Russia’s leading children's store Detsky Mir has published a robust 1Q19 trading update with sales accelerating 16.1% y/y, driven by robust like-for-like (LFL) growth in both Russia and Kazakhstan, the company said on April 15.

Real incomes in Russia may be stagnating but people are still spending on their kids and most of the gains came from increasing customer numbers, up by 7.25 in the quarter, VTB Capital (VTBC) said in a note.

“The company’s core, Russian market demonstrated 6.6% LFL growth, boosted by the national holidays in Russia (23 February and 8 March) and the maturity of stores opened in 2017-18," Maria Kolbina, a retail analyst with VBTC, said. “These results provide upside risks to our more conservative forecast for 2019F of 11% y/y growth and could potentially serve as a foothold for better growth prospects.”

The company continues to expand on the back of its iconic brand, well known to everyone in the former Soviet Union. The company opened five outlets in the first quarter, bringing its total store base to 748 locations, and 769,000 sqm of selling space.

Detsky Mir also entered the Belarusian market this year as an emerging middle class makes it more appealing to retailers, as bne IntelliNews has reported with “The long march of Belarusian retail” in September 2018. Detsky Mir opened its first three stores in the first quarter and confirmed plans to open at least 80 more Detsky Mir stores in 2019, including 10 more in Belarus. As bne IntelliNews has already reported, Detsky Mir plans to open 30-50 new stores in Belarus in the next three to four years.

The real disposable money income of Belarusians rose by 8.1% y/y in January-October 2018, the National Statistics Committee of Belarus reported on December 18, and is expected to continue rising. The domestic supermarket chain Eurotorg (aka Euroopt) twice tried to IPO in London last year and is expected to try again this year.

VTBC has the stock market up as a Buy with a 47% upside to the 12-month target price of RUB120.

Robust results

Revenues increased 16.1% y/y to RUB27.9bn ($434mn) in the first quarter — the highest level for five quarters.

According to the company, this growth can be attributed to:

1. the national holidays (23 February and 8 March);
2. the start of procurement from Spin Master (one of the largest toy manufacturers in the world), which boosted sales in the toys category (33% of total sales in 1Q19);
3. the sale of the winter collection in the clothing and footwear category (24% of total sales in 1Q19); and
4. the maturity of stores opened in 2017-18, which reached full capacity utilisation. LFL growth was also impressive, reaching 6.6% in Russia and 7.2% in both Russia and Kazakhstan, mainly due to the growing number of customers.

The store base reached 748 locations (five net openings in the quarter), with the number of openings corresponding to the previous year, as the first quarter is usually slow in terms of store roll-out, with the majority of stores being opened at the end of the year.

The new stores in Belarus have a sales area of 3,000 sqm and the company plans the launch of an online store in Kazakhstan in 2019, along with an in-store pick-up service.

A classic Russian retail investment, Detsky Mir’s shares have long been a darling of investors and are up 5% YTD, although that is well behind the RTS gain of 17% YTD and the financial sector stocks that are up over 21% as of April 15, making it the best performing sector. All-in-all Russia’s stock market is now the second best performing in the world after China’s. 

Detsky Mir’s stocks are currently trading 2018F EV/Ebitda of 6.4x,, which analysts at VTBC says are appealing.

“The company delivers one of the fastest growth rates in our coverage universe and its dividend profile is the most impressive, with our dividend yield forecast at 10.6%,” Kolbina adds.

Detsky Mir 1Q19 trading update
	1Q17	2Q17	3Q17	4Q17	1Q18	2Q18	3Q18	4Q18	1Q19
Revenues, RUB mn	21.1	21	24.6	30.3	24	24.1	28.4	34.3	27.9
Chng, YoY	28.40%	21.40%	19.60%	19.80%	14.20%	14.60%	15.70%	13.20%	16.10%
On-line revenue, RUB mn	0.9	0.8	0.9	2	1.5	1.6	2.1	3.6	2.6
Chng, YoY	n/a	n/a	59%	80%	65%	93%	133%	80%	74%
as % of total Revenue	4.30%	3.90%	3.70%	6.60%	6.20%	6.60%	7.40%	10.50%	9.30%
12m trailing LFL growth, Russia	11.20%	4.80%	6.10%	7.20%	5.10%	6.10%	3.70%	3.00%	6.60%
Average ticket	-1.90%	-5.40%	-4.00%	-6.00%	-3.40%	-2.60%	-1.50%	-2.30%	-0.90%
# of tickets	13.30%	10.70%	10.50%	14.10%	8.80%	8.90%	5.20%	5.40%	7.50%
Number of stores	521	529	557	622	625	650	666	743	748
Net store openings	-4	8	28	65	3	25	16	77	5
Selling space, 000 sqm	596	606	631	688	686	704	714	768	769
Chng, YoY	20.40%	18.60%	18.40%	15.40%	15.10%	16.20%	13.20%	11.60%	12.10%
Source: Company data, VTB Capital Research