ACRA assigns A(RU) to ReStore Retail Group Limited (holding company of Inventive Retail Group), outlook Stable

The credit rating of ReStore Retail Group Limited (hereinafter, Inventive Retail Group, or the Company) is based on the strong assessment of the business profile, which is largely due to the strength of the brands in the Company’s portfolio and its policy for promoting them, as well as the high level of geographical diversification of business (the retail stores of Inventive Retail Group operate in 37 Russian cities). High profitability, which is the result of the Company’s presence in the premium retail segment, and a strong cash flow have a positive impact on the financial profile assessment. At the same time, the rating is limited by the Company’s medium size of business and average leverage (although the Company has a low level of borrowed funds, its leverage is mainly made up of capitalized rental expenses). In terms of corporate governance, ACRA notes that the Company has a consistent strategy which it successfully implements, and applies well-established risk management procedures.

Inventive Retail Group is a group of companies that owns a chain of mono-brand stores specializing in selling the products of Apple (re:Store project), Samsung, LEGO, Nike and other well-known brands. As of December 31, 2020, the Inventive Retail Group chain included 382 stores. The Company also carries out direct corporate sales. The main ultimate owner of Inventive Retail Group is Filipp Gens.

Key rating assessment factors

Strong business profile assessment. For financial year (FY) 2020 (from October 1 to 30 September), the largest share of the Company’s revenues was generated by sales of electronics, mainly produced by Apple, Samsung, and Huawei. The Company is also present on the clothing (STREET BEAT, Nike, and The North Face projects), children’s goods (LEGO project), jewelry (UNOde50) and B2B segments. The offline channel has traditionally been the largest for Inventive Retail Group, and this negatively impacted the volume of sales during the period of quarantine measures introduced to fight against the COVID-19 pandemic. However, the Company was able to quickly switch to the online retail format, which it plans to actively develop in the future, while cooperation with well-known manufacturers to develop business and work under their brands allows Inventive Retail Group to have additional strong support in terms of promotion. The Company has shops in 37 Russian cities, primarily inside premium shopping centers and five online stores. Additionally, the Company develops distribution and corporate sales, and also offers services of an operational partner in eCommerce.

Average leverage. Low borrowed financing is typical for Inventive Retail Group. As of the end of FY 2020, the Company’s total debt was around RUB 3 bln, while its FFO before net interest payments ratio was 0.96x. The Company reduced the size of its bank debt by more than three times thanks to substantial surplus liquidity in the period from October to December 2020. According to ACRA’s forecast, in 2021 the Company’s total debt will return to RUB 3 bln, but the loan debt in 2021–2023 will be low. Inventive Retail Group has high coverage: in FY 2020, the ratio of FFO before net interest payments to interest payments exceeded 15x by a large margin. Despite this, the Company’s leverage is assessed as high taking into account operating lease expenses. The ratio of adjusted total debt to FFO before fixed payments in FY 2020 was 4.7x, and the ratio of FFO before fixed payments to fixed payments was 1.6x. ACRA expects the Company’s indicators to be maintained at a similar level in the forecast period (up to 2023).

High liquidity assessment and strong cash flow. Inventive Retail Group has positive free cash flow (FCF) due to two main factors. Firstly, despite the active development of its chain, the Company’s capital expenditures are low (their weighted average for 2018–2023 is around 1% of revenues); secondly, in 2019–2020, the Company allocated insignificant sums of money to pay dividends. The strong operating cash flow will allow Inventive Retail Group to increase the size of dividends paid from 2021 onwards while retaining positive FCF.

In ACRA’s opinion, the combination of positive FCF and insignificant bank debt provides considerable support to the Company’s liquidity assessment.

High profitability and medium size of business. According to preliminary results for FY 2020, the revenues of Inventive Retail Group amount to around RUB 72.6 bln, a 4.7% increase vs. the indicator recorded in FY 2019. ACRA expects average annual growth of revenues at around 20% in 2021–2023. The Agency assesses FFO before fixed payments and taxes for FY 2020 at RUB 9 bln, which corresponds to the medium size of the Company.

ACRA assesses the profitability of Inventive Retail Group as high. The FFO margin before fixed payments and taxes was 12% in FY 2020, according to ACRA’s calculations. The Agency notes stable profitability achieved in the past and expects this trend to continue in 2021–2023.

Average corporate governance. Inventive Retail Group does not have a board of directors, and its shareholders take part in managing the Company. The group has a moderately complicated structure because different parts of the business are separated out into individual legal entities. At the same time, ACRA notes that the main procedures are well documented, including the risk management process. Inventive Retail Group draws up financial statements according to IFRS and its auditor is Deloitte, however, it does not publicly disclose them.

Key assumptions

  • Average annual growth of revenues at 20% in 2021–2023;
  • FFO margin before fixed payments and taxes maintained at 12–13%;
  • Share of online sales in the revenue structure maintained at the level achieved in FY 2020;
  • Continued access to external liquidity sources.

Potential outlook or rating change factors

The Stable outlook assumes that the rating will most likely stay unchanged within the 12 to 18-month horizon.

A positive rating action may be prompted by:

  • Weighted average ratio of adjusted total debt to FFO before fixed payments declining below 2.0x at the same time as weighted average ratio of FFO before fixed payments to interest payments exceeding 2.5x;
  • FCF margin above 8%;
  • Weighted average indicators of revenues and FFO prior to fixed payments and taxes growing to RUB 100 bln and RUB 30 bln, respectively amid simultaneous growth of FFO margin before fixed payments to 15%.

A negative rating action may be prompted by:

  • Weighted average ratio of adjusted total debt to FFO before fixed payments exceeding 6.0x;
  • Weighted average ratio of total debt to FFO before net interest payments growing above 1.0x;
  • Weighted average ratio of FFO before fixed payments to fixed payments falling below 1.5x;
  • Weighted average ratio of FFO before net interest payments to net interest payments falling below 10.0x
  • FFO margin before fixed payments and taxes declining below 10%;
  • Deterioration of access to external liquidity sources.

Rating components

SCA: a.

Adjustments: none.

Issue ratings

No outstanding issues have been rated.

Regulatory disclosure

The credit rating has been assigned under the national scale for the Russian Federation based on the Methodology for Credit Ratings Assignment to Non-Financial Corporations under the National Scale for the Russian Federation and the Key Concepts Used by the Analytical Credit Rating Agency within the Scope of Its Rating Activities.

A credit rating has been assigned to ReStore Retail Group Limited for the first time. The credit rating and its outlook are expected to be revised within one year following the publication date of this press release.

The credit rating was assigned based on the data provided by ReStore Retail Group Limited, information from publicly available sources, and ACRA’s own databases. The credit rating is solicited, and the ReStore Retail Group participated in its assignment.

Disclosure of deviations to the approved methodologies: an adjustment was applied to the sub-factor “FCF Margin” that is applicable to companies with low leverage (according to ACRA’s methodology), even though the Agency assesses the leverage of ReStore Retail Group Limited as average. The Company’s low level of financial debt is the reason for this deviation.

No material discrepancies between the provided data and the data officially disclosed by ReStore Retail Group in its financial statements have been discovered.

ACRA provided no additional services to ReStore Retail Group. No conflicts of interest were discovered in the course of credit rating assignment.

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