We assume that Magnit presented remarkable 4Q and 2019 FY financials.
- Increase of the selling space in 4Q showed an expected slowdown vs the previously reported period and formed 12.1% YoY (core formats). Due to the calendar changes of the openings, the majority took place in the first half of the year.
- According to our expectations, the LFL-sales resumed rising and increased by 0.1%. The traffic dynamics improved vs the previous quarters, which was the most positive item of the report. The decline totaled 0.2% vs 3.4% for 3Q. We assume that the remarkable growth of the share of promo in the sales of the retailer and loyalty program roll-out formed the core factors of the LFL-traffic improvement. Increased promo activities and a slowdown of the food inflation made high pressure on LFL-average ticket, which rose by just 0.3% vs 2.8% for 3Q. Magnit outlines the high base assets in the comparison of the LFL average ticket dynamics due to the promotion activity carried out in December of 2018.
- According the report presented overnight, the company has already issued over 33 mn loyalty cards and the number of their active users has exceeded 60%. At large, the cards penetration in tickets was 39%, with the share in total sales reaching 58%.
- Within the reported period, the sales rose 11% YoY on the back of the retail sales rising 9.2% YoY and the wholesale – 135% YoY. As for the core formats, the drogerie stores appeared to be the most fast growing, as before. Sales in the supermarkets segment was declining for all 4 quarters of the year.
- Margin turned out to underperform our targets. Gross profit margin declined to the lowest of the recent years at 21.7% on the back of the high share of the promo in sales, rise in logistics costs/shrinkage and the fast growth of the wholesale business. The promo activities rose being driven by the loyalty program roll-out, selling a share of passive matrix assortment and seasonality. EBITDA margin was 5.4%, underperforming the 4Q 2018 estimate by 1.6 pps and 3Q 2019 – by 0.4 pps, when the estimate was affected by the one-off factors (about RUB 5.5 bn). Magnit failed to reach 6.5% in terms of the EBITDA margin, which was forecasted by its management. The actual EBITDA margin formed 6.1%. EBITDA margin adjusted by the one-off factors and LTI has lost 0.4 pps to 6.8% in 2019 (5.5% in 4Q).
- For the quarter, the net profit plunged 51% YoY and down by 49% YoY for the full year. We do not expect the decline to make a negative impact on the company’s dividends. The 2019FY dividends are likely to overweigh the 100% of the net profit remarkably.
- In 2020, Magnit plans opening a bit more than 1.3K shops of the core formats (net), the most of which will be represented by the drogerie stores (1.1K). About 250 (net) new retail locations will be opened in the convenience format, which was 5x less than in 2019. The gross number of convenience stores to be opened totals about 700 locations, which we believe marks the company planning to focus on closing and changing the inefficient locations in 2020. Considering the low number of openings, we suppose Magnit expands its selling space by just 4.8% YoY this year (-7.3 pps by 2019).
Traffic dynamics improvement is an important step, yet it is important as well that the company manages to keep up with the results through several quarters on the back of sustainable profitability. Up until then, we assume that speaking about a rebound is premature.
For now, our recommendation for Magnit stock is “HOLD” with RUB 3,917 per share TP.