Magnit Racing to Open Outlets

VedomostiA woman paying for her groceries at a Magnit store. The retailer plans to open 320 outlets and two distribution centers in 2008 as part of its expansion.
Magnit, the country's second-largest supermarket chain, is opening a store every 27 hours to keep pace with demand and may post a record $5.5 billion in sales this year, billionaire founder Sergei Galitsky said.

Magnit, which owns mainly discount stores, plans to open 320 outlets this year in a $1.5 billion, two-year expansion, Galitsky said in a recent interview in his office in Krasnodar.

The retailer also intends to open 13 hypermarkets to challenge Germany's Metro, Auchan of France and St. Petersburg-based Lenta.

"We can keep opening stores in 500 to 600 towns" because the market is not close to saturated, said Galitsky, 41, who is also Magnit's chief executive. Sales will probably climb about 50 percent in 2008 and the company may pay its first dividend in 2010 or 2011, he said.

The average wage in the country has doubled in the past three years, to 17,500 rubles ($710) a month. Retail sales climbed 25 percent to about $440 billion last year. Food sales, which account for about half of that total, will grow 21 percent a year through 2010, according to UBS.

Galitsky opened his first store in 1998, less than three months after Russia defaulted on its domestic debt and devalued the ruble. Ten years later, he has more than 2,300 stores and a fortune estimated by Forbes magazine to be $2.2 billion.

"Magnit has chosen this niche of small towns where there is no competition," said Sabina Muhamedzhanova, an analyst at Bank of Moscow who has a "buy" recommendation on the stock.

"Most companies go to big cities with new stores."

Galitsky said he was not concerned about losing market share to international competitors for the time being because of "administrative barriers" in Russia.

"Russia has its specifics, such as registering land plots," that make it difficult for foreign companies to enter small towns, Galitsky said. "It will happen at some point."

Metro was Russia's largest international food retailer last year with sales of $4 billion, according to UBS. Magnit had 1.9 percent of the local market, while X5 accounted for 2.8 percent, according to the bank.

Magnit plans to spend more than $100 million this year adding two distribution centers to the eight it operates and expanding its fleet of trucks.

Profitability will improve as Magnit expands its distribution network, cutting transport costs for suppliers, Muhamedzhanova said. A larger proportion of private label products will also help improve margins, she added. The share may reach about 14 percent of total revenue within two years from 12 percent at the end of 2007, Galitsky said.

Magnit beat analysts' estimates on Aug. 26 when it said first-half net income rose 75 percent to $65.9 million. Thirteen of 18 analysts that cover Magnit recommend buying the stock, while the other five have a "hold" rating.

Galitsky said he was considering acquisitions, in particular "one chain, which I like a lot." He declined to be specific.