Detsky Mir aims to prove toys R Russia with $355mn IPO

Bloomberg

Anna Krutevich looks over the displays of diapers, Hot Wheels and baby food at Detsky Mir, a children’s emporium in Moscow’s Aviapark shopping mall, then pulls juice and milk from a shelf. Though the past two years have been tough as Russia has slogged through a recession, the jewelry marketing manager still spends 15 percent of her salary on her toddler even as she scrimps on other purchases. “My son remains my priority,” she says.
It’s consumers like Krutevich that Detsky Mir counted on in its stock offering, priced on Wednesday and valuing the company at almost $1.1 billion. While Russian consumer spending has plunged, Detsky Mir — the name means “Children’s World” — has opened more than 200 stores over the past two years, boosting revenues almost 30 percent annually while increasing gross profits per square meter of floor space. The chain plans another 250 stores over the next three years, bringing the total above 700, and online sales are booming.
The 70-year-old retailer, which for decades had its flagship across the street from the KGB’s headquarters, reinvented itself in the early 2000s as a chain catering to the emerging middle class. Today, it offers everything from strained carrots to bicycles to frilly party dresses in stores that often feature entertainment areas where kids play with Lego and shoot Nerf balls. That formula has gotten parents to open their wallets even as a recent Nielsen poll found that 84 percent of Russians say “this isn’t the best time to spend money.”

Litmus Test
There hasn’t been a major IPO by a Russian consumer company in almost three years. The current offering, expected to raise about $355 million, is seen as a litmus test. While Sistema’s founder, billionaire Vladimir Evtushenkov, shelved a planned IPO of Detsky Mir in 2014 after Russia’s annexation of Crimea, the economy is recovering and chilly relations between Moscow and Washington are warming up with Donald Trump’s presidency.
Priced at the bottom of the range — 85 rubles a share — the sale appealed to foreign investors. About 90 percent of the bids came from outside Russia, mostly from long-term investors and hedge funds, with 35 percent of the total from the U.K. and 25 percent from the U.S., according to Sberbank CIB.
“With investor sentiment improving, other Russian companies may also consider selling shares,” says Natasha Zagvozdina, head of research at Verno Capital in Moscow.
Children’s retailers have fared better than others during the downturn in part because of rising birth rates, nudged by a government “Maternity Capital” program that pays women as much as 453,000 rubles ($7,700) for each child after their first. And Russians, even in hard economic times, “are willing to spend a larger share of income on their children” than parents in many other countries, says Yulia Bychenko, head of research at the Ipsos Comcon survey group in Moscow.
One worry for investors is that big-box stores could start eating into Detsky Mir’s business, as the likes of Wal-Mart Stores Inc. and Target Corp. did to Toys R Us Inc. in the U.S. Fallout from other business dealings involving Sistema and Evtushenkov, who in 2014 spent several months under house arrest in a murky dispute over an oil-company deal, could also affect Detsky Mir’s prospects. After Sistema in 2006 completed a London offering of construction subsidiary Hals Development, that company fell victim to the financial crisis and ended up in the hands of state-controlled bank VTB.
And even consumers like Krutevich say they’re being cautious with their spending. “I need to be more selective,” she says, noting that she now tries to only buy clothing when it’s on sale.
Morgan Stanley analysts, though, are bullish on the offering, noting that Detsky Mir’s scale lets it negotiate deals with suppliers and landlords that help keep prices lower than those at smaller rivals. While the weak ruble, which has lost almost half its value against the dollar since 2014, forced it to raise prices on imported goods, some foreign-branded products such as Procter & Gamble Co.’s Pampers
diapers are produced in Russia.
The chain has diversified away from toys, which now make up about 35 percent of revenue. It’s repositioned some higher-priced items, such as Lego blocks, as “educational and developmental” aids, guessing correctly that parents might spend more on such products. Through a 2012 acquisition, it also owns 45 Early Learning Center stores specializing in educational games and toys.
And just as important, Detsky Mir benefits from its Soviet legacy as the primary destination for parents seeking goods for their kids, says Oleg Kuzmin, strategy director at Landor Associates, a branding consultancy in Moscow.
“It was THE brand for children,” Kuzmin says. In children’s retailing, “consumers want to know who they’re buying from, and trust is very important.”