Lenta Ltd.: 2Q 2019 sales and operating results

LENTA SALES AND OPERATING HIGHLIGHTS FOR THE SECOND QUARTER ENDED 30 JUNE 2019

St-Petersburg, Russia; 25 July, 2019 - 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 second quarter ended 30 June 2019.

2Q 2019 Operating Highlights:

• Total sales grew 0.4% in 2Q 2019 to Rub 100.2bn (2Q 2018: Rub 99.8bn), including retail sales growth of 4.7% to Rub 97.8bn (2Q 2018: Rub 93.4bn) and wholesales decline of 62.4%;
• Like-for-like ("LFL")[1] retail sales growth of 0.8% excluding VAT vs. 2Q 2018. This is equivalent to LFL retail sales growth of 1.6% including VAT, due to increase in VAT from 1 January 2019;
• LFL retail traffic growth of 0.6% combined with LFL retail ticket growth of 0.2%;
• Two hypermarkets and one supermarket were opened during the second quarter of 2019;
• Total store count reached 377 stores at 30 June 2019, comprising 246 hypermarkets and 131 supermarkets;
• Total selling space increased to 1,472,937 sq.m as at 30 June 2019 (+5.0% vs. 30 June 2018); and
• Number of active loyalty cardholders[2] increased to 15.2m (+13.5% y-o-y) with around 97% of transactions in the second quarter made using the loyalty card.

1H 2019 Operating Highlights:

• Total sales grew 3.1% in 1H 2019 to Rub 199.2bn (1H 2018: Rub 193.2bn), including retail sales growth of 7.2% and wholesale decline of 62.2%

• LFL retail sales growth of 2.9% excluding VAT vs. 1H 2018. This is the equivalent of LFL retails sales growth of 3.7% including VAT, due to increase in VAT from 1 January 2019;

• LFL traffic growth of 2.1% combined with a 0.7% growth in LFL ticket; and
• Three new hypermarkets and one supermarket were opened during 1H 2019 while one hypermarket and four supermarkets were closed.

Events in 2Q 2019 and after the reported period:

• Severgroup LLC acquired 34.45% and 7.47% of Lenta's issued and outstanding voting shares from TPG and EBRD respectively. As a result, Severgroup launched a cash offer on 30 April 2019 to acquire all of the issued shares and GDR's of Lenta;
• Once Severgroup acquired in aggregate more than 50% of the Lenta voting shares, the Board used its authority to fill the four vacated seats on the Board with the nominees of Severgroup, namely  Messrs. Alexey Mordashov, Roman Vasilkov, Maxim Bakhtin and Alexey Kulichenko;
• Upon completion of the mandatory tender offer on 4 June 2019, Severgroup's holding was a combined total of approximately 78.73% of Lenta's voting rights (c. 77.99% of Lenta's share capital).

Lenta's Chief Executive Officer, Herman Tinga commented:

"Lenta delivered healthy retail sales growth of 4.7% and like-for-like sales growth of 0.8% in the second quarter. The results mainly reflect a deteriorated economic situation for our consumers, negative impact of calendar effects in the second quarter and overall tough competition in the retail industry.

Stagnating household disposable income and a shift in Easter holidays especially affected our performance in hypermarkets with a decline of like-for-like retail sales by 0.2%. The pressure mainly came from negative like-for-like traffic of 1.4% due to lower frequency of customer visits, and slower growth of the average ticket.

Despite these challenges we have being encouraged by ongoing inflow of new customers to our stores throughout the second quarter thanks to further improvements in offering and balanced promotional activity. This trend also supported our supermarket format, which continued to demonstrate solid like-for-like sales growth driven by strong increase in traffic.

Amid pressure from the market environment, we remain focused on improving operational efficiency of our existing business, while we keep working on initiatives that should drive sales and deliver continued growth this year.

I would also like to welcome Severgroup as our new major shareholder and long-term strategic partner. The management team will be looking forward to working together on the strategy that would help to further strengthen Lenta's business and deliver strong returns to all of our shareholders. "

Lenta Store Developments

In the second quarter of 2019 Lenta opened 3 new stores on a net basis. This included the opening of two compact hypermarkets: one owned hypermarket in Ekaterinburg with selling space of 4,340 sq.m, and one leased hypermarket in St. Petersburg with selling space of 5,263 sq.m. The Company also opened one leased supermarket in the Moscow region.  

In the reported quarter Lenta added 10,568 sq.m of net selling space.  As at 30 June 2019 the total number of stores reached 377, including 246 hypermarkets and 131 supermarkets with total selling space of 1,472,937 sq.m. (+5.0% y-o-y). Lenta retained its presence in 88 cities across the country.

After the end of the reported period the Company made a decision to close one compact leased hypermarket in Novokuznetsk and one leased supermarket in St. Petersburg with selling spaces of 4,503 sq.m and 644 sq.m respectively.

Lenta's Operating Performance

The Company's retail sales grew by 4.7% in the second quarter of 2019, driven by selling space additions as well as growth of LFL retail sales. Total sales reached Rub 100.2bn implying a 0.4% growth compared to the second quarter of the previous year. A significant decline of 62.4% in sales to wholesale customers accounts for the difference between retail sales growth and total sales growth in the second quarter. Lenta expects wholesales to decline y-o-y throughout 2019.

The Company continued implementing a series of initiatives 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 15.2m as at 30 June 2019 (+13.5% y-o-y) and the share of transactions made with the loyalty card was 97%. Lenta's Mobile App launched in the fourth quarter of 2018 has already attracted more than 3 million users. Lenta plans to continue to enhance the Mobile App's functionality to deliver an even better customer experience resulting in increased loyalty, higher sales and lower marketing costs.

Hypermarket retail sales growth was 2.4% in the second quarter primarily driven by selling space growth of 4.2%, while LFL retail sales in the format decreased by 0.2%. The supermarket format's total retail sales rose by 38.3% in 2Q 2019 driven by a 17.8% increase in selling space and significant improvement in LFL retail sales, which rose by 15.8% in the reported quarter. The supermarket format's share of Lenta's retail sales was 8.7% in the reported quarter vs. 8.8% in the first quarter of 2019. Its share increased from 7.8% in the fourth quarter of 2018.

The average hypermarket retail ticket increased by 0.2% to RUB 1,068, while LFL average hypermarket retail ticket rose 1.2%. The average retail ticket in the supermarket format in the second quarter decreased by 1.1% to Rub 467 compared to a 1.9% increase in the LFL average retail ticket. In both formats, the difference between total and LFL average ticket growth reflects the impact of stores in a ramp-up phase which entered the LFL panel in the recent quarters.

Total retail customer traffic increased by 7.3% in the second quarter of 2019 compared with the same period of the previous year, comprising 2.2% growth in hypermarket traffic and a 39.9% increase in retail traffic at Lenta's supermarket format.

During the second quarter of 2019, no hypermarket entered the LFL panel, while 10 supermarkets were included in LFL base.

LFL retail sales grew 0.8% (excluding VAT) in the second quarter, representing 0.6% increase in LFL retail traffic and 0.2% growth in LFL retail ticket. LFL retail food sales increased by 1.7%, while LFL retail non-food sales decreased by 5.7% y-o-y.

LFL retail sales including VAT increased by 1.6% - about 0.9% faster than LFL retail sales excluding VAT as a result of higher VAT rates since the beginning of 2019.

Lenta continued to win new customers in both new and LFL hypermarkets and supermarkets with a strong growth of number of unique customers. LFL sales growth of -0.2% in the hypermarket format was mainly impacted by declining traffic growth. Customer traffic growth in the LFL stores turned negative at -1.4% as an increase in the number of new customers was largely outweighed by a reduction in visit frequency.

LFL average retail ticket growth in the format increased by 1.2% as a result of continuous trading-up effect and impact of on-shelf Inflation in the second quarter 2019. Lenta recorded quarterly shelf price inflation for the first time since the first quarter of 2017. Nonetheless, LFL ticket growth slowed compared to the previous quarter, being affected by a reduction in the average number of articles per basket.

LFL retail sales in supermarkets in 2Q 2019 demonstrated strong growth of 15.8%. Higher traffic continued to drive LFL retail sales growth as a result of significant increase in the number of new unique customers in the format. Lenta continued to work on tactical changes to the offering, such as extension of the assortment and changes in marketing activities, in order to enhance attractiveness of stores to customers. LFL retail ticket growth decelerated to 1.9% from 2.3% in the first quarter as the effect of trading-up and shelf price inflation were partly offset by a declining number of articles in customers' average basket. 

LFL retail sales growth of 0.8% in 2Q 2019 was therefore due to a combination of factors: an increase in number of customers combined with strong trading-up effects and on-shelf inflation offset by lower frequency of visits and a reduction in the average number of items per basket.

Guidance

The Company reconfirms its previous guidance for this year. Lenta will also announce its 1H 2019 IFRS financial results on 28th August.  

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 245 hypermarkets in 88 cities across Russia and 131 supermarkets in Moscow, St. Petersburg, and the Siberia, Urals and Central regions, with a total of approximately 1,468,978 sq.m. of selling space. The average Lenta hypermarket store has selling space of approximately 5,500 sq.m. The average Lenta supermarket store has selling space of approximately 800 sq.m. The Company operates 12 distribution centers.
• 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 45,759 people as of 31 December 2018[3].
• 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 Severgroup, which is 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.
• For further information please visit www.lentainvestor.com, or contact:  

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.

[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. The Company has not made any changes to the methodology of LFL calculation; both total sales growth and LFL sales growth are reported excluding VAT as the best measure to evaluate y-o-y performance

[2] Cardholders who made at least 2 purchases at Lenta during the 12 months to 30 June 2019 are considered active.

[3] FTE (full-time equivalent). Average FTE for FY2018 was 43,283 employees