Strong growth rate affects Lidl's profits

Lidl is still serious about its international ambitions: the German discounter has reported strong growth figures and is moving onto new markets. That expansion comes at a cost, however: it affects profits.

Analysis of the figures

Every year, Barclays financial analysts take a look at the financial results of Lidl Stiftung & Co KG, the enterprise behind Lidl’s international operations representing over 60 % of the chain’s total turnover. Barclays recently published an analysis of Lidl’s financial year 2017, which ended in February 2018 and was the first financial year to include the new American market.

Lidl started its foreign expansion in 1988 and is today present in 26 countries. The report shows that the company has continued its strong growth due to numerous new stores, but also that the costs of this expansion are a burden on profitability. This made the balance sheet look a little less impressive, confirming a trend that began last year.

Rising turnover

Lidl’s international operations generated a turnover of 46.1 billion euros, which constitutes a growth of 11 %: a stronger growth than previous years and better than expected. Lidl points out that turnover increased in ‘almost’ every country. Previous reports stated that turnover had increased in every country – an important nuance to point out.

The company does not release separate results per country, but according to the estimations of IGD, the United Kingdom would be the country with the strongest growth (+ 16 %), followed by Czechia (+ 14 %), Sweden (+ 11.2 %), Austria (+ 8.3 %) and Spain (+ 7.8 %). On the German home market, Lidl grew 5.2 %, despite tough competition – especially now that Aldi has been renewing its stores and adding more brands to the range.

Margins under pressure

Despite all of this turnover growth, the profit margins for these international activities are under pressure for the second year in a row. At 4 %, the EBIT margin has reached its lowest level since 2012, while the EBITDA margin dropped down to 6.4 % – still excellent for a food retailer by European standards.

According to Lidl, the decrease in net profits is in line with budgeting and comes as a result of the expansion’s launch costs. That probably means the move to the United States, which is the only country the retailer added in the past financial year. The Barclays analysts also suspect that the upgrading operations in other European countries have affected net profits. The gross profit margin meanwhile descended to 26.5 %.

Cost discipline

Staff expenses at Lidl Stiftung slightly increased and now represent 9.2 % of the turnover. The number of full-time employees increased by more than 10 % and wages increased as well – Lidl claims it pays more than the legal minimum wage in most countries, both in the stores and in the distribution centres. Remarkably, turnover per employee increased from 349,000 to 352,000 euros per year, while the previous financial year still saw a decline. It shows that Lidl has taken efficiency measures. Other operational expenses also decreased slightly, as did investment costs.

After the last financial year, Schwarz Group had indeed insisted on stricter cost discipline: according to CEO Klaus Gerhig, Lidl had to become leaner and simpler. Some stores looked like glass palaces with wide income halls that were nothing but a waste of space, he claimed. Gehrig intervened by appointing Jesper Hojer as the new CEO. The Dane previously served as chief executive of Lidl Belgium. Since then, there have been signs of a tighter cost policy: online plans have been restrained and the American expansion has been slowed down. About three quarters of the investments are in real estate, which is to be expected, considering the strong expansion and the refurnishing of existing stores. Compared to other European retailers, those expenses are quite high in relation to the turnover.

Further expansion

For the current financial year, Lidl expects reasonable turnover growth and stable net revenue. The retailer will continue to modernise, expand its existing stores and try out new markets such as Serbia (where 16 stores opened at once in October), Estonia and Latvia.

In existing markets, expansion remains an important point. In the United States, the retailer acquired 27 Best Market supermarkets, which will be refurbished later on in 2019. In Italy, forty new outlets are planned, as many as in the previous financial year. In Sweden, there will be twenty new stores and in Greece five. In Switzerland, Lidl will be opening city outlets in collaboration with department store chain Loeb.