Market announcement

Title

Audited financial results 2008

Message

Business Results

In 2008, economic downturn has swept rapidly through the global economy.
Consumer demand has weakened in all of Group's markets. The rapidly increasing
proportion of retail revenue in the total revenue of the Group is having a
negative effect on the profitability and respectively net profit and EBITDA
numbers because of increasing fixed costs attributed to retail rental expenses
and personnel costs. However, at the same time retail operations in Russia, the
major region for the retail expansion of the Group, are demonstrating a more
than 50% growth in revenue year-on-year (for the shops with more than 1 year in
operations).  Apparel retail performance in the Baltic countries is lower
compared to the previous year mainly due to the economic situation in the
region. Despite substantial growth of sales per square meter in the Russian and
Ukrainian stores the overall sales results were unsatisfactory to support
business efficiency in the short term. Due to the crisis on the market the loss
generated in Russia would be sufficient enough to put the whole Russian retail
operations at risk. It has been decided to focus on development of lingerie
retail chain, as this is core business of SFG. PTA apparel stores in Russia
will be closed within first half of 2009. Ukrainian subsidiary of PTA has been
restructured in the beginning of 2009 and the operational costs have been
significantly decreased. It is planned to continue Ukrainian operations of
apparel with existing 6 stores. 

It is likely that all of Group's market areas will experience an economic
downturn during future periods, recording negative growth; therefore Group has
launched a series of measures to adjust its business to conditions of lower
demand. 

Financial Performance

In 2008, consolidated net sales of the Group totalled EEK 1,694.8 million,
showing 9.8% increase compared to 2007. The proportion of retail sales have
grown significantly and amounted to 28.1% from total sales as compared to 18.1%
in 2007. Apparel sales proportion in total sales also increased from 10.1% in
2007 to 11.9% in 2008. 

The Group's gross margin improved slightly from 43.5% in 2007 to 43.9% in 2008.
The margin improvement was mainly driven by the growth in retail sales. 

Operating profit amounted to EEK 46.2 million in 2008 as compared to EEK 321.6
million in 2007. 2007 operating profit included EEK 89.4 million profit from
negative goodwill write off as the result of shareholding increase in SP ZAO
Milavitsa, partially explaining decrease in profitability. 

In 2008 due to rapid downturn in economy the Group reassessed current
investment priorities and determined that the goodwill related to the
investment in UAB Linret LT (in the amount of EEK 11.0 million) and investment
in France Style Lingerie S.A.R.L. (in the amount of EEK 21.9 million) would not
be recovered. As the result, total goodwill write-off in the amount of EEK 32.9
million was made to other operating expenses. 

In Q4 2008, the Group also negotiated a share purchase agreement for the sale
of all its shares (90% of the share capital) in Splendo Polska Sp. z o.o., a
Polish retail subsidiary operating 6 retail outlets, a transaction that was
signed in Q1 2009. Taking account of the Group's total investment in Splendo,
the transaction was estimated to generate a loss of approximately EEK 18.8
million and the amount was fully provided as other operating expenses in 2008.
Net loss of Splendo Polska Sp. z.o.o. amounted to EEK 14.1 million in 2008,
therefore, the sale of this loss-making subsidiary will end cash outflows to
Polish operations. Splendo will be acquired by a local wholesale partner of the
Group, and Splendo's retail outlets will continue their business after being
rebranded as “Milavitsa” franchise stores. 

In 2008 the Group also re-assessed the performance of PTA and Oblicie retail
operations in Russia. Due to expected economic downturn and based on the stores
performance up to date the management decided that all PTA stores in Russia and
selected Oblicie stores will be closed in the first half of 2009. Management
has also decided to rebrand Oblicie operated stores to “Milavitsa” to increase
the contribution of the brand name towards the overall performance of Russian
lingerie retail operations. PTA will continue its retail operations in Estonia,
Latvia, Lithuania and Ukraine. The loss related to Russian retail operations
restructuring was estimated in the approximate amount of EEK 32.9 million as of
31 December 2008 and is recognized in other operating expenses in the amount of
EEK 29.7 million and EEK 3.2 million in cost of goods sold in the period ended
31 December 2008. 

Operating profit was also adversely impacted by the growth in distribution
expenses of the group which were mainly driven by increased retail operations
largest distribution expenses being shop rent expenses. 

Net loss from foreign exchange amounted to EEK 62.1 million (EEK 4.3 million
gain in 2007) and was partially generated by intercompany trading and borrowing
balances within the Group denominated in EUR currency. Average BYR/EUR rate in
2008 was 3134,80 as compared to 2937,06 in 2007 while average RUR/EUR rate in
2008 was 36,45 as compared to 35,03 in 2007. The Group ended 2008 with a net
loss of EEK 119.0 million, representing a 163.6% decline compared to 2007, and
net margin equaled -7.0% (12.1% in 2007). 
In 2008, the Group's return on equity was -17.3% (down from 31.5% in 2007) and
return on assets was -10.4% (down from 19.7% in 2007). Deterioration of return
of assets was partially caused by increase in working capital, mainly increase
in inventories and trade accounts receivable. 

Financial position

At 31 December 2008, consolidated assets amounted to EEK 1,208.5 million (up
from EEK 1,089.6 million at 31 December 2007). 

Trade receivables have increased by EEK 9.5 million in 2008. Inventory
increased by EEK 96.9 million and reached EEK 434.4 million at 31 December
2008. The growth in inventory was driven primarily by slowdown in customer
consumption at the end of 2008 and also due to the expansion of the retail
network requiring permanent working capital increase. The Group made rental
prepayments and deposits for store premises which increased other receivables
and prepayments balances. 

Property, plant and intangibles increased by EEK 35.1 million. 

Current liabilities increased by EEK 190.7 million mainly due to increase in
loans and borrowings. Current and non-current loans and borrowings increased by
EEK 105.6 million to EEK 134.5 million. Loans received and loans repaid during
the period amounted to EEK 126.3 million and EEK 26.8 million respectively.
This includes finance lease liabilities of EEK 5.7 million. Tax liabilities,
other payables, including payables to employees, and provisions amounted to EEK
122.6 million, remaining at the expected level. 

Equity attributable to equity holders decreased by EEK 92.5 million to EEK
641.3 million. 

Sales

Sales by business segments

In EEK million	            2008	2007	  Change

Women's apparel	           201.2	155.7	  +29.0%
Lingerie	         1,419.8	1,347.4	  +5.3%
Subcontracting services 
and other sales	            73.8	39.3	  +88.0%
Total	                 1,694.8	1,542.4	  +9.8%


Sales by Markets

In 2008, the Group continued to focus on East European markets, mainly the
Baltic States, Russia, Belarus and Ukraine. 

Retail Operations

Total retail sales of the Group in 2008 amounted to EEK 477.2 million,
representing a 70.5% increase against 2007. 

Retail operations were conducted in Estonia, Latvia, Russia, Belarus, Poland,
Lithuania and Ukraine. At the end of 2008, the Group operated 134 retail
outlets with a total area of 14,566 square meters. 

Women's apparel retail operations were conducted in Estonia, Latvia, Lithuania,
Russia and Ukraine. At the end of 2008 the Group operated 37 women's apparel
stores with a total sales area of 6,833 square meters. 

Lingerie retail operations were conducted in Russia, Belarus, Latvia,
Lithuania, Ukraine, Poland and Estonia. At the end of 2008 the Group operated
97 lingerie stores with a total area of 7,733 square meters. 

In 2008, 36 new stores were opened of which 13 new shops were opened in the
apparel business (operating under PTA brand name, including 4 shops in Ukraine,
7 - in Russia, one - in Estonia and one - in Lithuania) and 23 stores in the
lingerie line of business, including 9 shops operated under Oblicie name (7
shops in Russia, one - in Ukraine and one -  in Estonia), 12 shops under
Milavitsa name (7 shops in Belarus and 5 shops in Russia), one shop under Lauma
Lingerie brand name in Latvia and one stock outlet in Estonia. 17
underperforming stores were closed (5 PTA stores in Russia, one PTA store in
Ukraine, 6 Oblicie stores in Russia, one Oblicie store in Ukraine, two 
Milavitsa stores in Belarus and two Splendo stores in Poland). 

The number of stores at 31 December:
	             2008	2007
Estonia	               11	8
Latvia	                7	6
Poland	                8	10
Belarus	               28	23
Russia	               52	44
Lithuania	       21	20
Ukraine	                7	4
Total stores	      134	115
Total sales area, 
square meters	   14,566	12,454


In 2008, women's apparel retail revenue compared to 2007 increased by 57.9%,
amounting to EEK 187.8 million. The total like-for-like growth was a negative
3% mainly because of the drop of sales in the Baltics. The like-for-like growth
in Russia was +33%, in Estonia -4% and in Latvia -3% in 2008. Results in
Baltics are influenced by overall macro economical situation and by the fact
that the Estonian and Latvian stores have already been in operation for long
enough to be close to optimal capacity. Sales of PTA stores were growing in
Lithuania due to expansion, however efficiency of Lithuanian stores is still
much lower than in Estonian and Latvian stores. Apparel sales in Ukraine were
growing 8 times compared with previous year because of retail expansion.
Ukrainian stores showed positive trend of sales until October 2008, due to
economical crisis and devaluation of Ukrainian Grivna sales results and mark up
were decreasing significantly in the end of 2008. Also PTA stores in Russia
made over 50% like-for-like growth in first half of 2008, sales revenues were
not high enough compared to operational costs in Russia. Growth of PTA apparel
sales in Russia stopped in second half of 2008 due to financing problems of
Russian apparel operations. 
   
The like-for-like increase in the Oblicie lingerie retail chain in Russia
approximated 49% for stores operating longer than one year, however, still
below breakeven on average. Retail development continues to be the major
objective of the Group, however the focus has been shifted towards franchising
versus directly operated stores. In Q4 2008 the Group opened 4 Milavitsa
monobrand shops in Russia and one Oblicie shop was re-branded to Milavitsa. 
The intention of the re-branding is to capitalise on Milavitsa's brand
awareness in the country. The remaining Oblicie stores will be re-branded to
Milavitsa in 2009. 

Stores by concept

Market	  PTA      Oblicie   Milavitsa Other            Sales area, 
          stores    stores   stores   stores   Total    sq m

Russia	      13	34	5	-	52	5,467
Ukraine	       6	1	-	-	7	994
Estonia	       9	1	-	1	11	2,120
Latvia	       4	-	-	3	7	1,196
Lithuania      5	-	-	16	21	1,883
Belarus        -	-	28	-	28	2,554
Poland	       -	1	-	7	8	352
Total	      37	37	33	27	134	14,566

Wholesale

In 2008, wholesale amounted to EEK 1,145.3 million representing 67.5% of the
Group's total revenue (2007: 79.3%). The main wholesale regions were Russia,
Belarus, Ukraine and the Baltic States for lingerie, and Finland and the Baltic
states for women's apparel. In 2008, revenue from wholesale of women's apparel
decreased by 53.6% compared to 2007, amounting to EEK 20.3 million. 

Lingerie wholesale in 2008 decreased by 4.6% compared to 2007, amounting to EEK
1,125.0 million. Most of the lingerie wholesale partners are located in Russia.
There was a slowdown in wholesale operations in Russia and Ukraine in Q4 2008
caused by the financial crisis and key customer working capital financing
complications. 

Capital investments

In 2008, the Group's investments totalled EEK 97.0 million. A total of EEK 39.1
million was invested in retail operations, EEK 12.5 million was invested in
real estate for retail needs in Belarus, while other investments were made in
equipment and facilities to maintain effective production. 

Personnel

At the end of December 2008, the Group employed 3,901 employees including 851
in retail and 2,319 in production. The rest are employed in wholesale,
administration and support operations. The average number of employees in 2008
was 3,935. 

The total salaries and wages for 2008 amounted to EEK 355.2 million. The
remuneration paid to members of the Management Board totalled EEK 4.7 million.
Four members of the Management Board also serve as executives for the Group's
subsidiaries. 

Outlook for 2009

The Group's overall strategy entails further development of retail and
wholesale operations, while at the same time taking into account the current
economic crisis that has already resulted in shrinking of consumer demand,
slowdown in shopping malls' traffic and limited access to financing for
wholesale partners. 

In retail, the main focus for 2009 will be on franchising partners' retail
networks, i.e. Milavitsa branded stores in Russia, Ukraine and other CIS
countries. Revised franchising policies and standards will be communicated to
the partners including business model (logistics, pricing, retailing
principles), IT support, monitoring, and HR policies. The second important
retail development objective is to enhance efficiency of the Group's own retail
operations in Belarus, Russia and Baltics. In Belarus, the Group operates 28
stores. The goal is to maintain the current level of sales per square meter
with moderate expansion and investments into new stores (3-5 new openings in
2009). In Russia, the Group will operate only lingerie stores. The Group
intends to close lingerie stores with negative retail contribution and intends
to rebrand the remaining stores into Milavitsa stores. Out of current 39
lingerie stores the management intends to close two stores in the first half of
2009 and to decide on further store closing based on Q1 2009 shop performance.
The Group plans to close down all PTA stores in Russia that have demonstrated
low potential of becoming a sustainable apparel retail brand for Russia. For
the Baltics, the Group plans to operate apparel PTA stores (21 store), and to
close 2 underperforming lingerie stores in Lithuania and to rebrand most of the
remaining Amadea Line stores (14 stores) operated by Linret LT into Lauma
Lingerie stores, the Group also intends to open a few franchise stores of
Jockey (men's underwear) and Yamamay. 

There will also be other fields of improvement of retail operation for all
markets including improvement of the store retail sales efficiency by enhancing
brand awareness and recognition, supplementing collections, and performing
consumer campaigns and other marketing events for all markets. For all own and
partners' stores, the Group will be gradually implementing IT support improving
supply chain management within the system and stock planning for the stores. 

In wholesale, the main focus for 2009 will be on upgrading existing wholesale
network, strengthening relationships with existing dealers, exploring new
markets and new product niches, and improving planning and logistics for
wholesale distribution. 

Upgrading existing distribution network calls for new wholesale policies
including pricing, special events, new collections' presentations, as well as
better collection and analysis of orders. The Group plans to restructure its
planning principles and calendar to assist dealers in placing more precise
orders by reducing the lead-time from order to actual shipment. The Group plans
to work on raising existing dealers' loyalty to the Group and its products via
closer communication with partners, offering competitive terms and conditions,
providing marketing and PR support, organizing round-table conferences with key
accounts on a quarterly basis. There also appear to be “white spots” on the map
of the Group's regional distribution, where the Group will work harder to
provide penetration ratio similar to benchmark regions. New planning and
logistics procedures are intended to clearly reflect the difference between
classic and fashion collections offerings and are aimed at shortening
lead-time, allowing wholesale partners to prepare more detailed and precise
forecasts. 

The Group's manufacturing entities will focus on manufacturing its own brand
products. Lauma Lingerie has accomplished its reorganization downsizing its
staff and shifting production to Belarus and China. The downsizing programme
was successfully accomplished, the total staff was reduced from 416 to 184
employees, the total cost of the downsizing was EEK 4,490.6 thousand. 

In general, in 2009 the Group plans to prioritize the efficiency of the
existing business units each having an ultimate goal of becoming cash positive
by the end of 2009, as opposed to investment in new ventures. 

Selected financial data

The Group's operating results are best summarized in the following figures and
ratios: 

Key figures and ratios	            2008	2007	  Change
Net sales (EEK million)	         1,694.8	1,542.4	  152.4
Net income attributable 
to shareholders (EEK million)     -119.0	186.9	  -305.9
Earnings before interest, 
taxes and depreciation (EBITDA) 
( EEK million)	                    95.0	360.1	  -265.1
Earnings before interest 
and taxes (EBIT) (EEK million)	    46.2	321.5	  -275.3
Operating margin, %	             2.7%	 20.8%	   -
Net margin, %	                    -7.0%	 12.1%	   -
ROA, %	                           -10.4%	 19.7%	   -
ROE, %	                           -17.3%	 31.5%	   -
Earnings per share (EPS), in EEK    -2.97	  4.81	   -
Current ratio	                     2.1	  3.6	   -
Quick ratio	                     1.0	  2.1	   -

Underlying formulas: 
Operating margin = operating profit / sales revenue
Net margin = net profit attributable to equity holders of the parent / sales
revenue 
ROA (return on assets) = net profit attributable to equity holders of the
parent / average total assets 
ROE (return on equity) = net profit attributable to equity holders of the
parent / average equity 
EPS (earnings per share) = net profit attributable to equity holders of the
parent / weighted average number of ordinary shares 
Current ratio = current assets / current liabilities
Quick ratio = (current assets - inventories) / current liabilities

Dmitry Ditchkovsky
Chairman of the Management Board


Consolidated balance sheet

As at 31 December 
In thousands of EEK		    2008	2007
ASSETS			
Non-current assets			
Property, plant and equipment    293,530	246,541
Intangible assets		  16,085	27,976
Investment property		  23,141	22,954
Investments in equity 
accounted investees		   2,879	876
Available-for-sale 
financial assets		   8,716	8,480
Other receivables		  17,477	595
Total non-current assets         361,828	307,422
			
Current assets			
Inventories		         434,412	337,528
Prepaid taxes		          62,070	24,471
Trade receivables		 168,013	158,531
Other receivables		  50,851	29,713
Prepayments		          49,209	51,680
Cash and cash equivalents	  82,129	180,233
Total current assets		 846,684	782,156
TOTAL ASSETS		       1 208,512	1 089,578
			
LIABILITIES AND EQUITY			
Equity			
Share capital at par value       400,000	400,000
Share premium		         223,293	223,293
Own shares		          -7,041	0
Statutory capital reserve          1,046	1,046
Translation reserve		 -58,086	-76,512
Retained earnings		  82,035	185,927
Total equity attributable 
to equity holders of the parent	 641,247	733,754
Minority interest		 141,977	136,313
Total equity		         783,224	870,067
			
Non-current liabilities			
Loans and borrowings		  18,197	4,068
Deferred tax liabilities	     201	201
Other liabilities		   1,314	360
Provisions		             125	139
Total non-current liabilities	  19,837	4,768
			
Current liabilities			
Loans and borrowings		 116,254	24,783
Trade payables		         167,951	122,888
Corporate income tax liability	   4,006	3,192
Other tax liabilities		  18,150	23,486
Other payables		          27,584	17,807
Provisions		          70,817	22,462
Accrued expenses		     689	125
Total current liabilities	 405,451	214,743
Total liabilities		 425,288	219,511
TOTAL LIABILITIES AND EQUITY   1 208,512	1 089,578


Consolidated income statement

In thousands of EEK		    2008	2007

Revenue			
Sales revenue		       1 694,762	1 542,438
Costs of goods sold		-950,969	-870,780
Gross Profit		         743,793	671,658
			
Other operating income 		  34,469	105,794
Distribution costs		-337,607	-213,958
Administrative costs		-219,976	-170,552
Other operating expenses	-174,475	-71,394
Operating profit		  46,204	321,548
			
Finance income and expenses			
Finance income		           8,684	18,047
Finance expenses		 -69,111	-3,630
Net finance income		 -60,427	14,417

Share of profit of equity 
accounted investees 		   1,752	988
Profit before tax		 -12,471	336,953
Income tax expense		 -87,777	-92,943
Profit for the period		-100,248	244,010
Attributable to			
Equity holders of the parent	-118,961	186,914
Minority interest		  18,713	57,096
			
Earnings per share			
Basic earnings per share (in EEK) -2.97	        4.81
Diluted earnings per share (in EEK)-2.97	4.81