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Weak performance continues

Weak performance continued in 3Q (revenue declined 26%; volume declined 12%), as expected. We note several initiatives by Bata to accelerate recovery – (1) ramping up sales from new channels (ChatShop, Home Delivery, Store on Wheels) to 15% of sales (albeit on a low in-store sales), (2) capturing semi-urban / rural demand through franchisee stores, (3) expanding the distribution business, and (4) restarting promotional campaigns and new launches. That said, we believe these initiatives are inadequate to mitigate the medium-term headwinds from potential pause in the growth of per capita spending on footwear. Inferior product mix (away from formals & fashion and more towards open style footwear), is likely to put further pressure on profitability. Reiterate REDUCE.

* Revenue yet to recover completely: Q3FY21 revenue / EBITDA / PAT declined 26% / 55% / 74% respectively. Volume decline was just 12% as realisations were severely impacted due to unfavourable product mix as Formals (incl. School business) & Fashion categories continued to be subdued due to prevailing market conditions (schools and offices largely continue to remain closed). However, management did mention bounce back in Casual, Fitness & Essentials categories. That said, Bata reported consistent increase in footfall across its retail stores led by the festive season in October. Recovery was also driven by growth in digitally enabled platforms and store expansion (franchise stores) in smaller towns.

* Company initiatives: To mitigate the impact, Bata embarked on few initiatives – (1) Launched campaign ‘Kick Out 2020’ with new collection Ready Again, (2) costfocused initiatives that will continue to have long-term positives, post-pandemic as well, (3) rolled out its first ever 'Sneaker Fest', which helped drive younger consumers to shop from its North Star & Power brands, and (4) scaled up its digital initiatives (Bata website, online marketplaces, Bata ChatShop, Bata Home Delivery and Bata Store on Wheels).

* EBITDA margin continued to decline due to negative operating leverage; sequential recovery though: Gross margin declined 910bps to 51.5% due to unfavourable product mix and lower fixed cost absorption with lower sales. Staff costs, rent and other opex declined 17%, 14% and 18% YoY respectively. In terms of rent, Bata recorded Rs 86 mn of rent concessions in 3Q. EBITDA margin declined 1260bps to 19.1% (+1410bps QoQ).

* Other highlights: (1) Digitally-enabled channels contribute over 15% of store revenues, and (2) Bata opened 45 new franchise stores in the quarter, taking its total to 221 Franchise stores in new towns (population between 50K to 3 lakh).

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