29 Oct 2019 18:24

Magnit boosts revenue 10.5% in Q3, net profit down 57.3%

MOSCOW. Oct 29 (Interfax) - Magnit boosted net revenue 10.5% in Q3 2019 to 342.58 billion rubles from 310.11 billion rubles in the previous year, the retailer said in financial reporting.

Magnit EBITDA declined 9% to 19.78 billion rubles. EBITDA margin stood at 5.8% compared with 7% in Q3 2018, the company said.

The retailer's net profit fell 57.3% to 3.25 billion rubles. Net margin declined to 0.9% from 2.5% in the same period last year.

The Magnit results underperformed the Interfax consensus forecast: it had envisaged EBITDA growth of 3% to 22.41 billion rubles, a decline in EBITDA margin to 6.5%, and a 38.6% decline in net profit to 4.68 billion rubles. Expectations of revenue growth had also been more optimistic: according to analyst estimates, this indicator was expected to grow 10.8% to 343.52 billion rubles.

Gross profit grew 5.1%, to 76.6 billion rubles, and the gross margin fell to 22.4% from 23.5% a year earlier.

The sale of old products that were not in demand in new stores had a negative effect on Magnit's profit indicators. In Q3, the company sold off more than half of its passive matrix inventory (for 16.7 billion, out of about 33 billion). The effect on gross margin and EBITDA margin was 144 bps; the effect on net profit was 115 bps.

President and CEO Jan Dunning was quoted in the report as saying, "I see clear signs of improvement in our business. Our convenience and drogerie formats continue to show positive LFL Sales. LFL Traffic, although still negative, is recovering with LFL Basket continuing its positive trend. In the third quarter we took a strategic decision to sell more than half of our passive matrix stock. It had a one-off negative effect on our EBITDA margin and LFL Sales but allowed us to clear up crucial space for our new assortment, a key component of our CVP. During the reporting period we achieved significant assortment improvements, launched the category management function and raised availability. These developments have not yet been evident in the LFL numbers but I am looking to the coming quarters with growing confidence."

Magnit's LfL revenue fell 0.7% in Q3 due to a 3.4% decrease in customer traffic, which was partly compensated by a 2.8% increase in the average ticket. The negative effect of the sell-off of goods on LfL sales is estimated to have been 117 bps. The adjust indicator rose 0.49%.

The gross margin corrected for the sell-off was 23.8%. Growth was due to improved commercial terms. Additionally, "Magnit continued to implement various initiatives aimed at shrinkage optimization. Due to better forecasting, replenishment and quality in fruits and vegetables, shrinkage started to gradually improve in 3Q 2019. Logistics costs are also improving on the back of savings in transportation and increased productivity in the distribution centers," the report reads.

EBITDA margin corrected for the sell-off was 7.4%. Also negatively affecting the margin were "LTI provisions and operating expense, partially offset by improvements in commercial terms. The growth of operating expense YoY was driven by rental, utilities and maintenance costs partially mitigated by lower payroll, marketing, packaging and raw materials expense," the report reads.

Magnit's net financial expenditures grew 81.5% year-on-year, to 3.8 billion rubles (up from 2.1 billion), "due to a combination of higher interest rates and higher average amount of borrowings compared to the previous year. The weighted average effective interest rate for 3Q 2019 was 8.0% (including the effect of subsidized debt)."

"As of 30 September 2019 Net Debt was RUB 168.7 billion compared to RUB 137.8 billion as of December 31, 2018. The net debt increase was due to acceleration of redesign program and store openings. Company's debt is fully RUB denominated matching revenue structure. As of end of 3Q 2019 it was 67% long-term debt," the report reads. The net debt/EBITDA ratio was 2.0x, compared with 1.5x at the end of 2018 and 1.3x a year earlier.