Market announcement

Title

Baltika's unaudited financial results, Q3 2011

Message

On the whole, Baltika Group's third quarter results were in line with its
plans. The beginning of the quarter saw strong growth in consumption that
allowed the company to achieve sales that exceeded projections. However, from
mid-August consumption began to cool notably due to warm weather that caused
consumers to defer their purchases of the autumn collection and problems in
Greece and the euro-zone that undermined the stability of the economic
environment as well as consumer confidence. Besides the above, in the third
quarter the company had to face a decline in the growth trends of its Russian
and Ukrainian markets. Despite sales decrease in the second half of the
quarter, the company succeeded in ending the last month of the quarter,
September, with a positive net result. 

The company continues to focus on improving efficiency and maintaining cost
control. In the third quarter, sales per square metre grew by 8%; in local
currencies the increase was even larger. At the same time, the costs of
operating the store network decreased by 7% while costs per square metre
remained stable compared with the previous year. 

In the third quarter, the company continued optimising its retail network and
streamlining internal processes, which involved enhancing the collection
creation process, upgrading inventory and discount management, aiming marketing
efforts more directly at the brands' target customers and improving customer
service at the stores. 

Third quarter gross margin improved, rising to 49.4% (the corresponding figure
for 2010 was 48.7%). An improvement was also achieved in discount rates - the
average third quarter discount rate was one percentage point lower than a year
ago. 

The company achieved sales comparable to those of the third quarter of 2010 on
a 7% smaller sales area; at the same time gross profit grew by 2% and operating
expenses (distribution and administrative expenses) decreased by 5%. In the
third quarter, the Group's profit centres improved their performance
considerably. Retail network profit increased more than two times
year-over-year. 

Operating loss for the third quarter of 2011 was 732 thousand euros compared
with an operating loss of 1,743 thousand euros for the third quarter of 2010.
The current year figure includes a foreign exchange loss of 37 thousand euros
while in the comparative period the foreign exchange loss was 491 thousand
euros. 

Baltika Group ended the third quarter of 2011 with a net loss of 1,172 thousand
euros against a net loss of 2,141 thousand euros for the third quarter of 2010. 

Third quarter highlights:

  -- A public offering which ended on August 3rd, was over-subscribed by 1.1
     times and was carried out in respect of entire issue, i.e. 4,300,000 shares
     with a total par value of 3,010,000 euros.
  -- The company opened five new stores: three in Russia, one in Ukraine and one
     in Latvia. Baltika Group closed Polish market with four shops and also one
     shop in Latvia and Estonia.
  -- To improve management efficiency and product development and better utilise
     sales resources, a new and more effective brand and sales management
     structure was implemented in the third quarter of 2011. Baltika will
     continue to operate with four brands but will centralise a number of
     activities that used to be brand-based and will streamline its former
     matrix management structure by reducing management levels and specifying
     responsibilities.

Although third quarter performance corresponded to plan, the company has
revised its anticipated fourth quarter and full-year results. In the third
quarter the instability of the economic environment increased and consumer
confidence decreased. Therefore, the company has lowered its fourth quarter
growth expectations and will revise sales plans for the next year. 

REVENUE

Baltika Group ended the first nine months of 2011 with revenue of 37,924
thousand euros, 2% up on nine months of 2010. Third quarter revenue was 13,511
thousand euros, remaining stable compared with a year ago. 

Revenue by activity

                 Q3 2011  Q3 2010    +/-  9M 2011  9M 2010   +/-
----------------------------------------------------------------
----------------------------------------------------------------
Retail            12,444   12,401     0%   35,291   34,314    3%
Wholesale            933      943    -1%    2,199    2,433  -10%
Rent                 125       99    26%      350      271   29%
Sewing services        0       37  -100%       60       72  -17%
Other                  9        6    50%       24       34  -29%
----------------------------------------------------------------
----------------------------------------------------------------
Total             13,511   13,486     0%   37,924   37,124    2%

Retail

Retail revenues for the first nine months of 2011 totalled 35,291 thousand
euros, a 3% increase year-over-year. In the first nine months of 2011, sales
grew by 16% in Latvia, 13% in Estonia and 1% in Russia. 

Third quarter retail revenue amounted to 12,444 thousand euros, remaining at
the same level as in the previous year. In the third quarter, sales grew in
Latvia (+15%) and Estonia (+11%). Sales contraction in Lithuania, Ukraine,
Russia and Poland is attributable to a substantial decrease in sales areas and
in Ukraine also the adverse impact of movements in foreign exchange rates. In
local currency, third quarter Ukrainian sales grew by 2% year-over-year while
in euros the figure decreased by 8%. 

Retail sales by market

EUR thousands  Q3 2011  Q3 2010   +/-  Share  9M 2011  9M 2010   +/-  Share
---------------------------------------------------------------------------
Estonia          3,670    3,295   11%    29%   10,126    8,984   13%    26%
Russia           2,576    2,733   -6%    21%    7,657    7,555    1%    24%
Lithuania        2,488    2,539   -2%    20%    6,940    7,071   -2%    19%
Latvia           1,888    1,646   15%    15%    5,167    4,454   16%    14%
Ukraine          1,689    1,829   -8%    14%    4,663    5,186  -10%    14%
Poland             133      359  -63%     1%      738    1,064  -31%     3%
---------------------------------------------------------------------------
Total           12,444   12,401    0%   100%   35,291   34,314    3%   100%

Stores and sales area

As at the end of the third quarter of 2011, Baltika had 115 stores in five
countries with a total sales area of 23,165 square metres, which is 8 stores
and 1,629 square metres less than at the end of the third quarter of 2010. In
the first nine months of 2011 the Group opened six stores: three in Russia, two
in Ukraine and one in Latvia. At the same time the Group closed eleven stores:
four in Poland, two in both Lithuania and Russia and one in Ukraine, Estonia
and Latvia each. 

Stores by market

                      30 Sept 2011  30 Sept 2010      Change in period-end sales
                                                                            area
--------------------------------------------------------------------------------
Estonia                         29            31                             -3%
Lithuania                       29            32                             -7%
Russia                          24            22                              1%
Ukraine                         18            18                              1%
Latvia                          15            15                              3%
Poland                           0             5                           -100%
--------------------------------------------------------------------------------
Total stores                   115           123                                
--------------------------------------------------------------------------------
Total sales area,           23,165        24,794                             -7%
 sqm                                                                            



The numbers of stores and sales area have decreased on account of restructuring
undertaken in the retail system with a view to improving operating efficiency.
The company continues to monitor underperforming stores and will improve their
results by various activities. However, to date the store network has in all
material respects been streamlined and no major closures are planned. 

The efficiency of the retail system is measured in sales per square metre. In
the first nine months, the indicator improved in all markets. The strongest
growth per square metre was achieved in the Lithuanian market that was hit by
the downturn after the other Baltic markets and also regained growth later than
the others. 

Estonian and Latvian markets are posting stable growth. Ukrainian and Russian
third quarter growth figures were negative at -3% and -2% respectively. The
decrease in sales efficiency is attributable to unfavourable movements in
foreign exchange rates. In local currency, respective third quarter growth
rates were 7% and 2%. 

Sales efficiency by market

           Q3 2011  Q3 2010  +/-  9M 2011  9M 2010  +/-
-------------------------------------------------------
Estonia        214      193  11%      196      175  12%
Russia*        182      186  -2%      176      169   4%
Lithuania      149      134  11%      138      118  17%
Latvia         189      168  12%      174      153  13%
Ukraine*       166      172  -3%      156      148   6%
Poland          98       99  -2%       99       98   1%
-------------------------------------------------------
Total          179      166   8%      166      149  12%

* In local currency, third quarter sales efficiency grew by 2% in Russia and 7%
in Ukraine while the respective figures for the first nine months were 6% and
13%. 

Brands

In terms of brands, the largest share of Baltika's retail revenue is generated
by Monton whose retail sales accounted for 53% of the Group's retail revenue
for the first nine months of 2011. Mosaic contributed 31% and Baltman and Ivo
Nikkolo 8% each. 

Retail revenue by brand



             Q3 2011  Q3 2010   +/-  Share  9M 2011  9M 2010   +/-  Share
-------------------------------------------------------------------------
Monton         6,595    6,510    1%    53%   18,766   17,957    5%    53%
Mosaic         3,867    4,116   -6%    31%   11,107   11,552   -4%    31%
Baltman          963      779   24%     8%    2,769    2,376   17%     8%
Ivo Nikkolo    1,003      988    2%     8%    2,617    2,374   10%     7%
Other             16        8  100%     0%       32       55  -42%     0%
-------------------------------------------------------------------------
Total         12,444   12,401    0%   100%   35,291   34,314    3%   100%

Baltman continues to post strong growth figures: its third quarter sales grew
by 24%. Baltman's largest, 78% sales growth was achieved in Latvia. Sales of
Ivo Nikkolo and Monton grew by 2% and 1% respectively. Third quarter sales of
Mosaic dropped 6% year-over-year, primarily on account of closure of stores,
i.e. a decrease in sales area. 

All brands improved their efficiency indicators compared with the first nine
months of the previous year, which may be attributed to stabilisation in the
economic environment and consumer demand as well as effective streamlining of
the retail system. 

Sales efficiency and change in average sales area by brand

              Q3      Q3  +/-      Change in      9M  9M2010  +/-      Change in
            2011    2010        average area    2011                average area
--------------------------------------------------------------------------------
Monton       169     152  11%            -9%     155     136  14%            -9%
Mosaic       164     168  -3%            -3%     156     152   2%            -6%
Baltman      274     218  26%            -2%     267     203  31%           -11%
Ivo          296     258  15%           -11%     258     214  21%            -9%
 Nikkolo                                                                        
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Total        179     166   8%            -7%     166     149  12%            -8%
 retail                                                                         

Monton, which is the largest brand in terms of revenue, improved its third
quarter sales efficiency by 11% (on a year-over-year basis) mostly thanks to a
successful collection that was exceptionally well received by the customers. 

The second-largest brand, Mosaic, posted a 3% decrease in third quarter sales
efficiency because the spending of its target customers has recovered more
slowly than expected. In addition, its third quarter results were influenced by
a significant weakening in sales that is characteristic of the period when
school starts, holidays end and people return to work. In the third quarter of
2010, Mosaic's sales also included sales of childrenswear whose creation was
discontinued at the beginning of this year. 

In the third quarter, Baltman's sales per square metre grew by 26%
year-over-year, reflecting the success of the collection, better planning and
the economic recovery of customers purchasing men's business wear in the
Group's markets (particularly Estonia and Latvia). 

For Ivo Nikkolo the first nine months of the year were successful. In the third
quarter, sales efficiency improved by 15%, mostly because the brand succeeded
in realizing the sales potential of its business and outerwear at the beginning
of the season and closed inefficient stores at the beginning of the year. 

Wholesale

Baltika's wholesale revenue for the first nine months of 2011 amounted to 2,199
thousand euros, a 10% decrease year-over-year. At the same time, wholesale
revenue from comparable customers grew by 9%. In the first nine months of last
year, 17% of the Group's wholesale revenue was generated by the products of AS
Virulane; to date the brands of AS Virulane have been divested. 

The largest sales growth was achieved in Western and Eastern European markets
in connection with an increase in number of Peek & Cloppenburg department
stores that carry the Group's products. To date, Mosaic is represented at 40
Peek & Cloppenburg department stores in a total of ten markets. Wholesale to
Stockmann has increased in connection with the opening of new Stockmann stores
in the Russian market (particularly the flagship store in St Petersburg). 

FINANCIAL PERFORMANCE

In the third quarter, distribution expenses decreased by 4% to 6,720 thousand
euros. The retail system's store operating expenses were almost 7% smaller than
in the previous year and costs per square metre decreased by around 0.5%. The
positive trend in cost development results from the restructuring of the store
network, particularly the closure of Europeysky, the Group's flagship store in
Moscow, at the beginning of April.  Comparable market and store operating
expenses have grown somewhat because in the previous year several lease
contracts included temporary crisis-induced price concessions which to date
have expired. Economic recovery in Baltika's target markets has increased
pressure on lease and labour expenses but the Group considers cost control a
priority and continues to monitor its expenses. 

Administrative and general expenses for the third quarter have decreased
compared with the third quarter of 2010 mostly because of shrinkage in
consultancy and salary expenses. Other operating income and other operating
expenses for the third quarter were influenced by unfavourable movements in
foreign exchange rates. Other operating income and other operating expenses for
the third quarter of 2011 include a foreign exchange loss of 37 thousand euros
whereas in the same period of 2010 the items included a foreign exchange loss
of 491 thousand euros. 

The Group's gross profit for the third quarter of 2011 was 6,677 thousand
euros, a 2% increase year-over-year on a sales area that was 7% smaller on
average.  The vigorous growth may be attributed to a higher gross margin. The
Group's third quarter gross margin was 49.4% (Q3 2010: 48.7%). 

Third quarter operating loss was 732 thousand euros compared with 1,743
thousand euros for the third quarter of 2010. 

Operating loss for the first nine months was 2,926 thousand euros compared with
4,258 thousand euros for the first nine months of 2010. The figure for the
previous year was improved by the divestment in the first quarter of the
MasCara and Herold brands of AS Virulane and the sale of some items of
property, plant and equipment that yielded 256 thousand euros. In addition, in
the first nine months of 2010 movements in foreign exchange rates had a
positive impact and Baltika Group earned a foreign exchange gain of 118
thousand euros in contrast to a foreign exchange loss of 319 thousand euros
incurred in the first nine months of 2011. 

The Group's finance costs for the third quarter of 2011 were 411 thousand
euros, a 16% increase year-over-year. The largest finance cost item was
interest expense. At the end of the third quarter of 2011, the weighted average
loan interest rate of the Group's loan portfolio was 6.24% (Q3 2010: 5.77%). 

Baltika Group ended the third quarter of 2011 with a net loss of 1,172 thousand
euros. Net loss for the third quarter of 2010 was 2,141 thousand euros. 

FINANCIAL POSITION

At 30 September 2011, Baltika Group had total assets of 40,152 thousand euros,
a 2% increase compared with 31 December 2010. 

The Group's trade and other receivables decreased compared with the previous
year-end, totalling 3,102 thousand euros at the end of the quarter. Trade
receivables decreased by 2% to 1,226 thousand euros. The net amount of trade
receivables includes the allowance for doubtful receivables of 22 thousand
euros. 

At the end of the third quarter, inventories totalled 13,678 thousand euros, an
increase of 2,874 thousand euros, i.e. 27% compared with the previous year-end.
One reason for the increase in inventories is weaker sales at the end of August
and in September. On the other hand, some of the growth has been carefully
scheduled and planned - the company has purchased most of the goods required
for the winter season. Last year, purchase of fourth quarter goods  was delayed
which is why in certain clothing segments the sales potential was not fully
realized. 

Trade payables as at the end of the third quarter totalled 9,950 thousand
euros, an increase of 2,969 thousand euros on the year-end figure. The rise is
attributable to growth in inventory purchases. 

At the end of the third quarter, the Group's net debt (interest-bearing
liabilities less cash and bank balances) was 18,414 thousand euros. The net
debt to equity ratio was 164%. The Group's equity as at 30 September 2011
amounted to11,250 thousand euros. 

INVESTMENT

Baltika Group investments in the third quarter amounted to 214 thousand euros.
Most of the investments were made in retail system. 

PEOPLE

At 30 September 2011, Baltika Group employed a total of 1,413 people (31
December 2010: 1,419): 795 (799) in the retail system, 442 (442) in
manufacturing and 176 (178) at the head office and logistics centre. The
period's average number of staff was 1,413 (9M 2010: 1,560). 

Employee remuneration expenses for the first nine months of 2011 totalled 7,892
thousand euros (9M 2010: 7,976 thousand euros). The remuneration of the members
of the supervisory council and management board totalled 233 thousand euros (9M
2010: 281 thousand euros). 

KEY FIGURES OF THE GROUP (Q3 2011)

                                     30 Sept 2011  30 Sept 2010    +/-
Revenue (EUR thousand)                     37,924        37,124   2.2%
Retail sales (EUR thousand)                35,291        34,314   2.8%
Share of retail sales in revenue              93%           92%       
Number of stores                              115           123  -6.5%
Sales area (sqm)                           23,165        24,794  -6.6%
Number of employees (end of period)         1,413         1,456  -3.0%
Gross margin                                52.4%         50.4%       
Operating margin                            -7.7%        -11.5%       
EBT margin                                 -10.4%        -13.4%       
Net margin                                 -10.5%        -13.6%       
Current ratio                                 1.4           1.0  42.1%
Inventory turnover                           4.31          4.48  -4.0%
Debt to equity ratio                       167.5%        148.9%       
Return on equity                           -48.0%        -61.7%       
Return on assets                           -13.5%        -16.5%       

Definitions of key ratios
Gross margin = (Revenue-Cost of goods sold)/Revenue
Operating margin = Operating profit/Revenue
EBT margin = Profit before income tax/Revenue
Net margin = Net profit (attributable to parent)/Revenue
Current ratio = Current assets/Current liabilities
Inventory turnover = Revenue/Average inventories*
Debt to equity ratio = Interest-bearing liabilities/Equity
Return on equity (ROE) = Net profit (attributable to parent)/Average equity*
Return on assets (ROA) = Net profit (attributable to parent)/Average total
assets* 
*Based on 12-month average



CONSOLIDATED STATEMENT OF FINANCIAL POSITION

                                                       30 Sept 2011  31 Dec 2010
ASSETS                                                                          
Current assets                                                                  
Cash and bank                                                   434          823
Trade and other receivables                                   3,102        3,119
Inventories                                                  13,678       10,804
Total current assets                                         17,214       14,746
Non-current assets                                                              
Deferred income tax asset                                       838          838
Other non-current assets                                        778          780
Investment property                                           7,069        7,069
Property, plant and equipment                                10,506       12,121
Intangible assets                                             3,747        3,898
Total non-current assets                                     22,938       24,706
TOTAL ASSETS                                                 40,152       39,452
                                                                                
EQUITY AND LIABILITIES                                                          
Current liabilities                                                             
Borrowings                                                    2,501        2,125
Trade and other payables                                      9,950        6,981
Total current liabilities                                    12,451        9,106
Non-current liabilities                                                         
Borrowings                                                   16,447       17,953
Other liabilities                                                 4           37
Total non-current liabilities                                16,451       17,990
TOTAL LIABILITIES                                            28,902       27,096
                                                                                
EQUITY                                                                          
Share capital at par value                                   25,056       20,129
Share premium                                                    56        1,332
Reserves                                                      2,244        2,784
Retained earnings                                           -11,592       -4,961
Net loss for the period                                      -3,980       -6,344
Currency translation differences                               -696         -746
Total equity attributable to equity holders of the           11,088       12,194
 parent                                                                         
Non-controlling interest                                        162          162
TOTAL EQUITY                                                 11,250       12,356
TOTAL LIABILITIES AND EQUITY                                 40,152       39,452



CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

                                              Q3 2011  Q3 2010  9M 2011  9M 2010
                                                                                
Revenue                                        13,511   13,486   37,924   37,124
Cost of goods sold                             -6,834   -6,915  -18,041  -18,401
Gross profit                                    6,677    6,571   19,883   18,722
                                                                                
Distribution costs                             -6,720   -6,970  -20,283  -21,021
Administrative and general expenses              -628     -758   -2,122   -2,099
Other operating income                             20        4       23      398
Other operating expenses                          -81     -590     -427     -258
Operating loss                                   -732   -1,743   -2,926   -4,258
                                                                                
Finance income                                    -14        0        1      161
Finance costs                                    -411     -354   -1,030     -881
                                                                                
Loss before income tax                         -1,157   -2,097   -3,955   -4,978
                                                                                
Income tax expense                                -15      -44      -25      -75
                                                                                
Net loss                                       -1,172   -2,141   -3,980   -5,053
Loss attributable to:                                                           
Equity holders of the parent company           -1,172   -2,140   -3,980   -5,065
Non-controlling interest                            0       -1        0       12
                                                                                
                                                                                
Other comprehensive income (loss)                                               
Currency translation differences                 -156      -54       50     -176
                                                                                
Total comprehensive income (loss)              -1,328   -2,195   -3,930   -5,229
Comprehensive income (loss) attributable to:                                    
Equity holders of the parent company           -1,328   -2,194   -3,930   -5,241
Non-controlling interest                            0       -1        0       12
                                                                                
                                                                                
Basic earnings per share, EUR                   -0.04    -0.08    -0.13    -0.23
Diluted earnings per share, EUR                 -0.04    -0.08    -0.13    -0.23



Maigi Pärnik
CFO, Member of the Management Board
+372 630 2731
[email protected]