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The biggest supermarket chain in Belarus Eurotorg (aka Euroopt) reported that sales were up 11.9% year-on-year to BYN2.4bn in local currency terms and up 5.1% y/y to $1.2bn in dollar equivalent in the first six months of this year.
A middle class is emerging in Belarus as bne IntelliNews previous reported in “The long march of Belarusian retail” in September 2018 that is allowing organised retail to flourish.
Net retail sales increased by 14.0% y/y and reached BYN2.2bn and net retail sales in increased by 7.0% y/y in dollar terms to $1.1bn.
Sales were mainly driven by accelerated store openings (131 net stores added in 1H 2019) while like-for-like (LFL) sales growth was negative at -5.8% over the period.
Growth of retail sales y/y was also supported by the consolidation of Eurotorg’s e-commerce operations and “drogerie” (pharmaceutical) retail chain Magia in June 2018.
The gross margin decreased to 24.7%, by 1.1 pp y/y, on the back of the launch of the Hit! discounter format and active investments in shelf prices to strengthen Eurotorg’s price leadership positioning.
Selling, general and administrative expenses (SG&A) increased as a share of revenue by 1.4 pp to 18.4%, driven by higher employee and rental costs on the back of accelerated expansion of the core retail business and consolidation of new businesses, as well as growth of costs for professional services.
EBITDA decreased by 19.4% y/y to BYN158mn ($74mn). The EBITDA margin decreased by 2.5 pp to 6.5% under pressure from the lower gross margin and higher SG&A.
The net profit margin decreased by 0.5 pp, mainly due to the lower EBITDA margin, which was partly offset by an FX gain on the back of the strengthening BYN/$exchange rate.
Net trade working capital as a percentage of revenue remained stable at -3.5% (unchanged y/y).
Capital expenditures remained moderate at 2.0% of revenue, in line with the Company’s capex-light growth strategy.
The Company continued to operate with moderate leverage, with a net debt/EBITDA ratio of 2.9x as of 30 June 2019, and delivered positive free cash flow of BYN141mn.
In 2019 the Company continued its expansion, with 1.6x y/y growth in total store numbers (993 as of the end of 1H 2019 vs 627 as of the end of 1H 2018).
The Company remains committed to its capex-light growth strategy, with a focus on developing smaller grocery formats in leased premises.
The Company continued the expansion of the Magia drogerie business, and opened 42 drogerie stores in 1H 2019.
E-commerce, represented by two online grocery services (E-dostavka.by and Gipermall.by), continued to be the Company’s fastest growing segment in 1H 2019. Online sales increased by 19.8% y/y to BYN107.8mn ($50.9mn), with 2.0mn orders delivered over the period. Online grocery retail accounted for 5% of total net retail sales during 1H 2019.
Eurotorg took important steps to optimise its real estate portfolio in line with its asset-light retail development strategy. In 1H 2019 the Company sold one of its owned shopping centres in Minsk, including hypermarket space, and opened one new hypermarket in leased premises in Baranovichi.
Eurotorg launched the Hit! banner for its grocery discounters to continue diversification of the company’s customer proposition. The commercial and operating models for Hit! differ from stores that operate under the Euroopt banner in the following ways: limited assortment with a higher share of private label and direct import goods, as well as more significant price distinction from competitors; simplified service with faster and more efficient in-store processes that allow for lower operating costs (as a percentage of revenue).
The launch of the Hit! format was an important step aimed at diversifying the company's customer value proposition that enabled Eurotorg to maintain leadership across all formats, including discounters, despite competitors' attempts to expand their presence in this format.
As of 30 June 2019, the Company operated 151 stores under the Hit! banner in 68 localities. Some stores previously operating under the Euroopt banner were rebranded as Hit! stores, and some Hit! stores were opened in new localities.
Eurotorg CEO Andrei Zubkou said: “Eurotorg continued its expansion in the first half of 2019 and as a result delivered another half-year of double-digit top-line growth, with revenue and net retail sales increasing by 11.9% and 14.0%, respectively, year-on-year.
“Gross margin was affected by a number of factors including the launch of the Hit! format and investment in shelf prices to strengthen our position as a price leader. Despite the short-term decline in margins, we believe that these steps are strategically important for the Company and its long-term market leadership.
“We also saw an increase in operating costs as a share of revenues. This was expected as rental costs grow in line with our capex-light expansion strategy with a focus on opening new stores in rented premises. The increase in personnel costs was related to overall growth in the national average salary, combined with a decrease in sales densities per sqm.
“By controlling the operating models of our stores we are able to make adjustments in response to changes in traffic density. At the same time, we are cautiously implementing optimisation measures in order to avoid any negative impact on service quality for our customers. I want to underscore that sales densities in our stores remain significantly higher than for the vast majority of emerging market retailers, which reflects our status as the leader in customer appreciation in Belarus.
“Eurotorg’s financial position remains solid. The Company reported strong adjusted free cash flow in 1H 2019, which represented 90% of EBITDA. Leverage also remains at a comfortable level, with the net debt to EBITDA ratio at 2.9x.
“Our e-commerce operations delivered further solid performance and continue to be the fastest growing segment of our business. Online sales grew by almost 20% year-on-year during the first half of 2019 and the number of orders reached the 2mn milestone. As a proportion of overall net retail sales, online accounts for around 5%, and we believe that there remains substantial opportunity for further growth.”
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