On October 22, 2019, the X5 Retail Group N.V., a leading Russian food retailer, released the company’s unaudited condensed consolidated interim financial information for the three months and the nine months of 2019 in accordance with International Financial Reporting Standards, as adopted by the E.U.

Net retail sales

The total net retail sales growth reached 12.8 percent year-on-year in the third quarter of 2019, driven by positive like-for-like (LFL) sales dynamics and the expansion of retail space. In the third quarter, LFL sales performance remained strong at 3.9 percent year-on-year.

Gross profit margin

The gross profit margin decreased by 10 b.p. (basis points) year-on-year to 24.5 percent in the third quarter of 2019. The decrease was due to a decline in the commercial margin as a result of targeted price investments, which was partially offset by successful measures to decrease shrinkage levels and logistics efficiency.

SG&A expenses

In the third quarter of 2019, selling, general, and administrative expenses (SG&A), excluding depreciation, amortization and impairment costs (D&A&I), long-term interests in associates and joint ventures (LTI), share-based payments, and the impact from the Karusel transformation, under IAS 17 as a percentage of revenue increased by 35 b.p. to 18.2 percent, mainly due to increases in staff costs and other expenses. Staff costs (excluding LTI, share-based payments, and the impact from the Karusel transformation) as a percentage of revenue increased by 31 b.p. year-on-year in the third quarter of 2019 to 8.1 percent. LTI and share-based payments expenses amounted to RUB270 million in the third quarter of 2019. Lease expenses under IAS 17 as a percentage of revenue in the third quarter of 2019 increased by 6.0 b.p. year-on-year due to the growing share of leased space in X5’s total real estate portfolio, which accounted for 79 percent as of September 30, 2019, compared to 75 percent as of September 30, 2018.

Third-party service expenses under IAS 17 as a percentage of revenue in the third quarter of 2019 decreased by 22 b.p. year-on-year to 0.7 percent as a result of lower marketing expenses due to the operating leverage effect.

Other expenses (excluding the impact from the Karusel transformation) under IAS 17 as a percentage of revenue in the third quarter of 2019 increased by 24 b.p. year-on-year to 1.2 percent primarily due to the reclassification as of January 1, 2019 of proceeds from the sale of recyclable materials to other income and an increase in acquiring costs driven by an increasing penetration of card payments.

In the first nine months of 2019, SG&A expenses, excluding D&A&I, LTI, share-based payments, and the impact from the Karusel transformation, under IAS 17 as a percentage of revenue increased by 30 b.p. to 17.9 percent, mainly due to increased staff costs and other expenses.

Lease/sublease & other income

As a percentage of revenue, the company’s income from lease, sublease, and other operations under IAS 17 totaled 0.8 percent, an increase of 13 b.p. year-on-year in the third quarter of 2019, driven by the reclassification of income from the sale of recyclable materials from SG&A expenses.

EBITDA & EBITDA margin

Depreciation, amortization, and impairment costs in the third quarter of 2019 totaled RUB17,842 million (RUB44,154 million for the first nine months), increasing as a percentage of revenue by 95 b.p. year-on-year to 4.2 percent (an increase of 34 b.p. to 3.5 percent for the nine months). This was due to the impairment of non-current assets related to the Karusel transformation.

The negative impact on the net profit from the Karusel transformation under IAS 17 totaled RUB5,334 million in the third quarter of 2019. As announced on September 26, 2019, the company plans to transform its hypermarket format by transferring 34 stores to Perekrestok by early 2021 and closing 20 hypermarkets by 2022, while the remaining stores that continue to operate as Karusel hypermarkets will be further evaluated before a final decision is made.

Non-operating gains & losses

Net finance costs under IAS 17 in the third quarter of 2019 decreased by 2.6 percent year-on-year to RUB4,394 million due to a lower gross debt and a decrease in the weighted average effective interest rate on X5’s total debt as a result of declining interest rates in Russian capital markets, as well as actions by X5 to minimize interest expenses. In the third quarter of 2019, the income tax expense under IAS 17 increased by 53.6 percent year-on-year to RUB4,190 million due to an impairment related to the Karusel transformation.

Consolidated cash flow

In the third quarter of 2019, the company’s net cash from operating activities before changes in the working capital under IAS 17 increased by RUB1,737 million, or 6.3 percent year-on-year, totaling RUB29,403 million. The negative change in the working capital under IAS 17 of RUB17,564 million in the third quarter of 2019 compared to a positive figure of RUB8,475 million in the third quarter of 2018 was mainly due to an increase in accounts payable (calendarization effect) and inventories (low base effect due to stock optimization last year). Inventory turnover days or payment terms with suppliers during the third quarter of 2019 did not change.

The net interest and income tax paid under IAS 17 in the third quarter of 2019 increased by RUB1,408 million, or 17.6 percent year-on-year, totaling RUB9,402 million. The income tax paid under IAS 17 increased year-on-year due to higher tax accrual in the second quarter of 2019 following strong operating performance. As a result, in the third quarter of 2019, the net cash flow generated from operating activities under IAS 17 totaled RUB2,437 million, down 91.3 percent from RUB28,147 million in the third quarter of 2018.

In the first nine months of 2019, the net cash flow generated from operating activities under IAS 17 totaled RUB51,468 million, down 7.7 percent from RUB55,779 million for the corresponding period of 2018.

The net cash used in investing activities under IAS 17, which generally consist of payments for property, plant, and equipment, increased to RUB23,003 million in the third quarter of 2019 from RUB19,533 million in the third quarter of 2018, mainly due to mergers and acquisitions (M&A). For the first nine months of 2019, the net cash used in investing activities under IAS 17 decreased to RUB58,562 million from RUB68,986 million in the corresponding nine-month period of 2018.

The net cash generated from financing activities under IAS 17 totaled RUB14,496 million in the third quarter of 2019 compared to the net cash used in financing activities of RUB7,012 million in the third quarter of 2018.

Liquidity update

As of September 30, 2019, the company’s total debt under IAS 17 amounted to RUB226,586 million and was comprised of 32.2 percent short-term debt and 67.8 percent long-term debt. The company’s net-debt-to-EBITDA ratio under IAS 17 was 1.75x as of September 30, 2019. The company’s debt is 100 percent denominated in the Russian rubles. As of September 30, 2019, the company had access to RUB358,455 million in available credit limits with major Russian and international banks.

X5 Retail Group N.V. (LSE and MOEX: FIVE, Fitch: ‘BB+’, Moody’s: ‘Ba1’, S&P: ‘BB’, RAEX: ‘ruAA’) is a leading Russian food retailer. The company operates several retail formats: the chain of proximity stores under the Pyaterochka brand, the supermarket chain under the Perekrestok brand, and the hypermarket chain under the Karusel brand.

As of September 30, 2019, X5 had 15,752 company-operated stores. It has the leading market position in both Moscow and St. Petersburg and a significant presence in the European part of Russia. Its store base includes 14,850 Pyaterochka proximity stores, 811 Perekrestok supermarkets, and 91 Karusel hypermarkets. The company operates 43 distribution centers and 4,029 company-owned trucks across Russia.

X5’s shareholder structure is as follows: CTF Holdings, S.A. has 47.86 percent; Intertrust Trustees, Ltd. (Axon Trust) has 11.43 percent; X5 directors have 0.08 percent; treasury shares stand at 0.01 percent; and shareholders with less than three percent own 40.62 percent of the stock.