Battle of the titans: CFO of Russia's major retailer X5 unexpectedly quits

Battle of the titans: CFO of Russia's major retailer X5 unexpectedly quits
X5 leading brand super market Perekrostok
By Vadim Dumesh June 10, 2016

Elena Milinova, the CFO of Russia's second largest retailer X5 Group announced the plans to leave the company to pursue new ventures, according to X5 press release of June 8.

The departure of the CFO with over 15 years of experience could make X5 slip on its mission to overtake market leader Magnit and claim to the title of "Russia's best company." The two companies have been slogging it out in the market place and X5 has already closed part of the gap between them. 

Currently X5 continues to show leading top line and like-for-like ticket growth in a sector dominated by few large players. The gap between X5 and Magnit turnover began to contract in October-December 2014, reaching 9% in January-March 2016.

“We believe the news is negative for the stock, as this is yet another change in X5’s senior management (the company hired a new CEO as recently as November), and Milinova had a strong reputation among investors,” Alfa Bank commented on June 9.

BCS Equity also said on June 9 that news of the CFO leaving X5 came unexpectedly. “Milinova has a reputation of an extremely effective, predictable, and investor-open manager,” the analysts write, while stressing that any changes in the top-management of the retailer are seen as a risk factor.

In November 2015 the CEO of X5 Stephan DuCharme resigned and was replaced by Igor Shekhterman.

Fitch Ratings calculated that together with exit payments to former CEO and other related expenses, one-off payments to management amounted to RUB4.2bn ($65mn) and led to EBITDA margin decreasing to 6.8% in 2015 versus 7.2% in 2014. The press release on Milinova did not specify whether there will be special compensation involved.

Magnit in January 2016 had also announced a management line-up reshuffle as revenues underperformed in the end of 2015, but is expected to retain its long-term strategy.

Vladimir Gordeychuk stepped down as CEO of Tander, the main operational company of Magnit, while Alexander Barsukov, who previously headed the cross-company sales and hypermarket format, has been appointed as the new CEO.

The company also introduced new heads of the convenience format and development department aimed at improving operational efficiency.

All of the changes are seen as "well-planned out in advance" and not bringing any material alterations to Magnit's operations or long-term strategy", VTB Capital commented on January 12.

X5 consolidated revenue growth of 26.7% y/y in January-March to RUB230.6bn ($3.5bn) beat Magnit's top line growth of 16.6% y/y for the same period, while still being behind in absolute terms.

Faster expansion and an aggressive promotion helped X5 offset the notable slowdown in food inflation in the first quarter, Sberbank CIB commented said in a note on April 19.

The top-line growth was driven by 31% expansion of floor space (with 377 net openings versus 156 a year ago) and 7.8% LFL sales growth supported by a 5.8% higher ticket and a 2% traffic increase.

X5's Pyaterochka chain continued to be the main growth driver with 32.3% top-line growth, a 10.3% increase in LFL sales, a 7.2% higher ticket and 2.9% traffic growth.

Revenues at supermarket chain Perekrestok were up 18.2% y/y to RUB37.5bn compared with 14.4% growth in October-December.

"For the first time since 2013, Perekrestok reported positive LFL traffic growth (of 0.5%). However, we attribute this to an aggressive promotion launched in March (for each RUB700 purchase stores offered a RUB300 discount for the next purchase over RUB700). As a result, we saw traffic spike and the ticket shrink," Sberbank CIB said.

"The figures surpassed our expectations, mostly due to Perekrestok. While we view the supermarket's spike in traffic as unsustainable, we are still positive on the results, which were much better than those of X5's public peers, which have seen a significant q/q slowdown in revenue growth," Sberbank CIB analysts said.

The bank reiterated the positive view on the company, which is now delivering the fastest top-line growth and expansion, while the stock trades at a discount to local peers.

X5 shares were trading at $20.15 as of June 10, off the 52 week high of $22.80 but well ahead of the 52 week low of $14.50. The shares have returned 3% year to date, underperforming the RTS index which is up 17% over the same period. The shares almost doubled in value last year.


X5 Retail Group 4Q15 IFRS, R bln                  
  4Q14 3Q15 4Q15 Q-o-Q y-o-y 4Q15E A/E 4Q15C A/C 2014 2015 y-o-y
Revenues 181.6 196.1 230.1 17% 27% 229.7 0% 226.7 2% 633.9 808.8 28%
Gross income 44.6 49 56.4 15% 26% 57.4 -2% Ð Ð 155 198.4 28%
Gross margin 24.60% 25.00% 24.50% Ð Ð 25.00% Ð Ð Ð 24.50% 24.50% Ð
EBITDA 13.5 14.3 13.5 -6% 0% 17.1 -21% 16.5 -19% 45.9 55.2 20%
EBITDA margin 7.40% 7.30% 5.80% Ð Ð 7.50% Ð 7.30% Ð 7.20% 6.80% Ð
Adjusted EBITDA Ð Ð 17.5 22% 29% 17.1 2% 16.5 6% Ð 59.3 29%
Adjusted EBITDA margin Ð Ð 7.60% Ð Ð 7.50% Ð 7.30% Ð Ð 7.30% Ð
Net income 2.8 4.1 2.1 -50% -26% 4.9 -57% 4.8 -57% 12.7 14.2 12%
Net margin 1.60% 2.10% 0.90%     2.10% Ð 2.10% Ð 2.00% 1.80% Ð
Adjusted net income Ð Ð 6.1 47% 116% 4.9 26% 4.8 27% Ð 18.2 43%
Adjusted net margin Ð Ð 2.70% Ð Ð 2.10% Ð 2.10% Ð Ð 2.20% Ð
C Ð Interfax consensus estimates                  
Source: Company, Interfax, Sberbank CIB Investment Research?            
X5 Retail Group - KEY METRICS
  2014E 2015E 2016E 2017E
Financials, $ mln        
Revenues 16,520 13,139 13,099 15,296
EBITDA 1,195 955 950 1,144
EBITDA margin 7% 7% 7% 7%
Net income 331 255 250 404
EPS (adj), $ 1.22 0.94 0.92 1.49
Div/share, $ 0 0 0 0
Valuation, Gearing and Yield        
EV/EBITDA 5.3 8.1 8.1 6.7
P/E 13.9 22.4 22.8 14.1
P/CF 8.4 8 8.6 6.3
Net debt/EBITDA 1.5 2.1 2.1 1.7
Dividend yield 0.00% 0.00% 0.00% 0.00%
Revenues -2% -20% 0% 17%
EBITDA -1% -20% -1% 20%
EPS (adj) -4% -23% -2% 62%
Sector Valuation      
EV/EBITDA 6.6 8.7 9.1 7.7
P/E 12 16 17.9 13.8
P/CF 8 10.6 10.8 8.8
Sector Growth      
Revenues 1% -24% -4% 16%
EBITDA 5% -30% -6% 17%
EPS 9% -38% -10%  
Main Shareholders      
Alfa Group       47.90%
Founders of Pyaterochka 16.30%      
Free float 35.70%      
Management 0.00%      
Treasury shares 0.10%      


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