X5 Retail Group - Capital Markets Day Highlights

Yesterday, X5 Retail Group hosted a virtual capital markets day. The management aims to expand the company's market share to 15% by 2023. Openings in 2021 are not expected to exceed the 2020 level, while margins and ROIC next year are projected to be as high or higher, with the dividend increasing to at least R45 bln. Pyaterochka is expected to maintain the momentum from its renovations and Perekrestok to increase its profitability in 2021. The company's ongoing digital projects are seen contributing R6.7 bln to EBITDA in 2020 and R20 bln in 2021. Top-line growth accelerated to 13.8% y-o-y in October and LFL sales growth to 5.5%. We were left with an overall positive impression from the event and reiterate our BUY recommendation on the stock.> Strategy. Over the next three years, the key priorities will be increasing sales density and digital transformation. By 2023, the company hopes to boost its market share to 15% (from 11.5% in 2019), which would suggest revenues increasing from R2.0 trln this year to R2.8 trln (versus our forecast of R2.5 trln). Importantly, the management assumes 5% of revenues will by then be generated from online businesses. Ongoing digital transformation projects (pricing, assortment, promos, logistics, in-store automation), are expected to contribute R6.7 bln to EBITDA this year and R20 bln next year. A new customer journey concept was introduced. The aim is to assist shoppers in all four stages of making a purchase (planning, selection, shopping and services). It was noted that conventional offline retail only covers the third step (in-store shopping), but that the company will be able to cover all four with the development of its digital platform. > Mid-term guidance. Next year, openings are seen at or below this year's level (1,700 in our model), the dividend is expected to grow 50% in absolute terms (to at least R45 bln), and profitability and ROIC are expected to come in at least at the 2020 levels. The company sees its 2021-23 revenue CAGR exceeding 10%, with the EBITDA margin holding above 7% and capex growing slower than revenues. Net space growth will further slow to 6%, meaning LFL sales growth and new projects will be bigger contributors to revenue growth than expansion.> Profitability drivers. The ongoing shift in formats and the regional mix should support profitability. The company is divesting from hypermarkets, which only nearly break even, while supermarket margins, which have been under pressure in 2020 (due to lower traffic in malls), should recover in 2021. In terms of geography, X5's market share exceeds 15% in only two of eight regions, which gives it an EBITDA margin of more than 10% in these regions. Market share expansion in the remaining six regions should help lift the company's aggregate profitability.> Hard discounter concept "Chizhik." The first store in this new concept will be opened this week. The format features 200-250 m2 of selling space and offers 800 SKUs, with a 60% share of private label. Some 40-50 stores will be opened in 2021 before the large-scale roll-out begins. Opex and capex should be low, giving Chizhik an ROI comparable to that of the core formats.> Pyaterochka. Market capacity for the format is still huge, as 50-60% of its new openings are in locations that were previously occupied by other grocery stores. Around 10% of the chain has been updated to the new concept, and these stores deliver LFL sales growth above 10%, have a higher EBITDA margin, are better perceived by shoppers and have more young customers. Capex per store for the new format is approaching the level of the old format, as X5 has rolled out sub-formats to address varying income levels. Within 5-6 years, all Pyaterochkas will be in the new format. The promo share will decline from above 35% currently to below 30% by 2023. Automated pricing was tested in 800 stores and added 1 pp to the EBITDA margin. Express delivery is now available in 11 cities from 550 stores, and more regions are being added. Ready-to-eat is seen growing from 0.4% to 3.7% of Pyaterochka's revenues by 2023. > Perekrestok. Around 10% of Perekrestoks are in the new format. These stores deliver LFL sales growth above 10% and generate a higher EBITDA margin than old stores, all at a comparable level of capex. Profitability is expected to retreat from the 2020 level, staying below the level of Pyaterochka. Ready-to-eat is seen expanding from 3.6% of revenues currently to 8.5% in 2023. The EBITDA margin should rise from the 2020 level but stay below the level for Pyaterochka.> Perekrestok's Vprok channel. The online channel was rebranded and a new mobile app was introduced to make its focus on bulk purchases more clear. It now processes 12k orders per day. Vprok generated positive EBITDA in May and is expected to become sustainably profitable next year. Complementary assortment will be added (e.g. children's goods, pet food and household chemicals) to make it a FMCG marketplace. > 4Q20 trading. Revenues are up 13.8% y-o-y so far this month (more than in all of September), with 5.5% LFL sales growth driven by a 3.8% increase in the average ticket. Customers are trading up and migrating from HORECA (trends highlighted in our recent Ivanov survey). Our current forecast of 12% revenue growth in 4Q20 now seems conservative.