adding 12 stores on a net basis. For the first half, we opened 34 stores and closed 13, taking our network to 1,053 stores at the end of September. Our expansion approach remains selective. We want each format to have the right locations and product assortment to support sustainable, profitable stores. These investments position us to pursue the next phase of growth across our established portfolios and newer formats. Let me now address our newer businesses where the opportunity remains significant but the pace of expansion depends on product availability and operational readiness. For Clarks, we now offer the women's range in more than 400 multi-brand outlets with a limited men's range in more than 100, we expect to complete exclusive store range to become available during the third quarter with the full assortment available on our D2C side. Subject to stabilization of the supply chain and assortment, we expect to launch Clarks exclusive stores in the second half of fiscal 2027. For foot log and Metro active, DIS implementation challenges affecting selected external brands have constrained supply readiness and the pace of expansion. We are seeing early signs of normalization, but we will continue to calibrate store openings to product availability. Profile, we have begun local manufacturing of footwear in India in response to BIS related concerns. The brand's repositioning is underway with a sharper merchandise and pricing strategy. We expect this transformation to take shape over the next 12 to 18 months with store expansion expected to pick up from FY '28 onwards. Because Clark Foot Locker, Mettractive and Sela are at different stages of development, we will align investment in store expansion with each brand product availability, supply readiness and repositioning progress. Our established business provides a strong foundation for the next phase of growth. Our own brands contributed approximately 70% of store product sales at Metro Mochi and Walkway in the first half. These brands sit alongside international partnerships that broaden our offering across consumer needs and price points. We will continue to pursue profitable store expansion and develop our multi-brand platform in digital, our priority is to build on existing capabilities, lowering discounts and strengthen the connection between online discovery and store fulfillment. Sports and athleisure remain important opportunities to file Footlocker new era and metro active. Though these verticals demand continued investment on our part, we believe in the potential for each of these to grow. Looking ahead, we expect a moderate increase in frontline staff costs as we revise the remuneration structure for our store teams. This will keep our compensation competitive and well above minimum wage levels in most states. We believe this investment will help us attract and retain strong talent, raise service standards and support sales growth over time. To conclude, we had a strong second quarter performance in sales, given the festive shift, our PAT margin and EBIT margin outpaced our growth. And as we enter the third quarter, we are focused on capitalizing on the festive demand. With that, I will hand it back to Ashutosh for the Q&A.

Sorry, we can open the Q&A session.

[Operator Instructions] The first question is from the line of Videesha Sheth from AMBIT Capital Limited.

I hope I'm on my first question was on the store addition momentum looking at the store closures, and I understand it's only 2%, 3% of -- on a trailing 12-month basis, it is 2% of the overall store network. But can you help us understand which format is the closure pertaining to what are the volumes that you'll be seeing in those stores?

So Videesha, broadly, it is not linked to any particular format. We constantly review stores. any store that doesn't hit profitability mark max in 2 years, we go and close the store. So it is not coming from any specific format. We've seen constantly to clean up across all the formats.

We're also seeing that there are malls that have been around for 7, 8 years, but now that new malls come around them they tend to be quite erosive to the existing malls. So that happens as well. It's not just the first 2 years. Sometimes these stores have been around for 5, 7 years in Asia, but other shopping precincts have come up and nearby vicinities, putting pressure on this, and we believe that the right place to be is in the new vicinity. And that's why you see some of this.

you see even for this year, we expect it to be in that range of around 3% -- 2% to 3% as we have seen historically.

Got it. And just on the store addition piece, you did mention that you remain selective, but ballpark, should we be anticipating a lower addition momentum versus the 100 to 110 stores that olefin on an average?

Yes. Videesha, what we target is opening as many profitable stores or stores that we believe will be profitable if possible. We do have some growth levers of Clark and as Footlocker stabilizes through its BIS journey as Sila comes online. That creates opportunities for us. But nonetheless, we're not fixated on a number for growth though last year, last fiscal year, we opened over 100 doors, and we have done so for a while. What we're really keen on is opening profitable stores. Sure.

Got it. My second question was on the gross margin. What would be the moving parts for the higher gross margin besides, say, lower growth that we've seen in the e-com channel or even the partial benefit of low customer entry -- just trying to understand the sustainability of the number.

Videesha, there are 2, 3 reasons. But I think the most important reason was lower average discounts on our end of season sale and also online sales that we do. as compared to last year. That was 1 of the most important reason why we saw improvement in gross margin, specifically in we have seen slight improvement in markup. And third reason you touched upon slightly lower contribution of e-commerce sales to the overall sales. I think these are 3 key reasons why you see the movement of 2% in gross margins.

Okay. caution the second reason that you mentioned the slight improvement in Macao that a function of the low cost inventory or printed.

So it's a combination of everything, right? It is also a combination of mix a slight price increase in view of further raw material hikes that we have seen. So it's a combination of multiple sectors that helps us improve the mass.

Okay. And just lastly, a related question. What is the ballpark inflation change in your RM basket and the quantum of price cycle had taken into tilts.

Sir, broadly, in terms of raw material, I would be somewhere in the range for a 10% to 15%, but then you see it on MRP, obviously, it goes down.

Sure. I'll get back in the queue to the question.

The next question is from the line of Sameer Gupta, IIFL Capital from India Infoline.

Just take it up from where the previous participants left. So stores added in first half is around 21%. I understand you're not fixated with any number, but still this is the lowest net store addition in the first half that we have done in the past 4 years. even including FY '25, which was a low store addition year for the company. So just wondering, is there a recalibration of the store opening strategy given strong momentum that we are seeing in the e-com channel, not this quarter particularly, but last year was a good number, and we kind of have recalibrated our strategy about store addition presence. Anything that has changed?

Sameer, the first off, the number for the year is not '21. It's actually 34 opened and what you're seeing is 13 closed, right? So that is correct. But we did open 24 -- 34 new stores in this first half of the year. What we're seeing is rentals, right? So supply is not keeping up with the demand for new real estate. As you know, there are a lot of real estate formats coming out there. We play for the long game and we've seen this before. We've seen when rentals get high, and there's a little bit of blip in the economy and rentals come rationalized again. If you take 34x2, that puts in the 75 range, that's not horrible as a store opening number. But that's not the point. The point is we are disciplined on how we open stores so we don't really mind whether we open 70 stores or 125 stores if we believe they all have a chance of profitability.

Said, internally, we have also tightened our criteria for store openings. So obviously, we want to make sure that our rents remains in that particular range. the team would also take some time in terms of getting the overall act right. Having said that, we surely expect H2 to be better as compared to H1 in terms of number of solar additions.

And I don't think I got the number of price hikes that you said you have taken? I did listen that 10% to 15% is the RM increase, but what kind of price hike have we taken on a pure basis. So I understand there will be mix in realization, but pure price hike would be ballpark in what range?

So broadly, it could -- it would depend on the quantum of increase that we have seen in raw materials for that particular item, but on an average, you price hike due to raw material increase would be in that range of 2% to 4% or maybe 2% to 5%. It ranges for each article as.

Got it. And last question, if I may. Inventory continues to be on the higher side. And of course, fourth quarter, we know that you had front-loaded, but things haven't really normalized also but if this is the base case, then would it mean that inventory also will remain at this level for the foreseeable future?

This is not the base case for sure. I think 2 key reasons, Sameer, we are sitting on slightly higher quantum of inventory one, and this is continuation of what we mentioned around -- we front-loaded inventory, especially when the U.S. Iran were broke out. This was to ensure that we protect ourselves to the extent possible. Looking at the impending raw material increase that we were anticipating in front of us. That is one. Second, in some of the brands, like for example, Filo, there also we have to frontload had to cantled inventory because 4 of their factories are coming up for BIS renewal and we didn't want the delay in renewals to sort of delay to sort of disrupt our business. So that was the second reason. Third reason is also take for example, new formats like, say, Clarken Foot Locker, we are in process of like, for example, glass, we are in process of expanding our reach Clark ladies range has now penetrated in 400 MBOs of Metro much dense range is around 100 MBOs. So obviously, these are all doors that we are selling with inventory, sales will come over a period of time. So if you broadly ask us, we will see some sort of inventory normalization to happen by March. And moving back to that 80-odd working capital base somewhere around mid- to end next financial year. Obviously, this is considering nothing new content.

Thank you. The next question is from the line of Devanshu Bansal from Emkay Global Financial Services Limited. Please go ahead.

I wanted to check the rental thing that you are sort of mentioning. The PNAS PAT margin currently is down about 160 basis points, and this is despite 100 basis points of gross margin gain in first half. So actually, the business has seen about 60 basis points of negative leverage. So wanted to check us in while you are mentioning that you are cautious in terms of expansion, but rental is actually playing a negative leverage role in our business currently. So I guess I wanted to check on this. And secondly, throughput also is currently weak, and that is sort of reflecting in this negative leverage. So what are the drivers to increase the throughput in the business? So I wanted to check on that.

Let me take the first one. With respect to rental, you are correct that we are seeing some pressure, and that is what we have mentioned in our presentation to if I reflect the H1 numbers, we have seen some pressure come through rentals. We have been pressured on the front-end staff costs which is predominantly a function of minimum basis revisions that have happened. Apart from that, we have also continued our investment in talent you could see some increase in salaries. We have continued with our investment in marketing because we feel this is marketing is really a cycle. You start investing in Liniareflecting in 6 to 12 months, and we are seeing that positive effect on ground. And the last reason, if you see when I am that, H1 last year was very good in terms of treasury gains. If you see H1 other income was around INR 54 crores compared to the full year income of around INR 100 crores. So that is also 1 of the effects leading to slightly muted growth as compared to last year. But yes, these are all the cost pressures that you are seeing, and we are working on addressing all of that for a period of time.

Kaushal thank you for this explanation. But these investments that we have made, right, in terms of marketing and talent -- by when do you think this should sort of start reflecting in better throughput for us. So if you could just provide some more color on this?

So Devanshu, tech examples class. This is a business which will start unfolding meaningfully from and obviously in next financial year. But in terms of management team, we have an entire team in place. And this applies to all the other newer formats to, so these are investments that are happening at this point in time, hopefully, once the start opening EVs for the stores, you will see better adoption of cost from next financial year is what you can expect improvement part on to. As I just mentioned, marketing, it takes about 6 to 12 months to sort of reflect in terms of better sales throughput and variant you do marketing costs.

Got it. Sir, second question is on crocs, right? So there are a few developments which have come to light. Firstly, we were seeing sort of this import data of rubber and plastic footwear, which has reduced meaningfully. Crocs globally has identified India as a Tier 1 market, and they're opening their own copostores as well. In your numbers also, we are seeing an acceleration. So are we sort of seeing better growth prospects for this particular format versus what was there earlier? And does gross opening their own focus stores post any threat to us. So that's on go.

So first of all, I think crops opening stores is very, very limited and focused on creating high heat markets, which will really help our business. Because it has a halo effect coming through the bunch. That's number one. I think Crocs has done well with us over many, many years. And I think even though they've had a high base for the last few years with us, we continue to be able to grow that brand. So we're quite excited about it. So it's nothing unusually out of the question that they do they have a huge runway for growth because it's been a very steady, solid growth business for us for many years, right? So there's a certain level of maturity that we have. Having said that, like them, we believe India has a lot of opportunity for future growth.

Sir, just last 1 question. For Fila, right? So BIS issues are now behind, right? So there is a lot of import that is happening from Vietnam and Indonesia and this is sort of reflecting in reported import numbers in the country, right? So, but we are sort of indicating expansion from FY '29 onwards. So what exactly are the challenges here? So this is both from a line Foot Locker perspective? Because I guess, from a licensing perspective, now the government has been sort of granting licenses.

Well, that's not quite true, Devanshu. We know a number of factories that are not getting their licenses renewed after getting it granted for the first year. There's a certain degree of erraticness and uncertainty that comes with it. So that's number one. Number two, yes, you can get licenses approved, but before it becomes meaningfully viable financially to get a license, you need to have a certain amount of velocity of orders from a particular factory. Don't forget they're very factory specific, right? Given that PLA is in a stage of rebuild, it's hard to hit those minimums to justify why a factory should go through both the cost and the time to get the renewal, right? So there's multiple levels of complexity that come with it. Yes, there are tax fees that are getting approved. I can also tell you that there were a series of factories that went through 5 months of no renewals and then all of a sudden got renewals. It's a very erratic supply chain, and it's very hard for us to build business based on that. So we had to come up with our own supply chain. That has been 1 of the reasons why it's been taking us a little bit longer to get it going. We would rather do that and be self-sufficient than hope that this BIS renewals will continue or be steady at any given point in the future.

Next question is from the line of Saurabh Kundan from Goldman Sachs.

Just going back to your revenue growth that you reported this quarter, I recall, I think there was some benefit, Nissan, in this quarter that you got because crocs sales from Q1 has, I think, shifted to Q2. Just trying to understand if you take that effect and late festive effect out of the equation, any idea you can -- any indication you can give us as to what is the real underlying sales growth in your business today?

Yes. So Saurabh , when we talked, I think it was at the conference call, right, that we had we were had a delayed monsoon this year, and that's what had moved some of it -- some of those sales into the subsequent quarter. As you know, the monsoon hasn't been that strong even in the second quarter. So it wasn't the most month soon of seasons to see crop. Having said that, crocs had decent growth, but crocs business is about less than 20% of our entire business, if you count everything they do between the stores and Metrolibrand. So it doesn't really can't move the needle. The biggest driver for this quarter is the fact that we had Durga Puja and the finishing of Shad inside this quarter were in this year, this quarter, then it's been exactly the other way around Durga pooja moved out and Saurabh into this quarter fully with no benefit of post-hotseason sales. So we believe that it has about 250 to 350 basis point impact on our growth, which takes us right back to that 15% growth that we always have guided to.

Sure. Understood. And my next question is around the margins. If I recall correctly, there's a guidance that you have of PAT margin being somewhere around the 15% mark. This year until now in the first half, it's obviously lower than that, even if I look at the adjusted pad that you've started reporting. I just wanted to ask if the 15% guidance is more like a sustainable medium-term guidance. Or you think that in the second half this year itself, you will be able to make up for the shortfall, so to say, in margins that you have had in the first half? And second related question is the gross margin level or expansion that you've seen in this current quarter, I think Kaushal mentioned the drivers for it. Should that expansion more or less continue going forward in the second half of this year?

So Saurabh, on PAC, H2 will certainly be better compared to H1. Historically, we have seen that. And in this year, because of this tie shift more so even if you see compared to last year, broadly the same last year or many years, probably the same trend is what would be visible. 15% PAT is like a medium to long-term guidance. We would want to be in that range of around 13% to 15%. Especially considering the investment that we are doing in the newer business. When they start kicking in, obviously, our target is to hit that number on a consistent basis. With respect to your question on gross margins, A portion of it was a reasonable person of it was on account of lower discounts on the end of season sale that happened in Q2. So obviously, that will not sustain in Q3. However, improvements are improvement in markup that I mentioned, a portion of it, obviously, will reflect in the ongoing margins as we see here. Important thing sort of would be also the mix of sales, right? So over a period of time, its sales contribution for walkways, footer, metro active increases to the total portion, you will see them dragging our gross margin slightly lower. At the same time, growth in other business, including Clarks, hopefully Fila and Meera. These all will help us to sustain or improve our gross margins that we are currently reporting. So it's going to evolve over a period of time are not a single brand company. And there are so many multiples. So it all depends on how each of the move and then resultantly impact the gross margin and that number that we see.

Sure. Last question from my end is on the Clark opportunity. once you start opening the stores, what kind of -- because this is a completely new format. Does it mean for you -- does it mean that your store acceleration store addition can accelerate once clocks, supply, et cetera, is in place for you. This brand does not have the overhang of, let's say, in the case of Fila, there were primarily 2 overhangs. One is supply and the other is repositioning I believe none of those are a problem for this one. Secondly, if you could let us know, Clark has been around in India for quite some time. What were the peak sales that this brand used to have if you have that number? And that's my last question.

Okay. Just to speak to the Clark journey for us. You're right. We didn't have experience with trucks, Saurabh. However, we had deep experience with the Clarks and our MBO stores, which is what gave us the confidence to go seek the brand out. That's number one. If you recall, that's very similar to the crop story that we had. And just like crocs where we use our sales in Metro and Mi to guide the way as to where we could open stores. We're going to use Metro Moti the same way for Clark. And now early in its crop years, we had some meteoric store openings in numbers with crop. The other thing is crops did have about 80 EBOs in the country at 1 point, and we have their data. Now we're just using that as a reference point. what we like is our own reference point, which is the sales in our own metro and merch stores. So that's how we look at the cross EBO journey. We think it has very strong length and the good news is croc is going to be not dilutive to our margins and our profitability. So that's another thing that excites us about it. When it comes to the no overhang, you're right, we don't have any overhang with regards to carryover inventory or BI issues because Slack has been diligently working over the last 2 years to establish that supply chain. And it is as nimble and robust as any supply chain we could have in the country, which is where they're making it, right? So the consumer acceptance has been extremely high and very quickly so as well.

In terms of your second question, sir, say, peak sales based on whatever information I have, I think that number was somewhere in the range of INR 225 crores to INR 250 crores. But this was inclusive of a large portion of that was distribution sales. in a different example, Metro Moss was 1 Pulsion out of it. So in terms of MRT sales, the number could be in that range of INR 300 crore to INR 450 or INR 500-odd crores.

The next question is from the line of Tejash Shah from Avendus Park Institutional Equities Private Limited. Please go ahead.

So a large part of our user base or our customer base actually comes from formal economy where at least based on macro data, the job creation has been under pressure. Just wanted to know, first of all, if you have trackers, then if you can share inside that, are you seeing any divergent trends of growth, let's say, in IT heavy centers versus non-IT in terms of demand?

Tejash. We did see some of that a few years ago. We saw a little bit in Bangalore. We saw a little bit in Hyderabad. But those things tend to normalize after a bit too because other employment seems to kick in. So we did see that. We're not seeing that as a reason for any shift in business today. Bangalore has rebounded quite nicely. Hydro bad has not fully come back, but we don't think IT was the only reason that affected Hyderabad. We think there's a lot of real estate issues out there as well in terms of the real estate market pricing and so on and so forth, not for rentals, but I mean, just in terms of buying and selling real estate, so we're not seeing that. And we're not -- it's not like our growth is coming from Tier 1 or Tier 2 cities. We've kept a steady representation. 31% of our business comes from in geography terms, it comes from various parts of the country. 31% comes from the West, 33% comes from the South. But when you look at tiering of business, that has not moved significantly anything, the metro cities that actually started to over-index just a little bit, though we've opened up more stores in the lower-tier cities. The metro cities are holding their own quite well.

Overall south predominantly slightly heavily focused on we saw our breakup in terms of number of stores and revenue contribution. And broadly, it has remained consistent. Like in '24, 33% of revenues to come from South, same stands even in H1. And stores to sale contribution also, we don't see a significant dive.

Yes. Second question, just wanted to reconcile 2 divergent trends that we have been kind of calling out the last few quarters. At 1 place we are calling out that there is a retail good asset inflation in terms of real estate, we are struggling to find a or terms. And at the other end, the demand in retail in oral and not only for our category, except jewelry, we are not seeing any aggressive demand in any of the subcategories in retail. So just wanted to know, is it like how does this settle down finally because if the demand is not picking up for retail in general at large the rentals have to reconcile with that at some stage, right?