Good afternoon. Thank you for joining us, and welcome to Migros first quarter 2026 earnings webinar. We are here with the management team, and today's speakers are Özgür Tort, Migros CEO, and Cem Doğan, Migros CFO. After Özgür Bey's presentation, we will have a Q&A session. We can now start the presentation, Özgür Bey. Thank you.
Thank you, Affan . Good afternoon, good morning. Welcome again to our first quarter review. I guess to express our introduction, it is worth to elaborate that we managed to deliver another resilient performance on the top line growth. It is clearly the case that we still have a relatively weak consumer demand. That's mainly due to tightening economic environments. Obviously, this environment is pushing us towards a focus on expanding our business. Of course, meanwhile, strengthening, also creating some additional cost pressures where we have to be also careful in maintaining our competitive position, as we have been doing for recent years across all channels.
This year as well, similar to first quarter of last year, we witnessed a cost pressure coming from our operational expenditures. We are at the beginning of the year with a clear mindset of improving our operating expenditures leverage. That's mainly coming from our efficiency initiatives supported by our technology investments. We will elaborate the case. However, we trust that this is gonna be our focus area across the years, considering the tough consumer demand environment. Let us start right now elaborating our financial and operational results as we used to. I hope you all received our presentation. We're gonna just start and follow with the page numbers. As usual, we're gonna start with our market share evolution on page four.
This year's, we started the year by maintaining our market share at the levels of within the total FMCG market on the levels of 9.9% at the similar level of last quarter, first quarter of last year. On the modern market shares definition, we are also at the levels of 15.2%, again flat versus last year. That's obviously our focus and our target of improving market share will continue to be our primary focus as we have been doing and promising across the years. Basically, it is worth to elaborate in the last three years with all the efforts coming mainly of our focus of competitiveness.
We can see that improvements on the total market is very clear, 160 basis points in three years and 250 basis points on the overall modern market share improvement. I guess it is also important to address that physical space growth across all the space and the different grocery formats are stabilizing. We can see it in the pace of growth of our competitors as well, in terms of physical growth are not at the same pace of previous years. However, Migros's growth potential is still significant with our number of stores and penetration level.
On the other hand, of course, we are becoming more cautious in terms of store location definitions and regarding our prioritization of larger store formats in terms of supermarkets and Macrocenter as the priority of our expansion. Continuing with the expansion numbers, with this strategy in mind, we reached 3,812 number of stores as at the end of first quarter, with 51 new store addition. The main perspective of the store expansion is still, as I expressed, the focus on a larger format as much as possible. Considering the expansion of online operations as well, we see the potential of combination of hybrid stores with the expansion advantages of medium-sized supermarkets with the potential of also serving online. That includes our Macrocenter expansion perspective as well.
Out of these 51 stores opened, four of them are Macrocenter operations. With this expansion, we generated for the first quarter compared to previous year at the levels of 2.3% physical space growth. When it comes to online service, store expansion, we are addressing the store expansion of online services in two folds. In the total figures, we already reached 2,500+ levels of number of stores serving for online purposes. However, we wanted to express that these two major operating models are worth to elaborate. You can see that especially click and collect and service, pure service online stores are different from each other.
At the moment, with the full service of online servicing, the number of stores serving online is at the levels of 1,000 + levels. Including our click and collect advantages for faster expansion. Of course, compared to full service with a limited potential within the country, it has reached 2,520. Starting from this quarter, we're gonna just skip this two fold of expansion of online proposition as well. Moving on, capital expenditure on page six. The total capital expenditure in the first quarter reached 2 billion, TRY 2.7 billion levels. This is a clear increase versus the first quarter of last year. Mainly, we prioritized, as we addressed last year as well.
We prioritize on purpose the expansion of self-checkouts and electro shelf labels with the mindset of tough conditions on cost pressures, and obviously the additional service improvements coming from this initiatives. You can see that within the breakdown of capital expenditure as well, this portion is taking a significant part of our expenditures on capital investments. The technological IT solutions and all the other initiatives. We believe that this will continue the case across the years, so we will still spend our efforts on the new stores. However, the large majority of the expansion on capital expenditures will go through the efficiencies at the store operations, efficiencies at the distribution centers, and some refurbishment operations, which also brings additional efficiencies at the store level.
As we addressed earlier, that will be relatively a priority for 2026. Most likely in the coming 2027 also, at least for the first half of it, will be the case. Starting from the coming years, the regular capital expenditure breakdown will take place in the company's overall proposition. Before analyzing our top line growth, it is worth to elaborate on our similar store sales growth figures. In the first quarter of the year, we realized in inflation-adjusted numbers 3.1% same store growth, which is with a combination of 4.2% coming from basket size growth and 1% levels of negative traffic on our store portfolio.
As we addressed during the quarter as well with our disclosures, obviously our target is of continuing to be keeping our traffic positive. We had some labor disruptions in our main distribution centers, especially mid of February and the beginning of March. That has been taking place. On purpose, we have limited our marketing activities during this period, which has consequently resulted a part of traffic reduction on our store portfolio. Our commitment on volume growth are still valid, and we have consequently resulted an important growth figures of basket size, which is above 4% levels and which is above inflation, which is a clear gain for our overall volume growth of the company, excluding the physical growth itself.
We trust that we will gonna maintain our overall proposition of top line growth commitments with our competitiveness. Starting for the second quarter of this year, we will be addressing the traffics starting from April are at the positive levels back again. Continuing with our financial outcomes on the top line. We reached TRY 109 billion of sales turnovers with a 6.4% growth on real terms, excluding inflation, with IAS 29 figures. The nominal top line growth reached 40% levels. That is an important top line growth. As we promised to the markets, our focus on expanding our overall proposition in terms of competitiveness and at the same time store base is still taking place.
That is mainly, of course, our efforts of overall multi-format, but also at the same time, online contributions of the stores are also continuing to improve. Taking in this our consideration, we trust that we started the year with an important growth figures. Following with the gross profitability of the operations. We reached the first quarter with TRY 26 billion of gross profit generation, which is a 23.6% gross margin profitability for the company. As usual, we are addressing here the accounting adjustments and impact on equity interest and inventory inflation coming from IAS calculations. We are observing a 60 basis points of headline gross margin decline in terms of outcomes on inflation accounting results.
Once we are excluding these adjustments on accounting adjustment, let's call them, the reduction is down to 30 basis points level, so 22.4% to 22.1% in the first quarter of the year. The main reason of the reduction is basically coming from our distribution centers, disruption-driven issues. As we already disclosed, we employed all the employees coming from subcontracted structures, and that transition has an element of additional cost base. When we employed them in our payroll, and obviously this is gonna be a challenge for us in terms of the efficiencies that we have to address.
At this moment, we are considering as usual, this cost of warehousing at the gross profitability calculations, since they are mainly driven by the supply chain costs. Basically, our target is gonna be just throughout the case, to come up with efficiency metrics, with technology, with further efficiencies. Having our employees now directly employed by the company, we're gonna be targeting additional efficiency figures across the years in order to subsidize this cost of transition. Other than this figure, I can express that the regular commercial margin of the company is flat when we compare to previous year. Considering page 10, our operating expenditure evolution. Our total costs of operations has reached TRY 25.5 billion level, at the levels of 23.3% of our sales.
Obviously, within these figures, there is an improvement in terms of fixed cost base advantages and our initiatives coming from technology-driven actions. As we addressed from previous year as well, our commitment on spending efficiency, capital expenditures are now paying back. We can see here, with the figures we charge, excluding depreciation and amortization, the improvement is further even deeper. That improvement, I think partly still, related with IFRS accounting, reclassification of cost of rent. Probably around 30-35 basis points are linked to this improvement level. Putting aside this accounting reclassification, I guess we can still express that there is a 40 basis points of improvement coming mostly from employee costs and the efficiencies reached through technologies that we deployed across the stores.
The energy efficiencies and the cost of energy at the beginning of the year, especially on the electricity, and our initiatives on solar panels are structured to have an operating efficiency for the company. Finally, the outcome of this at the EBITDA level. You can see that we reached 4.8% margin with IAS 29 at the levels of TRY 5.3 billion levels. Once we adjust the figures with the accounting cycles of imputed interest and inventory inflation, we can see the EBITDA improvement clearly.
Which means that even if we had the 30 basis points reduction on gross margin levels, we compensated that with a bit of OpEx improvement, as I expressed on the previous page, and which leaded us towards an operating profitability efficiency gains for the first quarter of the year. Taking this into consideration, we will keep our focus on this operating expenditure efficiencies. As we addressed earlier, several new distribution centers coming to our operations are also helpful in terms of employee management.
We trust that new distribution centers efficiencies, when we gain them within the next couple of years, they will further improve our efficiencies at the store level, especially on goods in, goods replenishment and stock levels, which are resulting back again to staff efficiency and similarly some additional utility efficiencies as well. On page 12, with the net profit margin. Starting with the nominal figures, with the impact of even if we had a clear EBITDA improvement on our operations. The net financial income and expense balance and one- off kind of subcontract agreement cancellation, which is an outcome of, again, the transition we had in the distribution centers to recruit and cancel the contracts of subcontractors and recruiting them directly to our own payroll.
This joint impact has consequently declined our net profit at the nominal levels. However, with the inflation accounting monetary gain, which is offsetting clearly with the amortization and the net financial income hits that we received. With the addition of this straight impact, we resulted the quarter with TRY 1.6 billion of net profit, with a margin of 1.5%. However, it's definitely worth to elaborate that we are focused on the nominal figures improvement as well. Basically our both at the operating level and on the financial income level, we will be focused to improve our net profit at the nominal levels as well in the coming quarters. Considering the one-off kind of subcontractors driven cancellation cost is only relevant for the first quarter itself.
With the net profitability, I think it's worth to elaborate on free cash generation on page 13. We generated TRY 1.1 billion of free cash, which is compared to previous year's similar quarter, is a significant increase. However, we have another one obtained here as well, which is linked to our employee payables, linked, which is defined by the union agreement, which is just signed this morning. I think I'm glad to also express that this important step for the next three years, is concluded. We're gonna give some updates here on the operating updates. With the impact of this payables, which are still on our cash balance, we have a significant free cash flow generation compared to regular seasonality years.
However, even if we exclude our employee payables, which are now will be coming due in the next week straight, we still have an improvement on the operating levels of free cash flow. It's not just with the employee payables, but also a clear improvement coming from our cash generation, both from operating profit and working capital management. All in all, net cash has reached TRY 28 billion, which is 17% higher than previous year. With an additional important improvement coming from cash conversion cycle, that our cycle is now increased to 37.6 days, which is another 1.6 days improvement versus previous years. That is mainly from our gains on stock turns.
I think it is definitely worth to expose that back to back, this is the fourth year that we are declining our stock levels, with the improvements coming from our additional distribution centers, bringing efficiencies on our overall supply chain efforts. That stock days reduction, which is converted into cash generation, it is gonna be another priority for this year. While the net profitability margins are under significant challenge for grocery retailers, cash management will further have importance, and we are dedicated, deliberately acting on a lower stock turn items, which is helping the net overall working capital generation as well. That will be the financial update for the first quarter. Now we're gonna go straight to our operational update, starting for our core grocery operations highlight.
As I addressed during the financial part of the compliant growth, I think this elaboration on volume growth is a clear gain for the company. I can express that the baskets expansion and the volume growth are mainly coming from fresh categories, where we are deliberately focusing in order both to act towards less stock generation items and also traffic-building items. Mainly even if we had some distribution center-driven labor disruptions, which has resulted 1% levels of traffic reduction for the first quarters. With an important gain on volumes, we compensated that traffic loss and ended up the quarters with a positive volume growth on the overall proposition of the company.
As I addressed earlier, right after, since we already have the April figures, our same-store traffic is back to positive, which is a good news, which is a supportable volume growth combined with traffic growth as well. Important update, which is just this morning, we concluded to sign with our union, our union agreement, which is going to take place for 2026, 2027 and 2028. We ended the negotiations with 36% increase on gross minimum wage, gross wage increase levels. We are clearly ahead of the minimum wage increase in the country, and we trust that with the efficiencies and with the positive working environment generated with this important increase, we are going to have further efficiencies at the store level to have a motivated environment for all our workers.
Obviously, the headline inflation is still at the high levels. All in all combined, we agree with the employee union to have these figures and to further focus on our operations with this outcome. For the following two years, we agreed that the wage increase will be limited with the CPI official TurkStat CPI rate. I think on the core business, it is definitely our focus, as I addressed at the introduction, our efficiency investments, which are mostly technology driven at the store level, at the distribution center level, and our additional energy costs, mainly this year. We started the year with good news on the economy, that hydroelectric generation is very strong in the country across the year.
Thanks to climate environment that we had significant rain, especially in the first quarter of the year, which is helping the electricity cost at the moment. Furthest, we are also dedicated with our own initiatives to lower our energy costs, both from our energy generation and also the efficiency initiatives. Overall, I guess the total of these impacts are already taking place at the 50 basis points of cost savings already realized in the first quarter of this year. Continuing with the updates on online operations. I think in every occasion, we are trying to be as transparent as possible. We already had our Capital Markets Day, and we thank to the analysts and the investors who have participated on the extended detailed presentation and store tours and distribution center tours.
We are glad to share more headline and detailed information regarding our new initiatives, which are completely to our focus of additional traffic to our overall ecosystem. At the same time, new business areas which will help us to deliver further profitability generation for the overall ecosystem as well. The main driver, one of them, is our online operation. When we reached the levels of 6%, 7% top line growth in real terms, our overall online e-commerce initiatives increased their turnovers with an inflation-adjusted number at the 23% level, which is a significant growth. We are very happy to realize these figures. Within the e-commerce platform, the meal initiative is growing even further higher at the 54 levels of top line growth excluding inflation.
These are important gains for our further traffic generation. Our daily orders, which is an important driver in the e-commerce ecosystem, have reached above 300,000 levels, which is another 23% increase by number of orders taken in the e-commerce platform. Our unique customers have reached 6.3 million, which is another 800,000 more shoppers are acting at our online platform. All this combined has resulted the e-com shares on our total turnover reached right now 23.5% of our turnover, which is 240 basis points higher than the previous year. Which means that our online focus is not the similar case in different parts of the world. It's not a hype, it's not a kind of one type of growth.
It is still maintaining our additional growth pace even after COVID and even after cost challenges we are trying to overcome. We are glad that they're both driving traffic and the bottom line contribution as well. The key highlight for this quarter on, which is another very good news for us, that our hybrid customers, which are online and offline shoppers combined. Which means the shoppers who are both doing store shopping and ordering online, has increased by another 190 basis points, which is a clear gain because we know that hybrid customers are our best shoppers in terms of basket size and in terms of profitability. The higher the hybrid customers, the better gonna be our profitability contribution as well.
On the bottom of the page, you can see the trends from previous years', similar quarters that our, general merchandising value reaching TRY 25.4 billion and TRY 3.5 billion of it, coming from meal itself. Daily orders from 2023 from 150,000 to 300,000 so it's doubled even after COVID impact, which is ended up around 2022. We can easily express that even after COVID impact realized and stabilized, we doubled our daily orders. Another important initiative as we all continuously address is our Fintech operations under the brand of MoneyPay. Again, the figures are inflation adjusted. We reached TRY 37 billion of total payment volume, which is 148% higher. Obviously, with a lower base, but an important growth again.
More important is that the daily transactions on our Fintech operations has reached 373,000 per day, which is 64% higher than previous year. Which means that our Fintech deployment is taking place clearly, mainly at the Migros ecosystem, so the stores, the online and everywhere, but also at the same time outside Migros world. Which means that the additional contribution is also targeted coming from our ecosystem as well. The revenues generated from the total payment volume reached TRY 877 million, which is 150% higher than last year. Our registered users has reached 5.1 billion, which is another 1.4 million higher than last year. The trends are at the below. It's a new operation, just two years old.
However, the growth are impressive for us that the deployment of Fintech across our ecosystem is taking place. One very important news for the key highlight of this quarters is that MoneyPay is now enabled as a QR payment feature within the Migros app, which is the e-commerce app that we are using for every shoppers. On the previous page, you have seen that it has already reached more than 6 million people. Migros app, where we are doing the online shopping, is now an app with a QR payments features, is now can be used at the store as a payment tool as well. The same app both for e-commerce and also for payments. The deployment has started, and we are putting more efforts to have a joint ecosystem of e-commerce and the Fintech operations coming together.
That will be the update on the operations. Now we're going to summarize and close the presentation with our underlying performance. Net sales reached TRY 109 billion with 6.4% increase. IAS 29 adjusted EBITDA figures reached TRY 5.3 billion with a 10% increase previous year. Excluding the imputed interest rate and inventory inflation adjustments, our EBITDA reached TRY 3.7 billion with a 26% increase. Our net profits has reached TRY 1.6 billion with 19% increase versus last year. With this realization of first quarters, we are mainly keeping our guidance as at the beginning of the year, no change at the moment. The top line guidance will be still kept at the 5%-7% levels in terms of real growth.
Our EBITDA margin on IAS 29 accounting with the margin levels of 6%-7%. When we exclude IAS 29 impact and the imputed interest charges, our guidance for EBITDA margin will be at the levels of 4%-5%. Our expansion target is kept at the levels of 180-200 store level. We are guiding the market with capital expenditures at the 2.5%-3% level for 2026. That will be the presentation for today. As usual, we are ready for your questions. Thank you.
Thank you, Özgür. Please raise your hand to ask your questions. Yes. I guess there's one question from Cemal Demirtas.
Thank you for the presentation, congratulations for the good results. My question is about the working capital side and your cash position. You have net cash of TRY 28 billion. Including the leasing, you know, IFRS 16, you know, your net debt position increased from TRY 4.6 billion to TRY 7.6 billion levels. We see a decline in the net working capital side Q over Q. Could you further elaborate these, you know, sides in your financials? The second question is about the difference between, you know, the inflation accounting net income and including TFRS 29 and excluding. In this quarter, we see your nominal earnings is weaker compared to TFRS 29 net income. Could you also further elaborate that?
You mentioned some, you know, the reasoning, that reasoning should be applied also to the TFRS 29. I would like to understand what was specific about that. The last question is about the effective tax rate. Could we expect this depending on the inflation, of course, this could, you know, fluctuate, where could that tax rate stand going forward, if we think about sustainable levels? Thank you very much.
Thank you, Cemal Bey. I will start with the answers, and I will also share with Cem Bey to express more details. The reflections of working capital seasonality is. That is pretty much what we are used to. The first quarter's working capital generation is seasonally negative compared to fourth quarters. Obviously, the high turnover of previous years is now paid with a 60-90 days delay, which is generating a working capital overall seasonality decline. The reactions on net debt figures, mainly, I guess, Cem Bey will can give you a better update, but the leasing-driven items are also linked with our distribution centers', additional contracts. Which means that the lease liabilities coming from our long-term contracts coming basically with the large distribution centers in the recent years are pretty much the major impact.
Other than that, there is nothing we can express out of the ordinary course of business. Basically, I assume that it is mainly from the large distribution centers' overall rental contracts reflection. On, on the inflation accounting part, I try to express that we had, we have two major driver of declining nominal earnings. One of them is coming from net income generation from financial income versus expenditures in an environment where the net interest rates are lower than previous years. At the same time, our additional challenge which we had at the first quarter, which is a kind of a one-off type of hit coming from the subcontractors cancellation at the distribution centers.
These are pretty much the reasons of the first quarter impact, because we know that our operating profitability is better than previous years. The additional impact on the negative side is due to these two reasons. You are right, this too is also reflected to our IAS 29. Also at the same time, IAS 29 is correcting with a monetary gain, which is offsetting the additional pressure which is coming from the amortization of higher amortization rates, which are again linked with the inflation accounting. It is at the same time the monetary gains we are generating from asset valuations of inflation accounting is offsetting that amortization and financial financial income expenditures balance. These are pretty much what I can express. Please, Cem Bey.
Sure. Of course. Cemal Bey, on the net cash side, our cash position versus last year improved significantly, as we have said, on the free cash flow side. There is a one-off impact. If you look at on the balance sheet, the employee payables, there is a significant increase, and that increase, as Özgür Bey has mentioned, is related to the finalization or the late finalization of the union agreement. There is a pending payment that we will make in the coming weeks, and this will be settled at that point in time. On the net debt side, because IFRS 16 financial expenses as you rightly point started to increase, but it's related mostly to the IFRS 16 coverage rental.
Of course, the duration of the rental contracts, especially for the warehouses which came into operation this year, had a significant impact, the duration of our rental contracts also impacting this item. You had a question on the effective tax rate.
Tax rate. Yes. Yes.
Yes, exactly. On the inflation accounting side, we don't really expect much of a change on the effective tax rate, and so we are not really projecting a significant difference for what we are actually reporting at this point in time. If there is anything which is coming there, we will also communicate that. Currently, we don't really have a projected difference.
Cem Bey.
Currently it's 50% level, yeah, we see some impact of the inflation accounting. Did I understand correctly? You know, should we assume 'Cause normally, you know, taxes should be like 25%, 30% at this, you know, in reality. This thing will continue, I understand from what you are saying.
That's what we've planned. Let us get back to you on this one. I mean, perhaps, there's something that I am missing, but we will get back to you, Cemal Bey, on this.
By the way, when I mean about effective tax, I'm just directly taking the, you know, the reported tax, just including both, you know, income tax and deferred tax divided by profit before tax. Maybe that definition may be, you know, maybe we are talking about different things. Yes, later on, it will be helpful. Thank you.
Yes. My colleagues are warning me that it has something to do with our monetary inflation-related monetary gains account as well, but we will get back to you on this one.
Thank you.
Thank you, Cemal Bey. There's one question from [Hamza Hanım]. Please go ahead, [Hamza Hanım]. Yes, you may go ahead, [Hamza Hanım].
[Hamza Hanım], can you hear us? You can go ahead.
Please unmute. Maybe we can move to. There's one more question from Maxim Nekrasov. Yes, Maxim.
Yes. Good afternoon. Can you hear me?
Yes, we can hear you very well.
Great. Thank you so much for the presentation and the very good disclosures, very detailed. I have a couple of questions. The first one is about the April trend that you mentioned. You see improvement of like-for-like traffic after a decline in the first quarter. I just wanted to confirm that it also corresponds to improvement in the real like-for-like total rather than, you know, adjustment like from traffic to basket. The second question is regarding the union agreement that you mentioned on the call. I wonder, like for 2027 you mentioned that it should be in line with the inflation. What inflation data point are we talking about? Is it like December 2026 inflation?
Whether this agreement is applied to the new workers from that were employed from the distribution centers. Those are two questions from my side. Thank you.
Thank you, Maxim. Regarding April trend, trading is pretty much parallel to our expectation, which means that this disruption-driven issue that we had in the beginning of March is not taking place. Obviously, we just solved all the issues, pretty much our April traffic is positive. The trend on the basket size growth is also maintained. Pretty much our figures are to the expectations. I can express that both traffic and basket size are positive. At the same time, of course, the season will be very important, just to give you the trading expectation as well.
The issues regarding the geography that we have to be careful, I guess, when we commence, because the tourism and similar areas are pretty much linked with the current macro conditions and also at the same time the surrounding geographical issues. It is still early to commence, but probably by the end of May, we can see a better pictures how the season will react. To our expectation, it is pretty much parallel to previous years. Not a very good news coming from the high reservations or cancellation of reservations are not taking place. I'm relatively positive compared to April as well for May in terms of growth perspective.
When it comes to your question regarding union, our agreement is for three years, and our negotiations are based on backward inflation. That is the historical discussion. When we have the declaration of December 25 inflation, this is actually the base of union's overall discussions. Since we are also signing for three years, we should also take into account that for the next two years it will be just the CPI itself. The reflections, we can assume that 36% is for only this year, but also we can assume that the additional increase above the inflation is actually a gain for the employees for the next three years. You may argue that it is an increase of that might be also separated for three years time horizon as well.
The impact of it will be for 2026. That is why we all agreed with the union and with our workers, employees, and the managers that this hit should be compensated with a better efficiency at the store level, with a better service, with a better shoppers' happiness that has to be directed. I'm positive that these reactions will start right away since we're gonna be just paying the additional difference which is coming from due from January will be paid from next week. That is why this impact, we have to take it into account as a positive shift for the employees' overall position.
Reflections of it for every employee who are in our payroll at the beginning of January 26 will have that increase. Which means that the agreement is valid for all the employees which are under our payroll at January 26. The difference will be for the employees coming from the distribution centers with a new contract directly under our own payroll. Since they already had their increases during the transition, they will not gonna have an additional increase, which we are trying to express here.
If there is a gap with their base accounting, they will only receive the gap in between, which means that the majority part of them with a lower seniority will not gonna have the additional additional increase because that increase of 36% is lower than the transition that they had when they moved to our payroll. There are of course fewer senior colleagues who may have had less increase during the transition. They will have the difference in between only. The short story is just that increase is relevant for store employees, not straight for the warehouse employees.
Thank you so much, Özgür Bey. Just to follow up on what you said. After the conclusion of the agreement, would it be fair to assume that because of that kinda higher compensation, we might see a bit of pressure on the employee cost as opposed to improvement in employee cost as a percentage of sales in the first quarter? I'm talking about the other quarters starting from the second.
Maxim, that's an important point. Thank you for the question. First of all, there are two impacts. One of them is just the financial part, and the other part is the motivation part. What I addressed, is the motivation part that, I'm expecting positive reaction, from the overall service levels in the store. That is our aim. That is our expectation. On the financial part of it, we already, since we are doing this for years, since we were expecting a higher, inflation, higher than inflation, increase, we already provisioned that in the first quarter results. The results that we shared for the first quarter are pretty much in line on what we signed this morning.
What I can express that we already reflected this additional cost into our first quarter results.
Got it. Thank you so much.
Thank you. [Hamza Hanım], there's one more question. You may go ahead, please.
Sorry, can you hear me now?
Yes, we can hear you.
Okay. Apologies, I couldn't unmute myself. Özgür Bey, Cem Bey, thank you both for the presentation, and also congratulations for taking the company back to ETS growth cycle. Actually, Maxim has asked some of my questions. About the employee cost, you mentioned that in Q1 you have already reflected an assumption which is parallel to the current agreement. If it's, we won't see any additional employee costs impact in Q2 that will cover the Q1 impact, right?
That's correct, [Hamza Hanım].
All right. Okay. Thank you. Your, I mean, you have highlighted that you have seen some GM pressure, gross margin pressure in the first quarter because of these warehouse employee cost issues. I'm trying to confirm how you record these warehouse costs. Aren't they supposed to be part of OpEx? I mean, why are they putting pressure on your gross margin?
That's a good question. Thank you. For several years, cost of goods sold has the cost of supply chain. That is what we account for years. The reasons are coming from a lot of years ago. When you buy the goods, you have the option from the supplier either to deliver to your warehouse or to your store. When they deliver to your warehouse, this is the cost of goods sold still because we still have the option of receiving them at the store level. Because of this, the buyer's negotiation, it has two folds. If we feel that the cost of delivering directly to the store is lower than cost of delivering the goods to the distribution center, we prefer direct distribution to the store.
That is the main reason for years, and that is why the cost of distribution centers employees, or just rents or anything which is linked of distribution of the goods are within our gross margin.
That's clear. If you exclude these warehouse costs, have you seen any gross margin pressure because of the intensified promotional activities in Q1? I understand Q1 was quite promotionally intensive in the sector. Is it putting any pressure on your gross margin, or this is something you'll fairly manage because of the inflation and the strong positive growth?
The short answer is that we are managing it, but it is very difficult, I have to express. It is very difficult because we still have a weak demand, and that's the economic program by definition. To initiate the demand, we are focusing on marketing activities, promotions, but we do it together with our suppliers obviously. That is why they are supportive for these actions, and we share the cost of it. All in all, we are still managing. There is no commercial margin reduction because of this current trading. However, it is difficult, and I have to express that it is taking time, effort. It is disturbing the supply chain because promotions are, you know, demand hikes.
Probably, they are also creating additional costs for our supply chain, and we are trying to compensate that as well. Just bear in mind as well, we also have some about two to three weeks of disruption in our supply chain during this, during these issues on warehouse labors. That also impacted our marketing activities, which is a kind of slight impact on our I would say commercial outcomes. All in all, the short answer is that we believe that we can manage this commercial challenge.
We can't say that Q2 gross margin is going to be higher than Q1?
Seasonality. On the outside of the seasonality, it is gonna be the same, due to seasonalities, it may differentiate.
That depends on the tourism, probably.
Partly tourism, partly bayrams, you know, the holidays, breaks, seasonal stores performance during the breaks. These are pretty much the drivers.
All right. Okay. Thank you very much, Özgür Bey .
Sure.
Thank you, [Hamza Hanım]. There is one question from [Ata Şen] from Izon.
Can you hear me?
Yeah, we can hear you. Yes.
Okay. Good afternoon. Thank you for the presentation. I have a short question. Do you plan to increase market share via an acquisition, like an inorganic growth?
Thank you for the question. All the acquisitions are always an opportunity, but to be honest, we are not planning our yearly budgets or guidance based on acquisitions. That is why I can express it. We may act opportunistic if there is a case which is lucrative in terms of the ROI, why not?
Okay. Thank you so much.
Thank you for the question. There is one more question from [Harry Lawson]. Yes, please. You may go ahead.
Hi. Can you hear me okay?
Yes.
Great. Thank you very much for the call and congratulations on the strong numbers. Just to ask a few couple more questions on those points raised, like, I think at the end of last year, end of financial year, you were talking about the tough conditions in the market, and it sounds like those have continued. Would you say you're more conservative now just considering the geopolitical tensions and, you know, possible energy cost impacts and how that flows down to your consumer? So that's the first question. Just if you're, you know, whether you're feeling kind of incrementally more conservative on the outlook?
Thank you for the question. Economy condition-wise, the conditions are tougher. That's what we can express very straight. I am not an expert on economics, but we all know that the current macroeconomic program is pushing towards less consumption. I mean, program itself requires less consumption, and which is the case, and shoppers are becoming much more cautious on their spending. It is a straight challenge to the basket size. However, we are overcoming this with a clear partnership with our suppliers to overcome this challenge. When it comes to additional issues which has started the year itself with the geographical challenges further on top of our own economic program, this is two folds.
On one side, due to oil prices, nobody knows where it will stay, but existing levels are challenging for the economy, we know, for current account deficit issues. That may put further pressures on the economy. However, it may also put further inflation on the cost of goods sold, which we have to reflect to the sales. However, the consumption still will be weaker under these conditions. We may expect higher inflation due to oil prices. However, with a lower demand, which is a difficult environment when we have an issue on high inflation, low demand. That is what we have to face and tackle. This is why, from the beginning of the year, we prioritize majority of our initiatives towards efficiencies across the ecosystem because we are foreseeing these economic conditions.
Considering that existing macroeconomic program will sustain and will continue. Outside of that territory, it's difficult to answer. With this, with this tough conditions, we have to be deliberately acting on efficiencies on the supply chain, efficiencies on the distribution center, efficiencies on the store level, and prudent on capital expenditure with new stores. If required, some of the stores may be closed if they are totally, really underperforming to the expectations, compared to expectation. This is a year where we have to be careful.
Great. Thank you. My second to last question is just related to the agreement on 36% wage increase, which I think, if I remember correctly, the minimum wage increase for 2026 in the market is 27%. I know you do things on a sort of backward-looking basis, but is this, would you say this is a more favorable or less favorable outcome than you had budgeted, like both for 2026 and for the 2027, 2028 CPI based?
It is again, two answers. On one side, it is higher than what we budgeted. That's very straightforward because we had inflations around 30%, 32% levels, and that was our aim to conclude. It is not the case because inflation is not going down. That is the main concern, and that is the main issue with the negotiation. If the inflation was towards a declining phase, which was our agenda for the company, for the union itself, I would have assumed that we're gonna be just ending up with a lower than 36%, it is not the case. Inflation is not going down. In that environment, we are somehow in need of signing to the benefit of both the company and the employees. That is the joint point.
That's the common point that we agreed. It is higher than what we budgeted, but during the negotiations, we already felt the issues. That is why we already provisioned on our accounting of the first quarters with this additional cost. Even if it was higher than our budget, we already provisioned. We're not expecting anything extra for Q2 because we already signed. The challenge for us will be now is to manage this. We can argue that that's an increase compared to existing inflation. You name it, maybe 4% higher than the existing inflation, but it is an agreement for three years. That 4% is for the next three years at an additional cost for us. We should also maybe just put in that perspective.
Got it. Okay. Thank you very much.
Thank you for the question. I guess there is no more question from the participants.
Özgür Bey.
Okay. Thank you very much for joining us today, we will be just expecting you to see a healthier results again in August. Thank you.
Thank you. This concludes our earnings call. Thank you.