Russian retailer X5's margins hit by price cuts

Reuters

By Maria Kiselyova

MOSCOW (Reuters) - Russian supermarket operator X5 Retail Group NV took a hit to its gross margin in the first quarter, as it cut prices to attract customers and stay competitive amid a round of discounting in the sector.

X5 had said earlier this month that promotions helped boost sales 14 percent year-on-year to 144 billion roubles (2.4 billion pounds) in the quarter, but it conceded on Monday that the cuts had caused its gross margin to narrow to 24 percent from 24.4 percent a year before.

X5 changed its strategy in 2011, aiming to grow without acquisitions, but has struggled with operational and management issues including the replacement of its entire management team in the following three years. Last year it lost its market lead to Magnit to become Russia's second-biggest food retailer by revenue.

Magnit also said last week its margins declined in the first quarter due to what it termed "active price investments" in the Russian regions into which it has recently expanded.

"We see these results as marginally negative for shares in X5. During the quarter the company sacrificed margin for traffic which is consistent with (what has happened at) Magnit," analysts at investment bank Renaissance Capital wrote in a note, adding X5 was also having to invest in refurbishing its stores.

"However, with X5 we have more concerns around margin sustainability due to ongoing format restructuring, while we believe that Magnit will improve its profitability in the following quarters as promotional activity moderates," the note added.

Shares in X5 were down 3.5 percent by 0830 GMT.

Net profit grew 25 percent to 2.5 billion roubles as core earnings or EBIDTA rose 13 percent to 9.8 billion roubles. Selling, general and administrative expenses rose in line with sales, while net finance costs edged down 0.8 percent.

In dollar terms, net profit rose 8.5 percent to around $71 million, EBITDA fell 1.4 percent to $280 million and revenue edged down 0.9 percent.

X5's EBITDA margin was flat at 6.8 percent.

X5 changed its reporting currency from the dollar to the rouble in the first quarter to eliminate the effect of exchange rate volatility, it said. The rouble has fallen 15 percent since the first quarter of 2013.

(Editing by David Holmes)

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