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Detsky Mir Group Adjusted EBITDA Increased by 24.2% YoY in Q3 2020

Moscow, Russia, 2 November 2020 – Detsky Mir Group (“Detsky Mir”, the “Group” or the “Company”, MOEX: DSKY), Russia’s largest specialized children’s goods retailer, announces its unaudited financial results in accordance with International Financial Reporting Standards (IFRS) for the third quarter and the nine months ended 30 September 2020.

Q3 2020 Financial Highlights[1]

Group unaudited consolidated revenue increased by 13.5% year-on-year to RUB 38.5 bn, compared to RUB 34 bn in Q3 2019.
Online revenue[2] increased 2.4x year-on-year to RUB 8.0 bn.
- The share of online sales in total revenue of Detsky Mir in Russia increased 2.1x year-on-year to 21.4%.
- The share of in-store pick-up service amounted to 83%.
Revenue in Kazakhstan decreased by 26.7% year-on-year to RUB 780 m.
Like-for-like sales[3] at Detsky Mir stores in Russia and Kazakhstan grew by 3.9%. The number of tickets decreased by 2.1%, while the average ticket grew 6.0%.
Like-for-like sales at Detsky Mir stores in Russia grew by 4.4%. The number of tickets decreased by 1.5%, while the average ticket grew by 5.9%.
Detsky Mir opened 10 new branded stores[4] in Q3 2020, as well as two new Zoozavr stores. The Group had 810 stores[5] as of 30 September 2020:
Total selling space increased by 8.1% year-on-year to approximately 858,000 sq. m.
Gross profit increased by 13.8% year-on-year to RUB 12.2 bn. The gross margin improved by 0.1 p.p. year-on-year to 31.6%.
SG&A as a percentage of revenue[6] decreased by 1.2 p.p. year-on-year, driven by increased operational efficiency.
Adjusted EBITDA[7] increased by 24.2% year-on-year to RUB 5.2 bn; the adjusted EBITDA margin improved by 1.2 p.p. year-on-year to 13.5%. EBITDA[8] totaled RUB 5.2bn (+26.7% year-on-year).
Adjusted net profit[9] amounted to RUB 2.4 bn (-3.9% year-on-year). Net profit totaled RUB 2.3 bn (-1.5% year-on-year).
The net debt[10]/adjusted EBITDA LTM ratio improved to 1.1x as of 30 September 2020.

9M 2020 Financial Highlights

Group unaudited consolidated revenue increased by 9.5% year-on-year to RUB 98.4 bn, compared to RUB 89.8 bn in 9M 2019.
Online revenue increased 2.5x year-on-year to RUB 22.1 bn.
- The share of online sales in total net revenue of Detsky Mir in Russia increased 2.3x year-on-year to 23.3%.
- The share of in-store pick-up service amounted to 81%.
Revenue in Kazakhstan decreased by 7.2% year-on-year to RUB 2.4 bn.
Like-for-like sales at Detsky Mir stores in Russia and Kazakhstan grew 3.0%. The number of tickets decreased 2.7%, while the average ticket grew 5.8%.
Like-for-like sales at Detsky Mir stores in Russia grew 3.2%. The number of tickets decreased 2.5%, while the average ticket grew 5.8%.
Detsky Mir opened 30 new branded stores[11] in 9M 2020, as well as one new Detmir Pickup store and three new Zoozavr stores.
Gross profit increased by 6.5% year-on-year to RUB 30.1 bn, with a gross margin of 30.6%.
SG&A as a percentage of revenue decreased by 1.5 p.p. year-on-year, driven by increased operational efficiency.
Adjusted EBITDA increased by 15.8% year-on-year to RUB 11.0 bn; the adjusted EBITDA margin improved by 0.6 p.p. to 11.2%. EBITDA totaled RUB 10.6 bn (+16.6% year-on-year).
Adjusted net profit amounted to RUB 3.8 bn (-23.2% year-on-year). Net profit totaled RUB 3.4 bn (-24.7% year-on-year).

Q3 2020 Key Events

In September 2020, the Company started to accept payments via the Faster Payments System (FPS) across its retail stores. Detsky Mir customers are now able to pay for their purchases using a QR code via the FPS across all of Detsky Mir retail stores in Russia.
In September 2020, the Extraordinary General Meeting of Shareholders approved a final dividend payment of the remaining undistributed profit for Q4 2019 totaling RUB 1.8 bn, or RUB 2.5 per ordinary share.
In September 2020, PJSFC Sistema (the majority shareholder of the Company) and the Russia-China Investment Fund (RCIF) successfully priced the offering of Detsky Mir shares. The offering size was 185 million existing shares in Detsky Mir, representing 25% of Detsky Mir’s issued share capital. Through this offering, Detsky Mir became the first Russian company with a 100% free float. Sistema and RCIF ceased to hold any ownership interest in the Company.
In July 2020, the Company launched its first regional distribution center in PNK Park Rostov-on-Don, a Class A+ industrial park developed by PNK Group. Detsky Mir leased 6,000 sq. m of warehousing space for seven years with the option to expand. The project’s CAPEX totals around RUB 100 m.
Despite the repeated closures of most of Detsky Mir stores in Kazakhstan due to the spread of the coronavirus (COVID-19), the Company promptly launched pickup points for online orders at its retail outlets, which helped maintain its revenue generation and deliver positive financial results.
Detsky Mir updated its mid-term growth strategy. The Company primarily plans to strengthen its leadership in the children’s goods market while maintaining double-digit growth in total sales via the further rollout of its omnichannel business model. At the same time, the Company sees a solid upside in family digital services, as well as in the pet supplies market. A recording of the online conference where the updated strategy was discussed is available here: Medium-term Strategy.
The Detsky Mir Charitable Foundation donated humanitarian aid totaling about RUB 24 m to boarding schools and medical institutions of the eight Russian regions. In July, the Zoozavr retail chain successfully held the Comfort in a Shelter campaign aimed at helping homeless animals: one whole ton of feed were collected in total. The Company held the Uchastvuyte campaign to collect the goods for disadvantaged children: more than 1.5 million participants donated more than 1.8 million items.
The Company held a campaign for the collection of post-consumer household appliances at the head office – about 70 kg of equipment, as well as 1.5 tons of waste paper were collected and sent for recycling.

Events after the Reporting Period

As of 2 November 2020, all Detsky Mir stores[12] remained open to customers.
In October 2020, the Company signed a preliminary agreement to open a distribution center in Kazan based on Russian Post’s fulfillment center at Kazan International Airport with an area of 8,000 square meters. The distribution center is expected to be launched in Q2 2021.
In October 2020, Detsky Mir announced the full-scale launch of its own marketplace. A personal account functionality has been added to the online platform, offering all necessary features – assortment creation and management, analytical reporting, price management, etc. The Company plans to further expand the marketplace functionality by adding a promotion management system, financial reporting and operational analytics. In the medium term, the assortment is expected to grow to 2.4 million SKUs. The Company has already established long-term partnerships with a number of local and foreign brands
In October 2020, the Company launched a super-express delivery service from Detsky Mir stores. Customers in 250 cities across Russia can now receive their order within two hours of placing it on the website. Moreover, a good number of deliveries in Moscow are fulfilled by own courier service.
In October 2020, the Company continued to enhance the UX of the detmir.ru online store by launching a new personal account, optimizing the shopping cart and by adding Apple Pay and Google Pay to the mobile application. Preliminary results of A/B testing show that revenue per user increased by 15%.
The Detsky Mir Charitable Foundation donated humanitarian aid totaling about RUB 1 m to children’s social institutions in Udmurtia. The fund also provided support to large families in the three Russian regions with aid totaling over RUB 5 m.
Detsky Mir is running a campaign to collect and recycle clothes and shoes across the retail chain and at its head office.
Detsky Mir is observing all necessary epidemiological safety measures in retail stores: the health of all personnel is monitored, personal protective equipment for employees (masks, gloves, hand sanitizers) have been purchased, special markings have been applied to help our customers maintain social distancing, disinfection efforts have been stepped up across all our sales areas and buildings, and hand sanitizers are available to customers at store entrances. The Company constantly monitors the decrees of regional leaders and fulfills their instructions for transferring employees to remote work. Employees who work at the head office in Moscow are regularly tested for COVID by PCR.

Maria Davydova, PJSC Detsky Mir Chief Executive Officer, said:

“Q3 results once again proved Detsky Mir’s high resilience in the face of the crisis. We managed to quickly return to the trajectory of double-digit business growth and strengthen our leadership in the children’s goods segment. In October, we also expect a high total sales growth over 16%, as the online channel grew by 2.4 times year-on-year.

“We continuously focus on execution excellence by optimizing costs and improving the efficiency of business processes, thanks to which we achieved a solid operating income growth. As a result, adjusted EBITDA margin increased by 1.2 p.p. year-on-year to 13.5%.

“In addition, we continue to generate strong cash flow thanks to low capital requirements and the efficient optimization of debt capital. It is critical to highlight that the accumulated FX losses of RUB 2.6 bn, which significantly diminished net profit under IFRS, are mainly non-cash in nature due to the revaluation of foreign currency payables from suppliers. Cash FX losses amounted therefore to RUB 504 m for 9М 2020.

“Given our strong financial position, the Company’s management team will recommend the BoD and shareholders to pay out our entire net income as an interim dividend for 9M 2020. Thus, the total amount of paid dividends in 2020 would increase by 11% year-on-year to RUB 7.8 bn, corresponding to around RUB 10.6 per ordinary share.

“Given that Detsky Mir has become the first Russian company with a free float of 100%, process has been initiated to refresh the Board of Directors to achieve majority of independent directors. The BoD launched the formal search to nominate four new independent directors, including a new Chairman. The Company will place a heavy focus on candidates with a background in e-commerce and digital transformation. We fully expect that new candidates will be presented to our shareholders before year-end 2020.

“Looking ahead, we will continue to consolidate the children’s goods retail market in Russia and the CIS thanks to our unique and diversified product range, affordable prices and a well-developed online sales channel. Our team will do our best to ensure that the shareholders get a high return on their investment in Detsky Mir.”

View the full press release

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Conference Call Information

Detsky Mir’s management will host a conference call today at 17:00 (Moscow time) / 14:00 (London time) / 9:00 (New York time) to discuss the Company’s Q3 2020 unaudited IFRS Financial Results.

The dial-in numbers for the conference call are:

Russia

+7 495 283 98 58

+44 203 984 98 44

USA

+1 718 866 46 14

PIN

288 543#

Online presentation

Web dial-in and Presentation

For additional information:

Julia Polikarpova

Head of Public Relations

Tel.: +7 495 781 08 08, ext. 2041

upolikarpova@detmir.ru

Sergey Levitskiy

Head of Investor Relations

Tel.:+ 7 495 781 08 08, ext. 2315

slevitskiy@detmir.ru

The Detsky Mir Group of Companies (MOEX: DSKY) is a multi-format retailer and the leader in the children’s goods sector in Russia. The Group comprises the Detsky Mir and the Detmir Pickup retail chains, as well as the Zoozavr pet supplies retail chain. The Company operates a retail chain of 792 Detsky Mir stores located in 306 cities in Russia, Kazakhstan and Belarus, five Detmir Pickup stores, as well as 13 Zoozavr stores as of 30 September 2020. The total selling space was approximately 858,000 square meters.

Detsky Mir Group’s shareholder structure as of the date of this announcement is as follows: Detsky Mir Group’s shareholder structure as of the date of this announcement is as follows: Free float[13] – 100%.

Websites: detmir.ru, elc-russia.ru, ir.detmir.ru

Disclaimer:

Some of the information in these materials may contain projections or other forward-looking statements regarding future events or the future financial performance of Detsky Mir. You can identify forward looking statements by terms such as “expect”, “believe”, “anticipate”, “estimate”, “intend”, “will”, “could,” “may” or “might” the negative of such terms or other similar expressions. Detsky Mir wishes to caution you that these statements are only predictions and that actual events or results may differ materially. Detsky Mir does not intend to update these statements to reflect events and circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events. Many factors could cause the actual results to differ materially from those contained in projections or forward-looking statements of Detsky Mir, including, among others, general economic conditions, the competitive environment, risks associated with operating in the Russian Federation, rapid technological and market change in the industries Detsky Mir operates in, impact of COVID-19 pandemic on macroeconomic situation on the markets of presence and financial results of Detsky Mir and its subsidiaries, as well as many other risks specifically related to Detsky Mir and its operations.

([1]) Hereinafter the Company’s consolidated financial measures for 2019–2020 and related interim periods are based on proforma financial information prepared as if IFRS 16 ‘Leases’ had not been adopted, and thus do not represent IFRS measures.

([2]) This channel includes online orders at www.detmir.ru, including in-store pick-up.

([3]) Hereinafter like-for-like RUB sales growth, like-for-like number of tickets growth and like-for-like average ticket growth are based on stores in operation for at least 12 full calendar months. A store is included in the calculation of the monthly like-for-like if the difference between the worked periods in comparable months does not exceed three business days.

([4]) In Q3 2020, in order to improve profitability on the back of the accelerated opening of the compact-format Detmir Pickup stores, the Group decided to close ELC and ABC branded stores, the share of which in the total revenue of the Group comprised less than 0.5% in 1H 2020.

([5]) Including five Detmir Pickup stores as well as thirteen Zoozavr stores.

([6]) Hereinafter, selling, general and administrative expenses is calculated as selling, general and administrative expenses adjusted for depreciation and amortization expenses, additional share-based compensation expense and cash bonuses under the LTI program.

([7]) Hereinafter, adjusted EBITDA is calculated as profit for the period before income tax expense, foreign exchange (loss)/gain, gain on acquisition of controlling interest in associate, finance expense, finance income, depreciation and amortization, adjusted for share-based compensation expense and cash bonuses under the LTI program. See Attachment A.

([8]) Hereinafter, see Attachment A for definitions and reconciliation of EBITDA to IFRS financial measures.

([9]) Hereinafter, adjusted net profit is calculated as profit for the period adjusted for the share-based compensation expense and cash bonuses under the LTI program. See Attachment A.

([10]) Hereinafter, net debt is calculated as total borrowings (defined as long term loans and borrowings and short-term loans and borrowings and current portion of long-term loans and borrowings) less cash and cash equivalents. Lease liabilities are not included in the calculation of net debt. Adj. EBITDA LTM is calculated as adj. EBITDA for the last 12-months period.

([11]) In 9M 2020, Detsky Mir closed four stores.

([12]) The Company temporarily closed one store, in which a fire occurred on November 1, 2020. The store is located in the Zhemchuzhina Sibiri shopping center (Tobolsk city).

([13]) Excluding quasi-treasury shares and shares held by management and directors (0.8% of total shares).