Metro Brands Ltd

NSE:METROBRAND

Earnings Call Analysis

Sales Up 15%, High ASP Brands Fuel Growth

The company has seen a noteworth 15% sales growth, driven by high average selling price (ASP) brands like Crocs, Da Vinchi, J. Fontini, and Birkenstock. With an 8% increase in Profit After Tax (PAT), there's a small 1% delta attributed to ESOP and IndAS 116 adjustments, and minor increases in certain line items. The executive team expressed confidence in sustaining a revenue of INR 5,500 per square feet in the future despite recent drops. Their compensation philosophy includes a 60-40 fixed-variable pay mix for store staff, which underpins their retail strategy. For Fila, a break-even is expected by FY 25 or early FY 26 as they work on inventory this year.

Inventory Optimization and Expansion Strategies

The company is on a mission to reshape its brand image by eliminating outdated inventory and revamping its stores to better represent its ideals—an endeavor expected to bear fruit by 2024. This purposeful cleansing is key to enhancing brand perception but may initially dilute performance metrics. Expansion plans are ambitious, including targeting a significant 20% growth through the addition of 20+ Crocs stores. These new stores, coupled with a focus on lucrative regions like the East, where even a small percentage of stores are outperforming, will spearhead the company's strategic growth.

E-commerce and Omnichannel Development

As shopping patterns shift online, the company's e-commerce channel is ballooning, signaling a possible transformation in the retail landscape. Despite margin pressures from heavy online discounting periods, like those on Amazon, omnichannel strategies have sustained solid growth and might emerge as the leading force in capturing the digitally adapt consumer base.

Brand Differentiation and Geographic Coverage

The company is strategically maneuvering with its Walkway brand, targeting distinct consumers across various city tiers. With an eye on understanding this consumer segment's preferences before scaling, the brand eyes future potential, especially in the South and West, and fine-tuning their approach towards a demographic that's widespread but more concentrated in certain locales.

Cost Management amid Expansion

Simultaneous with aggressive store openings, the company has incurred approximately 1% impact at the PBT level from ESOP costs and IndAS 116 impacts. Yet, the spirit of continuous cost control is ingrained in the company's ethos, helping to counterbalance these impacts as it boldly strides towards expansion.

Profitability of Different Brands and Segments

Metro Brands stands firm on its profitability journey, achieving a 15% growth in sales and 8% growth in PAT during the first half of the fiscal year, despite minor margin pressures from ESOP and IndAS 116. As for brand-specific performance, Walkway, the value segment player, is poised with an opportunity to tap into a different consumer base, achieving competitive CapEx efficiencies vis-à-vis other in-house brands, even if it doesn't rake in the same level of EBITDA margins.

Sales Per Square Foot and Margin Efficiencies

Focusing on its most profitable brands in terms of sales per square foot, like Crocs, the company is adapting to a suite of variables including new city entrants and mix of store types. Despite the challenges, the leadership has guided that consistency in margins between 55% to 57% is attainable. Below the line, an attentive watch on expense line items coupled with a high proportion of variable costs has been instrumental in maintaining stable margins year over year.

Variable Pay and Employee Incentivization

Reflecting a unique approach towards sales motivation, the company has implemented a pay structure where approximately 60% of store staff compensation is fixed, while a notable 40% is variable, based on performance. This incentive system aims to drive an upward sales trajectory by tangibly rewarding staff efforts.

Earnings Call Transcript 2024-Q2

[Operator]

Welcome to Metro Brands Limited Investor Call hosted by Prabhudas Lilladher Private Limited. [Operator Instructions] Please note that this conference is being recorded.

I now hand the conference over to Mr. Amnish Aggarwal from Prabhudas Lilladher. Thank you, and. And over to you, sir.

[Amnish Aggarwal, analyst]

Hi. I welcome all to the conference call hosted by Prabhudas Lilladher for Metro Brands Limited for their second quarter earnings.

Now I will introduce the management. Today, we have Mr. Rafique A. Malik, who is the Chairman of the company; Mrs. Farah Malik, who is the Managing Director; Mr. Nissan Joseph, who is the CEO of the company; Mr. Kaushal Parekh, who is the CFO; and Ms. Aziza Rafique Malik, who is the President Sports Division E-commerce and CRM.

Without wasting any time, now, I hand over the call to Mr. Nissan Joseph to make the opening remarks. After which, we will open the floor for Q&A. Over to you, sir.

[Nissan Joseph, executive]

Thank you, Amnish. And my apologies to everyone for the slight delay in starting the call. And with that, I'd like to welcome you to our Q2 FY '24 earnings call.

I'm pleased to report that in spite of facing pent- up demand last year, a delayed festive season that moved most of the key festivals from Q2 to Q3 of this year, we've been able to close the quarter with a 15% growth over last year, along with a 15% PAT. This quarter has been very much in line with our expectations, and hence, we've delivered numbers consistent with our continued guidance.

I'll dwell into some of the key highlights that have contributed to our performance. In Q2 FY '24, we saw year-on-year revenue growth which reached an impressive 15%. This uptick in growth surpasses the 12% year-on-year growth witnessed in the previous quarter. A notable factor behind this growth is the slow but on pace normalization of demand as we move past the pent-up demand experienced in Q2 FY '23 compared to Q1 FY '23. Additionally, this year's festive period has been slightly delayed with festivities in FY '24 occurring approximately 2.5 to 3 weeks later than last year.

As we progress through the quarter and as anticipated, we did start to see the positive effect of the approaching festival season. Our store expansion strategy remains on track, with the net addition of 29 stores, including entry into 8 new cities across all formats. This expansion reflects our commitment to enhancing our presence in both existing and new markets and strengthening our brand's reach and accessibility.

E-commerce continues to be a driving force behind our growth with Q2 e-commerce sales, including omnichannel, reaching INR 60 crores. This segment saw a 45% growth, showcasing the increasing acceptance of our digital channels by our customers.

Looking to the first half of FY '24, we witnessed stable year-on-year growth of 13% when compared to the previous year. Our store expansion strategy continues to thrive, with a net addition of 56 stores and an entry into 15 new cities in the half, spanning all formats. I'm also pleased to add an update to our store count as earlier this week, we announced the opening of our 800th store for Metro Brands.

E-commerce sales, including omnichannel for H1 amounted to INR 121 crores with a remarkable 53% growth. Our digital investments presence and capabilities continue to be a source of strength, contributing to our overall performance.

We've also been proactive in managing challenges with the first half at a standalone basis, very much within our guidance of 15% to 17% PAT, with the half coming in at 17.1%. This despite incremental expenses of 100 basis points due to ESOP issuance and IndAS accounting, the latter primarily due to increased new store openings. We remain vigilant in managing and optimizing our operations to maintain our profitability.

Lastly, our premiumization strategy is making substantial headway with sales of footwear priced over INR 3,000 accounting for 48% of our business. This reflects a positive response from our customers and highlights our commitment to delivering high- quality products and an enhanced consumer experience.

Before I close, I would like to add some color on our Fila integration. As we mentioned in earlier calls, the 3-three year plan is to clean up the inventory and rationalize the current stores and distribution in this year. The second year to reset the brand and position it for success in the coming years. And the third year will be focused on acceleration.

And as a follow-up to the impending BIS regulations, we're gearing up for the implementation of the compliance requirements in January of 2024, though we still lack full clarity on all aspects of it. However, as guided previously, we have front-loaded inventory to help mitigate any supply issues caused by the implementations.

In conclusion, Q2 has been a period of solid growth and strategic advancement despite the many challenges faced by Metro Brands. I would like to thank the entire team at Metro Brands for their continued focus and hard work in ensuring we lead the way to serving India's footwear needs. We're excited about the opportunities that lie ahead and remain dedicated to delivering value to our shareholders and customers.

Thank you again for joining us. Apologies again for the delay, and we look forward to discussing our performance in further detail in the Q&A session. With that, I'll turn it back to the moderator to open it up for questions.

[Operator]

[Operator Instructions] The first question is from the line of Tejash Shah from Spark Capital.

[Tejash Shah, analyst]

Congrats on the decent set of numbers in the current environment. Sir, just wanted to start with your read on the prevailing consumer sentiment in general and specifically on the premiumization trend that we have witnessed since COVID till now. How is it evolving? And what's your read on the same going forward?

[Nissan Joseph, executive]

Thanks for your question, Tejash. What we're seeing is probably a temporary headwind of timing, more than it is an economic headwind that we're facing. So the challenges we faced were predominantly due to the pent-up demand from last year, number one, and the shift in festivals, which really is a temporary headwind. It's a timing headwind, not an economic headwind. Overall, we feel the consumers in our segment remains resilient to the business and is appreciative of the product offerings we have.

[Tejash Shah, analyst]

Sure. And we have seen a decent traction in our online sales. And then you spoke about it also that our omni strategy is working well. So just wanted to understand the margin profile of that business, a. And the breakup of that business, is it more platform-driven? Or is it B2C? Or is it largely third-party B2B in nature?

[Nissan Joseph, executive]

So one of the reasons our e-comm business hovers in the low double digits which have just crossed double digits for the first time, Tejash, is because we do not want to get into the discounting game, right, which unfortunately is the mainstay of Indian e-tailing today. Our business is done in multiple ways. One of them is product we sell directly to the marketplaces. But the main business that we really look at nurturing is what we call our omnichannel business where we light up the inventory across all our stores onto different platforms. And the advantage of that is twofold. One is we're able to increase our inventory utilization by getting products across the country and also reducing our time of delivery.

And the second reason we like that is we're also able to control any discounting that happens online, right? So if there's discounting that is unfavorable to us, we will be able to turn it off very quickly. Overall, the margin profile of that business is relatively healthy, in line with our regular business. But e-commerce is not an easy business overall with cost associated. So it's just not a margin profile that you might be looking at. You might want to look at the end cost profile. And I can tell you, if you look at all the pure play e-comm players, you get the sense that it's not the most profitable business in the world for most people. So consequently, it's the same thing for us.

Having said that, though, the way we try to grow it is to do it through curating ranges that will add both brand salience and also not be in any way dilutive to us.

[Tejash Shah, analyst]

Very clear. And then something from my side about Fila. So in last 2 quarters, there have been 3 WIP dimensions pertaining to Fila that you have spoken about. One is on cleaning up of legacy inventory, a. Second is optimizing route to market or accelerate store expansion somewhere around second half of FY '24, '25. And product and brand positioning. Where do you want to place the brand? Whether you want to place a premium me or semi premium? So if you can give us some update on all the 3 dimensions.

[Nissan Joseph, executive]

Right. So the first one is the first -- probably the first important step that we're going to focus on most of this year which is cleaning up the existing inventory because we don't believe that inventory is in line or reflects where we want to take the brand in the coming years, so that's number one. And that work in progress is progressing well. But as we've always guided, it's going to be dilutive towards performance in this year. And hence, I would encourage you to look at our stand-alone numbers if you want to get a true comparative read on how our business is doing, keep -- and that we keep Fila to the side, right?

So that's going to continue probably through most of this year, Tejash. The second one is store expansion. First, we need to rationalize the stores and the distribution, the route to market that we have today. And we need to make sure that it is congruent with where we want to take the brand in the future, right? And so what I mean by that is when we look at our real estate deployment of stores, do they represent the brand correctly, both in terms of being in the right malls, but also being in the right locations in those malls. Because that makes a big difference in how your brand is perceived by consumers if you're in the right locations in the right malls.

Distribution to other channels outside of us needs to be tightly controlled. So there's not extensive discounting or there's not overstocking of product going on that further leads to brand dissonance down the road. So that whole distribution piece is a critical part of how we're going to be approaching most of the latter part of this year and the early part of next year.

And then last but not least is the positioning of Fila. We honestly believe that in the sports fashion space, Fila has, a, relevance, b, awareness that we can play to and build on, somewhat similar to making it akin to the China model, where China Fila does roughly $4 billion because they position themselves differently than your typical athletic brands. And we see that consumer in India that is quite savvy going and migrating towards it as well. So that's how we want to position the brand, which will be starting late this year and go well into next year, and then that leads us to the third year where we will accelerate the brand, which will include store openings and positioning and so on and so forth.

[Tejash Shah, analyst]

Sure. And sir, one follow- up there. You said legacy inventory will be cleaned up by FY '24 or there will be some spillover in FY '25 as well?

[Nissan Joseph, executive]

No. By '24, we should be done with legacy inventory.

[Operator]

The next question is from the line of [ Devanshu Bansal ] from Emkay Global.

[Unknown Analyst]

Just to take forward from the previous question on e-commerce sales. Sir, you indicated that your focus is on growing omnichannel sort of sales through your own stores. But these numbers that we are reporting suggest that there is a significant amount of growth in the e-commerce channel sales [indiscernible] the omnichannel sales. [indiscernible] does this mix in any way -- and the mix of e-comm is increasing, does this in any way sort of impact our margin or return profile?

[Nissan Joseph, executive]

I'm sorry, you broke up there for a second, Devanshu. Can you just go -- we got you till the point that you read it as it was driven by other channels other than omni and then we lost you.

[Unknown Analyst]

Sure. I was indicating, sir, you indicated that the focus is on omnichannel sales. But the numbers that you have reported suggest that there is a significant amount of growth that we are seeing in the e-commerce space, ex of omnichannel in this quarter per se. And you also indicated that the other part of the business is likely, I would say, margin dilutive because of excessive discounting in the online channel. So I wanted to check does this increase in mix of online in any way impact our return or margin profile going forward.

[Nissan Joseph, executive]

Yes, and it's a good catch. What that is, is really -- as you know, right now is a period of the immense discounting sales and the festival sales that go on on the Amazons of the world and so on and so forth. So what that was, was actually shipments to those channels being booked in that period of time, which is similar to last year, mind you. It's no different than last year being booked in the last quarter. And hence, you see that omni didn't grow as fast as the rest of the business.

Having said that, omni still grew a very solid number over the last season and it continues to grow relative to the rest of the business. Don't forget, the rest of the business is also a little challenged because of the reasons I mentioned.

[Unknown Analyst]

Got it, sir. And sir, among regions, East as a market is not doing well for us, while West has picked up quite well. So among regions, what is your outlook for store additions in the Eastern geography? Also, if you could suggest if your margin or return profile is significantly different in the East geography versus rest of the region.

[Nissan Joseph, executive]

So I think you've got to be careful how you read some of those numbers because it's not that the East is not doing well. Don't forget, the big season in the East is Durga Puja, which fell squarely in Q2 of last year, whereas it's flowing into Q3 of this year. So that's the key driver.

Now, if you're talking about penetration not being high in the East, you're correct. It is not the highest in the East. In fact, it's our smallest market, but it's just a matter of us not having gone after the East enough as yet. There's still opportunity in the East for us to go after. And typically, as you know, you establish strongholds where you are based first and foremost, so I'm pleased that the West and the South really continue to be our stronghold.

[Kaushal Parekh, executive]

Devanshu, just to add to what Nissan said. In fact, East, is one of our strong regions. If you see on Slide 23 of our presentation, 13% of the store contributes 14% of the sales. And mind you, this is H2. Durga Puja has been pushed to Q3. But East is a very strong region for us, and it's also one of the focus areas in terms of expanding our reach.

[Unknown Analyst]

Got it, got it. And last question from my end. Any -- should we read this from Crocs penetration point of view, there is a relatively slower network expansion versus Mochi and Metro. So just wanted to check, is it a strategic move where we may see some slower expansion for Crocs going ahead? Or how should we read into this?

[Nissan Joseph, executive]

Well, I think there's 2 parts to that question. One is it's not really much slower than the rest of them. What you've actually seen is a very accelerated growth of Crocs 4 years ago, where we grew it from almost 0 stores in the last 5 years. We still added stores for Crocs. We added 2 stores in the last quarter. And this year, in the 12-month period, we'll add somewhere in the 20-plus range of Crocs stores.

So it's not like it's falling behind. And if you -- we guided that we'd open 100 stores, it's going to be 20% of our growth. What it really is driven from is our focus to grow our Metro and Mochi brands as well, right? So you're seeing a lot of focus being distorted to growing those brands, which are extremely profitable and extremely well- run banners for us. And that's what you're seeing.

And also the market size for Crocs is not as significantly wide as that for a Metro or a Mochi, right? Metro and Mochi can probably go into 400 cities in India, whereas Crocs is probably not as big. But it's still a very big opportunity for us.

The other thing is also -- the number you don't see in that growth number is that we closed 5 Crocs stores. And this happens a lot because either mall gets high or high street go dead because the mall got built up. So we went into the mall with a new store but we had to close the store in the street. So consequently, it looks like we didn't grow, but there's actually another 5 stores that we closed.

If you look at it net it has a different number. If you just look at the hard number for H1 of 7 stores.

[Operator]

The next question is from the line of Nihal Mahesh Jham from Nuvama.

[Nihal Jham, analyst]

My first question was on the numbers that if I look at the standalone numbers separately, the OpEx growth is much lower than our top line growth as well as the square footage addition. So if you could just give some more clarity. Is it that we have pruned our advertisement expenses or any other part of those OpEx, given how the slowdown went? Just some clarity on that.

[Kaushal Parekh, executive]

Nihal, sorry. That's a continuous exercise. We keep a close tab on all our expenses. But if you closely see, more or less, it's in line with how the sales have grown. Nissan also mentioned, if you see our overall -- at the PBT level, there is an impact of around 1% due to ESOP cost and IndAS 116 impact, which generally comes when you are opening stores aggressively. But cost control is something that we do on an ongoing basis within our company.

[Nihal Jham, analyst]

Point taken on that, Kaushal. In fact, just for the divergence between the top line growth and -- or let's look at square feet addition and the OpEx is even wider and something that's appreciated. But just any specific aspects which have been taken care of. If we could just get better clarity on how this has been achieved.

[Kaushal Parekh, executive]

Nihal, I'll urge you to see the numbers. It's more or less in line. If you see there's a percentage to sales because the good amount of our costs are also variable in nature. So if you compare absolute amount, you may see it has gone down because obviously rentals, staff salary et cetera, to a certain extent, are variable in nature.

So in Q2, as you know, is our smallest quarter. It's close to about 22%, 23%. So that also has an impact. But if you see it as a percentage of sales, there, they are more or less in line with the sales ratio.

[Nihal Jham, analyst]

Point taken on that, Kaushal. The second question was on Crocs. I know we discussed it earlier. But, just if I look at the last 2 years evolution, the number of cities that a Mochi and a Crocs were wasn't similar. Today, obviously, Mochi is in 16 cities now. So when you look ahead in terms of, say, adding these 20 stores and maybe the limited opportunity because of the price point, is Crocs going to see more density per city? Or are you planning to take this brand wider as you look at the evolution for Crocs ahead?

[Nissan Joseph, executive]

Well, so the reality is every city that has a Mochi or a Metro cannot take a Crocs today, right? But don't forget, India is changing rapidly. And India is growing very quickly. And we know that Tier 2 and Tier 3 cities are going to be the new hotbeds for growth in the future. So it's a matter of balancing and figuring out what is the right time to enter a city. And we have our own internal formulas and vectors that we use to determine when we believe a city is right and ripe for a Crocs product. We don't see it as Crocs being, in any way, reaching its full capacity of stores that can open. I think it's got some more runway, especially in the South and the West, for us to grow. And we continue to grow it.

And we also sell Crocs in our existing stores, right, Nihal? So that gives us a good point of view on what that city and how that city will react to a Crocs if we were to do a standalone store. So there are many, many factors we take into consideration. But the short answer is there's no way that every city that has a Metro or a Mochi will have a Crocs store because of what you said, the price points are different, the consumer profile is different.

[Nihal Jham, analyst]

Just one last question was on the quality control order. It has obviously been pushed for most categories to first run, which has given us some more time to assess. Is it that for most of our vendor network, despite, say, some of the uncertainty, we are comfortable that most of the implementation would be in place. Or maybe at this point in time, the approach is to keep the inventory in place? And then post Jan, we'll figure out how things have to eventually be implemented?

[Nissan Joseph, executive]

No, we're taking 2 steps to this, right? One is, of course, making sure that we don't see a disruption to our supply chain, and hence, we are forward buying inventory because we remain relatively certain that we'll be allowed to sell any product that we own prior to Jan 1 into next year. So that would ensure that we mitigate any supply chain disruptions caused by the BIS. So that's number one.

Number two, where the compliance outlines have been given to us, where we have granularity and clarity on what these guidelines are, we've got our vendor base to go ahead and get certified and get the product approved. So part of the issue is not so much whether we are -- our vendors want to do it. They're more than willing to do it. We have vendors that are capable of doing it. We just want to make sure that we have all of the parameters required because, to be quite frank with you, it's been a little bit of a moving target even at this late a stage.

[Operator]

The next question is from the line of [ Abhishek Getam ] from Alpha Invesco.

[Unknown Analyst]

So my question was regarding Walkway. So we've seen Walkway account from that to FY '20 levels, and it's a commendable growth from FY '22 ensure expansion. So I just wanted to have a little bit of flavor on numbers on Walkway on the revenue side and how do we see this growing in our whole portfolio.

[Nissan Joseph, executive]

So one of the reasons you saw it only come back to those numbers is, as you remember, we closed about 17 Dmart stores early in 2021, right? So that's another reason you've seen us go backward by about 25% of our store count and to build it back up, right? We think the Walkway consumer exists and is very strong. At the same time, we want to make sure that we understand that business well and good before we put the -- pour the gas on it and accelerate it.

So it is still work in progress. We will continue to devote resources to fully unlocking that consumer's potential. And once we do that, we see strong opportunities for a brand that caters to that segment of the market.

[Unknown Analyst]

Understood. Eventually, does Walkway brand expansion will be focused more towards Tier 2 and 3. Is that understanding right?

[Nissan Joseph, executive]

Not really. I think they are focused to a different consumer, and that different consumer exists in all the markets that are out there. I was just in Chennai last week, and there was a mall we were in. And I was able to -- in the mall, by the way, right in the middle of Chennai. And we were able to see our consumers shop in that mall. It's just a different consumer that it targets.

So that consumer exists in all the cities. The big difference would be there's more -- as a percentage of population, they might be more prevalent in a Tier 3 city. But as velocity of volume of consumers, the units of consumers, big cities have people in all demographics of the economic spectrum. So we don't see this being limited to just the Tier 2, Tier 3 account. We see it having definite legs. In fact, one of our better markets today is Hyderabad, which is not really a Tier 2 account.

[Unknown Analyst]

So can you share some numbers on Walkway business on the revenue side of the business.

[Kaushal Parekh, executive]

We don't give the numbers separately, Abhishek. So we won't be able to share anything on specific revenue, et cetera. However, if you see our presentation, we have shared all the relevant details in terms of the average ASP, store size, number of stores, number of cities that Walkway is present et cetera.

In terms of CapEx, obviously, cost that goes into Walkway is lower as compared to what it is for Metro and Mochi. Like say, for example, Metro and Mochi average CapEx is around 1 to 1.2. This includes all the 3 elements, inventory, stores fitout and security deposit that we pay to the landlord.

For Walkway, this comparative number would be somewhere close to around 70 lakhs to 80 lakhs. Just continuing to what Nissan said, we are -- in terms of profitability metrics, because Walkway is in value segment, it won't generate a similar profit in percentage terms as what Metro or Mochi would do. But our endeavor is to make sure that over a period of time, we built in a particular model that helps us generate the same return on capital employed as that of Metro and Mochi. So that's our long- term plan.

[Unknown Analyst]

Understood. That's very helpful sir. Just one last question, a broader question on Walkway. Do we see this Walkway as growing to a INR 500,000 crores business in that type of -- in that range?

[Nissan Joseph, executive]

Abhishek, I think the reality is, as a business, we want to consider only businesses that can get to a significant level of our sales, right? There's no sense in dabbling in a business if it's not going to grow. So all our business units, when we put them through the filter of capital allocation or even resource allocation, our big understanding and question is where do we see this particular brand, this banner in 5 years? And to your point, if it doesn't have those kind of metrics, it would not be very attractive to us.

[Operator]

[Operator Instructions] The next question is from the line of [ Kapil Jagatia ] from Nuvama Wealth Research.

[Unknown Analyst]

Looking at your average realization of H1 FY '24, and if I compare that with H1 FY '23, and if I then calculate that for this quarter of Q2, your average realization per unit seems to have corrected on a Y-o-Y basis. This time only seeing pertaining to this particular quarter. So is it that average realization for in-house brands is reducing and data for third-party brands is increasing? Is my understanding correct on this?

[Kaushal Parekh, executive]

Kapil, in Q2, we have end of season sale, right? So average ASPs move slightly lower in Q2 if you compare it with Q1. If you compare it with last year, we have seen an average ASP growth of around 3%.

[Unknown Analyst]

Okay. And probably even last year was high pent-up demand. So even pertaining to that, it would have been reduced, right?

[Kaushal Parekh, executive]

And just adding one more data point. We have seen our contribution of end-of-season sale inch slightly up as compared to what it was last year. So it was -- last year, it was up -- it was around 5%. It is close to about 7.5% for H1. So you know, that also has a slight impact on the ASPs as well as on the gross margins.

[Unknown Analyst]

Okay. Fine. This helps. My next question is the revenue per square feet was down about 9% this quarter. So even with this lower revenue per square feet, gross margins for H1 FY '24 is 58%. So would your guidance on gross margin still remain at 55%, 57% levels? Or would you be revising it upwards at a later date?

[Nissan Joseph, executive]

So I think there's a couple of ways to read that square footage erosion. One of them has -- a lot of it has to do with the mix of stores, right? So our most highly productive sales per square foot is Crocs. And somebody pointed out earlier on, that's not where we focus a lot of our growth in. So you're going to see some of that come -- naturally take place. We also know that we went into 8 new cities, and new cities take a little while to get the store going. We fully expect the store to be cash positive in 2, but it still takes a little while to get going. So it's a combination of things.

Having said all of that, we have guided, Kapil that we can hit 55% to 57% pretty consistently. As we look to the future, we'll blip up sometimes. We'll blip a little bit below it sometimes. But overall, we're pretty confident of hitting that range.

[Unknown Analyst]

Sure, sir. And what would have been the gross margins for Cravatex in this quarter?

[Kaushal Parekh, executive]

It is close to around 25%.

[Unknown Analyst]

Okay. And just last question from my side. How sustainable is this growth in online channel? As I believe a majority of it would have been driven by Fila and [ opco ] line. Because before this acquisition of Cravatex, e-comm contribution to sales was around 8% or so, and now it has risen to 10%. So just your thoughts on growth patterns for this channel going ahead?

[Nissan Joseph, executive]

First of all, let me address one of the statements, you made a couple. It is not driven by Fila and Cravatex. It's only Metro Brands stand-alone numbers that we were reporting that went from 8% to 11%, right? So it is really a growth without any consolidated numbers. So it is not driven by those two.

I think India is going to increasingly become digitally savvy and digitally adaptable. I mean, today, 75% of the Indian population has access to TV, an equal percentage will have access to smartphones within a matter of minutes. And we firmly believe that our consumers in the future will be starting their journey of online digitally and then moving to the off-line space or continue to buy online, right? There's a lot of friction points with online for consumers as there is for the retailer.

In shoes specifically, it has to do with fit. As you know, the fit of a shoe is not very -- doesn't have much tolerance. You can wear a shirt a little bit loose, a little bit tight. You cannot wear a shoe a little bit loose or a little bit tight, right? So that makes it a friction point because shoes typically run about a 30% return rate in the business, and that means 1/3 of your customers are dissatisfied.

Having said that, though, I think technology will ease the way as we continue to move forward. So the good news for us is we see brick- and- mortar as continuing to have vibrancy and a need in the market simply because consumers enjoy a shopping experience. At the same time, we see the convenience of e-commerce coming into play, giving that channel more growth.

[Unknown Analyst]

And any internal targets for this e-comm channel, INR 60 crore run rate for the quarterly basis. So around INR 240 to INR 250. So any internal targets looking at [ 500 ] per year revenue from this or any percentage of sales number?

[Nissan Joseph, executive]

Kapil, you don't give up, do you? I think our goal is to maximize the opportunity in every channel without in any way eroding the profits or more importantly, eroding the brand, right? If I wanted to hit a target of X double-digit percent in e-commerce, we could do it day after tomorrow, but then we wouldn't have a brand by the end of the week, right?

So it's a matter of managing growth to where you're having growth. It's profitable growth, it adds to your brand value and it's sustainable. And that is an evolving number. I'm going to tell you, the number I gave -- have in my mind today will probably be very far off in the next few months. So it's one of those -- it's a dynamic situation. And for me to make a comment on that, I don't want to box myself in either.

[Operator]

The next question is from the line of [ Kinjal Mota ] from [ Banyan Tree ] Advisors Private Limited.

[Unknown Analyst]

My question is around ASP and product pricing. So when I look at the presentation for this quarter on the Slide #26, if you look at product pricing sales mix, what I understand is more than 85% of sales is derived from products which are priced between 1,500 to 3,000 and 3,000 plus. But when I look at average selling price, that is somewhere around 1,500. So since we don't have volume data, I'm trying to understand that why is ASP around 1,500 whereas maybe more than 85% of sales is coming from products which are priced as more than 1,500 or even 3,000 plus.

[Kaushal Parekh, executive]

Kinjal, this is primarily due to impact of accessories. We sell lots of accessories below INR 500 as well. Classic case being, say, Crocs Jibbitz which sells around INR 250 to INR 300 per piece. If you see ASP for footwear, specifically, it is close to about 2,200 to 2,250.

[Operator]

The next question is from the line of Gaurav Jogani from Axis Capital.

[Gaurav Jogani, analyst]

My question is with regards to the margins, really. See, if we see the margins ex of the Cravatex brands, it is very much still comparable to the last year H1 numbers. And this is despite the fact that there has been some drag on the sales per square feet and also there is a 100 bps impact that you've called out due to ESOP and the IndAS impact. So what is really helping to drive these margins? Because even if you see the private label contribution, that has gone down by around 4-odd percent to 70% now. So if you can just throw some light, what are the efficiencies where we are getting this -- get -- to negate the challenges on the margin front?

[Kaushal Parekh, executive]

Gaurav, if you see our gross margins, they're more or less in line. As you mentioned, we have seen increase in third-party brands, but this increase to 30% is primarily driven by Crocs and Fitflop, where we enjoy gross margins similar to our in-house brands. And hence, you don't see any significant impact of that on our incoming gross margins that you sort of see. And hence, the gross margins have been relatively stable.

Below the line, obviously, as I answered earlier, we also generally keep very tight watch on all the expense line items. Another important reason is most of our expenses are also variable in nature, so it helps. When you see increase in sales, you will see increase in expense in absolute terms. In the slower quarter, it sort of helps. So there's a combination of all these factors that is seen in the numbers that we have delivered.

[Gaurav Jogani, analyst]

Okay. Sure. So it's largely the efficiencies that are showing up that is able to help to drive the margins despite the Cravatex impact. I hope that understanding is correct.

[Kaushal Parekh, executive]

Yes. I think, Gaurav, if you see stand-alone numbers on a -- separately, you will see that -- we've seen slight increase in expense as such. Our sales have grown by 15%. If you see for H1, our sales has grown by 13% and our PAT has grown by around 8%. I've given explanation for about 1% delta, which is on account of ESOP and IndAS 116. And then balance of 50, 60 bps is on account of certain increases that we have seen under certain line items.

[Gaurav Jogani, analyst]

Sure. And the next question is with regards to the contribution from the 3,000 plus segment, that has consistently continued to remain near that 40% average now for H1, if I speak so. So if you can highlight what kind of segments is really contributing to this 3,000 plus product contribution? And are there any specific brands that are really contributing to this?

[Nissan Joseph, executive]

So we have 2 brands of J. Fontini and Da Vinchi, which is our own brands that we operate in the Metro and Mochi stores that focus on the more premium products ranges, right, so which is our own brand. So that's number one. We're seeing growth in both those brands. Number two, the Crocs average ASP is much higher than 3,000. And so is the Fitflop. Fitflop, the average ASP is closer to INR 7,000. And then we also carry key brands like Skechers and Birkenstocks that also come with high ASPs.

So it's really about making sure that we have the right products for our consumers that shop our stores. And they tend to like the products like Birkenstock, like Crocs, like Da Vinchi, like J. Fontini that come with a higher ASP.

[Gaurav Jogani, analyst]

Sure. So just one follow-up here. I mean, do you see this trend sustaining even going ahead? Or is it really a short- term phenomena because of the K-shaped recovery that we are seeing in the overall economic recovery?

[Nissan Joseph, executive]

Well, we've had this kind of growth over the last quite a few quarters, right? And I would have attributed more of this being a spurt. When they came out of the pent-up demand. They were cooped up inside for COVID for 3 years and decided they got to go outside and treat themselves to a real nice pair of shoes, right? I would attribute it less to this period of time.

So the way we see is this is more indicative of where the consumer is going in our segment, right? There's different segments of consumers out there, as you well know, Gaurav. But in our segment, this consumer is showing that they want to gravitate and maintain that level of quality and value in our products.

[Operator]

The next question is from the line of Vikas from Equirus.

[Vikas Jain, analyst]

So my first question is with respect to the demand. You did highlight that there were some sales that were being postponed because of festive getting delayed right? So is it something that you are witnessing that this is returning back since festive is near the corner now?

[Nissan Joseph, executive]

Yes. I think our early indications, Vikas, is in line with our expectations. The East is getting closer to Durga Puja and we're definitely seeing that. So -- but a lot of these things in retail, you'll find is that, no, you can't do a math formula and say, 2 weeks before the Durga Puja, what did I do last year versus this year? There's lots of variables, right? I mean payday makes a big difference in all of retail. There are other factors as simple as was the 2nd of October on a Monday this year versus a Sunday last year, that has an impact on your business. So there's many variables.

But as we look through all those variables, we feel comfortable and confident that it bodes well to our statement earlier that this was a timing headwind and not an economic headwind.

[Vikas Jain, analyst]

Got it. Very clear. And the second question is more of to do with the revenue per square feet. So of course, last year, as you mentioned, there was some element of pent-up demand, and demand remaining strong. We did see our quarter doing roughly around on an average of 5,500 revenue per square feet, which for the last 2-odd quarters, can you broadly say that the new normal will be roughly at around this 5,000 revenue per square feet? Or it is just that timing issue, as you just mentioned? And can you even return back to that 5,500 revenue per square feet number going ahead?

[Nissan Joseph, executive]

No. I feel confident that we we'll get back to that number. Like I mentioned, there's a lot of variables behind that number dipping down. A lot of it has to do with new stores that you opened, right? And the new stores that you open, depending on the towns that you open and the concept that you open. Crocs has a high sales per square foot. But Metro although it does significantly more volume than a Crocs so does won't have the same sales per square foot.

So you've got to look at it a little bit in balance. And when we go back even last year through Q1 when we had the pandemic, getting to a 5,500 number was not -- is definitely something that we could guide to and feel very comfortable on an annualized basis. Of course, we're going to go up some quarters and down some quarters.

[Operator]

The next question is from the line of [ Anirudh Shetty ] from Solidarity Investment Managers.

[Unknown Analyst]

I had 2 questions. My first question is, something that we do uniquely is at the store level, we offer a high level of variable pay to our staff, which incentivizes them to get more sales. So I just wanted to understand what is the -- at the store level, what is the split between the fixed and the variable component?

[Nissan Joseph, executive]

So Anirudh, broadly, the split would be somewhere close to 60-40, 60 being variable and 40 -- 60 being fixed and 40 being variable. It differs depending on which state and city you see because in certain cities there are high minimum wages, it would be slightly lower. But on a global basis, this is the average.

[Unknown Analyst]

Got it. And is this true for both the store manager as well as the staff? Or does that differ?

[Nissan Joseph, executive]

For managers, it is almost entire amount is variable.

[Unknown Analyst]

Got it. And this is something that's fairly unique about what Metro is doing, which helps us differentiate ourselves. I just wanted to understand what are the other aspects of our culture and what are we doing differently that has allowed us to become such a leading player and allowed us to do so well in the past?

[Nissan Joseph, executive]

What we see us doing is not brain surgery, and it's not magic, right? What it is, is executing the details of retail every single day. I wish there was some magic pill or potion, I would write a book and I'd retire. It is going through the grind every single day and making sure that you stay focused, keep ego out of the way, work on facts and data. And we've got years and years of retail experience in this building, right? And it's utilizing all of that every single day.

And furthermore, I'm not so sure I want to talk too much about it because who knows who's listening, right? But thank you for that very nice -- thank you for those very nice statements, Anirudh.

[Operator]

The last question is from the line of [ Umang Mehta ] from [ Kotak Securities ].

[Unknown Analyst]

I just had one question on Fila, particularly. So do you think that with the brand repositioning you are planning to do. This year you are working on inventory. But next year, do you think that the brand could break even?

[Kaushal Parekh, executive]

Yes, we do see -- yes, that's what we are all working on. But to the end of FY '25 last quarter, our endeavor would be to sort of try and break even. But it's somewhere in end '25, '26 is what we expect breakeven point to sort of come in.

[Operator]

[Operator Instructions] Ladies and gentlemen, as that was the last question of the day, on behalf of Prabhudas Lilladher Private Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.