Lenta : 4Q and FY 2017 sales and operating results

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RNS Number : 8933C

Lenta Ltd

25 January 2018

LENTA SALES AND OPERATING HIGHLIGHTS FOR THE FOURTH QUARTER AND FULL YEAR ENDED 31 DECEMBER 2017

St-Petersburg, Russia; 25 January, 2018 - Lenta Ltd, (LSE, MOEX: LNTA / 'Lenta' or the 'Company') one of the largest retail chains in Russia, is pleased to announce the Company's consolidated sales and operating results for the fourth quarter and twelve months ended 31 December 2017.

4Q 2017 Operating Highlights:

--      Total sales grew 23.4% in 4Q 2017 to Rub 112.1bn (4Q 2016: Rub 90.8bn); 
   --      Like-for-like ('LFL')(1) sales growth of 5.2% vs. 4Q 2016; 
   --      LFL traffic growth of 0.6% combined with a 4.6% increase in LFL ticket; 
   --      30 new hypermarkets and 33 new supermarkets opened during the fourth quarter of 2017;

-- Total store count reached 328 stores as at 31 December 2017, comprising 231 hypermarkets and 97 supermarkets;

-- Total selling space increased to 1,382,111 sq.m as at 31 December 2017 (+20.6% vs. 31 December 2016); and

-- Number of active loyalty cardholders(2) increased to 12.3m (+17% y-o-y) with approximately 95% of transactions in the fourth quarter made using the loyalty card.

12M 2017 Operating Highlights:

--      Total sales grew 19.2% in 12M 2017 to Rub 365.2bn (12M 2016: Rub 306.4bn); 
   --      LFL sales growth of 0.9% vs. 12M 2016; 
   --      LFL traffic growth of (1.4%) combined with a 2.3% increase in LFL ticket; 
   --      Lenta started expansion of its supermarket format in Siberia and Ural regions; and

-- 40 new hypermarkets and 49 new supermarkets were opened during 12M 2017 with 236.0 th. sq.m of net selling space addition - in line with the Company's FY 2017 store opening guidance.

Material events in 4Q 2017 and after the reported period:

-- Lenta signed an agreement with the Holiday Group to acquire 22 supermarkets in the Siberia region, of which 6 were opened in December;

-- Lenta has joined EMD, Europe's leading purchasing alliance to benefit from membership of the world's largest FMCG purchasing network;

-- The Company started sales of Pirkka branded products (private label produced by Kesko of Finland) in Lenta stores across some regions;

-- 130 new MAN trucks with refrigerated semitrailers were purchased to improve supply chain performance; and

-- Steven Hellman was appointed as a non-executive Director of Lenta Ltd. with effect from 1(st) December, 2017.

(1) Lenta's stores are included in the LFL store base starting 12 months after the end of the month in which they are opened

(2) Cardholders who made at least 2 purchases at Lenta during the 12 months to 31 December 2017 are considered active

Lenta's Chief Executive Officer, Jan Dunning commented:

'Lenta's sales growth accelerated to 23% in the fourth quarter of 2017, driven by an improvement in like-for-like sales growth to 5.2% combined with a 21% increase in selling space. Customers reacted positively to continuing improvements in our offering, range, marketing and communication and this led to substantial improvements in both like-for-like ticket and traffic growth. We were particularly pleased to achieve an increase in like-for-like traffic for the first time in the year. Although we continued to see some pressure from cannibalization and deflation in the quarter, these effects show some signs of abating.

The Company continues to expand rapidly and again met its new store opening guidance with 40 hypermarkets and 49 supermarkets opened during the year. We doubled our supermarket network during 2017, opening more stores than in the previous four years since this format was launched in 2013. We also made notable progress in Moscow with 11 new hypermarkets and 10 new supermarkets, leading to year-on-year increases of over 70% in fourth quarter sales and selling space in this region.

We are very pleased with the first operating results of the 14 ex-NASH hypermarkets which were re-opened under the Lenta brand in November 2017. Sales at the 11 hypermarkets acquired from Kesko in 2016 also continued to ramp-up rapidly. Lenta's ability to succeed in diverse markets with both acquired stores and organic openings provides a very clear demonstration of the attractiveness of Lenta's customer proposition. In December, we completed the purchase of 22 supermarkets in Siberia from Holiday.

As a result of our expansion, Lenta's overall market position continued to improve - in addition to being the country's leading hypermarket operator, we are confident that Lenta also became Russia's #3 food retailer during 2017.

For 2018, the Lenta team will continue its efforts to drive sales by further strengthening our customer proposition. We also expect some improvement in the macroeconomic and consumer environment.'

Lenta Store Developments

In the fourth quarter of 2017, Lenta opened 30 new hypermarkets and the total hypermarket count reached 231 stores across Russia. The Company entered five new cities during the quarter and is now present in 84 cities across the country.

During the reported period the Company also opened 33 new supermarkets, including Lenta's first supermarkets in the Ural region. With the launch of supermarkets in the Urals, Lenta's supermarket network is now present in five regions (comprising Moscow, St Petersburg, Central, Siberia and Ural regions), with a total of 97 stores. The supermarket format's share in the Company's total selling space rose to 6.1% as at the end of the year.

Lenta added 179,245 sq.m of net selling space in the reported quarter. Total selling space as at 31 December 2017 increased to 1,382,111 sq.m, up 20.6% year-on-year, with 18.0% growth in the hypermarket format and 82.6% growth in the supermarket format.

Quarterly                                 Year to Date 
                    -----------------------------------------  ----------------------------------------- 
                        As          As         Net     Change      As          As         Net     Change 
                         at          at       change     (%)        at          at       change     (%) 
                         31          31                             31          31 
                        Dec         Dec                            Dec         Dec 
                         4Q          4Q                             FY          FY 
                        2017        2016                           2017        2016 
------------------  ----------  ----------  --------  -------  ----------  ----------  --------  ------- 
 Total 
  number 
  of stores             328         240        88      36.7%       328         240        88      36.7% 
------------------  ----------  ----------  --------  -------  ----------  ----------  --------  ------- 
     Hypermarkets       231         191        40      20.9%       231         191        40      20.9% 
------------------  ----------  ----------  --------  -------  ----------  ----------  --------  ------- 
     Supermarkets       97          49         48      98.0%       97          49         48      98.0% 
------------------  ----------  ----------  --------  -------  ----------  ----------  --------  ------- 
 Number 
  of net 
  store 
  openings(3)           63          43         20      46.5%       88          68         20      29.4% 
------------------  ----------  ----------  --------  -------  ----------  ----------  --------  ------- 
     Hypermarkets       30          36         -6      -16.7%      40          51         -11     -21.6% 
------------------  ----------  ----------  --------  -------  ----------  ----------  --------  ------- 
     Supermarkets       33           7         26      371.4%      48          17         31      182.4% 
------------------  ----------  ----------  --------  -------  ----------  ----------  --------  ------- 
 Total 
  selling 
  space(4) 
  (sq.m.)            1,382,111   1,146,148   235,963   20.6%    1,382,111   1,146,148   235,963   20.6% 
------------------  ----------  ----------  --------  -------  ----------  ----------  --------  ------- 
     Hypermarkets    1,297,583   1,099,863   197,720   18.0%    1,297,583   1,099,863   197,720   18.0% 
------------------  ----------  ----------  --------  -------  ----------  ----------  --------  ------- 
     Supermarkets     84,528      46,285     38,243    82.6%     84,528      46,285     38,243    82.6% 
------------------  ----------  ----------  --------  -------  ----------  ----------  --------  ------- 
 Total 
  net selling 
  space 
  added(3) 
  (sq.m.)             179,245     182,778    -3,533    -1.9%     235,963     263,765    -27,802   -10.5% 
------------------  ----------  ----------  --------  -------  ----------  ----------  --------  ------- 
     Hypermarkets     152,933     176,912    -23,979   -13.6%    197,720     250,991    -53,271   -21.2% 
------------------  ----------  ----------  --------  -------  ----------  ----------  --------  ------- 
     Supermarkets     26,312       5,866     20,446    348.6%    38,243      12,774     25,469    199.4% 
------------------  ----------  ----------  --------  -------  ----------  ----------  --------  -------

3 Within the reported period. In January 2017 the Company closed one leased supermarket in Electrostal (Moscow region) with selling space of 1,135 sq.m.

4 Selling space is shown after the adjustments made to the total reported selling space and store network described below

Adjustments to Reported Selling Space

During 2017, store reconstruction and refurbishment activities resulted in selling space increases in some operating stores and reductions in others. The net effect was a reduction of 372 sq.m in hypermarket selling space and an increase of 6 sq.m in supermarket selling space, giving an overall net reduction of 366 sq.m in total selling space (-0.03% of total selling space). Total selling space after these adjustments was 1,382,111 sq.m as of 31 December 2017.

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All the above mentioned changes are reflected on the Company's website at http://www.lentainvestor.com/en/about/lentas-geography/our-hypermarkets and http://www.lentainvestor.com/en/about/lentas-geography/our-supermarkets

Lenta's Operating Performance

Selling space additions combined with positive LFL sales growth resulted in overall sales growth of 23.4% for the fourth quarter of 2017. Total sales amounted to Rub 112.1bn in the quarter, compared to Rub 90.8bn for the same period last year.

Lenta continued implementing a series of initiatives launched earlier in 2017 to increase the distinctive attractiveness of Lenta's offering to customers. These initiatives included changes in assortment (including introduction of new private label product ranges), marketing, Lenta's loyalty program and customer communication.

The Company maintained focus on digital marketing activities to reach customers, with special offers tailored on an individual basis to enhance traffic and basket size. The number of active loyalty cardholders increased to 12.3m as at 31 December 2017 (+17% y-o-y) and the share of transactions made with the loyalty card was 95%, an increase of approximately 2p.p y-o-y.

Hypermarket sales growth accelerated significantly to 22.4% in the fourth quarter, up from 18.2% in 3Q 2017. A significant improvement in LFL sales growth to 5.4% from 0.5% in the previous quarter more than offset slightly slower selling space growth.

The supermarket format's total sales growth also substantially increased to 43.7% in 4Q 2017 from 30.9% in 3Q 2017, primarily driven by rapid selling space growth, while LFL sales growth reduced to 1.4%. The supermarket format's share of Lenta's total sales increased to 5.1% in the reported quarter.

Lenta also continues to grow rapidly in the Moscow region. The Company entered the Moscow market in 2013 and now has 24 hypermarkets and 43 supermarkets in the region, representing 12.2% of Lenta's total selling space. With 11 hypermarket and 10 supermarket openings during the year, net selling space in Moscow and the Moscow region increased 72% y-o-y. Total sales in Moscow grew 76.5% y-o-y during the quarter and the share of this region in the Company's total sales increased to 14.4%.

Quarterly                            Year to Date 
                   ------------------------------------  ------------------------------------- 
                      4Q        4Q       Net     Change     FY        FY        Net     Change 
                      2017     2016     change     (%)      2017      2016     change     (%) 
-----------------  --------  -------  --------  -------  --------  --------  --------  ------- 
 Sales 
  (Rub, 
  million)          112,090   90,846   21,244    23.4%    365,176   306,352   58,824    19.2% 
-----------------  --------  -------  --------  -------  --------  --------  --------  ------- 
  Hypermarkets      106,326   86,835   19,491    22.4%    346,989   292,624   54,364    18.6% 
-----------------  --------  -------  --------  -------  --------  --------  --------  ------- 
   Supermarkets      5,764    4,011     1,753    43.7%    18,188    13,728     4,460    32.5% 
-----------------  --------  -------  --------  -------  --------  --------  --------  ------- 
 Average 
  ticket 
  (Rub)              1,220    1,221      -2      -0.1%     1,124     1,135      -11     -1.0% 
-----------------  --------  -------  --------  -------  --------  --------  --------  ------- 
  Hypermarkets       1,302    1,283      20       1.5%     1,190     1,192      -3      -0.2% 
-----------------  --------  -------  --------  -------  --------  --------  --------  ------- 
    Supermarkets      562      599       -38     -6.3%      548       563       -15     -2.7% 
-----------------  --------  -------  --------  -------  --------  --------  --------  ------- 
 Customer 
  traffic 
  (million)          91.9      74.4     17.5     23.5%     324.9     269.8     55.0     20.4% 
-----------------  --------  -------  --------  -------  --------  --------  --------  ------- 
  Hypermarkets       81.6      67.7     13.9     20.6%     291.7     245.4     46.2     18.8% 
-----------------  --------  -------  --------  -------  --------  --------  --------  ------- 
  Supermarkets       10.3      6.7       3.6     53.3%     33.2      24.4       8.8     36.2% 
-----------------  --------  -------  --------  -------  --------  --------  --------  -------

The average hypermarket ticket in the fourth quarter increased 1.5% to a historically high level of Rub 1,302, while LFL average hypermarket ticket grew 4.5%. The difference reflects the large share of stores in the ramp-up phase which are not included in the LFL panel. The average ticket in the supermarket format in the fourth quarter decreased by 6.3% to Rub 562 compared to a 3.2% increase in the LFL average ticket - as for hypermarkets, the difference reflects the large share of younger stores which are not included in the LFL panel.

Total customer traffic increased by 23.5% in the fourth quarter of 2017 compared with the same period of the previous year, comprising 20.6% growth in hypermarket traffic and a 53.3% increase in traffic at Lenta's supermarket format.

During the fourth quarter of 2017, 19 hypermarkets and one supermarket entered the LFL panel.

LFL sales growth of 5.2% in the fourth quarter consisted of LFL traffic growth of 0.6% and average LFL ticket increase of 4.6%. LFL food sales increased by 5.8% and LFL non-food sales growth returned to positive territory for the first time since 2016, with an increase of 1.4% y-o-y.

Quarterly                       Year to Date 
---------------  -------------------------------  ------------------------------- 
                    LFL        LFL        LFL        LFL        LFL        LFL 
                    sales     average    traffic     sales     average    traffic 
                   growth     ticket     growth     growth     ticket     growth 
                   4Q 2017    growth     4Q 2017    FY 2017    growth     FY 2017 
                              4Q 2017                          FY 2017 
---------------  ---------  ---------  ---------  ---------  ---------  --------- 
    Lenta total 
            (%)     5.2%       4.6%       0.6%       0.9%       2.3%      -1.4% 
---------------  ---------  ---------  ---------  ---------  ---------  --------- 
   Hypermarkets     5.4%       4.5%       0.9%       0.8%       2.2%      -1.4% 
---------------  ---------  ---------  ---------  ---------  ---------  --------- 
   Supermarkets     1.4%       3.2%      -1.7%       1.9%       3.1%      -1.1% 
---------------  ---------  ---------  ---------  ---------  ---------  ---------

Lenta continued gaining customers ahead of sales - the number of unique customers outpaced sales growth in both new and LFL hypermarkets and supermarkets. LFL traffic in the reported quarter improved due to an increase in the frequency of customer visits, and returned to positive territory despite continuing cannibalization effects of new stores. Supermarkets demonstrated some deterioration of LFL traffic growth compared to the preceding quarter, which was largely attributable to seasonal effects.

The average LFL ticket improved versus the previous quarter. This was achieved despite continuing shelf price deflation. Deflationary effects in the fourth quarter were much the same as in the third quarter on average, but underlying trends have been improving since reaching a low-point in October. The effects of deflation were more than compensated by trading up (which continued for the sixth quarter in a row) and a further increase in the number of articles per basket which became the key driver of LFL basket improvement in the fourth quarter.

LFL sales growth of 5.2% in 4Q 2017 was therefore due to a combination of factors - an increase in the number of customers, trading up effects and significantly stronger volumes, partly offset by cannibalisation from new Lenta stores and on-shelf price deflation.

Update on Operating Performance of Hypermarkets previously operated under the NASH brand

During November, the Company reopened all 14 leased hypermarkets previously operated under the NASH brand (seven in Moscow and another seven stores in Obninsk, Nizhniy Novgorod, Chelyabinsk, Perm, Ryazan, Yaroslavl and Rostov-on-Don). The stores had been closed for refurbishment for approximately three months prior to reopening under the Lenta brand. The stores demonstrated rapid sales ramp-ups during the remainder of the year (approx. six weeks of operation in November and December), delivering 0.9% (approx. Rub 3.2bn) contribution to Lenta's 2017 total sales growth. The speed of ramp-up reflects the attractiveness of the Lenta customer offer and the high potential for further growth even in a very competitive environment.

Guidance

Guidance on hypermarket and supermarket openings as well as capex for 2018 will be published after the FY 2017 financial results announcement scheduled for mid-March 2018.

About Lenta

Lenta is the largest hypermarket chain in Russia, and the country's third largest retail chain. The Company was founded in 1993 in St. Petersburg. Lenta operates 231 hypermarkets in 84 cities across Russia and 97 supermarkets in Moscow, St. Petersburg, Novosibirsk, Yekaterinburg and the Central region with a total of approximately 1,382,111 sq.m of selling space. The average Lenta hypermarket store has selling space of approximately 5,600 sq.m. The average Lenta supermarket store has selling space of approximately 900 sq.m. The Company operates seven owned distribution centres.

The Company's price-led hypermarket formats are differentiated in terms of their promotion and pricing strategies as well as their local product assortment. The Company employed approximately 40,383 people as of 30 June 20175.

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The Company's management team combines a mix of local knowledge and international expertise coupled with extensive operational experience in Russia. Lenta's largest shareholders include TPG Capital and the European Bank for Reconstruction and Development, both of which are committed to maintaining high standards of corporate governance. Lenta is listed on the London Stock Exchange and on the Moscow Exchange and trades under the ticker: 'LNTA'.

A brief video summary on Lenta's business and its Big Data initiative can be seen here.

5 FTE (full-time equivalent). Average FTE for 1H 2017 was 40,197 employees

For further information please visit http://www.lentainvestor.com or contact:

Lenta                                 Russian Media: 
   Mariya Filippova                      NW Advisors 
   PR and GR manager                     Anton Karpov & Victoria 
   Tel: +7 812 380-61-31                 Afonina 
   ext.: 1892                            el:+7 495 795 06 23 
   E-mail: maria.filippova@lenta.com     E-mail: lenta@nwadvisors.com 
 
                                         International Media: 
                                         FTI Consulting 
                                         Leonid Fink & Jenny Payne 
                                         el: +44 7497 783 705 
                                         E-mail: Leonid.Fink@fticonsulting.com

Forward looking statements:

This announcement includes statements that are, or may be deemed to be, 'forward-looking statements'. These forward-looking statements can be identified by the fact that they do not only relate to historical or current events. Forward-looking statements often use words such as 'anticipate', 'target', 'expect', 'estimate', 'intend', 'expected', 'plan', 'goal', 'believe', or other words of similar meaning.

By their nature, forward-looking statements involve risk and uncertainty because they relate to future events and circumstances, a number of which are beyond Lenta's control. As a result, actual future results may differ materially from the plans, goals and expectations set out in these forward-looking statements.

Any forward-looking statements made by or on behalf of Lenta speak only as at the date of this announcement. Save as required by any applicable laws or regulations, Lenta undertakes no obligation publicly to release the results of any revisions to any forward-looking statements in this document that may occur due to any change in its expectations or to reflect events or circumstances after the date of this document.

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