Bata India delivered muted September Quarter 2023. The shift of festive season Q3FY24 was the major reason elucidated by the management. While that might be true for the quarter gone by, will growth return strongly for India’s largest footwear retailer in the coming quarters. The company reported revenues of Rs 819 crore, a 1.3% YoY fall in Q2FY24.
Operating margins stood at 22.2% and net profit fell 38% to Rs 34 in September Quarter 2023. Bata India stock price is flat both on yearly basis and over the past three quarters. On the other hand, close peer Metro Brands stock price is up 30% over the past one year. Is the management strategy of franchisee store expansion taking a toll on Bata India’s overall revenue growth and profitability and will the recently launched apparel business contribute meaningfully.
Red Label and Floatz report strong growth in Q2FY24
Premium brand Hush Puppies growth moderated in Q2FY24 due to high base of September Quarter 2022. Other popular premium brands, Red Label and Floatz reported strong growth in Q2FY24. Comfit grew in double digits and Red Label grew exponentially well according to the management. Speaking on Red Label, the first style brand under Bata banner, Gunjan Shah, MD and CEO at Bata India said, “It is now almost 4% of our turnover. And we’re looking at continuing to grow and fuel the entire style of imagery.” Floatz footwear grew strongly both YoY and sequentially in September Quarter 2023. Floatz sells nearly 16,000 pairs every week and the management wants to push it further with inhouse manufacturing. “Floatz has a significant delta margin, which will further get enhanced as we get the in-house manufacturing for Floatz going”, said Shah. The management expects its premium portfolio growth to be 1.5x of its overall growth in the near future.
Franchise stores expansion subdues revenue growth
Bata India expansion strategy rests on the franchise model. The retail network stands at 2150 stores as of September 2023. The company follows franchise and company owned and company operated (COCO) ratio of 80:20. Bata India had set a target of 500 franchisee stores by 2025. At present, there are 476 franchise stores as of September Quarter 2023. Franchise model not only aids in employing lesser capital and incurring lower operating expenditure, fast penetration in tier 2-4 cities has been a major advantage.
According to the management, 40% of the new franchisee store openings are from existing partners. Speaking on franchisee store openings by existing partners, Shah said, “We want to ramp it up to almost 60%. These partners are those who understand Bata, and therefore these new stores will mature much faster and be able to realize benefits much faster.” While the franchise store model has helped in expanding Bata’s retail network in the hinterland, lower average selling price (ASP) in tier 2-4 cities is hurting its topline. Bata’s ASP is 20% lower in tier 2-4 cities compared to metro cities.
Bata’s revenue CAGR is 4% over the past three years. And franchisee stores over the same period increased from 150 to 476 as of September 2023. In addition to this, the mass footwear (40-50% of product mix) category is still not in the pink of health. “It is still a mixed bag. We have still not seen a secular recovery on that front”, said Shah. The company has not taken any price increases in the mass footwear segment (below Rs 500) over the past four quarters. The company is hopeful that sooner than later, the mass footwear segment will bounce back and will converge with the premium category growth. The focus on the premium category has definitely helped Bata during Covid times and the company’s ASP has jumped to Rs 1,000 from Rs 700, a few quarters back. Close peer, Metro brands ASP stands at Rs 1,500 in Q2FY24. Still a lot of catching up to do for the hallmark of the Indian footwear industry. Hopefully, the new apparel venture should aid in improving Bata’s ASP. Bata’s Power Apparel is currently a pilot project implemented in 62 stores and contributed 2-3% of same store growth (SSG) in Q2FY24.
