Ladies and gentlemen, good day, and welcome to Metro Brands Limited Q2 FY 2027 Earnings Conference Call hosted by ICICI Securities Limited. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touchtone phone. I now hand the conference over to Mr. Ashutosh Joytiraditya by ICICI Securities Limited. Thank you, and over to you, sir.
Yeah. Thank you, [Shaurya]. Hello, and good afternoon, everyone present on the call. I, on behalf of ICICI Securities, welcome you on Metro Brands Limited's Q2 FY 2027 earnings call. I would like to thank the management to give this opportunity of hosting the call. From the management, we have Mr. Rafique Malik, Chairman, Ms. Farah Malik, Managing Director, Mr. Nissan Joseph, Chief Executive Officer, Mr. Kaushal Parekh, Chief Financial Officer, Mr. Mohit Dhanjal, Chief Operating Officer, and Ms. Alisha Malik, President, Sports Division, ECom, and CRM. I now hand the call over to Nissan, sir, for the opening remarks. Thank you.
Thank you, Ashutosh. Good afternoon, everyone, and thank you for joining our earnings call. On a standalone basis, second quarter net sales grew by 12% year-on-year to INR 712 crore, while profit after tax increased by 14% to INR 73 crore, and EBITDA grew 15%. On a consolidated basis for the second quarter, revenue grew by 12.2% to INR 730 crore. EBITDA increased by 15.9% to INR 198 crore, 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 crore, with the PAT margin unchanged at 10.6%. E-commerce, including omni-channel sales, grew by 12% in the second quarter and contributed 14.2% of revenue. For the first half, 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.
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 the third quarter compared with last year as sales demand moved from September to October. Gross margin improved to 58.4% for the first half 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.
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 the second quarter, we opened 21 stores and closed nine stores, adding 12 stores on a net basis. For the first half, 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.
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 the third quarter, 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 the second half 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.
We expect this transformation to take shape over the next 12 to 18 months, with store expansion expected to pick up from FY 2028 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 the first half. 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.
Sports and athleisure remain important opportunities through 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 compensations 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 second quarter performance in sales given the festive shift. Our PAT margin and EBIT margins outpaced our growth, and as we enter the third quarter, we are focused on capitalizing on the festive demand. With that, I will hand it back to Ashutosh for the Q&A.
Yes, [Shaurya], we can open the Q&A session.
Yes. 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 the touchtone 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 Videesha Sheth from Ambit Capital Limited. Kindly go ahead.
Hi, I hope I am audible. My first question was on the store addition momentum. Looking at the store closures, and I understand it is only 2%- 3% 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 problems that you would be seeing in those stores?
Videesha, broadly, it is not linked to any particular format. We constantly review stores. Any store, which doesn't 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 clean up across all the formats.
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. So that happens as well. It is not just the first two years. Sometimes these stores have been around for five, seven years, Videesha, but other shopping precincts have come up in nearby vicinities, putting pressure on this, and we believe that the right place to be is in the new vicinity, and that is why you see some of this.
As you see, even for this year, we expect it to be in that range of around 2%-3%, as we have seen historically.
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 100-110 stores that you all have been adding on an average?
Yes, you know, Videesha, 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. But 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.
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.
Videesha, there are two, three reasons, but I think the most important reason was 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 margin, specifically in Q2. We have seen slight improvement in markup. The third reason you touched upon, slightly lower contribution of e-commerce sales to the overall sales. I think these are three key reasons why you see the movement of 2% in gross margins.
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?
It is a combination of everything, right? It is also a combination of mix, a slight price increase in view of the raw material hike that we have seen. It is a combination of multiple factors that helps us improve the markup.
Okay. And 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 your till date?
Broadly, in terms of raw material, hike could be somewhere in the range of around 10%-15%. But when you see it on MRP, obviously it goes down.
Sure. I will get back in the queue for my other question.
Thank you.
Thank you. The next question is from the line of Sameer Gupta, IIFL Capital. From India Infoline, please go ahead.
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. Now, 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 four years, even including FY 2025, 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?
Yes, 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, right? That is correct. But we did open 34 new stores in this H1 of the year. What we're seeing is rentals, right? 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 x 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.
We don't really mind whether we open 70 stores or 125 stores if we believe they all have a chance of profitability.
Got it.
As Nissan 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 additions.
Got it. I do not think I caught the number of price hike that you said you have taken. I did listen that 10%-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?
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%-4%, or maybe 2%-5%. It ranges for each article as we review.
Got it. Last question, if I may. Inventory continues to be on the higher side, and of course, fourth quarter, 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?
This is not the base case for sure.
Okay.
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 U.S.-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, and 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.
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. 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.
Got it, Kaushal and Nissan. Thanks and all the best.
Thanks, Sameer.
Thank you. The next question is from the line of Devanshu Bansal from Emkay Global Financial Services Limited. Please go ahead.
Hi, team. Thanks for the opportunity. Sir, I wanted to check the rental thing that you are mentioning. The Pre-Ind AS PAT margin currently is down about 160 basis points, and this is despite 100 basis points of gross margin gain in first half. So actually, the business has seen about 260 basis points of negative leverage. So 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. So I guess, I wanted to check on this. Secondly, throughput also is currently weak, and that is reflecting in this negative leverage. So what are the drivers to increase the throughput in the business? So, I wanted to check on that.
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 revisions that have 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- 12 months. And 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.
If you see H1, other income was around INR 54 crore, compared to the full year income of around INR 100 crore. 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.
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.
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. And this applies to all the other newer formats too. So 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. So, from next financial year is what you can expect improvements to start coming from. As I just mentioned, marketing, it takes about 6- 12 months to sort of reflect in terms of better sales throughput and various other things that you do marketing for.
Got it. The second question is on Crocs, right? There are 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 one 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.
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 one. I think Crocs has done well with us over many years. 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. 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.
Thanks, Nissan. Nissan, sir, just last one question. For FILA, BIS issues are now behind, right? There is lot of import that is happening from Vietnam and Indonesia. This is sort of reflecting in reported import numbers in the country, right? But we are sort of indicating expansion from FY 2029 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.
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 one. Number two, 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 stage 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. There are multiple levels of complexity that come with it. Yes, there are factories that are getting approved.
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's a very erratic supply chain, and it's very hard for us to build a business based on that, so we had to come up with our own supply chain. That has been one of the reasons why it's been taking us a little bit longer to get it going. We would rather do that and be self-sufficient than hope that this BIS renewals will continue or be steady at any given point in the future.
Got it, sir. I'll come back in the queue for more questions. Thanks for taking the questions.
Thank you. The next question is from the line of Saurabh Kundan from Goldman Sachs. Please go ahead.
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, Nissan, 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 late 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?
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 Mochi, multi brands, so 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 Shraddh inside this quarter, whereas in this year, this quarter, that has been exactly the other way around.
Durga Puja got moved out and Shraddh fell into this quarter fully, with no benefit of post-Shraddh season sales. So, we believe that it has about 250- 350 basis point impact on our growth, which takes us right back to that 15% growth that we always have guided to.
Sure. Understood. Thanks. My next question is around the margins. 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 first half, 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 second half this year itself, you will be able to make up for the shortfall, so to say, in margins that you have had in the first half. A 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 second half of this year?
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. 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. So obviously that will not sustain in Q3.
However, the improvement in markup that I mentioned, a portion of it obviously will reflect in the ongoing margins as we speak here. Important thing, Saurabh, would be also the mix of sales. Over a period of time, if sales contribution for Walkway, Foot Locker, MetroActiv increases to the total portion, you will see them dragging our gross margin 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. 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.
Sure. Last question from my end is on the Clarks opportunity. Once you start opening the stores, 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.
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.
What we like is our own reference point, which is the sales in our own Metro and Mochi stores. That is how we look at the Clarks EBO journey. We think it has very strong legs. The good news is Crocs is going to be not dilutive to our margins and our profitability. 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? The consumer acceptance has been extremely high, and very quickly so as well.
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 crore- INR 250 crore, 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 that range of INR 300 crore- INR 450 crore or INR 500 crore.
All right. Thank you very much.
Thank you. The next question is from the line of Tejas Shah from Avendus Spark Institutional Equities Private Limited. Please go ahead.
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 that, 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?
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. We are not seeing that. It is not like our growth is coming from tier one or tier two cities. We have kept a steady representation.
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.
Tejas, overall South predominantly, slightly 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 used to come from South, same spends even in H1. Stores to sale contribution also, we do not see a significant divergence.
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?
No, unfortunately, Tejas, I'm not seeing what you're seeing. We're 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're seeing it with D2C brands wanting to go offline. We're seeing it from multiple levels and multiple avenues that it's coming through, right? I'm not saying, and I don't know what the QSR business is doing, but they're not actually sitting on their thumbs either. So there's 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's a one and done.
If you don't take it, somebody's behind you in line to take it, albeit at an unreasonable price, but somebody's right behind in line to take it. This goes for malls, this goes for high streets, and it's all because it is in short supply relative to the demand. I don't know of any retailer planning on contracting stores. I know of one, but I'm not going to mention them. I don't know any retailer that's 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 don't see the divergent trend settling down.
Now, if there is a hiccup in the economy or whatever it might be, that's when you'll see a lot of fallout, and that's when you'll 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's 2008 or the subsequent ones later on.
Okay. So you are essentially saying there's a supply side issue as well, and not only demand.
It's a two-way street. We're 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 the shopping zone. I think you know who I'm talking about. But that takes time to develop, and it doesn't come cheap either. Right?
Sure. The last one, if I may. So 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?
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, right? So it starts there, and hopefully, we're able to attract the kind of person that wants to do that, right? 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.
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 while demand hasn't been growing, we do grow SSGs every year, right? 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, right? It's just not what they make that day.
If it is, that is probably the wrong person for us as well, right? You want to weed them out. If somebody is just coming there, "I will sell and I will make my money and I will go home," you want people that are here for a career. So there are multiple ways we pull that lever.
Yeah. Thanks, and all the best.
Thanks, Tejas.
Thank you. The next question is from the line of Umang Mehta from Kotak Securities Limited. Please go ahead.
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 more sharper pricing and brand positioning. So what exactly are we looking to change going forward? Thanks.
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, right? As you know, we are great at creating product for Metro and Mochi. We are not great at creating product for the athletic business, right? We have not done that. That is not our DNA. So not only did we lose a huge opportunity to get supply 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, right? In that journey, you fail fast, you learn fast, you do all of those good things, but it comes with a drag.
That was one of the biggest drags on top of having to work out of extremely high old inventory levels there. So 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 have 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. So the sharper comes from having more of a point of view and a direction rather than necessarily a price point.
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?
Yeah. In the next two to three years, medium term, that's definitely the aspiration.
Sure. Got it. Thank you so much. Just one quick question on staff costs. We've seen 24% odd growth in first half. With the changes that you're making, how much more should we build going forward?
I'm sorry, staff cost and the 24%, I'm not connecting the two.
So, I'm saying you mentioned about changes in remuneration, right? How much more should we factor in terms of growth, going forward in staff costs?
Umang, with the change in the remuneration structure, we expect increase in our front-end staff cost anywhere in the range of 0.5%-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.
Understood. Thank you so much.
Umang, the reason it is 0.5 %- 1% is we want to be above and beyond the minimum wage.
Understood. Thanks a lot, Nissan and Kaushal, all the best.
Thanks.
Thank you. The next question is from the line of Utkarsh Nopany from Anand Rathi Group. Please go ahead.
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 FY 2027 over H1 FY 2023. 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?
Well, if the four-year period you are talking about anchors on the post-COVID year, I think that was the year that was stellar. 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. 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. 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.
One is all the new stores we open come in at a much lower rate of productivity than our existing mature stores. That is a given. 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.
So while it looks like we have been volume challenged, we have actually been a lot, mostly the beneficiaries of that volume in the markets where we operate. So 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, and more often than not, it is a new store that has a double effect on me.
Let's just take a case. Metro's 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. That's been the bigger driver of it.
Okay. So sir, regarding your new store point, like if we see the proportion of stores which are more than two year old, it was earlier in the range of 75%-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?
It's a two-way street. New stores are always dilutive to what you do. If I stop opening new stores today, my SSG would flow through straight to my square foot growth. But today, my SSG does not flow through to my square foot growth because I continue to open stores. 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. The second thing is the cannibalistic effect. 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. It's a compounding effect.
We do sell more volume and value of shoes in our existing doors.
Okay. And sir, lastly, you have mentioned in your initial remark that we plan to increase the pace of store addition from FY 2028 onwards. Can you give some ballpark range, what kind of a net store additions we are looking to add from FY 2028 onwards on an annual basis?
Utkarsh, that was specifically for FILA that I was talking about.
Okay.
Because obviously it is 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.
Okay. Got it, sir.
Thank you. The next question is from the line of Videesha Sheth from Ambit Capital Private Limited. Please go ahead.
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 are you seeing revenue growth trajectory shape up over here? Or to what extent has the productivity improved through the revised proposition and outlook going forward?
Yeah. As you know, Videesha, in the last 12- 14 months, we have opened over 35 Walkway stores on a base of about 60, right? 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 have started putting it back into use as we have opened up more Walkway stores in the last two quarters. And we are starting to see that it actually was the reason why the stores did not perform or did perform, right? We will continue to tweak this and until 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.
To put it 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.
No. Thank you for stopping and asking me to clarify that. 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.
Got it. Thanks.
Thank you. The next question is from the line of Rahul Agarwal from Ikigai Asset. Please go ahead.
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 will be a lot of distortion on when we have lower GST rates on the finished good and higher on the input side. Anything from a Metro Brands perspective? Does that benefit us in any manner?
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 our balance sheet or P&L.
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- 2 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.
The brands, Rahul, that we have control over, whether it is Metro, Mochi, Walkway, Da Vinchi, J. Fontini, all those brands, we have sorted it out. 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 brand 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.
From that standpoint, it is just that the growth brands that we are looking at have some exposure to the BIS still.
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 of 2027 in another six months' time? Is that fair to say?
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.
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?
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 seven months is what we feel ideal, because we also offer lots of variety. We don't want to cut ourselves too thin, but seven months would be an ideal months of inventory for us.
Got it. Lastly, Nissan, just one question. We already entered the festive season. Any qualitative comments on how the start been for October? Thank you so much.
Thanks, Rahul. 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.
Got it. Thank you so much, and wish you all the best.
Thanks, Rahul.
Thank you. The next question is from the line of Shreya Baheti from Anand Rathi Institutional Equity Private Limited. Please go ahead.
Yes, sir. I just wanted to know what were our brand spends for the quarter versus as compared to last year, Q2 FY 2026, and what are our expectations for same going forward?
Sorry, we did not catch your question. Were you asking about marketing spends?
Yes, sir. I just wanted to know what were our marketing spends for Q2 FY 2027, and what was the same last year in Q2 FY 2026, and what are we expecting going forward for the same?
Broadly, for this H1, it was around 4%. Comparative number for last year was around 3.25%- 3.4%.
Going forward, for the full year and all, it will be around 4% only, for next year also?
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.
Okay, sir. Just one more question. What would be our CapEx guidance for FY 2027 and FY 2028?
Close to about INR 80 crore- INR 100 crore, and this would include even the remodels that we do. So somewhere around INR 100 crore.
Thank you, sir. Thank you.
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.