Katy Askew

On the money: Magnit profit rises on margin gains

By Katy Askew | 22 January 2013

Russian retailer Magnit has seen profits benefit from improved purchasing terms and cost controls as it expanded its store footprint over the past 12 months.

Russia's second-largest retailer by sales grew full-year net profit to US$803.9m, up from $418.7m in 2011. EBITDA was up 71.62%, while sales gains totalled 34%, the group revealed in a trading statement today (22 January).

Speaking to just-food, investor relations director Timothy Post says that the firm has been able to grow profits ahead of its sales by driving improved margins. "Over the last 15 months we have achieved a 300bps improvement in gross margin," he emphasises.

While Magnit has driven SG&A expenses down through various initiatives, including optimising the number of people employed in store, better buying terms were the chief contributor to margin improvements.

Magnit's extensive programme of new store openings has enabled it to exact more competitive terms from suppliers. Post reveals that, as Magnit has expanded its store footprint and closed the gap with market leader X5 Retail Group, suppliers have come to view the group as a "one of Russia's two market leaders". As a result the company has been able to "get the same pricing".

"We have continued to push hard on pricing," he adds.

During 2012, the group opened 1,500 outlets with a CAPEX of $1.6m. In the coming year, Magnit expects to open around the same number of stores and is raising CAPEX to $1.8m.

"We are opening as many new stores as we can," Post says. "It is difficult to get the infrastructure in place... If you look at it in snapshot it does look a bit daunting."

The biggest challenge for Magnit is to find suitable retail locations and builders to complete construction, because there are no national building contractors, Post says. The group currently has 300 staff working to secure real estate, Post says. "If you break the task down like that it becomes more manageable".

Post remains upbeat on Magnit's ability to deliver on its ambitious store opening targets in the coming year, emphasising the company's extensive experience of establishing new stores. "We went from no outlets to almost 6,800 in 14 years."

Likewise, Post is equally confident in Magnit's ability to get these new stores turning a profit in a short space of time. "Stores reach maturity in about 6 months, laggards may take 12 months. Every store has to be profitable."

Over the past year, Magnit has posted like-for-like growth of 5.26%. However, Post says that this is not a metric that the group focuses on as same store sales are largely driven by inflation in the Russian market. However, he adds, the group is growing its share of Russian retail sales.

"We are gaining market share. This was primarily due to store openings, like-for-like is not the main driver."

Post says that Magnit's total market share now sits at "a little over" 5% of the Russain grocery sector. 

The company has focused its store openings in the fast-growing convenience sector. According to Post, this reflects Russian consumption patterns.

"Convenience is the main driver. The Russian market is somewhat different to a lot of developed markets. People shop more frequently in smaller baskets, so they don't want to get in their cars and drive out of town."

Post adds that Magnit sales have not felt a sharp impact from weak economic conditions and downbeat consumer sentiment.

"We are selling household necessities. There is not a lot of discretion or elasticity [in this spending]... There is not a strong correlation with the macro economy."

Sectors: Emerging markets, Financials, Retail

Companies: Magnit, X5 Retail Group

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On the money: Magnit profit rises on margin gains

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