Epicenter-K
Companies -> Epicenter-K

Business description

Epicenter is clear leader of DIY retail market of Ukraine. The group operates 58 DIY hypermarkets (44 under Epicenter-K brand and 14 of Nova Liniya chain, also owned by the group) with trade area exceeding 1.2 million sq m and net sales in Y2015 at UAH 25.6M (including revenues of Nova Liniya).

Owners of the company – Gerega family – started construction materials trading business in Y1996 when their first store was opened. First large DIY hypermarket with total area of 17k sq m was constructed and put into operation in Y2003 and almost immediately the chain started to grow: in Y2006 total number of hypermarkets made 6, in Y2007 – 14, Y2008 – 22:

Epicenter group hypermarkets dynamics
* - including Nova Liniya stores

Along with Nova Liniya (at that period of time owned by several shareholders including Dragon Capital and East Capital) Epicenter became one of the leaders of Ukrainian DIY retail market.

The market itself developed quite fast (FYs2006-2007 have been years of construction boom in Ukraine), two mentioned companies have factually been first market entrants in DIY format, so competition was mainly between them, and on the first stage this competition was just for the best stores locations. European retailers Praktiker and OBI also entered the market, but due to several reasons have been far less aggressive in their development.

Epicenter has been more successful with its expansion: in Y2008 it had 22 hypermarkets, while Nova Liniya – just 13. And, not less important, with the gross margins at about 30% (by more than 10% higher than, for example, in Ukrainian food retail, where competition has been much more significant), such aggressive development has not resulted in significant increase of debt burden of the company – as of Y2008 end, even after UAH devaluation (historically Epicenter prefers attraction of USD-nominated long-term bank loans), level of the company indebtedness to the banks was not very high.

In addition Epicenter tried to agree with its suppliers not only rather long open credit terms of payments for the goods (up to 120-180 days, longer than, for example, in food and electronics retail market), but even “payment after goods realization” terms, which allowed the company to significantly increase stores assortment, which became one of competitive advantages of the chain.

It allowed the group to keep on its rather fast development. Moreover due to fast decision-making process, ability of the company to effectively work with local authorities as for obtaining of good locations for new stores (Mrs. Gerega herself worked as Secretary of Kyiv City Counsil during Ys2012-14) and as prices in Epicenter hypermarkets have been generally lower than in competitors’ stores, the gap between Epicenter and other chains increased. And of course market power vs. suppliers grew as well.

Notable “feature” of the company has been very fast period of hypermarket construction – we estimate it on average at about 120 days (in some cases – less than 90 days).

So, finally Epicenter took dominant position on the market and started to compete with other chains “on their territory”, opening its hypermarkets not far from competitors’ in case latter had good locations. Along with lower attractiveness of Ukrainian retail market in general after post-crisis slump in purchasing power of Ukrainian population, it resulted in the fact that owners of Nova Liniya agreed to sell their chain to Epicenter (deal was realized in Y2013), while Praktiker and OBI completely left Ukrainian market. The only foreign chain still present on Ukrainian market is Leroy Marlin.

Years 2014 and 2015 have been rather complicated for the chain. First of all it lost 5 hypermarkets in Donbass region (four ex-Epicenter and Nova Liniya hypermarkets in Crimea continue operating under different brands, but their status and ownership structure is not fully clear). Also financial standing of the group was negatively impacted by UAH devaluation (mainly as the debt of the company has been nominated in USD). On positive side we note that Epicenter started Y2014 with relatively low debt burden (so that even after significant devaluation debt burden of the company has been fully sustainable) and as a clear market leader (so it could effectively work with suppliers and, if necessary, apply different pricing strategy).

With its further development the company somewhat shifted its focus – it started to open stores with lower trade area and goods assortment in towns with population of up to 200k people (before focus was mainly on large cities). But projects which started earlier have been also completed.

In Y2014 Epicenter opened four new hypermarkets with total area of 167k sq m (the most notable case is new hypermarket in Kyiv with total area of more than 100k sq m), as for the stores of small format, recently (in Y2016) the company opened new DIY supermarkets - in Bila Tserkva and Shepetivka.

In addition in Y2016 Epicenter became notable player on agri-market of Ukraine, purchasing controlling stake in VAGP (Vinnitska Agro-Promyslova Gruppa, the company with about 50k ha land bank). Agri-trading division of Epicenter group has also become active (on our opinion one of main motivations in this respect – VAT credit related to export operations, which can be important for the group). Since the start of new season in July’16 Epicenter-K exported more than 100k of grains.

Finally, the company launched new internet-shop 27.ua, intending to become one of the leaders of this Ukrainian retail market segment.

Financial information

Main companies of the group are following. Epicenter-K LLC is main operating company of the group (operator of all Epiceter-K stores) and is also the owner of part of real estate objects (with rare exceptions Epicenter is owner of its trade premises). There is also company called Epicenter-N, which is main asset-holder inside the group. Nova Liniya stores are operated by the company Nova Liniya JSC (part of trade premises also belongs to this entity).

Below we present key financial figures of Epicenter-K – main operating company of the group:
UAH M 2012 2013 2014 2015
Net Sales (VAT excl.) 14 693 16 542 19 071 22 706
EBITDA 1 328 1 218 2 079 3 369
EBITDA margin, % 9.0% 7.4% 10.9% 14.8%
Net Profit 581 440 379 1 809
Inventory Period 140
Payables Period 150

Comments to available financial information:

  • Financial model of the group is quite simple. Operating activity (factually Inventory Stock) is financed by suppliers by their open credit. Fixed Assets are financed by own funds (reinvested income) and bank loans, along with it historically debt burden has never been high. According to our estimations Debt/Sales ratio of Epicenter is below 10%, while Debt/EBITDA is far below 1.0x.
  • Sales dynamics since Y2007 is represented on the chart below:

    Epicenter-K net sales dynamics

  • On our opinion as a result of new stores opening in Y2014 and loss of Donbass and Crimea hypermarkets (we don’t know exactly on which bases stores in Crimea operate, so simply exclude their trade area from consideration), trade area during last years remained more or less stable. Growth of realization in UAH terms (by 15% in Y2014 and by 19% in Y2015) mainly resulted from inflation related to UAH devaluation. It is unlikely that same-store sales grew in real terms.
  • During last years Epicenter demonstrates good profits (increase of official profitability), the point to mention here – it is highly possible that part of Epicenter-K expenses are payments to related companies (including rental payments to Epicenter-N), so, according to our estimations) Group profitability is higher.

In general we estimate financial standing of the group is good, its current market position is perfect, we see risks related to core business as rather low. Main risks for the future activity – country and political, we can also note that in case of any, large-scale investments into non-core businesses (or into core business development in other countries) with significant new debt attraction can be also considered as risk factors for main business.

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