Supermarket giant Blue Square-Israel has yesterday [Wednesday] reported revenue of NIS1,384.6m (US$290.3m) for its Q2 ended 20 June, down 8.8% year on year.

The Rosh Ha'ayin-based firm explained that the drop insales reflects adjustments to its financial statements, made to reflect the rise in the Consumer Price Index (CPI); the timing of the Passover holiday buying season, which occurred entirely during the Q1 2002, but primarily during the Q2 2001; the difficult economic situation and the rise in unemployment, which has eroded the purchasing power of a large proportion of Israeli consumers, resulted in decreased demand.

The firm also blamed the security situation for further erording sales in its stores in shopping malls.

The timing of the opening of new store branches was another factor which saw same store sales fall 13.61% in the Q2. During the quarter, Blue Square closed one store permanently, and another large store temporarily for renovations. During the H2, it plans to reopen the renovated store, and to add 25,000m² of selling space.

Q2 gross profit was NIS357.1m, compared with NIS406.7m in the Q2 2001. Gross margins for the quarter declined to 25.8% from 26.8% year on year, reflecting competition and an increased emphasis on hard discount sales, partially compensated for by increased private label sales.

In addition, Blue Square's gross margins reflected an increase of 3.8% in the CPI for the Q2 2002, compared to an increase of just 1.6% in the CPI for the Q2 2001. The difference of 2.2% resulted in a drop of NIS7.5m in gross profit and operating profit for the quarter year on year, which was attributed to adjustments made to account for the effect of inflation on the opening balance of inventory.

Operating income for the Q2 was NIS50.1m compared to NIS88.6m year on year, with operating margin decreasing to 3.6% from 5.8% a year ago. The decline in operating margins is due to the decrease in sales, and the resulting reduction in gross margins, but was partially mitigated by the ongoing efficiency programme.

Q2 financing income was NIS19.6m compared to NIS5.3m for the Q2 2001. Net income for the Q2 was NIS38.6m, or NIS1.01 per ADS, compared to NIS47.8m, or NIS1.25 per ADS, for the Q2 2001. EBITDA for the quarter was NIS88m, resulting in an EBITDA margin of 6.4%.

H1 results

H1 revenues were NIS2,816.8m, a decrease of 3.8% compared to NIS2,928.1m for the H1 2001. Sales were affected by all the above factors, except for the timing of the Passover holidays. Gross margins for the H1 2002 were 26.4%, compared to 27.4% year on year.

The company's operating income for the H1 2002 was NIS121m compared to NIS165.6m in the H1 2001. Operating margin for the period was 4.3%, compared to 5.7% for the corresponding period in 2001, reflecting the effect of Israel's current security and economic situation, mitigated partially by the success of the company's ongoing efficiency programme.

Net income for the H1 2002 was NIS81.2m, or NIS2.12 per ADS, up 0.69% on NIS80.7m, or NIS2.10 per ADS, year on year.

During the H1 2002, same store sales fell 9.4%. The firm opened four stores and closed two during the H1 2002, adding a net total of 1,500m² to the chain. EBITDA for the first six months was NIS197m, resulting in an EBITDA margin of 7%.

Management comments

Yoram Dar, president and CEO, said: "Our Q2 performance reflects the effect of a combination of factors. However, we expect improved top line performance during the H2 due to a number of important developments, including the opening of new stores, the reopening of renovated branches, the continued rebranding of existing stores to discount formats, and other exciting activities."

Dar continued: "We are on track with an aggressive expansion programme, which includes an expanded emphasis on a number of specific consumer segments (such as the ultra-Orthodox market) and an expansion of our pharmaceutical outlets. We are on-track with our Private Label programme, which we expect to grow from the current level of 7.1% of our sales to 9%-10% by year-end. The number of customers who use our new Blue Center Home Buying Network continues to grow, and we have recently expanded it to additional regions. We also continue to intensify our ongoing Category Management, Self-Distribution, and efficiency initiatives."

Dar concluded: "We remain confident and excited regarding our future potential. Supermarket chains still account for only 52% of food sales in Israel, compared to about 75% in Europe. We believe that now is the time to expand the chain to optimise our positioning for the long-term. Our strategies are helping us to make the best of today's market, and we are working hard to achieve improved performance during the H2 2002 and beyond."

Selected operating data

(In Adjusted NIS of December 2001)

                           For the six           For the three    Convenience
                          months ended           months ended     translation
                             30 June                30 June         for three
                       ------------------   ----------------------  months to  
                          2002      2001        2002         2001     30 June 
                          NIS       NIS         NIS          NIS     2002 US$
                       --------  --------    --------     --------  ----------
                           (Unaudited)            (Unaudited)      (Unaudited)
                       -------------------------------------------  ----------

    Sales (in millions)  2,817     2,928       1,385        1,518         290
    Operating income
      (in millions)        121       166          50           89          10
    Number of stores
      at end of period     173       169         173          169          NA
      Stores opened
        during the period    4         3           1            2          NA
      Stores closed during
        the period           2         2           0            1          NA
    Total square
      meters at
      end of period (*)280,600   264,900  (*)280,600      264,900          NA
    Square meters
      added during
      the period         1,500     6,900         900        1,200          NA
    Same store sales    (9.41%)   (1.72%)    (13.61%)      (3.33%)         NA
    Sales per
      square meter
      (in thousands)    10,160    11,145       5,006        5,748       1,060
    Sales per employee
      (in thousands)       381       383         188          196          39
    EBITDA (in millions)   197       239          88          127          18
    EBITDA margin          7.0%      8.2%        6.4%         8.4%         NA

    (*) Includes 3,800 square meters associated with a store temporarily
        closed for renovation.