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Metro sales grew by 15% led by better product mix and retail footprint expansion. Gross margins stood healthy at 59.1% (-84bps YoY). Inventory cleaning up for Fila continued in 1Q marginally impacting GM. Higher, employee/other expenses (+35/29% YoY) led to EBITDA margin decline of 417bps to 32% (ex. Cravatex Brands: 35%). For 1Q net store addition stood at 27 taking total count to 766 in 1QFY24 (vs. 739 in FY23). We broadly kept our FY24/FY25 estimates unchanged. We maintain ADD rating with target price of Rs1,023 valuing the stock at 54x (50x earlier) FY25E EPS.

Demand remains healthy led by premium range

Demand for MBL is driven by products priced above Rs1,500 (especially Rs3,000+). This is evident from the fact that Rs3,000+ product category continued to grow fastest over the last three years. Contribution from RS3,000+ range has increased from 34% to 49% over FY20-1QFY24. Contribution of products priced between Rs500-1,000 has declined from 17% to 8% over FY20-1QFY24. As a result, blended ASP grew by ~3% while footwear ASP grew by ~6-7% in 1QFY24. We have highlighted in our past channel check notes that impact of inflation is felt least to the consumers of Metro. Management remains confident of maintaining the long term healthy sales CAGR growth of ~18-20% on a medium term largely led by the premiumization trend and retail expansion.

Geographic expansion and multichannel led growth

Metro had guided for 260 new store additions from FY22-25. The company has already opened 115 new (net addition) stores in FY23 taking total store count to 739. Hence, management upped its guidance (during the last quarter) of opening 100 new store each for FY24/25. The new store opening will be evenly spread across all the four concepts – Metro, Mochi, Crocs and Walkway. We estimate ~RS1bn of capex each for FY24/FY25. Sales contribution from stores in Tier II/III has increased from 33% to 41% over FY20- 1QFY24. This highlights that Metro is able to get healthy traction in tier II towns despite having ASP of Rs1,500+. Growth momentum in online sales (including omni channel) continued as sales grew 63% YoY to Rs6.1bn. Online & omni channel contributed ~11%.

Turnaround in Fila by start of FY25

Metro is currently focused on clearing the older inventory of Fila. It is expected to take another 9 months. As a result, GM and EBITDA margins may continue to remain marginally subdued vs. historic levels. Post clean up management will go for expansion of Fila stores. The company believes that there is scope to operate 300-500 Fila stores in India (based on some of the competitors’ current retail footprint).

Valuations

Entry into newer geographies, tie-up with international brands (Crocs, Fitflops and now addition of Fila) coupled with variable cost structure should help company to grow its sales/EBITDA/PAT CAGR at 20/19/19% over FY23-25E. We broadly kept our FY24/FY25 estimates unchanged. We maintain ADD rating with target price of Rs1,023 valuing the stock at 54x (increased from 50x earlier) FY25E EPS.

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