Ashutosh Joytiraditya: Thank you, Surya. Hello, and good afternoon, everyone present on the call. I, on behalf of ICICI Securities Limited, welcome you on Metro Brands Limited's Q2 FY27 earnings call. I would like to thank the management to give this opportunity of hosting the call. From the management, we have Mr. Rafiq Malik, Chairman, Ms. Farah Malik Bhanji, Managing Director, Mr. Nissan Joseph, Chief Executive Officer, Mr. Kaushal Parekh, Chief Financial Officer, Mr. Mohit Dhanjal, Chief Operating Officer, and Ms. Alisha Rafique Malik, President, Sports Division, E-comm and CRM. I now hand the call over to Nishant sir for the opening remarks. Thank you.
Nissan Joseph: Thank you, Ashutosh. Good afternoon, everyone, and thank you for joining our earnings call. On a standalone basis, Q2 net sales grew by 12% year-on-year to INR 712 crores, while profit after tax increased by 14% to INR 73 crores and EBITDA grew 15%. On a consolidated basis for Q2, revenue grew by 12.2% to INR 730 crores. EBITDA increased by 15.9% to INR 198 crores, with EBITDA margin improving to 27.1% compared to 26.2% a year ago. Profit after tax grew by 11%, almost 12% to INR 77 crores with the PAT margin unchanged at 10.6%. E-commerce, including omni-channel sales, grew by 12% in Q2 and contributed 14.2% of revenue. For H1, it grew by 11% and contributed to 13.6%. We continue to connect our stores with our online platforms, giving customers more ways to discover and purchase our products.
Nissan Joseph: As search behavior evolves, we are also working to maintain our brand's visibility across marketplaces and emerging AI-driven discovery platforms. When assessing this performance, it is important to recognize that a large share of festive demand shifted into Q3 compared with last year, as sales demand moved from September to October. Gross margin improved to 58.4% for H1 compared with 57.3% a year ago. However, several costs offset that improvement further down the income statement. These included continued investment in talent and brand building, higher frontline staff costs following minimum wage revisions, and a modest increase in occupancy costs associated with incubating new formats. Lower treasury income also, against a prior stronger year, also affected PAT growth. We recognize the difference between our revenue growth and bottom line growth.
Nissan Joseph: Our focus remains on developing the embryonic businesses of athleisure and investing in marketing and talent while maintaining discipline around that cost of growth. During Q2, we opened 21 stores and closed nine stores, adding 12 stores on a net basis. For H1, we opened 34 stores and closed 13, taking our network to 1,053 stores at the end of September. Our expansion approach remains selective. We want each format to have the right locations and product assortment to support sustainable, profitable stores. These investments position us to pursue the next phase of growth across our established portfolios and newer formats. Let me now address our newer businesses, where the opportunity remains significant, but the pace of expansion depends on product availability and operational readiness.
Nissan Joseph: For Clarks, we now offer the women's range in more than 400 multi-brand outlets, with a limited men's range in more than 100. We expect a complete exclusive store range to become available during Q3, with the full assortment available on our D2C site. Subject to stabilization of the supply chain and assortment, we expect to launch Clarks exclusive stores in H2 of fiscal 2027. For Foot Locker and MetroActiv, BIS implementation challenges affecting selected external brands have constrained supply readiness and the pace of expansion. We are seeing early signs of normalization, but we will continue to calibrate store openings to product availability. For FILA, we have begun local manufacturing of footwear in India in response to BIS-related concerns. The brand's repositioning is underway with a sharper merchandise and pricing strategy.
Nissan Joseph: We expect this transformation to take shape over the next 12 to 18 months, with store expansion expected to pick up from FY28 onwards. Because Clarks, Foot Locker, MetroActiv, and FILA are at different stages of development, we will align investment and store expansion with each brand's product availability, supply readiness, and repositioning progress. Our established business provides a strong foundation for the next phase of growth. Our own brands contributed approximately 70% of store product sales at Metro, Mochi, and Walkway in H1. These brands sit alongside international partnerships that broaden our offering across consumer needs and price points. We will continue to pursue profitable store expansion and develop our multi-brand platform. In digital, our priority is to build on existing capabilities, lowering discounts, and strengthen the connection between online discovery and store fulfillment.
Nissan Joseph: Sports and athleisure remain important opportunities with FILA, Foot Locker, New Era, and MetroActiv. Though these verticals demand continued investment on our part, we believe in the potential for each of these to grow. Looking ahead, we expect a moderate increase in frontline staff costs as we revise the remuneration structure for our store teams. This will keep our compensation competitive and well above minimum wage levels in most states. We believe this investment will help us attract and retain strong talent, raise service standards, and support sales growth over time. To conclude, we had a strong Q2 performance in sales given the festive shift. Our PAT margin and EBIT margins outpaced our growth, and as we enter Q3, we are focused on capitalizing on the festive demand. With that, I will hand it back to Ashutosh for the Q&A.
Ashutosh Joytiraditya: Yes, Shaurya, we can open the Q&A session.
Operator: Thank you very much. We will now begin with the question and answer session. Anyone who wishes to ask a question may press star and one on their touch-tone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Vidisha Sheth from Ambit Capital Limited. Kindly go ahead.
Videesha Sheth: Hi. I hope I am audible. My first question was on the store addition momentum. Looking at the store closures, I understand it is only 2%, 3% of or on a trailing 12-month basis, it is just 2%, 3% of the overall store network. But can you help understand which format is the closure pertaining to? What are the hurdles that you would be seeing in those stores?
Kaushal Parekh: Vidisha, broadly, it is
Kaushal Parekh: Not linked to any particular format. We constantly review stores. Any store which does not hit profitability mark max in two years, we go ahead and close the store. It is not coming from any specific format. We constantly do cleanup across all the formats.
Nissan Joseph: Yeah. We are also seeing that there are malls that have been around for seven, eight years, but now that new malls come around them, they tend to be quite erosive to the existing malls. That happens as well. It is not just the first two years. Sometimes these stores have been around for five, seven years, Vidisha, but other shopping precincts have come up in nearby vicinities, putting pressure on this, and we believe that the right place would be in the new vicinity, and that is why you see some of this.
Kaushal Parekh: As we see it, even for this year, we expect it to be in that range of around 2% to 3% as we have seen historically.
Videesha Sheth: Got it. Just on the store addition pace, you did mention that you remain selective, but ballpark, should we be anticipating a lower addition momentum versus the 100 to 110 stores that you all have been adding on an average?
Nissan Joseph: Yeah. Vidisha, what we target is opening as many profitable stores or stores that we believe will be profitable as possible. We do have some growth levers of Clarks, and as Foot Locker stabilizes through its BIS journey, as FILA comes online, that creates opportunities for us. Nonetheless, we are not fixated on a number for growth. Though last fiscal year, we opened over 100 doors, and we have done so for a while. What we are really keen on is opening profitable stores.
Videesha Sheth: Sure. Got it. My second question was on the gross margin. What would be the moving parts for the higher gross margin besides, say, lower growth that we have seen in the e-com channel or even the partial benefit of low-cost inventory? Just trying to understand the sustainability of the number.
Kaushal Parekh: Vidisha, there are 2, 3 reasons, but I think the most important reason was the lower average discounts on our end of season sale and also online sales that we do as compared to last year. That was one of the most important reason why we saw improvement in gross margins, specifically in Q2. We have seen slight improvement in markup. And third reason you touched upon, slightly lower contribution of e-commerce sales to the overall sales. I think these are 3 key reasons why you see the movement of 2% in gross margins.
Videesha Sheth: Okay. Kaushal, the second reason that you mentioned, the slight improvement in markup, was that a function of the low-cost inventory or price hike undertaken?
Kaushal Parekh: Well, it is a combination of everything, right? It is also a combination of mix, slight price increase in lieu of the raw material hike that we have seen. So it is a combination of multiple factors that helps us improve the markup.
Videesha Sheth: Okay. Just last bit, a related question. What is the ballpark inflation seen in your RM basket and the quantum of price hike already taken into Q or till date?
Kaushal Parekh: So broadly, in terms of raw material, hike could be somewhere in that range of around 10% to 15%. But when you see it on MRP, obviously it goes down.
Videesha Sheth: Sure. I will get back in the queue for my other question.
Kaushal Parekh: Thank you.
Operator: Thank you. The next question is from the line of Sameer Gupta, IIFL Capital from India. Please go ahead.
Sameer Gupta: Hi, everyone, and thanks for taking my question. I'll just take it up from where the previous participant left. So stores added in H1 is around 21. I understand you're not fixated with any number, but still this is the lowest net store addition in H1 that we have done in the past 4 years, even including FY25, which was a low store addition year for the company. Just wondering, is there a recalibration of the store opening strategy given strong momentum that we are seeing in the e-com channel. Not this quarter particularly, but last year was a good number and we kind of have recalibrated our strategy about store addition presence. Anything that has changed?
Nissan Joseph: Yeah. Sameer, first off, the number for the year is not 21, it's actually 34 were opened, and what you're seeing is 13 closed. So that is correct. But we did open 34 new stores in this H1 of the year. What we're seeing is rentals. So supply is not keeping up with the demand for new real estate. As you know, there are a lot of real estate formats coming out there. We play for the long game, and we've seen this before. We've seen when rentals get high and there's a little bit of blip in the economy and rentals come rationalized again. If you take 34 times 2, that puts you in the 75 range. That's not horrible as a store opening number, but that's not the point. The point is we are disciplined on how we open stores.
Nissan Joseph: We don't really mind whether we open 70 stores or 125 stores if we believe they all have a chance of profitability.
Sameer Gupta: Got it.
Kaushal Parekh: As Vasant said, internally we have also tightened our criteria for store openings. We want to make sure that our rentals remains in that particular range. The team would also take some time in terms of getting the overall act right. Having said that, we surely expect H2 to be better as compared to H1 in terms of number of store addition.
Sameer Gupta: Got it. I do not think I caught the number of price hike that you said you have taken. I did listen that 10% to 15% is the RM increase, but what kind of price hike have we taken on a pure basis? I understand there will be mix in realization, but pure price hike would be ballpark in what range?
Kaushal Parekh: Broadly, it would depend on the quantum of increase that we have seen in raw material for that particular item. On an average, price hike due to raw material increase would be in that range of 2% to 4%, or maybe 2% to 5%. It ranges for each article as we review.
Sameer Gupta: Got it. Last question, if I may. Inventory continues to be on the higher side. Of course, Q4 we know that you had front loaded, but things haven't really normalized also. If this is the base case, then would it mean that inventory also will remain at this level for the foreseeable future?
Kaushal Parekh: This is not the base case for sure.
Sameer Gupta: Okay.
Kaushal Parekh: I think two, three key reasons, Sameer, why we are sitting on slightly higher quantum of inventory. One, this is continuation of what we mentioned around Q4. We front loaded inventory, especially when the US-Iran war broke out. This was to ensure that we protect ourselves to the extent possible, looking at the impending raw material increase that we were anticipating in front of us. That is one. Second, in some of the brands, like take for example, FitFlop. There also, we had to front load inventory because four of their factories are coming up for BIS renewal. We didn't want the delay in renewals to sort of disrupt our business. So that was the second reason. Third reason is also, take for example, new formats, like say Clarks and Foot Locker. Take for example, Clarks. We are in process of expanding our reach.
Kaushal Parekh: Clarks ladies range has now penetrated in 400 MBOs of Metro Mochi. Gents range is around 100 MBOs. So obviously, these are all doors that we are filling with inventory. Sales will come over a period of time. So, if you broadly ask us, we will see some sort of inventory normalization to happen by March. Moving back to that 80-odd working capital days, somewhere around mid to end next financial year. Obviously, this is considering nothing new comes in.
Sameer Gupta: Got it, Kaushal and Nishant. Thanks and all the best.
Kaushal Parekh: Thanks, Sameer.
Operator: Thank you. The next question is from the line of Devanshu Bansal from Emkay Global Financial Services Limited. Please go ahead.
Devanshu Bansal: Hi, team. Thanks for the opportunity. Sir, I wanted to check the rental thing that you are sort of mentioning. The PNDES PAT margin currently is down about 160 basis points, and this is despite 100 basis points of gross margin gain in H1. So actually, the business has seen about 260 basis points of negative leverage. I wanted to check, as in, while you are mentioning that you are cautious in terms of expansion, but rental is actually playing a negative leverage role in our business currently. I guess, I wanted to check on this. Secondly, throughput also is currently weak, and that is sort of reflecting in this negative leverage. What are the drivers to increase the throughput in the business? I wanted to check on that.
Kaushal Parekh: Let me take the first one. With respect to rental, you are correct that we are seeing some pressure, and that is what we have mentioned in our investor presentation too. If I reflect with H1 numbers, we have seen some pressure come through rentals. We have seen pressures on the front-end staff costs, which is predominantly function of minimum wages revision that has happened. Apart from that, we have also continued our investment in talent. You would see some increase in salaries. We have continued with our investment in marketing because we feel, marketing is generally a cycle. You start investing and then it starts reflecting in 6 to 12 months. We are seeing that positive effect on ground. The last reason, if you see, when I am comparing PAT, H1 last year was very good in terms of treasury gains.
Kaushal Parekh: If you see H1, other income was around INR 54 crores, compared to the full year income of around INR 100 crores. That is also one of the effect leading to slightly muted PAT growth as compared to last year. But yeah, these are all the cost pressures that we are seeing, and we are working on addressing all of this over a period of time.
Devanshu Bansal: Kaushal, thank you for this explanation. But these investments that we have made, right, in terms of marketing and talent, by when do you think this should sort of start reflecting in better throughputs for us? If you could just provide some more color on this.
Kaushal Parekh: Devanshu, take for example, Clarks. This is a business which will start unfolding meaningfully from H2 and obviously next financial year. But in terms of top management team, we have entire team in place. This applies to all the other newer formats too. These are investments that are happening at this point in time. Hopefully, once we start opening EBOs for the stores, you will see better absorption of costs. From next financial year is what you can expect improvements to start coming from. As I just mentioned, marketing, it takes about 6 to 12 months to sort of reflect in terms of better sales throughput and various other things that you do marketing for.
Devanshu Bansal: Got it. Second question is on Crocs, right? There are a few developments which have come to our light. Firstly, we were seeing sort of this import data of rubber and plastic footwear, which has reduced meaningfully. Crocs globally has identified India as a tier 1 market, and they are opening their own COCO stores as well. In your numbers also, we are seeing an acceleration. Are we sort of seeing better growth prospects for this particular format versus what was there earlier? Does Crocs opening their own COCO stores pose any threat to us? That is on Crocs.
Nissan Joseph: First of all, I think Crocs opening stores is very limited and focused on creating high heat markets, which will really help our business because it has a halo effect coming through, Devanshu. That is number 1. I think Crocs has done well with us over many years, and I think even though they have had a high base for the last few years with us, we continue to be able to grow that brand. We are quite excited about it. It is nothing unusually out of the question that they have a huge runway for growth because it has been a very steady, solid growth business for us for many years, right? There is a certain level of maturity that we have. Having said that, like them, we believe India has a lot of opportunity for future growth.
Devanshu Bansal: Thanks. Sanchan, just last one question. For FILA, BIS issues are now behind, right? There is a lot of import that is happening from Vietnam and Indonesia. This is sort of reflecting in reported import numbers in the country, right? We are sort of indicating expansion from FY29 onwards. What exactly are the challenges here? This is both from FILA and Foot Locker perspective. Because I guess from licensing perspective now, the government has been sort of granting licenses.
Nissan Joseph: Well, that is not quite true, Devanshu. We know a number of factories that are not getting their licenses renewed after getting it granted for the first year. There is a certain degree of erraticness and uncertainty that comes with it. That is number 1. Number 2, yes, you can get licenses approved, but before it becomes meaningfully viable financially, to get a license, you need to have a certain amount of velocity of orders from a particular factory. Do not forget they are very factory specific, right? Given that FILA is in a state of rebuild, it is hard to hit those minimums to justify why a factory should go through both the cost and the time to get that renewal, right? There are multiple levels of complexity that come with it. Yes, there are factories that are getting approved.
Nissan Joseph: I can also tell you that there were a series of factories that went through five months of no renewals and then all of a sudden got renewals. It is a very erratic supply chain, and it is very hard for us to build a business based on that. We had to come up with our own supply chain. That has been one of the reasons why it has been taking us a little bit longer to get it going. We would rather do that and be self-sufficient than hope that these BIS renewals will continue or be steady at any given point in the future.
Devanshu Bansal: Got it, sir. I will come back in the queue for more questions. Thanks for taking my questions.
Operator: Thank you. The next question is from the line of Saurabh Kundan from Goldman Sachs. Please go ahead.
Saurabh Kundan: Yeah. Thank you. Just going back to your revenue growth that you reported this quarter, 12% or 13%. I recall, I think there was some benefit, Nishant, in this quarter that you got because Crocs sales from Q1 had, I think, shifted to Q2. Just trying to understand if you take that effect and the festive effect out of the equation, any indication you can give us as to what is the real underlying sales growth in your business today?
Nissan Joseph: Yeah. Saurabh, when we talked, I think it was at the conference call that we had. We had a delayed monsoon this year, and that is what had moved some of those sales into the subsequent quarter. As you know, the monsoon has not been that strong even in the second quarter, so it was not the most monsoony of seasons to see Crocs. Having said that, Crocs had decent growth, but Crocs business is about less than 20% of our entire business if you count everything they do between the stores and Metro and multi-brand. It does not really move the needle. The biggest driver for this quarter is the fact that we had Durga Puja and the finishing of Shradh inside this quarter, where in this year, this quarter, that has been exactly the other way around.
Nissan Joseph: Durga Puja got moved out, and Shradh fell into this quarter fully, with no benefit of post-Shradh season sales. We believe that it has about 250 to 350 basis point impact on our growth, which takes us right back to that 15% growth that we always have guided to.
Saurabh Kundan: Sure. Understood. Thanks. My next question is around the margin. If I recall correctly, there is a guidance that you have of PAT margin being somewhere around the 15% mark. This year, until now in the H1, it is obviously lower than that, even if I look at the adjusted PAT that you have started reporting. I just wanted to ask if the 15% guidance is more like a sustainable medium-term guidance, or you think that in the H2 this year itself, you will be able to make up for the shortfall, so to say, in margins that you have had in the H1. Second related question is the gross margin level or expansion that you have seen in this current quarter. I think Kaushal mentioned the drivers for it. Should that expansion more or less continue going forward in the H2 of this year?
Kaushal Parekh: Saurabh, on PAT, H2 will certainly be better as compared to H1. Historically, we have seen that. In this year, because of this festive shift, more so. Even if you see compared to last year, broadly the same. Last year or many years, broadly the same trend is what would be visible. 15% PAT is like a medium to long-term guidance. We would want to be in that range of around 13% to 15%, especially considering investment that we are doing in the newer business. When they start kicking in, obviously our target is to hit that number on a consistent basis. With respect to your question on gross margins, a reasonable portion of it was on account of lower discounts on the end of season sale that happened in Q2. Obviously that will not sustain in Q3.
Kaushal Parekh: However, the improvement in markup that I mentioned, a portion of it obviously will reflect in the ongoing margins as we see here on. Important thing, Saurabh, would be also the mix of sales, right? Over a period of time, as sales contribution for Walkway, Foot Locker, MetroActiv increases to the total portion, you will see them dragging our gross margins slightly lower. At the same time, growth in other business, including Clarks, hopefully FILA and New Era, these all will help us to sustain or improve our gross margins that we are currently reporting. So it is going to evolve over a period of time. We are not a single brand company, and there are so many multiples. So it all depends on how each of them move, and then resultantly impacts the gross margins and PAT number that we see.
Saurabh Kundan: Sure. Last question from my end is on the Clarks opportunity. Once you start opening the stores, what kind of, because this is a completely new format for you, does it mean that your store addition can accelerate once Clarks supply, et cetera, is in place for you? This brand does not have the overhangs of, let us say, in the case of FILA, there were primarily two overhangs. One is supply and the other is repositioning. I believe none of those are a problem for this one. Secondly, if you could let us know, Clarks has been around in India for quite some time. What were the peak sales that this brand used to have, if you have that number? That is my last question.
Nissan Joseph: Okay. Just to speak to the Clarks journey for us, you are right. We did not have experience with Clarks EBO, Saurabh. However, we had deep experience with the Clarks in our MBO stores, which is what gave us the confidence to go seek the brand out. That is number one. If you will recall, that is very similar to the Crocs story that we had. Just like Crocs, where we used our sales in Metro and Mochi to guide the way as to where we could open stores, we are going to use Metro Mochi the same way for Clarks. Early in its Crocs years, we had some meteoric store openings in numbers with Crocs. The other thing is Crocs did have about 80 EBOs in the country at one point, and we have their data. Now we are just using that as a reference point.
Nissan Joseph: What we like is our own reference point, which is the sales in our own Metro and Mochi stores. So that is how we look at the Crocs EBO journey. We think it has very strong legs, and the good news is Crocs is going to be not dilutive to our margins and our profitability. So that is another thing that excites us about it. When it comes to the no overhangs, you are right. We do not have any overhangs with regards to carryover inventory or BIS issues, because Clarks has been diligently working over the last two years to establish that supply chain. It is as nimble and robust as any supply chain we could have in the country, which is where they are making it, right? So the consumer acceptance has been extremely high and very quickly so as well.
Kaushal Parekh: In terms of your second question, Saurabh, their peak sales, based on whatever information I have, I think that number was somewhere in the range of INR 225 to INR 250 crores, but this was inclusive of a large portion of that was distribution sales. For example, Metro Mochi was one portion out of it. So in terms of MRP sales, the number could be in the range of INR 300 to INR 450 or INR 500 odd crores.
Saurabh Kundan: All right. Thank you very much.
Operator: Thank you. The next question is from the line of Tejas Shah from Avendus Spark Institutional Equities Private Limited. Please go ahead.
Tejas Shah: Hi. Thanks for the opportunity. A large part of our user base, our customer base, actually comes from formal economy, where at least based on macro data, the job creation has been under pressure. Just wanted to know, first of all, if you have trackers, then if you can share insight that are you seeing any divergent trends of growth, let's say, in IT-heavy centers versus non-IT in terms of demand?
Nissan Joseph: Tejas, we did see some of that a few years ago. We saw a little bit in Bangalore. We saw a little bit in Hyderabad. But those things tend to normalize after a bit too, because other employment seems to kick in. We did see that. We are not seeing that as a reason for any shift in business today. Bangalore has rebounded quite nicely. Hyderabad has not fully come back, but we do not think IT was the only reason that affected Hyderabad. We think there is a lot of real estate issues out there as well in terms of the real estate market pricing and so on and so forth. Not for rentals, but I mean just in terms of buying and selling real estate. So we are not seeing that, and it is not like our growth is coming from tier 1 or tier 2 cities. We have kept a steady representation.
Nissan Joseph: 31% of our business, in geography terms, it comes from various parts of the country. 31% comes from the West. 33% comes from the South. But when you look at tiering of business, that has not moved significantly. If anything, the metro cities have actually started to over-index just a little bit, though we have opened up more stores in the lower tier cities. The metro cities are holding their own quite well.
Kaushal Parekh: Tejas, overall South predominantly is likely heavily focused on IT. We show our breakups in terms of number of stores and revenue contribution, and broadly it has remained consistent. Like in 2024, 33% of revenues still come from South. Same stands even in H1. And stores to sale contribution also, we do not see a significant divergence.
Tejas Shah: Yeah. Second question, just wanted to reconcile two divergent trends that we have been kind of calling out the last few quarters. At one place, we are calling out that there is a retail good asset inflation in terms of real estate we are struggling to find on our terms. At the other end, the demand in retail in general, and not only for our category except jewelry, we are not seeing any aggressive demand in any of the subcategories in retail. Just wanted to know, how does this settle down finally? Because if the demand is not picking up for retail in general at large, then rentals have to reconcile with that at some stage, right?
Nissan Joseph: No, unfortunately, Tejas, I am not seeing what you are seeing. We are seeing a lot of players in the market, a lot of new players, a lot of existing players that want to accelerate the expansion. Then international brands wanting to come in. We are seeing it with D2C brands wanting to go offline. We are seeing it from multiple levels and multiple avenues that it is coming through, right? I do not know what the QSR business is doing, but they are not actually sitting on their thumbs either. So there is a lot of demand for space out there, and we know this because when we go negotiate a property, it used to be we could negotiate two or three times back and forth. Now it is a one and done.
Nissan Joseph: If you do not take it, somebody is behind you in line to take it, albeit at an unreasonable price, but somebody is right behind the line to take it. This goes for malls, this goes for high street, and it is all because it is in short supply relative to the demand. I do not know of any retailer planning on contracting stores. I mean, I know one, but I am not going to mention them. I do not know any retailer that is contracting stores. On the contrary, I know of quite a number of them that want to do nothing but open up hundreds and hundreds of stores as they keep announcing it and thumping their chest about it with pride. So I do not see the divergent trend settling down.
Nissan Joseph: Now, if there is a hiccup in the economy or whatever it might be, that is when you will see a lot of fallout, and that is when you will see Metro also spike in its growth. We had some of our best growth in the years that there were recessions in the economy, whether it is 2008 or the subsequent ones later on.
Tejas Shah: Okay. So you are essentially saying there is a supply side issue as well, and not only demand.
Nissan Joseph: It's a two-way street. We are limited in our supply. This has a long gestation period for us to construct malls or shopping precincts in the country. Then, of course, there are people like the other big box value price players that are going off-market to create new shopping zones because they can't get real estate inside a shopping zone. I think you know who I'm talking about. That takes time to develop, and it doesn't come cheap either, right?
Tejas Shah: Sure. The last one, if I may. Our front-end sales force is known to be very motivated, led by the variables that we offer in terms of as a percentage of sales or a direct impact. Now, in the current environment where demand has been tepid or below budget as it has been for a while, how do you, first of all, incentivize that sales staff to achieve their targets or at least monetarily compensate them for what they have been budgeting for? Are you making any structural changes in the compensation that you have been holding for a while?
Nissan Joseph: Yeah. I think it comes from a couple of things. The whole front-end entrepreneurship for sales, it comes from a culture that's been built over many, many decades of being the best in class in service. So it starts there and hopefully we're able to attract the kind of person that wants to do that to start with. If that's what they want to do and you reward them, that's an exponential result that comes out of it. We're going to make structural changes to our pay plan only because we want it to be even more competitive and more focused on rewarding our best, and equally filtering out people that aren't productive as much.
Nissan Joseph: Because as labor gets more costly, it's important that we have a compensation system that not only rewards our best, but is also able to very quickly filter out the people that aren't that good. It's not that, well, demand hasn't been growing. We do grow SSGs every year. So technically, people inside a store have two ways to grow their income. One is, of course, by selling more this year than they did last year. Don't forget, we're a growth company. So with all the growth that's coming, there's opportunities for salesmen to become assistant managers, assistant managers to become managers and area managers and so on and so forth. Each of those steps come with increased income and responsibility, but also increased income. These things help the journey of a person working in a retail career. It's just not what they make that day.
Nissan Joseph: If it is, that's probably the wrong person for us as well. You want to weed them out. If somebody's just coming there, "I'll sell and I'll make my money and I'll go home," you want people that are here for a career. So there's multiple ways we pull that lever.
Tejas Shah: Yeah. Thanks and all the best.
Nissan Joseph: Thanks, Pejuth.
Operator: Thank you. The next question is from the line of Umang Mehta from Kotak Securities Limited. Please go ahead.
Umang Mehta: Hi. Thanks for the opportunity. My first question was again on FILA. It has been four years since you acquired the brand. What would be your candid assessment on how much of a drag was supply, and how much of it is repositioning, which is possibly not resonating with the customers? Connected to it is your statement that you are going for a sharper pricing and brand positioning. So what exactly are we looking to change going forward? Thanks.
Nissan Joseph: I think, to be very candid with you, there was a couple of forces that hit us. Some of them had a multiplier effect. For example, when supply shut off, Umang, what that did was force us to become product creators. As you know, we are great at creating product for Metro and Mochi. We are not great at creating product for the athletic business. We have not done that. That is not our DNA. Not only did we lose a huge opportunity to get supplies for FILA, we also had to develop a capability of coming up with the entire product architecture and the design and the language that goes behind it. In that journey, you fail fast, you learn fast, you do all of those good things, but it comes with a drag.
Nissan Joseph: That was one of the biggest drags on top of having to work out of extremely high old inventory levels there. The supply really hit us in two ways. Having said that, though, we have tried a lot of things. That is the good news. We failed a lot, which is also good news because we learn a lot from that. Now that we talked about sharper pricing, it does not mean necessarily lower pricing, but we now understand what of those tests that we have run have actually worked and what has not worked. The sharper comes from having more of a point of view and a direction rather than necessarily a price point.
Umang Mehta: Understood. Your view that in the medium term, even this format can have, say, store counts north of a few hundreds, still remains the same and there is no change to that?
Nissan Joseph: Yeah. In the next two to three years, medium term, that's definitely the aspiration.
Umang Mehta: Sure. Got it. Thank you so much. Just one quick question on staff costs. We've seen 24% odd growth in H1. With the changes that you're making, how much more should we build going forward?
Nissan Joseph: I'm sorry, staff cost and the 24%, I'm not connecting the two.
Umang Mehta: I'm saying you mentioned about changes in remuneration. How much more should we factor in terms of growth going forward in staff cost?
Kaushal Parekh: So Umang, with the change in the remuneration structure, we expect increase in our front-end staff cost anywhere in the range of 0.5% to 1%. Having said that, our expectation is that we will be able to improve performance and top line. If that happens, impact would automatically come down.
Umang Mehta: Understood. Thank you so much.
Nissan Joseph: Mike, the reason it is 0.5% to 1% is we want to be above and beyond the minimum wage.
Umang Mehta: Understood. Thanks a lot, Nisa. All the best.
Nissan Joseph: Thanks.
Operator: Thank you. The next question is from the line of Utkarsh from Anand Rathi Group. Please go ahead.
Utkarsh Nopany: Yeah. Hi. Good afternoon, sir. My first question is with respect to your volume growth. If we see your average realization has gone up by, say, 15.5% in this H1 FY27 over H1 FY23. But your revenue per square foot has gone down by 17% over the past four-year period. Does it mean that your volume has been under pressure on a consistent basis over the past four-year period? If it is yes, what is the reason for the same, and do you expect the similar trend of weak volume to continue going forward?
Nissan Joseph: Well, before your period, you are talking about anchors on the post-COVID year. I think that was a year that was stellar, and if we have been able to match that year, that is quite commendable. I think what we have done over the last few years is we have had SSG growth that has come from two things. One is, of course, there has been this inflation/ASP growth. I say inflation/ASP because ASP is also the mix of goods. The average selling price is a factor of mix of goods. Of course, it comes from volume growth, right? I am talking like for like. Of course, we have seen overall volume growth because we have added new stores, we have added new formats, right? What I have looked at for the past few quarters, Utkarsh, has pretty much maintained our sales per square foot, and that is very tough to do for two reasons.
Nissan Joseph: One is all the new stores we open come in at a much lower rate of productivity than our existing mature stores, right? That is a given that that is what will happen. Secondly, we open a lot of stores where we are already successful. If there is a very successful Metro, we are going to open up a Mochi. If there is a very successful Metro and a Mochi that is selling X amount in Crocs, we will open up a Crocs store. While it looks like we have been volume challenged, we have actually been mostly the beneficiaries of that volume in the markets where we operate, right? It is not like we have been challenged for volume because of some other person from the outside getting it. More often than not, it is us getting it. More often than not, it is a new store that has a double effect on me, right?
Nissan Joseph: So let's just take a case. Metro is operating, doing X amount of revenue. I come in and open up a Mochi store that is like 0.6 or 0.7, 0.65 of what the Metro does or used to do. Immediately, you see a per square foot drop in sales if you just average out between the two, and then you also see a volume drop in my Metro stores. Having said that, we think it's a great strategy to own market as we continue to include new cities. If you notice, it's not like we go open new cities in droves. What we really do is go behind where we've been successful and we use the backfill model, and that's been the bigger driver of it.
Utkarsh Nopany: Okay. So, sir, regarding your new store point, if we see the proportion of stores which are more than two years old, it was earlier in the range of 75% to 79%. Now it has gone up to around 82%. Is that a relevant point that because of the new store addition, our volume is under pressure?
Nissan Joseph: It's a two-way street, right? New stores are always dilutive to what you do, right? If I stop opening new stores today, my SSG will flow through straight to my square foot growth, right? But today, my SSG does not flow through to my square foot growth because I continue to open stores. See, that's why I said, we maintain our sales per square foot for a considerable amount of time, for quite a few of the last few quarters that we've talked about it. But the second thing is the cannibalistic effect, right? This is literally what we do. If there's a successful Metro, we'll open up a Mochi. If both of them combined do X amount of sales in Crocs, for example, we'll open up a Crocs store. The same is going to happen as we start marching and doing our Clarks stores.
Nissan Joseph: And it's a compounding effect. So we do sell more volume and value of shoes in our existing doors.
Utkarsh Nopany: Okay. And sir, lastly, you have mentioned in your initial remark that we plan to increase the pace of store addition from FY28 onwards. Can you give some ballpark range, what kind of a net store additions we are looking to add from FY28 onwards on an annual basis?
Nissan Joseph: Utkarsh, that was specifically for FILA that I was talking about.
Utkarsh Nopany: Okay.
Nissan Joseph: Because obviously, a little bit more of a greenfield expansion. That is when you will start seeing us expand. The rest of the expansion, we are going to continue to say, I will open 100, I will open 200 stores, Utkarsh, as long as I have a reasonable amount of confidence that the financial metrics work.
Utkarsh Nopany: Okay. Got it, sir.
Operator: Thank you. The next question is from the line of Vidisha Sheth from Ambit Capital Private Limited. Please go ahead.
Videesha Sheth: Hi. On Walkway, given that it has been nearly a year of the tweaking done in the strategy pertaining to assortment or experience or expansion, can you share an update on how you are seeing revenue growth trajectory shape up over here, or to what extent has the productivity improved through the revised proposition and the outlook going forward?
Nissan Joseph: Yeah. As you know, Vidisha, in the last 12 to 14 months, we have opened over 35 Walkway stores on a base of about 60, right? So 60, 70. The growth was considerable as a percentage of growth. In those 35, you have your typical 30% of them were good news, 30% of them performed average, and 30% of them was bad news. But the bad news is actually where the good news is because it brings learnings with it. We have realized some things as we have opened these stores in certain markets that that is not the right formula for it. We have identified it, and subsequently, we started putting it back into use as we have opened up more Walkway stores in the last two quarters. We are starting to see that it actually was the reason why the stores did not perform or did perform, right?
Nissan Joseph: We will continue to tweak this, and till I have a high degree of confidence in it, we are not going to just open up the gates on it. However, the confidence is growing day by day.
Videesha Sheth: To put it in another way, the productivity improvement, which was expected earlier, didn't quite shape up. But given the recent tweaks or adjustments in the strategy, you're expecting the productivity to improve going forward.
Nissan Joseph: No. Thank you for stopping and asking me to clarify that.
Videesha Sheth: Oh.
Nissan Joseph: The productivity increases that we expected in our like for like stores, our existing stores, did start to come through. Absolutely came through, right? What we have not cracked yet is the new store opening formula, and that's the 30%, 30%, 30% I was telling you about. Of the 30 odd, 35 odd stores that we opened, 30% of them were absolute failures, 30% of them did really well, right? So that's the learnings I was talking about. So thank you for pausing to clarify that. But in the existing stores, the initiatives that we've done have been working.
Videesha Sheth: Got it. Thanks.
Operator: Thank you. The next question is from the line of Rahul Aggarwal from Ikigai Asset. Please go ahead.
Rahul Agarwal: Yeah. Hi. Good evening to you. Just few clarifications. One is on the GST input credit. The GST Council is discussing that purely from a retail perspective, looks like there has been lot of distortion on when we have lower GST rates on the finished good and higher on the input side. Anything from Metro Brands perspective? Does that benefit us in any manner?
Kaushal Parekh: Rahul, we don't have accumulated GST credit. That inverted duty structure is not a problem for us. So frankly, those changes won't have any beneficial effect on us that I'm still looking at.
Rahul Agarwal: Got that. Second clarification was on the BIS. You mentioned Foot Locker, FILA, MetroActiv, and the sport and athleisure side of Metro Mochi is basically facing issues even today. Just to clarify, you talked about another 6 to 12 months of things settling down in terms of supply chain for these brands, or FILA is going to take longer, Foot Locker is earlier, and you have different timelines for different brands.
Nissan Joseph: The brands, Rahul, that we have control over, whether it's Metro, Mochi, Walkway, DaVinchi, J. Fontini, all those brands, we have sorted it out. And they represent about 70% of our business. Where we do not have control of the brand, that is what creates the variance and the variability. It is also where we do not have control of the brands is where we want to emphasize and have a lot of opportunity for growth. I do not know if that answers your question. The volatility, the uncertainty is higher for Foot Locker, the uncertainty is higher for FitFlop because these brands are heavily dependent on imports. The dependence on the volatility there for even Clarks is not as much because they are producing most of it in India already.
Nissan Joseph: From that standpoint, it is just that the growth brands that we are looking at have some exposure to the BIS still.
Rahul Agarwal: Got it. And third clarification from Kaushal, again, on the inventory side, you mentioned that inventory number, which looks higher right now, should go back to normal by March 2027, in like another six months' time. Is that fair to say?
Kaushal Parekh: A portion of improvement you will see by March, Rahul. And coming back to those 80 odd days of working capital, that should happen sometime around mid to end next financial year.
Rahul Agarwal: And if I have to refer to only inventory, what would be a normal ideal level where you want to reach, versus let's say INR 1,000 crore right now? Maybe the absolute number might not be correct, but any thoughts on that?
Kaushal Parekh: Absolute number may remain around that. But in terms of inventory turns, we would want to improve. Months of inventory, say somewhere in that range of 7 months is what we feel ideal, because we also offer lots of variety. So we don't want to cut ourselves too thin. But 7 months would be an ideal months of inventory for us.
Rahul Agarwal: Got it. And lastly, Nishant, just one question. We already entered the festive season. Any qualitative comments on how the start been for October? Thank you so much.
Nissan Joseph: Yeah. Thanks, Rahul. So, we're just getting ready to wrap up Durga Puja on the eastern front, and it's done very well for us. We're quite optimistic about it. The other markets, when you compare them to a true like-for-like period versus the Diwali season, are also doing well. It is all indications that it has the makings of a good festive coming up.
Rahul Agarwal: Got it. Thank you so much, and wish you all the best.
Nissan Joseph: Thanks, Rahul.
Operator: Thank you. The next question is from the line of Shreya Baheti from Anand Rathi Institutional Equity Private Limited. Please go ahead.
Shreya Baheti: Yes, sir. I just wanted to know what were our brand spends for the quarter as compared to last year, Q2 FY26, and what are our expectations for same going forward?
Kaushal Parekh: Sorry, we did not get your question. Were you asking about marketing spends?
Shreya Baheti: Yes, sir. I just wanted to know what were our marketing spends for Q2 FY27, and what was the same last year in Q2 FY26? What are we expecting going forward for the same?
Kaushal Parekh: Broadly for this H1, it was around 4%. Comparative number for last year was around 3.25%, 3.4%.
Shreya Baheti: Going forward, for the full year and all, it will be around 4% only, for next year also?
Kaushal Parekh: We expect it to be around 4%, especially considering there are a few new brands which we are still incubating. So 4% is a reasonable marketing spend.
Shreya Baheti: Okay, sir. And sir, just one more question. What would be our CapEx guidance for FY27 and FY28?
Kaushal Parekh: So close to about INR 80 to 100 crores, and this would include even the remodels that we do. So somewhere around INR 100 crores.
Shreya Baheti: Thank you, sir. Thank you.
Operator: Thank you. As there are no further questions from the participants, on behalf of ICICI Securities Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.
