Magnit - Faster Store Rollouts, Higher Margin Targets Announced

Magnit's capital markets day yesterday left a positive impression on us. The company announced that it will speed up store rollouts and that the EBITDA margin should rise to 8%. Major strategic initiatives (store segmentation, assortment optimization, renovations) are already bearing fruit and should be further reinforced by the evolving CVP and the development of the e-grocery channel. The announced plans suggest upside to our model, which we intend to revise following the 1Q21 trading results. The stock now offers a 9% dividend yield. > Ambitious 2021-25 targets announced. These include opening up to 2,515 stores gross per annum (1,000-1,500 convenience, 750-1,000 cosmetic stores, 5-15 supermarkets), making the e-grocery platform handle up to 5% of revenues, lifting the EBITDA margin to 8%; making further WC improvements and distributing strong dividends.> Drivers of profitability mostly concentrated in gross margin. The drivers include higher sales densities, commercial margin improvement, an improved CVP, a rise in the share of private label (to 25%), reduced supply costs (thanks to ERP integration and warehouse management), reduced shrinkage and improved store efficiency. On top of that, the cosmetic store format, which is currently yielding a double-digit EBITDA margin, will contribute a higher share of revenues.> Clean and logical format segmentation. The format "clusterization" is now complete. Convenience stores are now split into three sub-formats with the same core assortment and additional items depending on location. The bigger formats are split into supermarkets and superstores. The latter, which are in more convenient locations than hypermarkets, saw positive LFL sales growth in 2020. Three formats of cosmetic stores offer different splits between cosmetics and household items. There are also three new formats being piloted (the discounter My Price, Magnit City and the kiosk Magnit GO).> CVP being further developed. The assortment continues to evolve, with a growing share of fresh and local produce. Private label, Magnit's own produce, direct imports and exclusive merchandise from suppliers are also becoming strong differentiating points. The mix between different price tiers has also been finalized. Our Ivanov survey has shown an increase in unique customers, most coming from hypermarkets.> E-grocery. All relevant models and customer missions are being tested. Bulk deliveries, which are currently available from two stores, are being rolled out to 40 stores, and dark stores are being launched in 2021. Express delivery is already available from 770 stores, and the two current mini dark stores will be joined by 20 new ones in 2021. > Upside to our numbers. The guidance of around 2,000 store openings per annum net exceeds our current forecast of 1,500. This should drive a 7.5% CAGR for selling space, while we now see 2-3 pp upside to our top-line projections. However, we note that expanding the EBITDA margin to 8.0% (versus our current 7.4% projection) will be challenging, especially considering that the company intends to boost the share of online stores to 5% of revenues. Still, it suggests a return to the old paradigm of Magnit being structurally more profitable than X5.