On the move: X5 CEO Gusev's departure offers cause for concern
Gusev's departure follows series of executive changes in last 12 months
News that Andrei Gusev will stand down as X5 Retail Group chief executive caused shares in the Russian retailer to sink to a 52-week low on Saturday (14 July). The market responded negatively to fears that an unstable management team will be unable to drive growth as X5 struggles to improve organic sales trends. The sudden nature of the announcement and lack of clarity over the reasons for Gusev's departure augmented these concerns. Katy Askew reports.
X5 Retail Group is Russia's largest retailer by revenue. It operates 3,298 company-owned stores throughout Russia and has a leading market position in the key markets of Moscow and St Petersburg.
However, the company's sales growth in the market is currently trailing its peers. For the first half of 2012, X5's rouble-based sales rose 7.2%, well below its full-year guidance of 15% sales growth. This compares to growth of 26% for rival O'Key and 33% for Magnit.
The firm has been unable to capitalise fully on improving consumer sentiment in Russia.
While the retail sector has rebounded after the global financial crisis hit consumer spending - with the latest official figures showing that retail sales in Russia increased by 6.8% year-on-year in May - X5 said on Friday that like-for-like sales dropped by 2.5% in the second quarter, its third consecutive quarter of like-for-like decline.
On the same day, X5 also revealed the company's CEO Andrei Gusev would stand down. In its statement to the London Stock Exchange, X5 did not provide a reason for Gusev's departure. Later, in a conference call with analysts, X5 CFO Kieran Balfe cited a division between the board and Gusev over strategic direction.
Analysts were unsure about what could be behind the departure of Gusev, a little more than a year after he became chief executive.
"We believe it is possible that Gusev's resignation is linked to [the] company['s] weak performance. However, X5 did not confirm this. Rather [they] said that it was due to disagreements on X5's future strategy, so it would not be correct to say there is a straightforward link between poor LFL and management change," BCS investment analyst Ekaterina Andreyanova tells just-food.
Indeed, the group's second-quarter results were more mixed than a cursory glance at the sales figures might suggest. The company did make progress on improving its like-for-like basket trends, which edged up 0.5% in the period, by using promotions to entice consumers to spend more in store. However, the success of this strategy was limited by low price inflation and a fall in footfall, with customer traffic down 3% year-on-year.
According to Raiffeisenbank analyst Natalya Kolupaeva, X5's first-half numbers were not a disappointment because the group was able to improve its organic sales trends and deliver on its key objective to tackle negative footfall trends during the second quarter.
"The company has managed to deliver on its promises - to show a positive trend in like-for-like consumer traffic and overall like-for-like sales in the second quarter of 2012. And we saw a decent improvement: second quarter like-for-like sales declined by just 1.1% versus a drop of almost 4% year-on-year in the first quarter, and traffic outflows slowed to -1.5% year-on-year versus -4.6% in the first quarter," Kolupaeva tells just-food.
Kolupaeva says she does not believe the mixed second-quarter results are the "true reason" behind the announcement that Gusev is standing down.
Nor does she believe that X5 is unhappy with the strategic direction announced during the year that Gusev was at the helm, as the company seemed to suggest.
In March 2011, Gusev said X5 would increase its focus on organic growth, which would be supported by - but not reliant on - M&A. The company said it aimed to become a customer-focused, multi-format retailer.
"During the Friday's conference call with analysts, X5 confirmed that it will continue with its current development strategy, with M&A to serve as an addition to its core organic development. Management remains focused on top line growth and efficient control over SG&A costs. We note that the strategy calls for the expansion of the retailer's selling space by over 50% in the mid-term, an increase in the market share to 7-8% versus the current 5.7%, and spending over $1.5bn annually on capex, while keeping the EBITDA margin above 7%," Kolupaeva reveals.
X5 has indicated it is concentrating on developing its various formats, which include convenience stores, supermarkets, discount stores, hypermarkets and its e-commerce unit.
To this end, over the past year X5 unveiled a swathe of senior management appointments. The retailer recruited Rewe executive Jan Fuchs to head up its hypermarket arm, while Frank Michael Mros - formerly the head of Lidl's operations in Germany and the UK - took on responsibility for the company's discount business and former Tesco and Casino executive Paul Martins was appointed commercial director.
The succession of high-level appointments could have played a role in X5's lacklustre results, Aton analyst Alexey Evstratenkov suggests. Moreover, with the senior management team only recently in place, Evstratenkov warns the further disruption caused by Gusev's exit could hinder X5's efforts to improve its financial performance.
"X5 completely changed its senior management team over the last year, which we believe limited its results as the new executives needed time to cohere and develop their strategy. The next CEO will also need time to get up to speed, which could mean further delays in improving X5's financial performance. This development looks negative, as it may make it harder for the company to reach its goals in 2H12," he warns.
According to Evstratenkov, the "rushed" nature of Gusev's departure and the fact that the company has only just started to look for a successor also "raises some major concerns for investors".
Movement in the group's share price reflected the widespread concerns that Friday's announcements highlighted. On Saturday shares dropped to a 52-week low of GBP19.90 on the London stock exchange, only to settle today at GBP20.75. During the week prior to X5's announcements, shares were trading at around GBP22.50.
A lot will depend on who the group appoints to oversee its operations at a time when X5 continues its transition into a firm that can drive growth on an organic basis, rather than relying on acquisitions.
As Russia's largest retailer, X5 is coming from a position of strength. However, in Russia's highly-competitive retail landscape the company must maintain its focus on the consumer in order to solidify its position as the country's most dominant multi-channel retailer.
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