X5 Retail’s Turnaround Challenged by Food Imports Ban

(Updates with shares in sixth paragraph.)

By Ilya Khrennikov

Aug. 26 (Bloomberg) –- X5 Retail Group NV (FIVE), Russia’s second-largest food retailer, said the country’s recent ban on some food imports makes it harder to source certain goods and drives up prices on others, challenging the company’s nascent turnaround.
“We have more work now,” said X5’s Chief Financial Officer Sergey Piven in an interview at the company’s Moscow headquarters, citing difficulty in finding large volumes of produce needed to keep its more than 4,000 Pyaterochka discount stores stocked. The ban is also leading to “accelerated price inflation” on affected items.
After an effort to renovate and bolster its fresh food offering at Pyaterochka that started last year, X5 posted second-quarter sales growth of 17 percent, the
fastest pace in more than two years, and a 23 percent advance in July. Then, on Aug. 7, Russian President Vladimir Putin banned the imports of meats, cheese, fruits, vegetables and dairy from the European Union and the U.S.
Russian retailers urgently need to find alternative providers for about $9.5 billion of food supplies affected by the ban, according to an estimate by Capital Economics Ltd. Fish is becoming more expensive, while French and Italian cheese is disappearing from shelves, Piven said. Putin imposed the measure to retaliate for sanctions against Russia for interference in Ukraine.

Photographer: Andrey Rudakov/Bloomberg

“We have more work now,” said X5’s Chief Financial Officer Sergey Piven in an interview... Read More

Retail Basics

A new management team, including Chief Executive Officer Stephan DuCharme, who began in 2013, is seeking to bring X5 “back to basics of retail,” Piven said. Sales growth was less than 10 percent in 2012 and 2013 after a series of acquisitions, leading the company to lose the title of Russia’s largest retailer to billionaire Sergey Galitskiy’s OAO Magnit. (MGNT)
X5’s stock is up 23 percent so far this year, on track for the first gain in four years, giving the company a market value of $5.6 billion in U.K. trading. The depositary receipts declined 1.4 percent to $20.65 at 12:26 p.m. in London today.
Pyaterochka stores were refurbished last year with brighter lighting, air conditioners and self-opening doors, Piven said. The chain added more fresh categories and made special discounts to win back customers. This year, the effort will be expanded to X5’s larger store formats, Perekrestok and Karusel. X5 is spending as much as 40 billion rubles ($1.1 billion) in 2014 to add stores and renovate existing ones. The company’s gross profit margin rose to 24.5 percent in the second quarter.

Photographer: Andrey Rudakov/Bloomberg

Russian retailers urgently need to find alternative providers for about $9.5 billion of... Read More

“The question is whether this growth and profit margins will be sustainable,” said Natalya Kolupaeva, an analyst at ZAO Raiffeisenbank in Moscow. “The recent food import ban is putting it at risk.” The assortment of products that needs replacing represents about 8 percent of sales, she said.

Russian Crossroads

Billionaire Mikhail Fridman and his partners set up store chain Perekrestok, which means “crossroads” in Russian, in 1995. It merged another chain Pyaterochka, Russian for “five” in 2006 to create X5 Retail Group, later acquiring the Karusel hypermarkets and Kopeyka discounter chains. The company runs about 4,800 stores and had sales of $16.8 billion last year.
X5 is replacing banned Norwegian salmon with fish from Russia, the Faroe Islands and further destinations such as Chile, where the long transportation required may either boost prices or decrease quality, Piven said. The company is also switching from Atlantic herring to inferior-quality Pacific herring, he said, while X5 has been unable to find a replacement for premium French and Italian cheeses.

Costlier Debt

For fruits and vegetables, X5 is switching to suppliers in countries including Morocco, Israel, Serbia and Azerbaijan.

Photographer: Andrey Rudakov/Bloomberg

Fish is becoming more expensive, while French and Italian cheese is disappearing from... Read More

“Retailers can adapt to these challenges,” Piven said. “I think customers will see some price increases for certain categories.” Passing cost increases on to customers may hurt sales as clients have fixed budgets for food, he said.
Russia’s tensions with the U.S. and Europe over Ukraine have also inflated X5’s borrowing costs to about 9 percent, Piven said on an Aug. 14 conference call. X5 has increased the share of long-term debt to 81 percent of its portfolio from 55 percent a year earlier. The costs may rise further as the company needs to refinance almost 9 billion rubles of debt by year-end, according to Piven.