Fix Price Group Plc

MOEX:FIXP

Earnings Call Transcript

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to Fix Price Q4 Full Year 2021 Operating Results Conference Call. [Operator Instructions] Without further ado, I would now like to pass the line to Elena Mironova. Elena, the floor is yours. Please go ahead.

[Elena Mironova]

Thank you, Michael. Hello, everyone, and thank you for joining us today. With me on the call, are Chief Executive Officer, Mr. Dmitry Kirsanov; and Chief Financial Officer, Anton Makhnev. After Dmitry talks us through the trading update for the fourth quarter and full year 2021, we will open the call to questions. Let me caution you that this presentation includes statements that are or may deemed to be forward-looking statements, with respect to the financial condition, results, [ operations ] and businesses of Fix Price Group. For the full disclaimer, please refer to Page 2 of the results presentation, which you can find in the Results Center section of our website, at ir.fix-price.com. Now, let me turn the call over to our CEO. Dmitry, the floor is yours.

[Dmitry Kirsanov]

Thank you very much, Elena, and good afternoon, everyone. I've got to say that I am proud of our team and the results we were able to achieve in Q4 and the 12 months and all of this despite that highly-uncertain and challenging environment with COVID restrictions, high inflation, currency volatility and global supply chain disruptions. For the full year 2021, our revenue grew 21.3% with the rollout, accelerated and like-for-like sales growth. Like-for-like sales in our Russian ] not affected by restrictions, grew 9% with group like-for-like sales or growth at 7.2%, the [ lower ] customer base reached 17 million. And this is up [ 7.2% ] year-on-year. Before our IFRS financial results are disclosed on February 28, I can say that in Q4, we closed the gap on gross margins versus 2020, and we expect our full-year EBITDA margin to be in the 19% [indiscernible]. In 2021, we opened 737 new stores above our guidance, up 730, including 151 net new stores in Q4. We also kept up our active international expansion. 25% of new openings in Q4 were outside Russia, where we see some headwinds in Belarus and Kazakhstan, the financial performance of our stores there remain solid and value accretive for the group EBITDA. In Q4, we entered 41 new localities, including [ Sakhalin ], and now Fix Price is present in 79 of Russia's 85 [ bridges ], which cover 98% of the country's population. We proactively sourced on-trend products. We have redesigned and [indiscernible] our assortments with the existing and new price points, and we got the full assortment onto the shelf, despite supply chain disruptions. As you will hear, when I discuss that underlying drivers, our performance demonstrates the flexibility and resilience [ of our ] model as well as our appeal to customers. Now on to the key drivers of the latest results in Q4. The revenue rose to RUB 66.5 billion due to new store openings and like-for-like sales growth of 3.2% and 6.9% average ticket growth, which fully offset a 3.5% traffic contraction. [indiscernible] unaffected by COVID restrictions, like-for-like sales reached 6.5%, where the ticket growth was supported by successful pass-through of inflation repression through the assortment and price point efforts. Traffic numbers were impacted by new COVID restrictions in Russia, at the end of October. As you might recall during our last call on Q3, we discussed such restrictions as a potential headwind for Q4 performance. During the so-called, nonworking week, at the beginning of November, the absolute majority of our stores remained open, although in one region, we had to make that the operations of -- as we Fix Price towards [indiscernible] online delivery. And then several Russian regions introduced various further restrictions that is restricting assets to shopping malls, only to those with [indiscernible] passports and limiting access to public places to some categories of [indiscernible]. At the end of December, 500-plus of our stores remained under restrictions. Apart from this direct impact, rising incidence rates and another wave of COVID, with this led to a more cautious consumer behavior across the whole country, which had an additional impact on the traffic. We saw a similar trend in November-December 2020. when like-for-like traffic also ended negative in the [indiscernible] fleet. But between the way, so we saw a promising recovery in both consumer sentiment and traffic. In October 2021, for example, we again saw positive traffic trends. and this was repeating the trend in 2020. COVID restrictions in Kazakhstan pressure on real disposable income, and price regulation and [indiscernible] continued to drag on [ topline ] growth. In Q4, the impact of stores in those countries on group like-for-like sales, was minus 2%. Excluding this factor for international geographies and adjusting for the leap year, full-year like-for-like sales for Russian stores not impacted by restrictions in November-December, grew by 9%. And now over to our assortment proposition and sales mix. Sales are still facing the changed customer behavior and, therefore, buy more food. And it means that the customers have not fully come back. And we saw the double-digit growth in Q4, like-for-like. And the like-for-like sales growth was double digit, as I said, and they came to 27% of our sales versus 25% in Q4 2020. And among non-food items, the seasonal ranges led the growth. Like-for-like sales in Q4 grew 26%, followed by personal care, households goods, books, stationery and DIY. Sales of discretionary goods that were also impacted by supply chain disruption, leading to delayed delivery of some items and [indiscernible] up some additional working capital. In addition, the warmer weather in November '21 led to demand for seasonal collections picking up only in December, compared to mid-November in 2020. We have expanded our assortment to roughly 2,000 SKUs, compared to 1,800 before. The [ deployment ] of higher price points remains promising, and the share of RUB 249 and RUB 299 in the sale of [indiscernible] and reached to us better, while the share of price point above RUB 100 grew to 32%, compared to 22% of Q4 2020. And this was made possible by our launching new products and repricing our [indiscernible] assortment to offset the cost pressure as well as containing a rise in the cost of sales, RUB 59 and RUB 79 price points, introducing November '21, gained traction and have supports margins and sales, and they maintain best value proposition anyway for us. And so RUB 50 and RUB 77 price points were completely phased out at the beginning of January, as a result. Even despite the higher share of food, our gross margin in Q4 2021 was higher year-on-year. And so the average ticket was up 7.4%, to RUB 320 in Q4, driven primarily by the price per item amid product repricing and rotation and our relentless focus on offering an [indiscernible] constantly in the assortment at the best prices and improvement of our loyalty program. We saw the gain of another 1.6 million loyal customers in Q4. And now the total number of loyal customers exceeds 17 million, 53% of total retail sales for Q4 2020 were made with loyalty card versus 39% in Q4 2020. Despite such growth of the loyalty customer base, the average ticket for our purchases with the loyalty card remains 1.8x higher than the average ticket for non-loyalty-card purchases. We confirm our guidance of 750 net new store openings in '22. We see no limitations on our store rollout and plan to further expand into existing white space. Besides, we see that the payback period for the [ investors ] remains below 9 months. We have updated our analysis of material [indiscernible] and like-for-like sales at stores focus [indiscernible] and remains generally in line with overall like-for-like sales at growth level. And like-for-like performance remains highly exposed to [ external ] factors, first and foremost, COVID-19. So we do not plan to give specific financial or operational guidance for 2022. And now over to the events after the reporting date, with trading impacted by COVID restrictions. It is hard to predict our national and local regulations [indiscernible]. With the onset of Omicron in Russia, the government postponed the introduction of mandatory QR codes for the whole country. In Kazakhstan, which is 3.5% of total to our numbers, the unrest at the beginning of the year caused some operational disruption [indiscernible] to go back to normal, and we see no reasons to change our plans for continued expansion in Kazakhstan. As for the competitive landscape in our market segment last year, looked challenging for smaller variety of value retailers in Russia. And it's more competitive with one [indiscernible] stores called [indiscernible] went out of business and filed for bankruptcy. Our ESG initiatives are underway, and we will share the first data in the coming weeks. We also plan to publish our first sustainability report in Q2 2022. We are now building a new DC in the Moscow region, with a total space of 68,000 square meters. This new DC will become operational in Q1 '23, and we'll serve them with the central and southern federal districts, boosting our ability to keep store shelves full for years to come. Today, we also announced a buyback program of up to RUB 4 billion, over the next 6 months, as a means of distributing cash, additionally, to our shareholders. Given the strength of our balance sheet, we remain confident in the company's prospects and maintain our unwavering commitment to long-term value creation for our shareholders and efficient capital allocation. Looking back, I can say that '21 was definitely not an easy year. Over the past 12 months, we have all endured unprecedented challenges and disruption due to COVID-19. And as a management team, we have remained focused. And we may believe [indiscernible] what we could, and we believe that our results demonstrate the strength and flexibility of our business model. With the procurement machine we have built, we can offer an amazing assortment at outstanding value with engaging [ customer ] experience that resonates positively with our customers. Our undisputed market leadership with huge white space potential and capital efficiency, we are best positioned to compound that in [indiscernible] growth and margins for years to come. With that, I will come back to Michael.

[Operator]

[Operator Instructions] Our first question comes from Mr. Henrik Herbst from Morgan Stanley.

[Henrik Herbst, Equity Analyst]

Yes. I had a few questions. Firstly, I just wanted to -- wonder, if you could talk a little bit about -- I know there's a lot of stuff going on with the restrictions, but how should we think about how the business can sort of trend, once these restrictions are eased and whether you've seen any change in consumer behavior, sort of, underlying, I mean, maybe it's difficult to say, versus a year ago?You're talking about store rollouts plans still being [indiscernible]. Can you maybe talk a little bit about how we should think about like-for-like growth over the next couple of years? I mean, you've talked about around 10%, previously. Do you still expect that growth could bounce back to those levels, and also, how you think about margins? I guess, you're saying that your Russian stores did 6.5% in Q4, the stores that were unaffected by the restrictions. Is that sort of a run rate we should have in mind? And then the other question is, if you have any early reactions from consumers on your new price plans. I know, you raised [indiscernible] price points a bit, if you can -- have they been well received?

[Dmitry Kirsanov]

Thank you very much. We hope, we were able to write it all down but answering it, if not then now, let us know. As to our development, we do not see anything that can to prevent us from further development and expansion of the store network. As to what is happening in the consumer space and in particular, online, for example, we see that the consumers are not going online from a fixed price. And as to competition with online, with our brick-and-mortar stores, we do not see any significant pressure from online retailers, not in our segment, not in retail. Moreover, I can tell you confidently that we still believe that with them -- despite the fact that we are working in the traditional brick-and-mortar format, we managed to keep the best prices in the trade or whoever you compare us to, whether it is online retailers or brick-and-mortar operators. As to the like-for-like projections, we cannot provide guidance or projections, but we feel are bullish about the development of the company and the sales, in particular. We see positive trends [ bode ] partially, probably. I believe so, we have gone through the inflation [ repeat ]. On the one hand, we busted in 2021. On the other hand, we see that consumers are less negative about the higher prices, not just our customers but the consumers across the Russian market because it was an unprecedented price, right? I cannot think of anything similar to that in the past 5 to 7 years. But now we've gone through this peak, we believe, and in consumer behaviors, we see that the consumer is going back to -- coming to offline brick-and-mortar stores. And sometimes, they are limited by COVID-related restrictions, when the QR codes that are required to enter shopping malls, or when shopping malls or are closed because of the COVID-related requirements. But we still see that our customers love coming to our stores. And for them, it's not just about buying something. They don't come there for essentials to meet, need. No, for them. It is a hangout place. It is an entertainment for them. And over the past 10 years, Fix Price, as you know, is legendary for offering you [indiscernible], every single week as well as the year, and the love of our customers, who come -- many of whom come to us, every single week, it is still there. And I believe [indiscernible] did research that proves that. And if needed, my colleagues will certainly develop on that. And now, over to Anton for the numbers.

[Anton Makhnev]

Yes. So Henrik, let me continue answering your questions. So with regards to Russian stores unaffected by restrictions, it's what you already pointed out, at 6.5% for the fourth quarter. But it's -- if you look at monthly performance, then it was -- in October and December, it was in the high single-digit area, while for November, when there was a period of nonworking week introduced in early November in Russia, it was in a low single-digit area. So nowadays, when we look into January performance, it keeps running in like high single-digit area. It's still -- it's also worth mentioning that even apart from QR codes and similar restrictions, there is an overall sentiment towards COVID, which depresses our traffic. And we've seen a similar situation in the fourth quarter 2020. When, as you recall, in Russia, there were no formal restrictions, but the number of COVID cases will going up. And it was also -- as a result, it was affecting our traffic. And therefore, in Q4 2020, our like-for-like traffic was minus 2%, whilst comparing with the previous quarter, third quarter of 2020, when it was plus 4%, therefore, quarter-on-quarter, it was minus 6%. Therefore, there is a certain element of overall COVID sentiment, which we believe, depresses our traffic and also depresses the performance of the stores in Russia, where there are no additional, incremental formal restrictions. Therefore -- and you also asked about margins. Well, we were always saying that we are balancing between margins and like-for-like, and we are trying to at -- during our operations, we are looking for the best -- the balance between the two components. And therefore, whilst traffic currently remains somewhat under pressure, as I said, because of external factors, which are outside of our control. But we see -- we continue to see positive developments of our margins, on the gross margin level. And we pointed out in the press release, and Dmitry was saying that our Q4 2021 margin, gross margin was higher, both year-on-year and quarter-on-quarter. And we see a continuation of this trend in the 2021 -- I'm sorry, 2022 year-to-date. And you had one last question about, I think, about reaction to the new price point. Here, I will pass the floor back to Dmitry.

[Dmitry Kirsanov]

Henrik, actually, you should take it with a pinch of salt. But to be honest, the response exceeded our expectations. We thought that it might create some negativity in our customers because they were genuinely annoyed by the higher prices everywhere. But what we saw in the feedback in November and December with the customers, were really receptive of the new price points. They accepted our new -- somewhat renewed pricing policy, especially given that we captured RUB 55, RUB 59 and RUB 79. And when the customer saw that everyone else was selling a lot more expensively. They raised the prices somewhat more, not by 10%, but by 10% up. So seeing that price rise in other retailers, the consumers were not unhappy, let me put it this way. So another important thing was that -- as you remember, we did a lot of preparation work. We did our homework. And when we introduced the new price points of RUB 59 and RUB 79 before, we did a lot of work with the assortment in those price categories. So we, basically, fully redesigned the full assortment, most of the [ assortments]. And so for the customers, those new price points, the product of this price point, anyways, looked very different from what they could buy at RUB 55 and RUB 77.

[Henrik Herbst, Equity Analyst]

Got it. I mean, just one last very quick question. Is it fair to assume -- I mean, from what you're saying, it sounds like Q4 2021 could be the trough on like-for-like growth, and trends should improve from here. Yes. Did I understand it correct?

[Dmitry Kirsanov]

You know what, Henrik, I would say that Q4 was the hardest [ term ] for us because this is when we felt the biggest impact from the COVID-19-related restrictions. And going forward, if we do not see any step-up in COVID-related restrictions, I don't think we will ever go back to those -- like last results of Q4.But what we see early this year, is that all the strategies, all the activities around the assortment, the new price points as well as working with our target audience and our participants in their own loyalty program, so far, all of this is paying back in higher numbers, in every single indicator of our activities. So we are bullish about the future. And we are also emphasizing, time and again, unless we see any major radical changes around COVID-related restrictions or any other events in macro and in global politics.

[Operator]

Our next question comes from Ms. Yulia Kazakovtseva from UBS.

[Yulia Kazakovtseva]

Actually, I have two. You said that in [ January], like-for-like was close to 8%, 9%, as far as I get, high single digit. Well, could you provide a comment on the growth of the total revenue from the start of the year? And the share of food is my second question. From the start of this year, do you see that trend continue or higher share of food in your assortment? Or has the situation, somehow, stabilized?

[Dmitry Kirsanov]

I started speaking with a muted mic. The share of food, so far, it remains the same as in Q4 2021. We do not see major changes there, either way. Going up or down, the consumer behaviors are primarily about buying essentials, nondiscretionary goods, including fruits and until probably [indiscernible], I give the numbers that I'm not supposed to say. In January, we also see good like-for-like in nonfood, for example, in the [indiscernible], and they are positive and double digits. Definitely, this is something that inspires us and give us confidence that, going forward, the demand for the nonfood will recover and even grow. We also see another thing, as we said before, in Q4 2021, the share of RUB 299 and RUB 249 price points, came to 12%. And it's against the backdrop of always someone's keeping back our activity, in terms of advertising those higher price points or promoting those goods because of the response of the consumers, overall, to higher prices. But as the inflation stabilized and consumer sentiment shifted more towards the positive area, starting from January and February, we are planning to expand the assortment in those higher price points. We are also going to have more presence in our advertising materials. And we hope that we will see higher share from them in our sales, about 12%, and they should also drive positively our like-for-like in the average ticket, as to the like-for-like of 8% to 9% or high single digit. Over to Anton for the [indiscernible] .

[Anton Makhnev]

Yes. So your question was about the revenue growth in the month-to-date, taking into consideration the high single-digit like-for-like performance for Russian stores unaffected by formal COVID restrictions. So unfortunately, I'm not in a position to give you the precise number. And the reason for that is because to calculate revenue for the group, we need to do some certain eliminations of intra-group operations because they are selling goods from our Russian operating company to our foreign subsidiaries. And that's an exercise, which we typically conduct at the month end, once the month has finished, and we don't have -- and normally, companies don't do it intra-month. But if you want to do a back-of-envelope calculation, you can probably calculate it by yourself, extrapolating the trend from the Q4 2021. It also was taken into account that the group like-for-like for month-to-date, is somewhat lower, taking into consideration the formal COVID restrictions and the impact of Kazakhstan and Belarussia.

[Operator]

Our next question comes from Mr. Alex Gnusarev from VTB Capital Investment Management. We will try again shortly. [Operator Instructions] We have a question from Mr. Aaron Armstrong from Ashmore Group.

[Aaron Armstrong]

First question is, how many stores currently have restricted access for customers such as acquiring a QR code to access the store? And secondly, you mentioned some like-for-like numbers and how the stores were go restricted versus unrestricted access at slightly different like-for-likes. Could you give any more detail on those numbers, please? Particularly, were they in regards to foot traffic or like-for-likes on sales numbers?

[Anton Makhnev]

Yes. Thank you for your question. So at the moment, we have about 650 stores, as of end of last week, 661 stores, to be precise, as of the end of last week and the certain QR code-type restrictions. And the impact is both on like-for-like sales and like-for-like traffic. And in those stores, which are under restrictions, we typically see a negative like-for-like, which obviously puts pressure on the overall like-for-like performance of the group.

[Aaron Armstrong]

Sorry, I think you gave these numbers earlier, but I didn't catch them. Could you give the Q4 like-for-like impact of the restrictions versus the unrestricted stores, please?

[Anton Makhnev]

Q4, so one second. Yes. It's -- hold on. The impact of Russian stores, unaffected by restrictions in Q4, was -- the sales like-for-like of Russian stores unaffected by restrictions, was 6.5% in Q4. And overall, it was 5.3. So it's for Russian stores, 5.3 for Russian stores and 3.2 for, overall, the whole group. Here, I'm talking about Q4 2021. It's also worth mentioning that in Q4, restrictions started just in the beginning of October -- November, I'm sorry. Therefore, the whole month of October, we kind of have not been doing any calculations for affected or unaffected stores. And therefore, the impact was 1.2% on the -- for the Russian stores.

[Aaron Armstrong]

And in terms of the number of stores that are affected by restrictions, do you think Q1 will be the same as Q4 or higher or lower?

[Anton Makhnev]

Look, the -- I wish I had a possibility to tell you what will be happening in a month's time with COVID restrictions, but unfortunately, no one has a crystal ball. And we -- as of the end of -- in December, there are about 500 stores affected at the end of December, affected by different QR code restrictions. Right now, it's 661. So at least in the month-to-date, the situation -- the number of stores under restrictions increased a little bit. It's still not like a substantial part of our overall store base. We have slightly less than 5,000 stores altogether, roughly 4,500 as company-operated stores. and call it, 4,000 in Russia. And 660 stores is about 13%. So it's -- month-to-date, it has been increasing but not that significantly.

[Aaron Armstrong]

And one more question, if that's okay, please. So the Russian like-for-like numbers are higher than the like-for-like numbers for the group as a whole, for Q4. So the international business is dragging slightly. In Q1, would you expect that to normalize? Or do you think international could still drag on like-for-likes for the group in Q1?

[Anton Makhnev]

The performance -- the negative performance of international stores, it started to [indiscernible] around summer last year, when quite significant restrictions were being introduced in Kazakhstan. It started in July. And before that, the performance, the like-for-like performance of Kazakhstan stores was rather solid. Therefore, we would expect that the impact would be decreasing during the course of Q2. And if we should -- it should mostly disappear, starting from around Q3 -- in Q3. Q3 2022, I mean.

[Aaron Armstrong]

And so in Q1, perhaps a similar trend to what we saw in Q4?

[Anton Makhnev]

That's a fair assumption.

[Dmitry Kirsanov]

If I may add something to what Anton said. When we speak about restrictions, what's important to understand is how the restrictions impact us. The stores that Anton spoke about, are the stores in the shopping malls, where the shopping mall [indiscernible] traffic . That's on the one hand, and the number of such shopping malls or rather our stores in the shopping malls, increased somewhat. But on the other hand, the number of those [ estimated ] is rising, and we expect that the QR code holders were people that [indiscernible] through their vaccination boosting or antibodies, will increase. And hopefully, this pressure around the restrictions can somewhat go down in months to come.

[Operator]

We will, once again, open Alexander Gnusarev's line from VTB Capital Investment Management, in case there is a question there. Okay. It looks like there is no question indeed. And it also looks like we have no further questions at this point. I will pass the line to Elena Mironova for the concluding remarks.

[Elena Mironova]

Thanks, Michael, and thank you all for joining us today. We will be reporting our full year 2021 IFRS financial results on February 28. So look forward to speaking to you all then. In the meantime, please feel free to reach out to Investor Relations team through the contact on our website with any follow-up questions. Thank you, and have a nice day.

[Operator]

Thank you very much. This concludes our conference call. We will now be closing all the lines. Thank you.