UPDATE 2-Russia's Magnit cuts prices after efficiency gains

Mon Oct 28, 2013 11:01am EDT

* Price reductions to draw more shoppers in seasonally strong Q4

* Reinvesting gains from better purchasing terms

* Core profit margin at new record high of 11.6 pct in Q3

* Inches up 2014 sales growth guidance, trims 2013 outlook

MOSCOW, Oct 28 (Reuters) - Russia's biggest food retailer Magnit said on Monday it had started to cut prices this month in a bid to win shoppers, while maintaining its forecast for a core profit margin no worse than last year's.

Magnit has been rapidly expanding its chain of low-price stores in Russia's regions while keeping a tight rein on costs, putting it ahead of competitors. This year it overtook struggling X5 as Russia's top grocery chain by revenue.

The company has benefited from its growing scale, allowing it to improve supplier terms, while its own logistics system has allowed it to save on delivery to its more than 7,600 stores.

On Monday Magnit said it had started to reinvest some of those gains into price cuts to protect its market share but it continues to expect broadly the same core profitability level next year as in 2013.

"We continue to improve the purchasing terms and conditions from both local and federal suppliers," Chief Financial Officer Khachatur Pombukhchan said on a conference call, while adding that "growing competition will take a part of our margins (through) price reductions."

"We estimate next year the same operating efficiency results as we have this year. The difference could be about one percent," he said following release of third-quarter results.

Magnit earlier guided for a 2013 margin on the basis of earnings before interest, tax, depreciation and amortisation (EBITDA) in line with last year's 10.6 percent.

In the third quarter it outperformed with 11.6 percent against 10.9 percent a year ago and analysts' forecast of 11.1 percent. In absolute numbers, EBITDA grew 34.5 percent to $512 million, above a forecast of $488 million.

Its listed Russian competitors - X5, Dixy , O'Key - have a margin below 8 percent.

The country's food retail chains have expanded rapidly over the past few years and are now facing increased competition for customers who often have a choice between three or four supermarkets in a single street.

Although retailers' sales growth still outpaces their European peers, Russia's economic slowdown has tested the financial health of consumers and, coupled with an inflation slowdown, raised doubts about whether ambitious sales and profit targets can be met.

"When we make a forecast for the year we assume an inflation rate on an average level, but this year it is below our expectations," said Pombukhchan.

The company trimmed its full-year rouble revenue growth outlook to 28-29 percent from the previously expected 29-30 percent due to the slowdown in the rate of inflation.

But for next year, Magnit now expects 25-27 percent growth compared with the previous guidance of 25 percent, Pombukhchan said, while repeating guidance on 1,000 new stores.

X5 earlier cut its sales growth forecast to 8 percent from 11 percent, while O'Key downgraded its expectations to 19-22 percent from 21-25 percent.

In the third quarter Magnit's revenue was up 29 percent in roubles or 26 percent in dollar terms to $4.4 billion, and it earned $283 million compared with a net profit a year ago of $199 million and a Reuters poll forecast of $259 million.

Magnit's Moscow-listed shares have risen around 70 percent in the year to date, while the wider market has eked out gains of 2 percent. By 1436 GMT, the stock was trading 2.4 percent higher, outperforming the broad market index.