Metro Brands, the most efficient footwear retailer in India, with earnings CAGR of 20% & store level ROI of 80%, is added to the Rising Giants portfolio

Marcellus’ Rising Giants portfolio

It is well known that the Marcellus’ Rising Giants portfolio aims to discover companies with a high probability of entry into benchmark Nifty 50 index over the next 3-5 years thus capturing the outsized returns that typically accrue to potential Nifty 50 entrants. These companies have robust long-term prospects on account of: (a) healthy reinvestment undertaken in FY22 & FY23 to further strengthen their franchises; (b) current valuations signalling the stock market’s underappreciation of RGP’s longevity of compounding; and (c) historical evidence of strong share price returns post periods of weakness.

The portfolio comprises of the following stocks:

Metro Brands is added to the portfolio

Saurabh Mukherjea announced that Metro Brands has been added to the Rising Giants portfolio. It is notable that the promoters, Rafique Malik and his family, hold 74.2% of the equity capital. Amount the public shareholders, Rekha Rakesh Jhunjhunwala holds 9.6% of the equity.

The virtues of Metro Brands have been explained by Saurabh Mukherjea and his team at Marcellus in a succinct manner:

(i) Metro Brands Limited (MBL) is the one of the largest and fastest growing Indian footwear retailers with a revenue and earnings CAGR of 15% & 20% respectively over FY18-23. MBL is the most efficient footwear retailer in India as evidenced by store level ROI of ~60-80% which is almost twice as high as other footwear retailers despite the challenges in managing close to 6,000 to 8,000 SKUs per store across ~750 stores.

(ii) MBL’s competitive advantage is the promoters’ skill in buying & merchandising which comes from over four decades of hands-on experience along with a Theory of Constraints based automated replenishment at the store level to bring in efficiencies, strong vendor relationships (built over four decades) who give MBL favorable terms in new designs and payment cycles, and a unique incentive structure at the store level (80% pay for store level staff is variable). The store level pay structure ensures that store staff has a strong incentive to offer the best customer service and give the right inputs to the buying & merchandising team at HQ.

(iii) MBL’s proven track record of running the most efficient footwear business in India makes it the platform of choice for global brands entering India. While MBL started as a standalone store in 1955 under the name ‘Metro Shoes’, it subsequently launched multiple formats like:

– Mochi (started in the year 2000 to cater to fashion footwear);
– Walkway (started in the year 2009 to cater to value segment);
– Crocs Exclusive Brand Outlets started in the year 2016 with MBL having Right Of First Refusal for offline Crocs stores and today running 80-85% of Crocs stores in India.

(iv) In 2022, MBL was awarded as licensee of the UK based FitFlop brand in India. Recently the firm has acquired licensing rights for the brand ‘Fila’ in India to cater to the sneakers & sports shoe segment. Across its 5 brands, MBL mainly caters to the formal & casual segment of the market with aspirational product offering as evidenced by ASP of ~Rs1600-1700.

Playing for the next decade and the decade after that at Metro brand

Nissan Joseph, the CEO of Metro Brands, outlined the business gameplan of the company in an interview to moneycontrol.com.

He pointed out that consumers are beginning to see value in purchasing premium footwear as it not only looks good but also lasts long. Middle class people are buying premium brands such as J Fontini, DaVinci, Crocs and Skechers.

“They (consumers) are starting to see the value in these products. If you invest in a pair of shoes not only do you feel good wearing it and look good wearing it but it also lasts you an equivalent proportion of time longer,” Joseph said.

“We’re playing for the next decade and the decade after that at Metro brand. We see that continuing to be dilutive to our earnings going through the entire fiscal year this year including Q3 and Q4 at about the same rate both in terms of revenue but also in terms of profitability,” he added.

According to the CEO FY25 is going to be more about the repositioning of the brand and the company is likely to see acceleration in FY26.

“Next year we start to see where it’s not dilutive to our overall performance and that’s our target for next year. At the same time, we will take that opportunity to position the brand to where we want it to go for the future so FY25 is going to be more about repositioning the brand and normalizing it down to where it’s not dilutive to us and FY 26 is where you will see the acceleration of that brand,” Joseph said.

4 factors set to drive strong earnings CAGR for Metro Brands

Vikram Kasat of Prabhudas Lilladher pointed out that Metro Brands is India’s one-stop-shop footwear retailer, with offerings across genres and for all occasions. He explained that the company looks well positioned to capitalize on the emerging growth opportunities in footwear retailing given its focused approach, contemporary designs, and sustained launch of new licensed brands.