IGI Logo

Marginal dip in PAT despite weak SSS

* Metro’s revenue declined 1% YoY (9% miss), due to weak same-store sales (SSS); however, store additions supported revenue. A higher contribution of INR3,000+ ASP products and own-brand products boosted gross margins. Controlled costs and higher gross margins restricted the decline in EBITDA/PAT to only 3%/2% (11% miss).

* In the near term, we believe that soft demand, delayed BIS implementation (which delayed FILA’s repositioning), and margin contraction could weigh on growth. However, in the long term, healthy store economics, steady store additions, and a growth opportunity in Fila/Foot Locker should drive a CAGR of 16%/19% in revenue/PAT over FY24-26. We reiterate our BUY rating on the stock.

Revenue/PAT down 1%/2% YoY

* Consolidated revenue declined 1% YoY to INR5.8b (9% miss) due to a 10% YoY decline in revenue per sqft. Area addition remained strong at 12% YoY.

* The company added 17 stores (in two new cities) and closed two stores, taking the net store additions of 15 and the total count to 854 stores (including three FILA stores).

* The management attributed weak revenue growth to fewer wedding dates, election-related headwinds, and subdued footfalls due to intense heatwaves.

* Gross profit was flat at INR3.4b (9% miss), while margin expanded 40bp YoY to 59.5%.

* GM remained elevated due to a higher sales contribution from INR3,000+ ASP products and own-brand products.

* Despite weak SSS, the company was able to restrict the EBITDA decline at 3% YoY to INR1.8b (11% miss) due to strong cost-control measures.

* Margin contracted 70bp YoY to 31.3% during the quarter.

* Depreciation/finance costs grew 11%/12% YoY, while other income rose 63% YoY.

* Resultantly, PAT declined 2% YoY to INR919m (11% miss).

Key takeaways from management commentary

Guidance remain intact: The company is expected to open 100/225 stores (excluding FILA but including Footlocker) in the next one/two fiscal years. Given the subdued 1Q, the management has guided for 12-15% growth. However, in the long term, the company reiterated its guidance of 15-18% growth, 55-57% gross margin, 30-33% EBITDA margin and 15-17% PAT margin.

* Current environment: The management is noticing a pick-up in business environment QoQ. However, headwinds persist in some casual footwear, athletic footwear and the Crocs range. It expects SSS to pick up in 3Q as there are no headwinds of disproportionate marriages.

* New Era: The product will be sold in Footlocker stores. It is a niche play in the premium category with a price range of INR3k-4k. This segment bodes well with the business. The management expects to launch the first kisok in the next few months. MBL will buy the products at a particular price with certain markup and the inventory risk will be on MBL.

* BIS: The BIS extension has come to an end. The sell-off period is two years. The company is in compliance with this rule. However, there is no clarity for BIS for the sports division (FILA).

Valuation and view

* METRO trades at a rich valuation of 70x FY26E EPS, backed by: 1) a strong runway for growth, largely funded by internal sources, given its strong OCF-toEBITDA ratio of over 50%; and b) superior store economics reflected in the balance sheet and a healthy RoIC of +50%.

* In the near term, we believe that soft demand and delayed BIS implementation are affecting FILA’s repositioning, and a moderation in margins could weigh on growth. But, in the long term, healthy store economics, steady store adds and a growth opportunity in Fila/Foot Locker should drive growth.

* We cut our PAT estimates by 3%/5% for FY25/FY26, factoring in a CAGR of 16%/19% in revenue/PAT over FY24-26 and assigning a PE of 70x FY26E PAT of METRO’s existing portfolio. A combination of superior store economics and a strong runway of growth should allow Metro to garner rich valuations going ahead.

* We have not factored in Fila and Foot Locker earnings in our estimates, but we believe they have revenue potential of INR15-20b over the next 3-5 years (i.e. 30-40% share of Metro). Since both the brands are in the initial stage of investment, we value Fila/Foot Locker at a ~75% discount to the potential value, which creates an option value of INR190 (Exhibit 2), arriving at a valuation of INR1,460 per share.

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html

SEBI Registration number is INH000000412