Russian retailer Magnit's profits drop after price cuts

MOSCOW, April 25 (Reuters) - Profits at Russia's biggest food retailer Magnit fell 13 percent in the first quarter, to 8.2 billion roubles ($123 million) after tax, with margins taking a hit from the costs of promotions.

The company also reported its gross profit fell 10 percent to 65 billion roubles in the quarter, with its gross margin sliding to 25.5 percent from 27 percent a year ago as net sales rose 16.7 percent to 255.3 billion roubles.

Analysts at VTB Capital, UBS (LSE: 0QNR.L - news) and Renaissance Capital (Other OTC: RNCG - news) said the weakness was due to increased promotional activity which saw Magnit sacrifice margins to win higher customer traffic.

Magnit has previously reported a 1.5-percent rise in traffic for the first quarter while the average price was down 1 percent despite food price inflation in Russia running at 2.3 percent.

Earnings before interest, taxation, depreciation and amortisation were down 3 percent at 19.8 billion roubles, as the EBITDA profit margin fell to a five-year low of 7.75 percent, compared to 9.32 percent in the first quarter of 2015.

"For 2016, our model assumes a broadly flat YoY bottom line that is now seeing downside risks. Should Magnit streamline its price investment strategy and assortment management, we would not rule out a recovery in profitability throughout 2016," said Maria Kolbina at VTB Capital.

Shares (Berlin: DI6.BE - news) in Magnit were down 6 percent at 9,663 roubles by 1100 GMT, when the main Moscow market index was down 0.7 percent.

($1 = 66.7220 roubles) (Reporting by Maria Kiselyova; Editing by Lidia Kelly, Greg Mahlich)