X5 Retail Group N.V. Reports 53% Growth in Q3 2007
OREANDA-NEWS. November 26, 2007. X5 Retail Group N.V., Russia's largest food retailer in terms of sales (LSE ticker: “FIVE”), published today its unaudited IFRS results for the quarter and nine months ended 30 September 2007 based on management accounts.
Q3 2007 Highlights:
•Q3 Net Sales surged 53% year-on-year to USD 1,270 mln;
•Q3 Gross Profit grew by 54% year-on-year to USD 330 mln, Gross Margin totaled 25.9%;
•Q3 EBITDA reached USD 99 mln, a year-on-year increase of 85%;
•Q3 Net Profit grew by 22% year-on-year to USD 13 mln.
9M 2007 Highlights:
•9M Net Sales surged 50% year-on-year to USD 3,618 mln;
•9M Gross Profit grew by 53% year-on-year to USD 946 mln, Gross Margin totaled 26.2%;
•9M EBITDA reached USD 311 mln, a year-on-year increase of 78%;
•9M Net Profit grew by 50% year-on-year to USD 54 mln.
"We are pleased to report all time high sales growth of 53%, which reflects our unrivalled leadership in all segments and regions of X5 operations. Like-for-like sales as well as new store performance were very strong despite seasonal effects of the third quarter – the toughest quarter for modern food retail. We have invested a lot of effort to retain customers by running a country-wide promo in September, which proved to be a great success but pressured margins. However, our focus on improvement of purchasing terms, upgrade of logistics capacity and optimization of business processes, combined with strong sales momentum, shall enable X5 to meet its aggressive growth and profitability targets for the full year,"
Lev Khasis, X5 Retail Group CEO, commented. He added:
"As we are preparing for record-high Christmas and New-Year sales, we decided to postpone several store openings until early 2008. This decision will enable us to concentrate on operational performance of existing stores, minimize store opening costs and ensure higher quality of the openings. Thus, we expect to open approximately 140,000 sq. m. in 2007, but keep our full-year sales target unchanged."
Total net retail sales for the third quarter increased by 54% in USD terms to USD 1,261 mln, translating into a 51% increase year-on-year in the first nine months of 2007 to USD 3,592 mln. Impressive retail sales surge is explained primarily by success of X5 promotional campaign in soft discounters across the country dedicated to Pyaterochka’s 8th anniversary and aimed at keeping positive traffic in what is traditionally the weakest quarter of the year. Despite seasonal pressures, hypermarkets and supermarkets also performed well, both in terms of LFL and new stores, reinforcing the overall positive sales growth trend.
For the third quarter 2007, LFL sales surged 20% in RUR terms – a healthy mix of growth in traffic (up 8%) and basket (up 12%) across formats and regions. Expansion brought additional 25% in terms of growth. As a result, nine months LFL sales increased by 17% in RUR terms with traffic growing by 9% and basket – by 8%, while 24% came from expansion.
Hypermarkets
For the third quarter 2007, hypermarkets sales surged 56%, excluding FX effect, as a result of 17% increase in LFL sales (strong performance of our hypermarket in Samara) and 39% contributed by five new stores opened after 30 September 2006. For the first nine months, gross sales in the hypermarket format increased by 51% (LFL sales up 15%, new stores sales up 36%).
Supermarkets
For the third quarter 2007, supermarkets sales grew by 47%, excluding FX effect, as a result of 21% surge in LFL sales and 26% coming from expansion. The strongest LFL growth in the supermarket format was reported in Moscow (up 26%), which is explained by further strengthening of Perekrestok competitive positions in its home market (supermarket traffic in Moscow posted very strong growth of 13% in the third quarter). For the first nine months, gross sales in the supermarket format increased by 46% (LFL sales up 18%, new stores sales up 28%).
Soft Discounters
In the third quarter 2007 soft discounters sales grew by 43%, excluding FX effect, as a result of 20% surge in LFL sales and 23% coming from expansion. The strongest LFL growth in the soft discounter format was reported in the regions (up 48%) due to outstanding performance of stores in Chelyabinsk and Yekaterinburg. These supreme growth rates demonstrate the efficiency of our super promo campaign dedicated to the 8th anniversary of Pyaterochka.
The company reports that for the third quarter in a row, X5 soft discounters reported positive traffic in St. Petersburg (up 1% in Q3, 2% in Q2 and 1% in Q1), which reflects success of X5’s efforts to maintain and reinforce its market share in the most competitive food retail market in Russia. For the first nine months 2007, gross sales in the soft discounter format increased by 37% (LFL sales up 17%, new stores sales up 21%).
Gross Profit
For the third quarter 2007, gross profit increased by 54% to USD 330 mln, translating into a 53% year-on-year growth to USD 946 mln for the first nine months. Third quarter gross margin totaled 25.9%, while nine months gross margin reached 26.2%.
Some pressure on the gross margin in the third quarter is typical for urban food retailers as there is more competition from open markets in fresh segment. Moreover, it’s vacations period which negatively affects both basket (average consumer spending on food falls) and traffic. Nationwide Pyaterocka promotion campaign aimed at maintaining high traffic rates also depressed the margin.
Selling, General and Administrative Expenses (SG&A)
For the third quarter 2007, SG&A totaled USD 288 mln – an increase of 52% year-on-year. For the first nine months 2007, SG&A increased by 48% over the same period a year ago to USD 799 mln mainly due to growth in staff costs and higher lease expenses.
Staff Costs
For the third quarter 2007, staff costs, including ESOP, increased by 43% compared to the same period of last year. Net of ESOP costs, which in 2006 included one-off restructuring expense of the previous ESOP, Q3 2007 staff costs grew by 65% on the back of continuing wage inflation and extensive hiring to prepare for store opening season in the fourth quarter. Third quarter 2007 ESOP costs amounted to USD 14 mln, which represents proportionally accrued expenses related to the first and the second tranches of ESOP. For the first nine months 2007, total staff costs grew by 38% year-on-year (61% net of ESOP)
Lease Expenses
For the first nine months 2007, lease expenses increased by 47% on the back of rent inflation. As a large proportion of the Group’s stores are owned, this reduces its exposure to the growth in rent prices.
In the third quarter 2007 X5 Retail Group focused on restructuring of its obligations to streamline its debt portfolio and reduce future interest payments. These efforts enabled the Company to significantly reduce its running cost of debt – effective interest rate decreased to 6.7% p.a. At the same time, in the third quarter of 2007 the Group recognized a one-off debt restructuring expense of USD 23 mln.
Ruble Bonds Restructuring
In July 2007, X5 Retail Group issued a 7 -year bond (with a call option exercisable in 3 years) with an interest of 7.6% p.a. and the notional amount of RUR 9 bln. This issue replaced three outstanding bonds previously issued by Pyaterochka and Perekrestok in the total amount of RUR 6 bln with an average interest rate of 9.55%. This move not only enabled X5 to reduce its interest rate exposure, but also significantly improved transparency of the Group’s debt structure.
Syndicated Loan Refinancing
In June 2007, the Group replaced its outstanding USD 800 mln syndicated loan bearing interest of LIBOR + 2.25% p.a. with a new one in the amount of USD 1 bln bearing interest of LIBOR + 0.75% p.a. In addition to reducing its interest exposure, the new loan gave the Company increased financial flexibility due to a simpler covenants structure.
At the end of the third quarter 2007 net outstanding debt of the Group totaled USD 1.48 bln.
FX Gain/(Loss)
X5 Retail Group employs hedging strategy to minimize its foreign exchange and interest rate exposure. Thus, in July 2007 it entered into arrangements to hedge both FX and interest rate risks on its USD 1 bln syndicated loan. Interest rate hedge resulted in interest savings of approximately
USD 0.5 mln as of 30 September 2007. On the other hand, as turmoil in the US financial markets led to significant USD depreciation against EUR and RUR, FX gains on the dollar denominated syndicated loan were off-set by mark-to-market result on the hedging facility. The Company plans to continue to apply hedging policy aimed at minimizing its FX and interest rates exposure.
Recent Events
In October 2007 X5 Retail Group announced acquisition of Korzinka - the largest and fast growing retail chain in the Lipetsk region. The company’s expected sales are US$190 million excluding VAT for 2007. X5 Group will acquire 22 stores in total, of which 15 will be integrated into the Group's discounter format, 6 into the supermarket format and one store will be added to the hypermarket network. The total area of Korzinka outlets is 38,007 sq.m., of which 12,352 sq. m. are owned, while average length of lease agreements for the remaining space is 10 years (including the hypermarket). The net selling space represented by the outlets is 19,966 sq. m.
2007 Store Opening Guidance
The Company has revised its full year 2007 guidance on store openings from 150,000 sq.m. to approximately 140,000 sq. m., which reflects our decision to focus on operational performance of existing stores and ensure high Christmas and New-Year sales, rather than pushing openings in December 2007. Unbalanced store opening at the very year-end affects performance of existing stores, generates extra costs, and does not guarantee the required quality of the openings. As usual, we will provide our 2008 store opening guidance in January 2008. The stores that are technically ready to be opened after mid-December 2007 but become operational in early 2008 will be reported separately.
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