© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day and welcome to the Lenta conference call on 2Q 2019 operating results. Today's conference is being recorded. At this time, I would like to turn the conference over to Albert. Please go ahead, sir.
Good evening, good afternoon, and good morning, ladies and gentlemen. Thank you for joining us to discuss Lenta's second quarter sales and operating results. With me to review the results are our CEO, Herman Tinga; and CFO, Rud Pedersen. The announcement and presentation are available on our website at lentainvestor.com. And as usual, after our remarks, we look forward to taking your questions. I will now turn the call over to Lenta's CEO, Herman Tinga. Herman, please.
Thank you, Albert. Good day, everyone, and thank you for joining us. You will have seen from the announcement that our retail sales growth in the second quarter came below the previous quarter. And this was mainly a result of several negative calendar effects during the period, which came on top of weak macroeconomic conditions and strong competition. And before taking you through the details of our operating results, I'd like to remind you some other developments. At the end of April, Severgroup completed the acquisition of approximately 42% in Lenta from TPG and EBRD, respectively, becoming the new majority shareholder of the company. On April 30, Severgroup launched an unconditional cash offer to minority shareholders to acquire all the issued shares and GDRs of Lenta. The MTO was completed on the 4th of June. And as a result, Severgroup obtained a combined total of around 78% of Lenta's share capital. And I would like to proceed with our operating results for the second sales quarter. As you know, the weak macroeconomic situation continued to be challenging for the retail industry. If you look at real disposable income growth, it was negative for the third consecutive quarter, declining by 0.2% year-over-year in the second quarter. Food inflation accelerated to 5.9% during the quarter from 2.6% in the previous year, substantially exceeding the growth of consumers' income. With elevated share of food expenses in their budget, consumers are particularly sensitive to prices in grocery stores. Meanwhile, we have an opportunity to shop around, look for promotions and the best prices offered in different chains. In addition, promo activity remains high and a good expression on consumers' spend specifically. Amidst this environment, Lenta delivered healthy trading results. Our total sales grew by 0.4% in the second quarter being mainly affected by the decline in our wholesale business, which we previously announced. Looking at our retail sales, where we grew by 4.7%, this shows macro pressure from calendar effects on our retail sales growth, mainly in April and June. For example, the Easter holiday shifted to 28th of April this year versus 8th of April in 2018. So the fact that we had less traffic during that month because Easter this year came along with public holidays in the first day of May, so there was only one seasonal peak instead of 2. So this impact was especially visible in our hypermarkets and consumers had less occasions to making bulk shopping during the month. As a result, the deviation between the retail sales growth in February and March versus April was almost 6 percentage points. Then there was 1 Friday less in June this year versus 2018, which also has some impact on that particular month. Having said that, our retail sales growth in May came at almost 8%, in line with the stronger [indiscernible] of the first quarter. Like-for-like sales growth was 0.8%, excluding VAT. And I would like to call your attention when Lenta reports about total and like-for-like sales excluding VAT. In fact, the VAT, as you know, increased at the end of the year. If it increases in our like-for-like calculation, our like-for-like sales growth in the second quarter would go up to 1.6%, a bit useful figure to use when comparing our results with companies, which include similar like-for-like calculations. Like-for-like customer traffic rose by 0.6%. This came mainly as a result of lower frequency of customer visits. The trend was enhanced by less holidays and weekend days during the quarter. Despite that, we record ongoing inflows of new customers in our Lenta stores. This impacts vital customer recognition, thanks to our customer value proposition. Our initiatives on changes in assortments and offerings continued to pay off as the like-for-like ticket rose by 0.2%. Slower growth comparing to the first quarter was due to lower number of items in the average customer basket. The trend that prevails in the retail industry due to excessive stale growth and weak consumer purchasing power. In reported premium, the reduction of the number of SKUs is still compensated by ongoing trading-up on end on-shelf inflation. We finally recorded quarterly on-shelf inflation for the first time since 2017. Shelf prices started to rise in March and stayed positive in each month of the second quarter. Moreover, shelf price growth in the second quarter outrated deflation recorded in the first quarter. And as a result, on-shelf inflation was positive in the first half year in total. Trading-up continued in our stores and was notably higher year-on-year. If you look at like-for-like food sales, the growth stayed positive in the second quarter. We continued to work on assortment and customer proposition to deliver differentiation from other retail chains. Fresh food remains our fastest-growing category, driven by a strong offer and rapid growth of our hero categories. All our hero categories showed high single-digit like-for-like sales growth in the second quarter. And with the health category being the fastest-growing with more than 50% like-for-like sales. But of course, we believe this is still on a small base but very promising development. All private labels also demonstrated long -- strong like-for-like sales growth up around 10% during the second quarter as we continued adding new private labels and launched around 200 SKUs in the second quarter on top of the 300 that we did in the first quarter. Let me remind you that we also introduced in 2018 and '17 1,000 of the 1,300 SKUs. So the private label offer [indiscernible] pretty solid for our sales. Unfortunately, the like-for-like monthly sales decreased year-on-year mainly due to shift in seasonal promotions and several promo campaigns in April. Overall, nonfood represents a small share of our total sales, around 11%. Promotional activity in the second quarter was still a bit higher year-on-year, but it continued to decline on a quarter-on-quarter basis. So let me now separate a little bit hypermarkets, supermarkets and wholesale, some comments, starting with hypermarkets. The sales growth in hypermarkets was lower than the selling space growth in the second quarter. So for example, the retail sales growth in our hypermarkets was 2.4% while the selling space growth remained at around 4%. Slower sales growth in the 12 months was mainly due to the calendar shifts in April and June, as I just mentioned before, which resulted in a decline on like-for-like traffic by 1.4% year-on-year due to lower frequency of customer visits. Average ticket continues to benefit from strong trading-up and on-shelf inflation, but this was not enough this quarter to fully offset the reduction in number of items in the basket. Moving to regions. When we see the Urals and St. Petersburg divisions showed selling space growth in the second quarter while the space on-shelf [ we liked] the most. And we are launching our marketing at [ districts ] to support the sales in this region. Looking at supermarkets. We are encouraged by the strong performance in our supermarkets during the quarter, even somewhat outpaced our own expectations. Total sales in the supermarkets rose by 38% year-on-year, more than doubling the increase in selling space of 15.6%. The like-for-like sales growth in the format remained strong at almost 16%, mainly driven by like-for-like [ ticket ] growth of 13.6%. And this was a result of further inflow of new customers combined with increased frequency of customers visiting in our stores. Customers are responding positively to our ongoing carrying changes in our offering, especially regarding assortment and marketing and communication. And then last, wholesales. In the second quarter, the decline in our wholesales continued putting pressure on the total retail sales. So starting from the end of 2018, the changes in distribution strategy of large suppliers led to a substantial growth in wholesales. As a result, it dropped by 62% in the second quarter, falling by more than 60% for the third consecutive quarter. And we expect wholesales to decline year-over-year until the fourth quarter. From the fourth quarter [ rate ], it basically looks a bit more favorable. Until then, it will continue to weigh on Lenta's total sales growth. Regardless, its share remains at only 2%. Some comments about July. Trading in the first 3 weeks of July are slightly lower average for the second quarter. Recent trading results for the first 3 weeks of July is a bit weaker, which is partly explained by different costing base. To a bigger extent, the sales are impacted by stronger base comparison due to the World Cup last year. We see slightly bigger shelf price inflation compared to the second quarter, which is in line with the currency trends reported by [indiscernible]. Trading-up effect continues, but this is partly offset by lower number of items in the average basket. Same trends such as the traffic development, vacancy of our specialty stores [indiscernible] although, the number of new customers continue to grow. Now I would like to hand over to Rud to talk about our expansion plans.
Thank you, Herman, and good day to everyone. We haven't made any changes to our expansion plans this year. In line with this, we've opened 2 owned compact hypermarkets in Ekaterinburg and St. Petersburg as well as 1 new the supermarket in Moscow in line with our organic expansion plan for the year. We didn't close any stores during the reported period while in July, we've made a decision to close 1 compact leased hypermarket in Novokuznetsk and we'll also closed 1 supermarket in St. Petersburg. Overall, we thus -- we maintain our store opening guidance for 2019. And with that short update, I'll turn back to Herman for a few closing remarks.
Thank you, Rud. Well, overall, I have to say we have been encouraged by the ongoing inflow of the new customers to our stores. Many consumers value our offering and prefer shopping with us. We will focus on our underlying hypermarket business to ensure sustainable growth in the core format. We also plan to announce further gross positive developments and strong results we already achieved in the supermarket format. Action plan will include working further on differentiation from our competitors with the focus on fastest-growing categories and our new categories and strong private labels. We will also focus on improving our [ other ] assortments, improving promo activity and customer communication to ensure we remain attractive to new and existing customers. And finally, I would like to welcome Severgroup as a major shareholder. With the new long-term strategic partner onboard, we aim at providing strong returns to all our existing shareholders. Thank you.
Thank you for listening. And now we look forward to taking your questions. Shelby, we're ready for the Q&A session.
[Operator Instructions] We'll take our first question from Alexander Gnusarev with VTB Capital.
I have just a couple of questions. The first question is about the potential strategy of Severgroup. When it will be presented and what's the possible time frame? And the second question is considering your possible synergies with Utkonos, have you made any estimations on that? And perhaps you could share some details.
Yes, thank you for the question. Let me just first answer the first question on strategy. At the moment, we are working closely, together with the Board and the new main shareholder, on defining the new steps for our strategy. This takes some work, some time. We have many options and scenarios that we have under consideration. And we think we will be ready to communicate it outside in the next [indiscernible] 3 quarters. So we're still working on that. We cannot, let's say, go into detail yet what are the considerations at the moment. But we are making speed with that. The second question is Utkonos. Also there, let's say, even before we had a new shareholder onboard, we realized as Lenta that we have to go online 1 day as a retailer to complete the offer for customers to shop not only in hypermarkets, supermarkets but also online. Of course, having now in the group a colleague company, Utkonos, we can learn from their experience and we're looking at potential synergies, that's for sure. But also that, we are -- is part of our total strategy. And also we expect to be ready with that around end of this year, the next steps.
I see. That's clear. And just one more question from my side. What's the current share of promo in your sales?
It is not a number that we release at this point in time.
If I can -- [indiscernible] that you have read about and what we said as well. Actually, we don't see that the number is declining this year. So it's still on a reasonable high level but stabilizing. So we would like to see it going down. But actually, it's on a high level. But if you also -- the way we look at promotions and we are also, by the way, invested in new analytic tools to see the value of promotions, does it make sense for our customers and our profitability? So the promotions pressure less on our margins than before. So in that environment, we're in a comfortable zone, I would say.
[Operator Instructions] Our next question will come from [ Max Neteresov ] with Goldman Sachs.
It's Yulia Gerasimova from Goldman Sachs. I have 3 questions, please. So number one, I think you mentioned about the -- that you would like to see your share of promo declining. But I think if I catch you right here, basically you said that in Q2, you've seen the promo expanding year-on-year as a percentage. And can you just share a little bit more color on what's driving that? Would that -- and then this attempt to divert the traffic trend that you have seen in Q2 or there was the competition all over the board raising the share of the promo and you just followed like your peers? That's the first question. The second question is about trends, if you can share performance in July, so at least like how is it growing compared to the Q2 results that you just reported? And third question, I just wanted to ask whether the management see the risk of losing any key members to Magnit, considering that Jan is right now the sole CEO of the company and may consider Lenta as a place to attract the talent from? So that's 3 questions.
Well, thank you for the questions. Let me start with the first one. Let's say if you look at the promo shares, in principle, if I have to reflect on that, the promo share in hypermarket is also always a little bit higher than in the market. But I think the promo activity is pretty high in the Russian market and also high in convenient stores of other players. We have to step up the game, which we did in the past, we are not doing that now anymore, to keep the traffic flowing. And in-store, let's say we are quite advanced in using customer data to do it in a smart way, so that we, let's say, also move in a profitable way. So that's basically our strategy. Second question was the July sales. Yes, I already commented on that. It's slightly below the second quarter, which is partly caused by the quality of base. And we see similar trends in the second quarter. Then your last question, the management team. Yes, actually, let's say, I think there's a team basically up onboard that's quite excited working also on the new strategy. And let's say we don't expect that any senior team members would leave Lenta or although you cannot, of course, 100% always guarantee it. But I think our team is motivated to work on Lenta. I think they are also -- they are part of the history and the future of Lenta. So I don't expect big changes there.
And we have no more questions in the queue at this time.
Shelby, thanks. You can check once again. And if no further questions, then we can finish the call.
[Operator Instructions] And we still have no more questions.
Thank you, Shelby. Then with that, we would like to finish the call and just to remind you that we will report our first half financial results on 28th of August. Thank you.
This concludes today's call. Thank you for your participation. You may now disconnect.