Big shoes to fill for footwear firms as near-term margin worries bite

Relaxo lags behind peers in the quarter, given demand weakness, price cuts, and higher input costs

Results for listed footwear makers in the July-September quarter were a mixed bag. While revenue growth for most of the bigger players was strong, margins were weighed down by raw material costs, advertising expenses, and volume pressures.

A majority of the players indicated demand weakness, especially in the mass-market segment, due to inflationary pressures and demand contraction in the semi-urban and rural markets.

Stock prices of major players are down over 5 per cent since their November highs, with Campus Activewear witnessing the highest selling pressure. The stock shed 18 per cent from its monthly highs, with 10.3 per cent of the losses coming on Friday.

Relaxo Footwears put up its worst quarterly performance in over two years. It was the only player to see a drop in revenue, given a higher base in the year-ago quarter and volume decline.

The company took price cuts in the mass segment as consumers downtraded. The magnitude of the price correction in September was 15-20 per cent. The pressure on profitability is likely to sustain in the near term due to subdued demand and input cost volatility, with some relief in the January-March quarter. Axis Capital has downgraded the stock to ‘hold’. 

Metro Brands posted better numbers, with revenue growth of 47 per cent, led by higher selling prices and additions to its store network. On a sequential basis, revenue was down 6 per cent due to seasonality, with sales per square foot falling 14 per cent. The revenue missed estimates of some brokerages. ICICI Securities highlights that the second quarter (Q2) is a seasonally weak one for Metro, given the higher occasionwear salience.

Higher-than-expected costs dented its operational performance. Gross margins were down 20 basis points (bps) year-on-year (YoY) to 57.3 per cent owing to end-of-season sales in August and September and higher mix of outside brands, compared to in-house products. Analysts Gaurav Jogani and Anand Shah of Axis Securities say the operational miss was largely on account of a 70-bp lower-than-expected gross margins and 140/100 bps higher than expected staff cost/other expenses. This is on account of higher-than-expected store openings. 

The company opened 28 stores during the quarter. While ICICI Securities says Metro’s Q2 showing is unexciting, the brokerage believes the addition of Fila and Proline to its portfolio places it a step closer to participating in the fast-growing sports category.

The performance by Bata India, which posted the highest revenue among footwear players in the quarter, was in-line with Street expectations. Its revenue rose 35 per cent over the year-ago quarter on the back of increased footfall and better showing by the sneaker segment. The company indicated that it has managed to drive broad volume-based revenue growth across business channels of retail/franchise/distribution/e-commerce, notwithstanding a tough operating environment and significant material inflation. 

While gross margins were up 210 bps over the year-ago quarter, they are still 140 bps lower than pre-Covid levels due to higher raw material costs, observes Motilal Oswal Securities. Margins at the operating level were lower than expectations due to high sales, general and administrative costs. The miss was largely due to investments in the launch of products, renovation of stores, old deposits, and legal expenses.

Campus Activewear posted a robust 22 per cent YoY growth in revenue in the quarter, riding on volume growth (up 16 per cent), as well as an uptick in the average selling prices by 5 per cent. Growth was achieved in rural and semi-urban areas despite an inflationary macro environment and transient demand contraction. It was aided by an improved product mix, with rising share of premium and semi-premium segments.

Operating profit margins saw sharp contraction of 719 bps YoY to just over 13 per cent. In addition to a jump in raw material costs, higher advertising costs, retail store expansion, and increased employee costs led to a dip in margins.  

The company indicated that some of the marketing spends were front-ended. While the company has to take a price hike in high single digits to offset input cost pressures, it is still circumspect in the face of competitive pressures and slowdown worries.

The Street will await improvement in margins and the bottom line (down by 50 per cent YoY in the quarter) in the quarters ahead.