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Delivering Growth Delivering Growth in 2014 We Remained Focused on Strengthening Retail Basics, Building the Right Team and Fine Tuning the +15.7% Operational Model

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Delivering Growth Delivering Growth in 2014 We Remained Focused on Strengthening Retail Basics, Building the Right Team and Fine Tuning the +15.7% Operational Model Annual Report 2014 Delivering growth Delivering growth In 2014 we remained focused on strengthening retail basics, building the right team and fine tuning the +15.7% operational model. This allowed us to increase in net reinforce our format value propositions selling space and take advantage of the growth opportunities in the Russian retail market. The strong results we achieved this year demonstrate that we are on track to deliver balanced and sustainable growth. Strategic report Governance Financial Statements About us Contents X5 is a leading Russian food retailer. Our strategy is to increase Strategic report our share of the Russian retail market by developing and About us 01 promoting modern retail principles to become the undisputed, Chief Executive’s strategic review 02 long-term leader of the Russian retail industry. Strong progress this year 04 Delivering growth 06 An attractive marketplace 08 Our core brands Our business model and strategy 10 Highlights 14 Operational review 16 Executive Committee 18 Pyaterochka, a chain of conveniently located proximity Our brands 20 stores, is one of Russia’s leading retail brands. Pyaterochka Logistics 36 stores are focused on simple, easy and economical shopping. Product safety and The brand offers quality fresh products and a non-food production quality 38 assortment supported by attractive promotional events and customer communication. Pyaterochka accounted Social, corporate and environmental responsibility 40 for 69.0% of X5’s total 2014 net retail sales. Risk management 50 Read more on pages 20-23 Financial review 56 Governance Introduction from our Chairman 60 Perekrestok is the leading national supermarket chain Corporate Governance report 62 in Russia and one of the country’s leading retail brands. Supervisory and Perekrestok strives to be the customer’s first choice Management Board 68 for fresh products supported by the right assortment and price Report of the Supervisory Board 70 strategy. Perekrestok accounted for 18.3% of X5’s total 2014 Remuneration report 74 net retail sales. Read more on pages 24-27 Financial Statements Consolidated Financial Statements Consolidated statement of financial position 80 Karusel is one of the largest hypermarket chains currently Consolidated statement operating in the Russian market. It offers customers convenient of profit and loss 81 one-stop shopping at fair prices in city locations with a wide Consolidated statement range of quality food and non-food products, efficient service of comprehensive income 82 at cash registers, engaging weekly catalogues and a loyalty Consolidated statement program. Karusel accounted for 11.0% of X5’s total 2014 net of cash flows 83 retail sales. Consolidated statement of changes in equity 84 Read more on pages 28-31 Notes to the Consolidated Financial Statements 85 Company Financial Statements Express convenience stores operate under the Perekrestok Company statement Express brand and offer convenient shopping and of financial position 122 ready-to-eat meals for people in a hurry. Express stores Company statement accounted for 1.6% of X5’s total 2014 net retail sales. of profit and loss 123 Read more on pages 32-35 Notes to the Company Financial Statements 124 Other information 129 Independent Auditor’s report 130 Net retail sales by format (%) 1. Pyaterochka 69.0% 1 2. Perekrestok 18.3% 3 3. Karusel 11.0% 4 4. Express 1.6% 2 Note: net retail sales include revenue from E5.RU and Ukraine operations which ceased during the year. Annual Report and Accounts 2014 X5 Retail Group 1 Chief Executive Officer’s strategic review A successful year – turnaround on track and delivering growth Stephan DuCharme Chief Executive Officer Dear Fellow Shareholders: The results we achieved at Pyaterochka during the year give Your Company performed well in 2014, delivering good us confidence that we have established the right platform for growth in retail sales which increased by 18.6% year-on-year. balanced and sustainable growth ahead. I take this opportunity This was at the upper level of our forecast, driven by record to complement Olga Naumova and her team on their success organic expansion of 15.7%, or 349 thousand square meters, in transforming Pyaterochka into a strong business and and contributing 8.8% to the year-on-year growth. Same store a modern proximity store banner. sales were responsible for the remaining 9.8% increase and were the Company’s best annual like-for-like sales results During the year Pyaterochka built momentum, culminating in the last five years. in a 34% year-on-year increase in December’s net retail sales, ahead of all format competitors. The new Pyaterochka All our retail formats contributed to this success. That being model is underpinned by an improved, standardized store said, the strong growth of our proximity format Pyaterochka, concept that hosts a better quality and wider range which accounts for approximately 70% of X5’s net retail sales, of products, and better in store processes supported by was a key contributor to our 2014 results. the cluster management system and opening process. This allowed Pyaterochka to add a record 907 stores in 2014, In terms of profitability, we were able to maintain margins in line or approximately 340 thousand square meters; including with 2013, delivering EBITDA and net profit margins of 7.2% and the tactical acquisition of 116 stores from a former franchisee 2.0%, respectively. In addition we increased EBITDAR (earnings in Samara. In parallel we have ramped up investments before interest, taxes, depreciation/amortization and rent) in the store base, completing almost 500 store refurbishments margin by 20 basis points to 11.6%, mainly due to improvements during the year. in operating leverage at Pyaterochka. We also improved capital efficiency, increasing the Company’s ROIC (before goodwill We also made significant progress with Perekrestok, our adjustments) by approximately 100 basis points to 20.1%. supermarket format. Having established its revised value proposition, which included the completion of an initial review Delivering growth of the product range and development of a new brand book, Our operational model allows each of the retail formats to we opened Perekrestok’s new concept store in Moscow respond to the needs of its customers, adjusting and improving in October followed by 12 further stores in this concept by value propositions on a continuous basis. It is this combination year-end. The format will continue to roll out a new range of focus and speed that has allowed X5 to return to growth. based on high quality fresh products complimented by unique This approach is underpinned by our strong market position promotions in a comfortable, service based atmosphere and buying terms, the improved relationship with suppliers, to meet customer demand. our strong and committed management team and the support of our shareholders. 2 X5 Retail Group Annual Report and Accounts 2014 Strategic report Governance Financial Statements I believe that 2014 was a turning point for X5 in terms of the transformation of our business and that we proved to ourselves, our customers, our business partners and shareholders that we have the ability to get the business growing again.” At Karusel, our hypermarket format, we are still in the process The right team of incorporating the results of the various pilot projects into The team is coming together. As we rolled out our new operations and finalizing the Karusel brand book, which will operating model, the need for additional competencies led be the blueprint for new store openings. During the year we also us to reinforce the Executive Committee through internal created a dedicated commercial division for the format that is promotions and new expertise. conducting a full review of the format’s product range, prices and promotions, which is especially important in the current In July, Svetlana Volikova transitioned from General Director environment. Once the format proposition is ready of Karusel Hypermarkets to take up a new role with the we will also be reinvesting in the ageing store base to bring Company as Director of Corporate Audit and Control. Svetlana new life to the existing portfolio. was succeeded by Vardan Dashtoyan who has considerable entrepreneurial and client-focused experience, which will assist Trading environment him as he manages the next phase in Karusel’s development. We ended the year with X5 and the Russian consumer facing an increasingly challenging macro environment. Also in July Sergey Piven, X5’s Chief Financial Officer, informed us that he would be stepping down to pursue other The economic sanctions and Russia’s response in the form opportunities. In October he was replaced by Elena Milinova. of a ban on certain food imports resulted in the disruption Elena brings a strong background in financial management of X5’s existing supply channels. At the time of the ban, the and senior executive experience at large Russian companies, products in question represented approximately 5% of X5’s which she has already applied within X5 as we face the new sales and the establishment of new supply channels resulted realities of local and international financial markets. in higher food inflation for those products. In October, Vladimir Sorokin, who had previously introduced I am pleased to say that thanks to the hard work of our and led category management for Pyaterochka and was part commercial teams we have found substitutes for the affected of the development of its rebranding campaign, assumed products and as the new suppliers adjust to a different demand the role of General Director for Perekrestok, replacing Janusz profile we will see a reduction in the initial inflation spike. Lella. Vladimir’s promotion highlights the progress we have made in developing internal talent and managing succession The economic sanctions combined with the collapse in global planning, and corresponds with the format’s new phase crude oil prices have also resulted in the overall worsening of expansion.
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