Metro Brands sprints ahead of peers, but premiumization is key

However, Metro Brands Ltd is on a solid footing rising almost 50% so far in 2023. Company-specific positives have aided Metro Brands to be an outlier. But one important factor that explains the disparity in stock performance is that Metro Brands has reaped higher benefits from the ongoing premiumization trend. 

Metro caters to the premium portfolio in the footwear segment, where the consumers are less price sensitive. Products with price range above ₹3,001 contributed 48% to Metro’s revenue in the first half of FY24. As such, the average selling price in this period stood at ₹2,200 per pair while that of Campus was ₹648 per pair. 

Analysts at ICICI Securities recently met the management of Metro and gathered that the premium price point, above ₹3,000 continued to outperform. 

Also, the company is refraining from aggressive discounting, which should aid profitability. While the end of season sale has kick started with peers offering discounts up to 50%, Metro has not participated. “This (perception of non-discounted brand) also helps Metro to become a preferred retailer by international brands looking to expand in India,” said the ICICI Securities report on 21 December. 

This is evident from the partnerships by Metro with global brands such as Crocs, Fitflop, Fila and the recent one, Foot Locker. The tie-up with Foot Locker, which is focused on the sneaker segment, sits well within Metro’s premium portfolio. Also, healthy demand momentum in the sneakers category is an advantage. 

But the stock doesn’t come cheap. Shares of Metro Brands trade at an expensive valuation multiple of 69 times their FY25 estimated earnings, according to Bloomberg. 

Owing to pricey valuations, Kotak Institutional Equities has a ‘Reduce’ rating on the stock despite Metro’s noteworthy execution and market opportunity. As such, the broking firm waits for a string of ducks to line up – “strong success of Fila (akin to Anta), inflection in omni-channel/online expanding total addressable market and/or a Zudio-like success in the value format, Walkway.” Metro targets to increase the return on capital employed in the Walkway format in line with Mochi. Zudio is Trent Ltd’s value fashion concept. 

As far as peers are concerned, the demand sluggishness in the mass segment continues to be a pain point. To beat the demand blues, companies are focusing on premiumization. For instance, Bata expects its premium portfolio’s growth to be 1.5 times its overall growth going ahead and is capitalizing on the sneakerization trend. In the case of Campus, the share of premium products ( ₹1,500 and above) in its portfolio has increased to 46% in the September quarter (Q2FY24) versus 40% in the same period last year. 

Meanwhile, the government has mandated BIS (Bureau of Indian Standards) implementation in footwear effective 1 January. This measure aims to curb imports and boost growth for domestic companies. However, it may create some supply chain volatility in the near-term due to lack of clarity on inventory holding. 

“Given that the average price per pair of imported footwear is sub-$5, we believe that domestic players that are exposed to the mass/mid-priced segments (such as Relaxo and Campus) would benefit more than the premium players (such as Metro),” said the Kotak report on 15 December. 

Q2 was lacklustre and weighed on earnings performance of footwear companies due to shifts in the festive season from Q2 to Q3. But management commentaries point to a better Q3. That said, the impact of BIS implementation on key operating metrics and pace of revival in the mass segment would be crucial.