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Q2 gross margin up at Baltika Group
Aug '11
On the whole, Baltika Group's performance in the second quarter of 2011 corresponded to the company's expectations. The focus of the period was on improving efficiency by restructuring the Group's retail network and streamlining the internal processes.

Throughout the first half-year, the company continued to enhance its collections creation process, upgrade inventory and discount management, aim its marketing efforts more directly at the brands' target customers and improve customer service at the stores. Thanks to determined streamlining, in the second quarter sales per square metre grew by 10%, and even more in local currencies. At the same time, store operating expenses were almost 10% smaller and costs per square metre dropped by 1.4%.

Second quarter gross margin rose to 58% (Q2 2010: 56%) and discount rates improved significantly; the average discount rate for the second quarter was 5 percentage points smaller than a year ago. Inventory turnover increased and although the world market saw an upsurge in raw materials prices (particularly cotton) and cost inflation in China was substantial, the Group succeeded in maintaining its cost to sales price ratio stable.

Sales level with the second quarter of 2010 were achieved on an 9% smaller sales area while gross profit grew by 4% and operating expenses (distribution and administrative expenses) declined by 6%. In the second quarter, the Group's profit centres considerably improved their performance, all brands and continuing retail markets generated a profit and total profit of the retail system grew by 57% year-over-year.

Operating loss for the second quarter of 2011 was 99 thousand euros compared with an operating loss of 511 thousand euros for the second quarter of 2010. The current year second quarter figure includes a foreign exchange loss of 94 thousand euros while in the comparative period the Group earned foreign exchange gain of 304 thousand euros. The second quarter of 2011 ended in a net loss of 444 thousand euros against a net loss of 886 thousand euros for the
second quarter of 2010.

Second quarter highlights:

- The Group continued to monitor all underperforming stores and closed its Evropeysky store in Moscow. This will lower operating expenses in Russia and will increase the profitability of the retail system. At the same time, the Group opened a store in a shopping centre in Odessa, Ukraine.

- The Group reinforced management of the Russian market by hiring a professional with over 15 years of retailing experience.

- The sannual general meeting that convened on 11 May 2011 decided to increase the share capital of AS Baltika by issuing 3,150,000 additional shares with an issue price of 1 euro each. As a sufficient quantity of shares was not subscribed for, the company cancelled the issue. On 27 June 2011 the supervisory council resolved to increase the share capital of AS Baltika by the issue of 4,300,000 additional registered shares with an issue price of 0.70 euros each. The new shares are being offered to existing and new shareholders through a public offering and can be subscribed for from 19 July to 2 August. The shareholder KJK Fund Sicav-SIF has signed the obligation to subscribe for 2,142,857 shares, the shareholder E.Miroglio S.A. for 2,157,142 shares and the shareholder East Capital Baltic Fund for 333,000 shares.

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