Navigating food ban, Russian retailer Magnit sees profits leap

MOSCOW, Oct 24 (Reuters): Russia's biggest food retailer Magnit posted a forecast-beating 40 per cent jump in third-quarter earnings on Friday after nimbly navigating an import ban and sticking with low prices despite surging inflation.
Magnit, a low cost retailer with a big presence in Russia's far-flung regions, moved quickly to find new supplies to fill gaps on the shelves when Moscow banned imports including fruit and vegetables from Europe and the United States in August, in response to Western sanctions over Ukraine.
It has also kept prices low - in line with its 'Always Low Prices' slogan - as the Russian economy teeters on the brink of recession and inflation rises to more than 8 per cent.
"The 3rd quarter was a challenging time for the business units of the company responsible for logistics and purchasing," Sergei Galitsky, Magnit chief executive officer and biggest shareholder, said in a statement.
"We managed to adapt to the changing conditions, in as short a time as possible, which resulted in a strong performance in the 3rd quarter," he said.
Magnit, which runs a more than 9,000-strong chain of low-price, mostly small neighbourhood stores, said its net profit amounted to $395 million in the third quarter, while analysts forecast $366 million.
The company said earlier it had switched to Serbia for imports of apples instead of Poland and was making other changes to cope with the import ban while pressing on with its low-price strategy which is winning over customers.
Russia's economy is expected to grow just 0.5 per cent this year after 1.3 per cent in 2013, amid large capital outflows and a slide in the rouble because of the Western sanctions, making consumers increasingly price conscious.
Magnit has been successful in improving purchasing terms, thanks to its rapid growth and resulting economies of scale which have shielded profitability from price-cut-driven erosion.
In the third quarter, Magnit's earnings before interest, taxation, depreciation and amortisation rose almost 30 per cent to $665 million, giving a 12.4 per cent margin against 11.6 per cent a year earlier, exceeding expectations.
"Consensus should go up on the back of the results, and we see a good chance of Magnit raising its full-year 2014 guidance," Otkritie brokerage wrote in the results preview.
Magnit earlier forecast an EBITDA margin of 10.6-10.9 per cent in 2014 and 26-29 per cent revenue growth in rouble terms. It had earlier reported a 34 per cent rise in third-quarter sales and a 30 per cent increase for nine months.
Shares in Magnit rose more than 1.4 per cent in early trade in Moscow but later erased the gains to be down 0.6 per cent at 0907 GMT. The stock is up more than 13 per cent so far this year.