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. Last Updated: 07/27/2016

GUM Sweet Over Profits Leap

Despite a sharp fall in consumer spending power after the 1998 ruble devaluation, retailer GUM has reported its profits more than doubled in ruble terms in 1999.

GUM, which means state department store, is continuing renovation of its main premises on Red Square and is consolidating assets by building a network of supermarkets based on its Moscow outlets.

"The Verenitsa supermarket chain will include eight to 10 of our [15] retail shops in Moscow," GUM president Vyacheslav Vechkanov said Tuesday in an interview.

Company restructuring follows a successful recovery from the 1998 financial crisis, in which GUM lost part of its working capital after the government defaulted on its GKO treasury bonds. GUM had to ask Dresdner Bank to roll over a $3 million loan priced at LIBOR plus 1.5 percent, repaid last year.

GUM's 1999 revenues increased by a third to 2.1 billion rubles ($79 million), but were down 57 percent in dollar terms, according to estimates made by Troika Dialog brokerage.

The company intends to pay dividends of 1 ruble per share, a total of about $2 million on 60 million outstanding shares.

The Red Square department store accounted for about 75 percent of the company's total revenues.

"GUM had an expansion strategy in the regions, but we had to revise our plans and focus on our Moscow businesses," Vechkanov said.

GUM sold off stakes in its subsidiaries in Orel and Magnitogorsk and now intends to sell a stake in its Tambov store, keeping shops in Kostroma and Smolensk as a foothold for expansion in the recovering market.

The company has not scrapped plans to issue an additional 12 million shares, and will place them through a level-three American Depositary Receipt program on the New York Stock Exchange when the market recovers.

"We do not rule out the possibility of raising the issue of share issuance sometime in the fall, but it is not on the agenda of the upcoming shareholder meeting," said Yury Solomatin, chairman of GUM's board.

GUM's shares crested at $5.50 in October 1997, after which the company decided to make level-three ADR placement on the NYSE.

GUM's share price has tripled since the start of 1999 to hit $2.22 at Tuesday close, down 10.6 percent for the day.

Some $80 million to $90 million raised through ADR placement and sales of a 9-percent stake held by GUM's financial subsidiary, GUM Trust, could be used to refurbish the main building, which is to have five trading levels, including one at basement level, officials said.

GUM has had to postpone total renovation until better times and work on it step by step, increasing its trading area by 3,500 meters to 20,000 meters, still short of the 32,000 meters of the original plan.

It now rents about 9,500 square meters at an average price of $1,200 per square meter, half what it was charging pre-crisis. About half the trading area is used for GUM's own operations, down from 80 percent before the 1998 crisis.

The brokerage industry is divided over GUM's performance and the company's prospects.

"The company is in sound financial shape with no loans on the balance sheet," said Vladislav Metnyov, retail analyst with Aton.

"We maintain our buy recommendation on GUM despite the stock's recent gain."

Troika Dialog brokerage said the company needed more aggressive management "to implement a sensible growth strategy."

GUM never articulates what its goals are and how it is going to attain them, said Kim Iskyan, retail sector analyst with Renaissance Capital brokerage.

Metnyov from Aton said GUM's strategy in the wake of the crash was entirely justified in the context of increased market volatility.

The nation's 1999 retail sales amounted to 1.723 trillion rubles ($72.4 billion), down 7.7 percent in real terms from 1.02 trillion rubles ($76.7 billion) in 1998 due to a 15.1-percent drop in household income last year.

Retail sales were up 7.1 percent in January-February 2000, in line with expectations of economists, who predicted the revival of the retail market in the wake of ruble appreciation and an increase in household revenues in election year.


GUM's economic highlights (millions)

1997 1998 1999

rubles dollars rubles dollars rubles dollars

Revenues 1,603.7 278.54 1,596.2 147.8 2,173 91.30

Pre-tax profit 245.6 42.66 192.2 17.8 515.6 22.3

Source: company data