Crisis Hastens X5 Exit But Not Responsible For It
X5, Russia's second biggest food retailer by sales after Magnit, is leaving Ukraine after agreeing to sell its stores (around 12) to the domestic retailer Varus for around US$5-10mn, according to the Ukrainian newspaper Capital. While the ongoing political crisis between Russia and Ukraine clearly poses enormous challenges for Russian firms operating in Ukraine, particularly outside of the Crimea region, this exit was on the cards before the crisis broke out. Our view is that the effect of the crisis has been to hasten X5's departure rather than causing it directly.
We have published a number of articles over the past year comparing the conflicting fortunes of X5 and Magnit and more recently published an article looking at the key implications for the food retail sector on the back of the crisis ( see 'Weak Rouble A Major Concern For Key Retailers Magnit And X5,' March 14 2014). Whereas Magnit has gone from strength to strength since mid- to late 2011 in particular, X5 has faced one challenge after another. X5 has only recently shown signs of finally turning the corner after posting its first quarter of same-store sales growth in more than a year in Q413, following average growth of -1.2% year-on-year in the preceding eight quarters.
Turning around Russia is clearly X5's main priority as it needs to put together a sustained run of sequential growth in same-store sales and ultimately restore confidence in its business, which has been blighted by its inability to execute a planned strategic shift in 2011 away from acquisition-led growth and towards organic growth. With fewer than 20 stores in Ukraine (compared with more than 4,500 in Russia), it is not losing much by leaving and in our view this is a predictable and sensible move.
|X5 Same-Store Drop-Off|
|Same Store Sales Growth Excluding Fuel (LHS) And EBIT Per Retail Square Foot (RHS)|