Financial performance review

RUB million (without VAT) 2011 2010 2009
Net revenue 111,937 86,565 72,507
Gross profit 29,267 22,361 18,360
As % of net revenue 26.2% 25.8% 25.3%
Operating expenses 24,666 19,127 16,243
As % of net revenue 22.0% 22.0% 22.4%
Operating profit (EBIT) 4,601 3,234 2,117
As % of net revenue 4.1% 3.7% 2.9%
EBITDA 6,239 4,523 3,244
As % of net revenue 5.6% 5.2% 4.5%
Net profit 3,374 2,221 783
As % of net revenue 3.0% 2.6% 1.07%


Overall our net revenue increased by 29.3%. This was due to both new stores openings and the increase in the average transaction amount accompanied with the growth of our Like-for-Like (LFL) traffic.

We believe these results confirm our strategy to deliver overall sales growth and store expansion despite the slowdown in the industry due to the worldwide recession. New store openings included 44 stores opened in 2010 that worked for the full year in 2011, and the 44 new stores we opened in 2011.

Gross profit

Gross profit increased from 22.3 billion rubles in 2010 to 29.3 billion rubles in 2011. As a percentage of revenue gross margin grew by 0.3% from 25.8% in 2010 to 26.2% in 2011.

This percentage growth was due to managing pro-actively the product mix. As a result of our Supply Chain projects we are getting better understanding of the demand cycles and are able to improve promotions and stock replenishment. All those allowed us to limit both out-of-stock and obsolescence issues, and we continued to reduce shrinkages and provision for obsolete stock.

Selling, general and administrative expenses

Our selling, general and administrative expenses (SG&A) increased 31.3% to 26.1 billion rubles in 2011 from 19.9 billion rubles in 2010. As a percentage of revenue the expenses increased by 0.4% from 23.0% in 2010 to 23.3% in 2011.

Overall SG&A increase was mainly from Payroll and Transportation expenses having been offset to some extent by Lease expenses and Depreciation.

Selling, general and administrative expenses in 2010-2011, RUB million and as % of net revenue

  Year ended
  31 December 2011 31 December 2010
* Other includes: security services, service centre, repairs and maintenance, bank charges, packaging and raw materials, consulting services, travel costs among others.
Payroll and related taxes 7,112 6.4% 5,356 6.2%
Lease expense 5,327 4.8% 4,139 4.8%
Advertising and promotional expenses 3,237 2.9% 2,729 3.2%
Transportation 2,380 2.1% 1,371 1.6%
Warehouse services 1,508 1.3% 1,158 1.3%
Utilities 1,070 1.0% 832 1.0%
Depreciation & amortization 1,638 1.5% 1,289 1.5%
Other SG&A* 3,841 3.4% 3,019 3.5%
Total 26,113 23.3% 19,893 23.0%

The increase in Payroll and related taxes amounted 0.16% of revenues, but that included a 0.4% increase in the payroll taxes as the rates went from 26% to 34% effective from January 1st, 2011. The efficiencies were achieved in controlling HQ costs. The wage inflation for HQ was approximately 8% while the stores salaries were based upon the sales increases. We also managed to rely less on temporary personnel during high season in 2011 as compared to 2010 by managing the load of existing sales staff.

Transportation expenses increased by 0.5% of revenue from 1.6% in 2010 to 2.1% in 2011. This increase was due to the regionalization as the average kilometers per cubic meter sold increased while sales in the regions were high due to the opening of most of stores in the South, Urals and Siberia. Price deflation in TV’s and Digital products also impacted our transportation costs. Even though Digital fell as a percentage of our revenue we still had significant volume increases.
Internet sales growth added to the cost of the transport as 100% of the products are delivered to homes. There was an offset for that as payroll and lease expenses were not as high in the internet channel as in the bricks & mortars business.

Warehouse expenses went up in line with the revenue growth. Cost inflation and additional space needed due to enlargement of our supply chain negated efficiencies.

Lease expenses were down by 0.02% of revenue. This was due to 10% L4L sales growth made the fixed rents lower as a percentage. The relative economy from currency denominated leases incurred in the first half of 2011, when the ruble appreciated, was reversed in the second half of 2011 when the national currency weakened.

Utilities expenses followed the revenue growth as a result of both increase in usage and tariffs in the regions.

Advertising and promotional expenses decreased by 0.3% to 2.9% of total revenue in 2011. In previous years we were spending on brand strengthening, brand awareness and were developing our loyalty programs that resulted in subsequent increase in loyalty revenue. In 2011 we were able to use our focused study of the market for changing marketing activities towards to satisfying customer need and requirements what gave us relative efficiency of this type of expenses.

Other operating income and expenses

Other operating income (net of expenses) increased almost twice from 766 million rubles in 2010 to 1,447 million rubles in 2011. The other operating income, which is Consumer Credit commissions, Delivery income and Advertising income for suppliers’ presentations in our stores grew by 71%. We do not recover 100% of the delivery cost but as sales increase, particularly in the internet, we see significant increases in the delivery income.

Operating profit

Operating profit increased by 42% from 3.2 billion rubles in 2010 to 4.6 billion rubles in 2011.

Net finance income

The Group had a net finance gain in both 2011 and 2010, 37 million rubles and 28 million rubles respectively. During these years did not have loans denominated in foreign currencies and used only short-term borrowings for new stores openings that allowed us to end the years in a net interest earned position. Strong cash management is now standard in M.Video.

Income tax expense

The effective income tax rate for 2011 was 27% compared to 32% in 2010. The reduction in effective tax rate was achieved through control of non-deductible expenses while EBIT (earnings before income tax) increased by 42% in 2011. This was primarily due to improvement in inventory control in the Group’s Supply Chain and trading processes which allow us to manage losses from inventory shortages.

Net profit for the year

Net profit for the year increased by 52% from 2.2 billion rubles in 2010 to 3.4 billion rubles in 2011.

Assets and liabilities

Like in the previous year, in 2011 had a very clean balance sheet with Fixed Assets, Inventories, Cash and Trade Accounts Payables being the only large items. Managing the level of Working Capital and stores openings continued to be the main focuses of the Company’s managing the business.

Dealing with the vendors we continued following “Payables-to-Inventories Parity” principle we introduced in 2009. This gives us financial strength by having sufficient cash balances and net income from financing instruments.

Cash flows

Cash flow from operations

The Company increased the amount of cash generated by operations by 5.7 billion rubles from 4.5 billion rubles in 2010 to 10.2 billion rubles in 2011.

The operating cash flows before movement in working capital increased by 19%, or by 1 billion rubles from 5.4 billion rubles in 2010 to 6.4 billion rubles in 2011.

The effect of movements in working capital amounted to 6.1 billion rubles. It was due in part to the incredible sales in December 2011 as inventories were converted to cash.

Cash flow from investing activities

In 2011 the Group invested 3.5 billion rubles in our CAPEX programs that was almost one billion rubles more as compared to 2010. As in previous year the investment in opening new stores and our Supply Chain systems dominated the investments.

Cash flow from financing activities

In 2011 the net cash used in financing activities represented the dividends paid in the amount of 691 million rubles. It was 310 million rubles less than in 2010, when in addition to 413 million rubles paid as dividends the company 2.7 million common shares were repurchased from the market for the total amount of 588 million rubles. The buyback was done to fund the LTIP (Long term incentive program).

Net cash

The Group increased its net cash balance by 6 billion rubles from 7.2 billion rubles in 2010 to 13.2 billion rubles in 2011.