X5 Retail Group has booked a 20.6% decline in first-half profits, with declining sales and margins hitting the bottom line and currency exchange dampening comparisons.
The company said today (21 August) net profit slipped to US$135.2m in dollar-terms during the six months to the end of July.
Dollar-revenue at Russia's largest retailer by sales dropped 0.1% to $1.86bn, although sales were up 6.9% in rouble terms, the company emphasised.
EBITDA slid 2.1% as EBITDA margin eroded from 7.2% in the comparable period of last year to 7.1%.
The company said margins were hit by an increase in logistics costs in the second quarter, when the group opened a new distribution centre and established direct imports.
Click here for our BRICs and beyond column on why the next 12 months will be a telling year in X5's future.
X5 RETAIL GROUP REPORTS CONSOLIDATED IFRS RESULTS FOR H1 2012
Amsterdam, 21 August 2012 - X5 Retail Group N.V., ("X5" or the "Company") Russia's largest retailer in terms of sales (LSE ticker: "FIVE"), today released the Company's Interim Report for the Half Year 2012 (the "Interim Report") prepared in accordance with International Financial Reporting Standards (IFRS) and the Dutch Financial Markets Supervision Act. The Interim Report, including the full set of reviewed IFRS condensed consolidated interim financial statements and notes thereto, is available on X5's corporate website,
· Net sales increased 9.8% year-on-year (y-o-y) in Russian Rouble (RUR) terms to RUR 123,637 million (mln) and decreased 0.8% in US Dollar (USD) terms to USD 3,988 mln;
· Gross profit totaled USD 910 mln, resulting in gross profit margin of 22.8%;
· EBITDA amounted to USD 280 mln, or 7.0% of total net sales; and
· Net profit reached USD 69 mln, for a net profit margin of 1.7%.
· Net sales increased 6.9% y-o-y in RUR terms to RUR 240,781 mln and decreased 0.1% in USD terms to USD 7,859 mln;
· Gross profit totaled USD 1,858 mln, resulting in gross profit margin of 23.6%;
· EBITDA amounted to USD 554 mln, or 7.1% of total net sales; and
· Net profit reached USD 135 mln, for a net profit margin of 1.7%.
Income Statement - Key Trends and Developments
In Q2 and H1 2012, X5's net sales in RUR terms increased y-o-y by 9.8% and 6.9%, respectively, primarily due to organic expansion of new stores and selling space. Net sales reported in USD for the same periods decreased by 0.8% and 0.1%, respectively, due to exchange rate differences between the RUR, X5's operational currency, and the USD, the Company's presentation currency.
In Q2 2012, gross profit margin totaled 22.8%, a 70 basis point (bp) decrease compared to Q2 2011 primarily due to an increase in logistics' expense related to start-up costs for direct imports and opening of a new distribution center as well as shrinkage associated with the seasonal peak in supplies of fruits and vegetables and the effect of inventory clean-up at our warehouses.
The gross margin in H1 2012 amounted to 23.6% and was in line with the gross margin in H1 2011, primarily due to a trade-off between working capital and margins in Q1 2012, which offset the increase in logistics' expense in Q2 2012.
Selling, General and Administrative (SG&A) Expenses
In Q2 2012, SG&A expenses, as a percentage of net sales, decreased by 80 bp y-o-y to 19.7% primarily due to a decrease in other expenses.
Staff costs, as a percentage of net sales, increased by 10 bp y-o-y in Q2 2012, to 8.1% primarily driven by an increase in store personnel, associated with the increase in new store openings, and a net expense recognized on the Company's long-term incentive plans, Employee Stock Option Program (ESOP) and Restricted Stock Unit Plan (RSUP), resulting from the remeasurement of the associated ESOP and RSUP liabilities at 30 June 2012, compared to income recognized on the plans and a reversal of accrued bonuses in the corresponding period of 2011. The increase in store personnel accounted for 17 bp of the increase in staff costs while the ESOP expense added 55 bp. Staff costs in Q2 2012 benefited from the reclassification of security and maintenance expenses from staff costs to other store costs, which reduced staff costs as percentage of net sales by 31 bp, as well as a decrease in the social tax rate from 34% to 30%, effective from 1 January 2012, reducing staff costs as a percentage of net sales by 31 bp.
The Company's Q2 2012 lease expenses, as a percentage of net sales, decreased by 10 bp y-o-y to 3.6% due to the impact of temporary store closures during the integration of Kopeyka in Q2 2011. As a percentage of X5's total real estate portfolio, leased space accounted for 54.4% at 30 June 2012 compared to 52.0% in the corresponding period of 2011.
In Q2 2012, other store costs increased, as a percentage of net sales, by 20 bp y-o-y to 1.6% mainly due to the reclassification of security and maintenance expenses from staff costs to other store costs. The increase was partly offset by preventive maintenance initiatives carried out at the stores.
Utilities expense, as a percentage of net sales, decreased by 20 bp y-o-y in Q2 2012, to 2.0% due to the impact of cost-saving initiatives, such as installation of electricity and water consumption meters in all stores at the end of 2011, which provide the Company with greater cost control over utilities expense.
Third party services expense in Q2 2012 increased, as a percentage of net sales, by 10 bp y-o-y due to an increase in advertising activity associated with promotional offers at the stores.
In Q2 2012, other expenses, as a percentage of sales, decreased by 100 bp primarily due to the completion of the Kopeyka integration in Q3 2011, a decrease in bad debt provision and the release of historical provisions for legal and tax risks.
As a result of the factors discussed above, EBITDA in Q2 2012 totaled USD 280 mln, or 7.0% of net sales.
In H1 2012 and 2011, SG&A expenses as a percentage of net sales amounted to 20.4%. In the 2012 period, SG&A expenses related to staff costs, lease expenses, other store costs and third-party services were higher y-o-y due to the increase in store openings and promotional activities in H1 2012 compared to H1 2011. The increases were equally offset by a decrease in other expenses related to Kopeyka integration costs and cost saving initiatives related to utilities expenses.
As a result of the factors discussed above, EBITDA in H1 2012 totaled USD 554 mln, or 7.1% of net sales
Non-Operating Gains and Losses
Net finance costs in Q2 2012 decreased by 2.5% y-o-y in USD terms, and increased by 8.1% in RUR terms. The weighted average effective interest rate on X5's total debt for H1 2012 increased to 8.5% per annum from 7.8% per annum in H1 2011. The increase was primarily due to the conversion of the Company's USD-denominated debt into RUR by year-end 2011 and the generally higher interest rates charged on RUR borrowings.
Income Tax
In Q2 and H1 2012, X5's effective tax rate was 25.5% and 26.1%, respectively, compared to 26.3% and 26.2%, respectively, in the corresponding periods of 2011. X5's effective tax rate is higher than the Russian statutory tax rate of 20.0% as inventory shrinkage and ESOP expense are only partially tax deductible in Russia.
Consolidated Cash Flow - Key Trends and Developments
In Q2 2012, net cash flows generated from operating activities totaled USD 69 mln compared to net cash flows used in operating activities of USD 66 mln in the corresponding period of 2011. The increase was primarily due to changes in working capital. In Q2 2012, changes in working capital resulted in a negative effect on cash flows from operating activity of USD 85.3 mln compared to a negative effect of 241.7 mln in Q2 2011.
The change in working capital in Q2 2012 was primarily driven by an increase in VAT receivables, driven by internal improvements in processing VAT claims on purchases resulting in a lower net VAT payable. The decrease in Q2 2012 VAT payable was partially offset by an increase in trade accounts payable.
Net cash flows used in operating activities in H1 2012 amounted to USD 8.4 mln compared to net cash flows generated from operating activities of USD 9.3 mln in H1 2011. The decrease was due to changes in working capital, primarily the decrease in VAT payable mentioned above, as well as an increase in interest expense in H1 2012 due to the conversion of USD-denominated debt into RUR by year-end 2011 and the generally higher interest rates charged on RUR borrowings.
Net cash used in investing activities totaled USD 194 mln and USD 375 mln in Q2 and H1 2012, respectively, compared to USD 172 mln and USD 270 mln, respectively, for the corresponding periods in 2011 due to an increase in store openings in the 2012 periods.
Net cash generated from financing activities in Q2 and H1 of 2012 amounted to USD 126 mln and USD 157 mln, respectively, and was related to short-term credit facilities drawn to finance working capital needs.
