X5 Posts 60% Increase in Q2 Revenue

MTCustomers bagging their purchases in a Perekryostok store on Novoslobodskaya, one of X5's two largest chains.
X5, the country's largest supermarket group, on Thursday reported 60 percent year-on-year revenue growth to $1.97 million for the second quarter.

The group, which is based on the Perekryostok and Pyatyorochka chains, posted net retail sales for the first half of $3.74 million, an increase of 61 percent on the same period last year. Both figures exclude the Karusel chain, which X5 bought for $1.1 billion in early April.

X5's London shares had fallen 65 cents, or 2.1 percent, to $30 in afternoon trading Thursday.

The high sales growth was widely anticipated, given rapidly increasing food prices, a trend toward Russians shopping in supermarkets and hypermarkets, and new store openings.

"It's a strong but not unexpected increase driven by strong like-for-like sales ... and additional new selling space through organic growth," said Viktor Dima, a consumer and retail analyst at Renaissance Capital.

Besides the 23 Karusel hypermarkets, the chain has opened 100 new stores in the first half of 2008, bringing the group's total selling area to 791,900 square meters. X5 now operates 968 stores across the country.

Dima said total sales rose on the back of a 20 percent increase in the amount of items purchased and a 7 percent increase in the number of shoppers for the first half of the year.

X5's sales, counting only the stores that existed last year and excluding Karusel, rose 24 percent, said Vitaly Kupeyev, a retail analyst at Alfa Bank.

"What's important for investors is that the company is likely to surpass its outlook for the year since it predicted 40 percent growth. Even in just the first half they have 47 percent growth in rubles," Kupeyev said.

Lev Khasis, X5 Retail Group CEO, in a statement described the second quarter as "very busy" and that the rest of the year will "also be a challenging time" as the company makes efforts to follow through on expansion plans and integrating the Karusel hypermarkets.

Khasis, who is chairman of the Russian Association of Retail Companies, said an additional area of focus would be cooperation with the government on the development of a new retail law.

Dmitry Yanin, head of the International Consumer Societies Confederation, said supermarket chains' higher sales were partly down to a lack of competition in the sector.

"It is clear that now Russians are spending more because competition in the retail sector is not as developed as in Britain, for example," Yanin said, adding that inflation also played a big part.

A study in April by PricewaterhouseCoopers showed that the country's 10 biggest retailers currently control just 5 percent of the market, compared with 85 percent for the four biggest British supermarket chains.

"The trend is that Russian retailers are still consolidating and we will see a lot of consolidation to come," said Dima, of Renaissance Capital.

As shoppers and retailers become more mature, Dima said, "the big retailers are now capable of passing on price increases of staples to the consumer."

Dima said Russians would accept rising prices because of the increases in disposable income.

"People in the regions are switching from traditional markets and kiosks to supermarkets and even hypermarkets," he added, which has helped sales double outside Moscow and St. Petersburg.

"People are getting used to 15 percent inflation. It's a common situation now," said Kupeyev, of Alfa Bank.

Analysts said, however, that prices would continue to rise, regardless of more competition.

"The state should liberalize the terms for retail investors," Yanin said.