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Updated February 7th, 2024 at 12:04 IST

Bata struggles with profitability despite store expansion

Despite a 130 basis points (bps) improvement in gross margins, higher operating expenses offset these gains.

Tanmay Tiwary
Bata store
Bata store | Image:Bata
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Bata Q3 results analysis: Footwear brand Bata faced challenges in its operating profitability, resulting in a decline in its profit after tax (PAT) during the December quarter (Q3FY24), analysts noted.

The company reported an 11 per cent decrease in earnings before interest, taxes, depreciation, and amortisation (EBITDA) and a major 30 per cent drop in profit after tax year-on-year (YoY) due to stagnant revenue growth. 

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Despite a 130 basis points (bps) improvement in gross margins, higher operating expenses offset these gains, brokerage firm Motilal Oswal said in a note. 

The Switzerland-based company expanded its store network by adding 54 new stores, reaching a total of 2,204 stores including Shop-in-Shops, but encountered ongoing difficulties, particularly in the value segment, where products are priced below Rs 1,000.

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Amid these challenges, the accessories maker is implementing strategies to support future growth, including the rollout of new stores and product revamps, such as in its apparel and sneaker segments. 

Analysts anticipate a modest 5 per cent revenue and a more notable 11 per cent profit after tax compound annual growth rate (CAGR) over the fiscal years 2023-2035 estimate (2023-2025E). 

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Despite these efforts, the company's performance fell short of analysts expectations, with soft revenue growth and higher operating expenses impacting operating profits majorly, the brokerage highlighted in its note.

During the quarter, Bata recorded flat revenue of Rs 900 crore, missing estimates by 5 per cent, attributed to ongoing challenges in consumer discretionary spending. 

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Gross profits increased modestly by 3 per cent annually to Rs 510 crore, with a margin expansion of approximately 130 basis points annually to 56.1 per cent, driven possibly by softened raw material prices and product mix improvements. 

Despite flat employee costs, other expenses surged by 20 per cent year-on-year (YoY) to Rs 220 crore, resulting in an 11 per cent annual decline in EBITDA to Rs 180 crore. 

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Meanwhile, the EBITDA margin contracted by 270 basis points year-on-year (YoY), standing at 20.2 per cent compared to the estimated 26.8 per cent. Furthermore, the company observed a 30 per cent annual decline in profit after tax to Rs 58 crore, primarily due to weak operating performance. 

In the management call, the company said that marketing costs are expected to increase to 300 basis points (bps) of sales, with investments aimed at driving improved demand. Despite outperformance in the premium category, continued softness persisted in the value segment for the third quarter of financial year 2024 (Q3FY24), with same-store sales remaining flat year-on-year due to higher pricing offsetting volume declines.

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Bata's omni business, initially restricted to company-owned stores, has now expanded to franchisee outlets, representing 80 per cent of franchise stores. 

Despite challenges, the company remains optimistic, leveraging its strong balance sheet, net cash position, healthy free cash flow generation, and impressive returns profile to drive growth initiatives. 

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However, with revenue growth proving challenging amidst weak demand recovery in certain segments, Motilal Oswal analysts reiterate a ‘Neutral’ rating on the stock with a target price of Rs 1,480 per share.

As of 11:39 am, shares of Bata were trading 2.40 per cent lower at Rs 1,406.90 per share. 

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Published February 7th, 2024 at 11:55 IST

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