Metro Brands got a spring in its step but valuations are pricey

While higher store additions augur well, it also means an increase in staff costs, which in turn weighs on margins. In Q3, Ebitda (earnings before interest, taxes, depreciation and amortization) margin stood at 34.3%, down 44 basis points (bps) y-o-y. However, the gross margin at 59.2% was above the guided levels of 55%-57%.

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In Q3, average selling price for footwear was higher by 6-7% year-on-year (y-o-y), the company said in an earnings call. Metro is also opening new stores at a fast pace. It added 48 stores in Q3, taking the total count to 720 as of December-end. Metro’s consolidated revenue last quarter grew by almost 24% y-o-y to ₹599 crore.

While higher store additions augur well, it also means an increase in staff costs, which in turn weighs on margins. In Q3, Ebitda (earnings before interest, taxes, depreciation and amortization) margin stood at 34.3%, down 44 basis points (bps) y-o-y. However, the gross margin at 59.2% was above the guided levels of 55%-57%.

Healthy store additions are expected to continue. Metro intends to achieve its store addition target of 260 over FY23-25. The company is currently present in 164 cities and sees huge potential for further expansion.

“Metro Brands’ right mix of brands provide growth runway (of store addition). Its focus on financial discipline along with balance sheet strength provides confidence on the execution. Besides, a platform of choice for international brands aids confidence on new avenues (of growth),” said a report by ICICI Securities on 17 January.

Meanwhile, to plug gaps in its portfolio, Metro acquired Cravatex Brands Ltd, which is present in the sports and athleisure segment. It owns the sportswear brand ‘Proline’ and holds exclusive license for ‘Fila’.

Analysts noted the general demand slowdown in the footwear segment post the festive season. Though Metro spoke of some weakness in November, it saw a strong December and has not seen any overall demand erosion as such. Even so, demand trends should be keenly watched. Plus, whether Q3 performance sustains in terms of gross margin and store addition needs tracking. If Metro falters on this front, that could be a dampener. Investors seem to have factored in the optimism adequately. In the past one year, the stock has risen almost 43%, making valuations pricey. The stock trades at nearly 54 times its FY24 earnings, showed Bloomberg data. Given this, sharp upsides in the stock appear capped at least in the near term.