Summer is leather’s season, and the footwear leader has sure basked in sun’s full glory! As per half yearly financials announced by Bata Pakistan (PSX: BATA) this weekend, the company has recovered stable recovery of top-line, which grew 6 percent on year-on-year basis, for the period ending June 2018.
The footwear giant had recorded sluggish sales during the last quarter as seasonal dip coupled with overall industry trajectory also eroded its profitability. Over the past decade, competition has begun to breathe down the margins of mass market variants, as new entrants with selective focus on trendy fashion have begun to make space for themselves.
However, mass market footwear enjoys competitive advantage in the form of a captive market as school wear that is difficult to chip away. While company’s B2B sales have suffered, the brand remains the low cost go-to brand for most low income and middle-income families.
As per management notes, the Retail division recorded 8 percent year on year growth on the back of Eid demand; however, the up tick in sales recorded during second quarter cannot fully be explained away as seasonal; since the effect from school children usually begins to show around July and reflects in third quarter financials.
Overall, the company managed to post 10 percent year on year improvement in gross profits along with improvement of 161bps in gross margin. However, as retail growth came on the back of sharp price competition and seasonal promotions, the company saw its overhead rise by 11 percent on year on year basis.
At 30 percent of top-line, overhead cost constitutes a major expense for the company. While these remained stable vertically compared to last year, these managed to erode whatever support high volume off take had provided to profitability. Thus, operating margin barely managed to increase by 6 percent on year on year basis, with a flat line 6bps improvement in operating margin since last year.
Going forward, Bata will continue to hold its significant comparative advantage thanks to its heritage and an established footprint of over 400 retail outlets across Pakistan. However, trendy fashion is where the future of footwear industry lies. The brand would do well if it incorporates individual segment into its long-term strategy.
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