Opening 140 New Foot Locker Stores Will Reach New Customers In India

Key Takeaways

• Significant store expansion and Foot Locker launch in India aim to boost revenue through premium pricing and increased market penetration.
  
• Focus on optimizing margins through cost control, private labels, and e-commerce growth supports strong net margins and sales growth.
  
• Competitive pressures and regulatory challenges may hinder revenue growth and store expansion, with potential impacts from inventory risks and limited pricing power.

Catalysts

Operates as a footwear specialty retailer in India.

• Metro Brands plans to expand its store footprint significantly, with plans to open 140-145 stores next year, potentially leading to increased revenue streams and market penetration.
  
• The company is strategically repositioning the Fila brand, launching new product tranches, and increasing distribution across more stores, which is expected to positively impact sales growth and profitability.
  
• The launch of Foot Locker stores in India, alongside new store openings, could drive higher revenue due to the premium pricing and demand for sports-inspired products.
  
• Increased focus on optimizing margins through cost control measures and a strategic mix of private labels and external brands, expected to support healthy net margins despite market fluctuations.
  
• Metro Brands is testing new retail channels like quick commerce and expanding its e-commerce offerings, which is likely to contribute to top-line growth by reaching new customer segments and improving overall sales.

Metro Brands Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Metro Brands's revenue will grow by 16.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 16.8% today to 17.8% in 3 years time.
• Analysts expect earnings to reach ₹6.8 billion (and earnings per share of ₹24.84) by about January 2028, up from ₹4.1 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 75.5x on those 2028 earnings, down from 79.6x today. This future PE is greater than the current PE for the IN Specialty Retail industry at 46.1x.
• Analysts expect the number of shares outstanding to grow by 0.41% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 13.63%, as per the Simply Wall St company report.

Metro Brands Future Earnings Per Share Growth

Risks

• The Fila inventory liquidation resulted in a 50 basis points impact on gross margins, indicating potential risks in inventory management and associated costs. This could affect future net margins if such situations recur.
  
• The delayed opening of malls and competitive pressure for retail space has forced the company to tone down its store opening guidance from 100 to 140-145, impacting revenue growth targets.
  
• The consistent average selling price (ASP) of ₹1,500 over the last six quarters, along with high accessory sales, suggests limited pricing power or significant growth in lower-value items, which could suppress overall revenue growth.
  
• The BIS (Bureau of Indian Standards) regulations and supply uncertainties, especially affecting brands like Foot Locker, pose a risk to store expansion and product availability, potentially impacting earnings.
  
• Competitive pressures leading to early end-of-season sales by competitors could affect Metro Brands' sales revenue, especially in the seasonally strongest quarters if they do not adjust their strategy accordingly.

Valuation

• The analysts have a consensus price target of ₹1280.61 for Metro Brands based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹1525.0, and the most bearish reporting a price target of just ₹949.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹38.5 billion, earnings will come to ₹6.8 billion, and it would be trading on a PE ratio of 75.5x, assuming you use a discount rate of 13.6%.
• Given the current share price of ₹1202.25, the analyst's price target of ₹1280.61 is 6.1% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.