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Adding feet’s to the marathon

Fila and Foot Locker to add next leg of growth

Strong execution

The discretionary category has seen weak demand trends in the last few quarters, but METRO has continued to post industry-leading growth, led by steady footprint expansion. Although it could face moderation in SSSG and margin rebase in the near term, we expect the company to deliver secular 20% growth over the next five years, driven by its strong execution prowess evident from superlative store economics, a huge runway of footprint addition, excellent cashflow and ROIC profile, and new brand additions.

Steady store economics

METRO has a history of robust store economics with 2x revenue productivity (~INR25k revenue per sq. ft.) vs. Bata. It generates store-level EBITDA margin of ~25%, which results in a superior payback period of less than two years. The right store size, a wide product portfolio (with upcoming Fila and Foot Locker), and premiumization (2x ASP vs. Bata) help METRO achieve healthy store economics.

Huge footprint growth opportunity with internal accruals

METRO is expected to generate strong OCF (pre Ind-AS 116) of INR6b over FY24-25E, which can enable the company to fund the addition of over 250 stores per year. Moreover, its robust store economics, the addition of new formats in the pipeline (Fila and Foot Locker), and its 10-year track record of consistent store additions give us enough confidence in its ability to drive growth from internal accruals. With the addition of Fila and Foot Locker, the company has enabled seven formats to drive scale. Metro Brands has 795 stores across 5 formats in 189 cities against Bata’s has around 2,150 stores in 725 cities, highlighting the huge growth potential ahead. We factor 21% revenue CAGR over FY24-26E led by 13% footprint CAGR.

Tapping growth through new brands

Fila and Foot Locker offers new growth engines. While Fila, in the near term, plans to focus on re-energizing its business by clearing the inventory. In the next three to five years, both brands could see about 400-500 store additions similar to the top sportswear brands in India, like Puma, Adidas, and Sketchers. With average revenue per store of INR20-30m (similar to Metro stores), both brands could garner about INR8-10b revenue from EBOs, online and other channels. Thus, METRO has an opportunity to leverage both brands in India to potentially generate INR15-20b in sales in the next three to five years, garnering about 50% of consol. revenue with ~20% pre Ind-AS EBITDA margin and ~15% PAT margin.

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