Rosh Ha’ayin-based food retailing giant Blue Square-Israel has reported revenues that increased by 1.6% year on year to NIS1,379.2m (US$295.5m), for its first quarter ended 31 March 2002.

Blue Square explained that the increase was due to its additional selling space, the effect of which was weakened by Israel’s difficult economic environment and the competition both from the company’s own stores and those of its competitors.

The results of the Q1 2002 reflect a 2.4% rise in the Consumer Price Index (CPI), while the results of the comparable quarter of 2001 reflect a 0.5% decrease in the CPI. The 2.9% gap between the CPIs of the two quarters had a positive affect on the net profit of the reporting period. However, it had a negative effect on the quarter’s gross profit and operating income due to a NIS9m adjustment for inflation made to inventory as of the beginning of the period.

Gross Profit for the Q1 was NIS371.3m, reflecting a gross margin of 26.9%, compared to NIS381.2m for the Q1 2001, reflecting a gross margin of 28.1%. The reduction in gross margin resulted from competition and an increased emphasis on hard discount sales, partially compensated for by increased private label sales.

Operating income for the Q1 was NIS68.3m reflecting an operating margin of 5%, compared to NIS74.1m for the Q1 2001, reflecting an operating margin of 5.5%. Financing Income for the Q1 was NIS10.9m compared to Financing Expenses of NIS11.3m for the Q1 2001. Net income meanwhile increased 30% to NIS41m, or NIS1.07 per ADS, compared with NIS31.7m, or NIS0.83 per ADS, for the Q1 2001.

Same store sales for the quarter declined by 4.82%. This reflects sector competition and the slowdown in the economy. It also reflects the opening of regional MEGA branches which impacted the sales of the company’s other stores in the same areas. Overall, the contribution of new branches was positive; however, because they did not exist in 2001, their sales were not reflected in the comparison of same store sales. In addition, because of Israel’s ongoing security situation, there were fewer shoppers in malls, negatively affecting the company’s stores located in malls.

Sales per employee increased by 2.8% during the quarter, reflecting the success of the company’s ongoing efficiency programme. EBITDA margin for the quarter was 7.6%.

Management comments

Commenting on the results, president and CEO Yoram Dar said: “In the face of an extremely difficult business environment, we are pleased to report a 30% increase in net income, together with continued top-line growth and strengthening margins.

“The strength of the quarter validates our business strategies. Our expansion programme continues on track, with an emphasis on discount formats. During the Q1, we transformed five Super Centers into King Centers, our new smaller-sized hard-discount format, and plan to open an additional five by the end of the year. We will open a number of new Mega stores during the H2, adding about 22,000m² to the chain. We also plan to continue expanding the chain in 2003 with the addition of about 25,000m².

“Our focus on efficiency, together with expanded self-distribution, has enabled us to reduce SG&A expenses despite today’s higher security expenses, and to increase our sales per employee. Increased private label sales and successful category management are helping us to maintain high gross margins despite the shift in customer demand toward hard discount stores.”

Dar concluded: “Taken as a whole, we continue to leverage our deep understanding of our markets to offer superior value to our customers, and they are repaying us with loyal patronage. We are proud of our ability to flourish even in today’s extremely tough markets, and are confident as we look ahead.”