August 14, 2014 / 7:05 AM / in 3 years

UPDATE 2-Russian grocer X5 sees inflationary risk after import ban

(Adds comments on import bans, details, analyst comment)

MOSCOW, Aug 14 (Reuters) - Russian supermarket operator X5 Retail Group NV said on Thursday it expected a recent ban on certain Western food imports to cause a slight increase in prices this year but pledged to rein in inflation on its shelves.

In retaliation against Western sanctions over the Ukraine crisis, Russia last week banned all meat, fish, dairy, fruit and vegetable imports from the United States, the European Union’s 28 members states, Norway, Canada, and Australia for one year.

The ban fuelled talk of a shortfall and consequent spike in inflation. The government has warned suppliers against speculative price increases and ordered retail food prices be monitored, which analysts said could add pressure to retailers profitability already at risk because of stagnating economy.

“With the ban in place, there is a possibility that we could see a slight increase (in inflation) this year and we will work with our suppliers to minimise any potential impact on prices,” CEO Stephan DuCharme said on a conference call.

He could not immediately estimate an impact on sales or margins. The banned products represent about 8 percent of the company’s assortment with most affected categories being fish, fruit and vegetables, and cheese.

“Our commercial team is in place, everyone is back from holidays, we are talking to suppliers across the categories, we are talking to traders, we are looking at alternative markets,” said DuCharme.

Analysts also struggled to estimate the precise impact, saying only it would not be easy for retailers to fully pass any incremental costs onto consumers.

“The need to adjust the supply chain will lead to higher sourcing costs, including purchasing and logistics,” said Mikhail Terentiev, analyst at brokerage Otkritie.

The company, just under 50 percent owned by Russian billionaire Mikhail Fridman’s Alfa-Group, reported earlier on Thursday a 71 percent jump in second-quarter net income to around 4 billion roubles ($111 million) due mainly to a one-off reduction in tax expenses.

The company eliminated a 749 million rouble tax provision in the first half of the year and its second-quarter income tax expenses halved to 376 million roubles, boosting net earnings.

Its earnings before interest, taxation, depreciation and amortisation (EBITDA) increased 24 percent to 11.4 billion roubles with an EBITDA margin at 7.3 percent compared with 6.9 percent a year ago, X5 said in a statement.

The result was helped by gross margin improvements thanks to better purchasing terms and lower logistics costs. It had earlier forecast full-year 2014 EBITDA margin in the 6.8-7.2 percent range, after 7.2 percent in 2013.

X5 also said its operating cashflow grew eight-fold in the second quarter to around 13 billion roubles due to changes in working capital and lower income taxes paid.

X5, Russia’s second-biggest retailer after Magnit, has been struggling to turn around its business after a strategy shift several years ago and a series of management changes.

DuCharme said on Thursday the company would continue to execute its turnaround programme irrespective of the import ban and economic slowdown.

1 US dollar = 36.0290 Russian rouble Reporting by Maria Kiselyova, editing by David Evans

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