Mirza International - consistent performer but undervalues at present?

[parkhi_nazar]

Dear @zygo23554, thank you for raising several valid points. These are indeed operational challenges the company will face as it scales up domestic (or let’s call it “front-end” operations). I will submit, however, that the challenges are not as difficult as it seems:

1. The company has always had a B2C element. The Red Tape brand has been in the Indian (as well as export) market for ages. I got married wearing Red Tape shoes…and that was years and years ago! Also, the e-tail reviews that have even been discussed on this forum are for the Red Tape brand shoes. These are front-end B2C
2. What the above means is that the company does have some sense of demand, trends, fashion, styles etc. They have design teams, both in India and abroad. Also some understanding of inventory management
3. Going from 150 to 300 stores is much easier than going from 0 to 150. Or 20 to 150

My point is that labeling the whole thing as B2B to B2C makes the transition seem greater than it actually is. The probability of success here is much higher than a pure B2B company attempting a B2C transition.

Further, my personal bet is that exports will come back sooner or later. Brexit has surely hit the company hard. When 50% of your revenue comes from a market and the currency there falls 20%, imagine what happens to your bottom line. One of my theories is that the Genesis Footwear acquisition was to soften the impact of Brexit on the listed company’s financials. At the end of the day, most of the promoters’ wealth is in the form of the listed company shares. Already now, the pound has gained back 10% from Brexit lows. And my sense (after seeing Amazon UK reviews and pricing) is that the company has enough headroom to increase prices - and cover the balance 10% if required.

If exports turn around, then the domestic market is a nice second scoop of ice-cream on top.

The challenges / risks you highlight remain, but they seem to me to be reasonably contained (e.g. they ain’t setting up a full manufacturing facility which could put a lot of money at risk), and the probability of things failing also seem low - especially when I look at the number of levers and size of the prize on the upside.

Discl: Invested from low levels

[parkhi_nazar]

Yup, RoE / RoCE might dip. Bata and Relaxo have decent RoEs, with a good domestic focus. Hoping Mirza can maintain its RoEs as well, as it expands in the domestic market.

[hitesh2710]

The big change that has happened at Mirza intl is the emergence of Shuja Mirza atbthe forefront. As soon as he took over the big change was to use redtape brand to promote sports shoes which has been the main growth driver. In one of the concalls he mentioned the changing preferences towards casual and sports shoes from the traditional leather footwear. He seems to have caught the trend change at the right time in terms of going after growth in the sports shoes category. Domestic sales and profit growth has been very good.

Focus on domestic sales growth will entail working capital increase. He has to figure out a way to deal with WC issues.

Exports suffered since past few quarters but in q4 concall they sound confident of modest growth for fy 19 in exports.

The management compensation is on higher side and will need to be monitored. How much importance to attach to that parameter is an individual call.

Overall product reviews have been pretty good. If Shuja can execute the plans according to his vision it can be an interesting brand play.

This is one company where investors have to be very clear what is ignorable and what is not.

[parkhi_nazar]

Dear @hitesh2710 bhai, that’s a very interesting point on the human element driving this.

WC will surely be a key monitorable! One thing I liked was their philosophy of not holding onto inventory beyond ~1 year, and sell using another channel / deep discounting if required. That at least helps us see the impact quickly, rather than having un-sellable inventory on their balance sheet - which will be hidden for a long time because it will be obscured by inventory increase to supply to the expanding distribution channel.

I also noted that the management was quick to mention the above point (no hesitation) during their last conf call. This also ties up with what @narendra found during his scuttlebutt.

Another point the company mentioned during the call was that currently they are paying 100% advance for the traded shoes. But they are expected to negotiate better payment terms soon, because of the volume they are now ordering.

Now it’s a question of what the “natural” WC level settles at.

[zygo23554]

More or less my take as well, which is why I am buying as well

The INR depreciation since Jan 2018 should work in favor or MIL since their imports are from other South East asain countries whose currencies dip along with the INR as well against the USD and other DM FX. INR has fallen close to 10% over the past 6 months, this should make the export business look much better than it actually is for a couple of quarters if not longer.

I too am willing to bet that these confluence of factors might just about get things rolling at MIL, even if that does not happen downside from current levels cannot be high. This is starting to fit my bill of an asymmetric payoff bet, let’s see how this goes

[Yogesh_s]

I was trying to find out annual count of Red Tape stores in all formats (EBO, MBO, Store-in-store,etc) in both domestic market so that I can get a sense of how the story has unfolded until now. Information provided in the annual reports is patchy and sporadic. Anyone has compiled this information?

[Gary24]

Could anyone please point me to a link where I can find the recent conference call reports. Couldn’t find on the company site. And the FY18 annual report as well (if it’s released yet).

Many thanks!

[ayushmit]

I was recently in Pune and saw a full page ad in TOI (few weeks back had shared about the similar ads in Lucknow and advertising through radio).

Based on the visit to stores in Pune and Lucknow, the look and feel is pretty good. These are large format stores (2500-3500 sq ft) and based on interaction, it seems these are doing business of about 20-25 lac per month. The sales are good due to the hard discounts being given (products are available at price similar to e-commerce platform). Similarly some friends had visited stores in Delhi and Hyderabad and the feedback was similar. May be more members can try visiting these stores and see how things are going.

Ayush
Disc: Invested

[ayushmit]

Hi @Yogesh_s,

I had compiled some of the data from the annual reports till 2017. Sharing the same:

Since H2FY18, the company has started opening large format stores (2000-3500 sq ft) vs 500 sq ft stores earlier. And in H2FY18, I think they had opened 10 odd stores which the company had guided to scale upto 50 stores by end of FY19.

Last 3 years, the domestic sales grew pretty well by tapping e-commerce platform and expanding product range. Need to see now how they expand their distribution network and what kind of profitability they will get in the large format stores.

Regards,
Ayush

[princevegeta]

[ashish_agarwal]

I think company will do better offline rather than online because in con call somewhere they said online business depends on discount. If you talk about discount, u will found sale almost each and every week on myntra flipcart etc. Now if a person approached to buy a pair of shoes online and he will also found discount on some models of Adidas Nike puma Fila having same price as price of red tape. So there are higher chances that he will choose those brands instead of red tape… Correct me of I am wrong

[akbarkhan]

I really don’t see the need for such big stores if they do not have the variety to display. The pics show majority shelf space covered with boxes. Wouldn’t they be better off having smaller stores and larger godowns, thus saving on rentals?

[ayushmit]

Good question Akbar! We should continue to check the efficiency of the execution…retail expansion is a tough thing and if the company is not mindful, they can incur big losses or loose on profitability. As they are trying to grow aggressively, already their balance sheet items like inventory have increased a lot.

The other part of the store was more stacked up and the apparel section is fully loaded. From what I understand, apparels have started contributing around 40-50% of total sales in these stores. The ratio was same for their old stores too. Attaching some more pics

[ramansharma]

Just visited store in noida which is same as mentioned by Ayush sir, around 2500~3000 sq ft.
The store opened just few months back. The quality of the shoes observed very good. Tried their sports shoes and they are quite light in weight. The discount on all the products are equivalent to the online. Some snaps are attached below

[dua]

which sector in noida…looks bigger than 2500 feet

[yogansh]

Hi All,

@akbarkhan Sir your post is indeed thought-provoking. Below are few points which come to my mind in this regard and also some pictures, links etc to support the same.

A good retail store layout starts on paper, which should consider aspects like building specs, customer traffic flow, product placement, and more, before even installing a single display. A keen thought should be given to this aspect whenever someone goes in for a retail business (be it an individual store keeper or a company going for forward integration with its own retail outlets). This planning helps you create a store layout that encourages customers to browse and buy and also create a perception of the proposition that you are offering to customers (like: Luxury/High-end products, Good products at best/lowest possible price).

Let me use some examples to explain my point lucidly:

1. If you notice Super Market Stores like Big Bazar, Spencer, Walmart etc, the layout they have gives you a sense of a market place which offers you huge variety and at a lower price. To convey this message to its customers, these stores are designed to have steel/plastic shelf, visible AC vents (instead of having a false ceiling) and very modestly styled interiors.

2. Another good example is the factory outlets that we often come across while shopping in city markets (not high-end Malls). Again, if you notice the interiors of such a store is very raw in nature. They don’t have fancy displays, usually stack products (clothes, shoes, belts etc) in bundles, visible AC vents etc.

To summarize, I will say that the way Redtape has stacked its shelves with shoe boxes instead of elegantly presenting their variety of SKUs could be a conscious call to convey the offering they have for customers i.e. good merchandise at very attractive price (factory price).

Store designing is an important part of building your brand in the minds of the customers and professional/experts use a variety of ways to engage a customer and build an image about the brand.

Also, if we deliberately think about our last shopping experience we would come up with several instances of where we had walked into a store and the ambiance of it conveyed us the type of brand it is.
In my experience, I remember walking into a store which had huge wooden shelves, leather sofas and a very limited but elegantly presented products and with no surprise it was a luxury brand store with price points which I would say reflected class. On the other hand, there was a store which had all its products bundled together and it looked like very less thought was given towards designing the store and again without any surprise the prices at which the products were offered, I can say was cheap.

So, it all depends on the customer base that you are targeting and the perception that you want to build in the market about the brand or its products.
However, all said and done, as an investor we should be vigilant of the execution and should evaluate it from every possible aspect but, within the rules of the game that it is into.

Below are some images of factory outlet stores of brands like Puma, Skechers & Nike. It looks similar to the layout we have for few of the Redtape stores.

(Source)

(Source)

(Source)

Below are the links to few articles that have explained about store design and layout styles.

1. How To Create Retail Store Interiors That Get People To Purchase Your Products- Click here.
2. Retail Floor Plans 101- Click here.

Regards,
Yogansh Jeswani
Disclosure: Invested

[ramansharma]

The store is located in sector-59 just on main road…opened approx 1 months back.

[aashav23]

Anyone noticed this concept on technically advanced stores having kiosks and virtual trying options ?

Also, I am from Gujarat and I don’t think they have any exclusive stores here despite the fact that its brand recognition is huge here… and many retailers sell its products here, generally only leather shoes.
Is not entering into Gujarat a conscious decision? Rational ?

[phreakv6]

It is well-thought out and insightful messages like these that makes VP special. I could figure out in my head what the store layout was going for but couldn’t put it into words as succinctly as you have done.

[akbarkhan]

That’s an interesting opinion. The factory outlet pics do look similar.
The economics also would need to be similar.