Magnit announces 16.0% revenue growth and EBITDA margin of 7.0% in 1H 2020

Krasnodar, Russia (20 August, 2020): Magnit PJSC (MOEX and LSE: MGNT), one of Russia's leading retailers announces its reviewed 1H 2020 financial results prepared in accordance with IFRS.

Key operating and financial highlights for 1H 2020:

• Total revenue increased by 16.0% y-o-y to RUB 763.4 billion;
• Net retail sales reached RUB 744.0 billion representing 15.7% y-o-y growth;
• LFL[1] sales growth stood at 7.5%[2] on 13.9% average ticket growth and 5.6% traffic decline, excluding leap year effect in February;
• The Company opened 498 stores[3] on gross basis (239 convenience stores, 258 drogeries and 1 supermarket). As a result of the ongoing efficiency improvement campaign and closure of 329 stores (280 convenience stores, 47 drogeries and 2 supermarkets), net store addition stood at 169, thus bringing the total store base as of June 30, 2020 to 20,894 stores;
• Addition of selling space amounted to 52 thousand sq. m., bringing total selling space to 7,290 thousand sq. m. (5.1% y-o-y growth);
• The Company redesigned 307 stores across all formats. As of June 30, 2020 the share of refurbished and new stores reached 71% of convenience stores, 24% of supermarkets and 54% of drogeries;
• Gross Profit stood at RUB 179.5 billion with a margin of 23.5% (down 9 bps y-o-y) driven by a combination of investments into loyalty card and slightly higher y-o-y promo share almost fully compensated by lower shrinkage, better commercial terms, improved transportation costs, favourable format mix and first improvements of promo margin and its coverage by suppliers;
• Cash SG&A[4] expenses as percentage of sales improved by 69 bps to 17.5% on positive operating leverage, increased personnel productivity, more efficient marketing and lower rent expenses;
• EBITDA increased by 23.6% to RUB 53.2 billion with margin of 7.0% - an improvement of 43 bps y-o-y driven by gross margin dynamics and lower SG&A expenses;
• Net income increased by 77.8% y-o-y and stood at RUB 17.0 billion. Net income margin increased by 78 bps y-o-y to 2.2%;
• As of 30 June 2020, Net Debt was RUB 187.4 billion. Net Debt / EBITDA ratio was 2.0x.

Events after the reported period:

• Magnit paid dividends for FY 2019 in the amount of c. RUB 16 billion or RUB 157 per one ordinary share bringing the total dividend payment to RUB 31 billion (RUB 304 per ordinary share) in line with the previous year;
• Dmitry Ivanov has been appointed acting CFO of JSC "Tander" effective from July 15, 2020;
• The Company started piloting discounter concept with the first three stores under the new format opened in the regions;
• Magnit reached an agreement to acquire long-term leasehold rights for the 89 stores currently operating under Evroros, Yablochko, and Tvoy brands in Murmansk and Murmansk region;
• Vladimir Sorokin, Chief Commercial Officer, resigned effective from August 28, 2020. The Company decided to restructure commercial department, including launch of a dedicated commercial procurement unit.

 

Financial results for 1H 2020

Total revenue in 1H 2020 grew by 16.0% y-o-y and stood at RUB 763.4 billion.

Net retail sales increased 15.7% y-o-y and reached RUB 744.0 billion driven by LFL sales growth of 7.5% and selling space growth of 5.1%. Starting from January 2020 net retail sales growth continues outpacing selling space growth on strong LFL results leading to higher sales densities. Sales density of the Company continued to accelerate across all formats and in 2Q 2020 increased by 1.7% q-o-q.

Wholesale revenue in 1H 2020 increased by 30.2% up to RUB 19.4 billion primarily driven by improvements of wholesale operations including expanded assortment and increased customers base which more than offset a decline in demand by HORECA related to pandemic environment and changes in regulation of tobacco sales. Share of wholesale segment increased from 2.3% in 1H 2019 to 2.5% in 1H 2020.

Gross Profit in 1H 2020 increased by 15.6% y-o-y and stood at RUB 179.5 billion with a margin of 23.5%. Gross profit margin decreased by 9 bps y-o-y driven by a combination of investments into loyalty card and slightly higher y-o-y promo share almost fully compensated by lower shrinkage, better commercial terms, improved transportation costs, favourable format mix and first improvements of promo margin and its coverage by suppliers.

Magnit cross-format loyalty program continued to gain popularity among customers. About 59 million cards have been issued since the start of the pilot in March 2019 with the number of active users exceeding 34 million. Company-wide, the share of tickets with the use of the loyalty card was 49% with penetration in sales reaching 66%. The impact on the gross margin coming from investments into loyalty program in 1H 2020 was 64 bps.

Shrinkage as a % of sales decreased by 57 bps y-o-y driven by ongoing optimization of supply chain processes, renegotiation of quality standards with suppliers and other initiatives launched in 2019 despite growing share of fresh assortment and overall improvement of on-shelf availability.

Transportation expenses as a % of sales decreased by 9 bps on route optimization, higher utilization of trucks and other efficiency gains leading to a reduction of cost per kilometer by 7.7% y-o-y. At the same time service level and availability of stock on the shelves continued to demonstrate positive dynamics compared to last year.

In 1H 2020 Magnit had a positive base effect driven by one-off costs related to the accident at Voronezh Distribution Center in May 2019 in the amount of RUB 1.0 billion.

SG&A costs demonstrated solid improvement by 1.2 p.p. to 20.5%.

Cash SG&A expenses as percentage of sales improved by 69 bps to 17.5% on positive operating leverage, increased personnel productivity, more efficient marketing and lower rent expenses.

Personnel costs as a % of sales marginally increased by 4 bps y-o-y to 9.1% reflecting one-off COVID-related expenses offsetting efficiency improvements. In April the Company made increased payments to existing frontline personnel related to extra working hours and additional hiring to cover high demand in March partially compensated by increased productivity and lower staff turnover. Productivity of in-store personnel increased by 6% y-o-y driven by accelerating sales growth and continuous automation of key business processes. Staff turnover decreased across all regions to record lows driven by improved working conditions of in-store personnel including selective increase of compensation as well as higher retention rate.

Rent expenses as a % of sales decreased by 26 bps y-o-y to 4.4% driven by higher sales density, improvements of lease terms with landlords and lower store openings despite growing share of leased selling space to 77.4% in 1H 2020 vs 76.3% a year ago.

Despite slightly higher promo share y-o-y and additional costs related to loyalty program, marketing and advertising expenses as a % of sales reduced by 32 bps y-o-y thanks to more efficient tactics and tools of promo campaigns.

Other lines including utilities, packaging and raw materials,  and other operating expenses[6] as a % of sales remained under strict control and decreased y-o-y by 15 bps supported by ongoing optimization initiatives and positive impact of operating leverage.

Total costs incurred as a result of the Company's response to COVID-19 in 1H 2020 amounted to approximately RUB 2.5 billion and included additional payments to frontline personnel, increased frequency of cleaning and other safety measures.

As a result, reported EBITDA was RUB 53.2 billion with 7.0% margin having improved by 43 bps y-o-y driven by gross margin dynamics and lower SG&A expenses. EBITDA pre-LTI was 7.0% - in-line with reported EBITDA due to partial release of accruals made last year in order to align with LTI threshold achievement.

Depreciation & amortization as a % of sales reduced by 51 bps y-o-y in 1H 2020 to 3.0% driven by operating leverage, slower expansion (169 net openings in 1H 2020 vs 1,536 stores opened last year) and redesign program (307 refurbishments in 1H 2020 vs 1,465 redesigns made last year).

 

 

As a result, operating profit in 1H 2020 stood at RUB 30.1 billion or 52.4% higher than a year ago.

Net finance costs as % of sales improved by 18 bps y-o-y and stood at RUB 7.3 billion. Finance expenses decreased by 16 bps and remained flat y-o-y at RUB 7.6 billion as higher average amount of borrowings was fully offset by lower cost of debt (6.3% as of end of 1H 2020 compared to 7.7% as of end of 1H 2019). Income from investing activities doubled y-o-y and reached RUB 331 million due to higher average amount of cash on bank accounts during the reported period.

In the reported period the Company had FX loss in the amount of RUB 0.8 billion related to direct import operations.

Income tax in 1H 2020 was RUB 5.0 billion with effective tax rate of 22.7%.

As a result, Net Income in 1H 2020 increased by 77.8% y-o-y and stood at RUB 17.0 billion. Net income margin improved by 78 bps y-o-y to 2.2%.

 

Balance Sheet and Cash Flows

Financial Position Highlights as of 30.06.2020 (IFRS 16)

million RUB	30.06.2020		31.12.2019
Non-current assets		680,090	697,347
Inventories		219,236	218,874
Cash and cash equivalents		21,149	8,901
Other current assets		15,801	23,568
Assets		936,276	948,689
Equity		187,302	188,533
Long-term borrowings		117,389	119,632
Other long-term liabilities		332,201	340,125
Trade and other payables		117,609	161,631
Short-term borrowings and short-term portion of long-term borrowings		91,204	64,578
Other short-term liabilities		90,572	74,189
Equity and liabilities		936,276	948,689

Despite 16.0% sales growth in 1H 2020, ongoing improvement of on-shelf availability, increased share of drogerie format to 8.4% of net retail sales, supplier inflation and stock-up activities to cover increased demand in March-April 2020, inventories remained almost flat vs December 31, 2019 and stood at RUB 219.2 billion.

As a result of a seasonal decline in the first half of the year related to payments to suppliers in January-February for large December volumes, lower buying volumes in the second quarter, higher share of fresh categories in sales and negative calendarization effect on payment days, trade and other payable reduced by 27.2% compared to December 31, 2019 and stood at RUB 117.6 billion. Magnit continued working on improvement of account payables extending payment terms with suppliers in days.

Debt composition and leverage as of 30.06.2020 (IAS 17)

Gross debt increased by RUB 10.3 billion or 5.2% compared to the end of 1H 2019 and stood at RUB 208.6 billion as of June 30, 2020. Accumulated cash and cash equivalents equalled to RUB 21.1 billion.

As a result, Net Debt increased by RUB 6.0 billion compared to June 30, 2019 and stood at RUB 187.4 billion as of June 30, 2020.

Company's debt is fully RUB denominated matching revenue structure. Net Debt to EBITDA ratio was 2.0x as at June 30, 2020 vs 2.1x as at June 30, 2019.

Cash Flow Statement for 1H 2020

The Company's cash flows from operating activities before changes in working capital for 1H 2020 equalled to RUB 54.3 billion, which was RUB 9.2 billion or 20.4% higher y-o-y. The change in working capital increased to RUB 28.9 billion from RUB 22.4 billion in 1H 2019 as a result of a decrease in trade payables partially offset by lower increase of inventories.

Working capital management remains one of the key priorities of the Company. A number of ongoing initiatives, including optimization of receivables, electronic document flow, cross-functional projects aiming at reducing inventories, etc. will result in working capital improvement going forward predominantly through the reduction of inventory turnover in days.

Net interest and income tax paid in 1H 2020 increased by RUB 2.4 billion or 28.5% to RUB 10.8 billion. Net interest expenses marginally decreased by 2.7% y-o-y to RUB 6.5 billion in 1H 2020 as higher average amount of borrowings was fully offset by lower cost of debt. Income tax paid for 1H 2020 increased to RUB 4.3 billion.

With this net cash flow from operating activities in 1H 2020 increased by 1.9% to RUB 14.6 billion.

Net cash used in investing activities predominantly composed of capital expenditures which decreased by 48.2% to RUB 11.4 billion in 1H 2020. The dynamics was attributable to lower number of store openings (169 stores in 1H 2020 vs 1,536 stores in 1H 2019) and less refurbishments (307 refurbishments in 1H 2020 vs 1,465 redesigns in 1H 2019).

In 1H 2020 net cash generated from financing activities was RUB 9.1 billion vs RUB 2.0 billion used in 1H 2019. In 1H 2020 the Company paid dividends in the amount of RUB 14.5 billion[7] while the second payment for the full year of 2019 was made in July 2020. The rest was driven by dynamics of proceeds from borrowings and repayment of loans.

As a result of factors mentioned above during the 1H 2020 net cash position increased by RUB 12.2 billion or 138% to RUB 21.1 billion as of June 30, 2020.

Note:

1. This announcement contains inside information which is disclosed in accordance with the Market Abuse Regulation which came into effect on 3 July 2016.
2. Please note that there may be small variations in calculation of totals, subtotals and/ or percentage change due to rounding of decimals.
3. Please follow the link to view 1H 2020 financial report - www.magnit.com/en/shareholders-and-investors/results-and-reports/

 

For further information, please contact:

 

Dmitry Kovalenko   Dina Chistyak    Media Inquiries

Director for Investor Relations  Director for Investor Relations  Media Relations Department

Email: dmitry_kovalenko@magnit.ru  Email: dina_chistyak@magnit.ru Email: press@magnit.ru

Office: +7 (861) 210-48-80  Office: +7 (861) 210-9810 x 15101

 

Note to editors:

Public Joint Stock Company "Magnit" is one of Russia's leading retailers. Founded in 1994, the company is headquartered in the southern Russian city of Krasnodar. As of June 30, 2020, Magnit operated 38 distribution centres and 20,894 stores (14,581 convenience, 472 supermarkets and 5,841 drogerie stores) in 3,710 cities and towns throughout 7 federal regions of the Russian Federation.

In accordance with the reviewed IFRS 16 management accounts results for 1H 2020, Magnit had revenues of RUB 763.4 billion and an EBITDA of RUB 86.9 billion. Magnit's local shares are traded on the Moscow Exchange (MOEX: MGNT) and its GDRs on the London Stock Exchange (LSE: MGNT) and it has a credit rating from Standard & Poor's of BB.

Forward-looking statements:

This document contains forward-looking statements that may or may not prove accurate. For example, statements regarding expected sales growth rate and store openings are forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause actual results to differ materially from what is expressed or implied by the statements. Any forward-looking statement is based on information available to Magnit as of the date of the statement. All written or oral forward-looking statements attributable to Magnit are qualified by this caution. Magnit does not undertake any obligation to update or revise any forward-looking statement to reflect any change in circumstances.

[1] LFL calculation base includes stores, which have been operating for 12 months since its first day of sales. LFL sales growth and average ticket growth are calculated based on sales turnover including VAT.

[2] Since October 1, 2019 VAT on fruits and berries has been reduced from 20% to 10%. The estimated impact on LFL sales growth is 0.4%.

[3] The number of stores does not include pharmacies.

[4] Selling, general and administrative expenses excluding depreciation and amortization.

[5] Long-Term Incentive Program

[6] Bank services, taxes other than income tax, repair and maintenance and other expenses

[7] Excluding intercompany transactions between PJSC Magnit and JSC Tander