Sector Overview

The manufacturing department is highly sensitive to economic variations, since its main cost comes from the acquisition of cotton, whose prices are established by the global market and are in dollars.

Recently, as consequence to Brazilian Real appreciation in comparison to North American currency, the production cost is remaining stable at low levels; however, any economic instability which may cause foreign exchange volatility should pressure the production costs.

The retail textile segment, however, is highly correlated with GDP variations and the availability (or not) of credit. Economic growth allied to the credit expansion, resulted in growth in the retail sector as well in the apparel industry. Price stability over the past few years also contributed to a real income gain for most of the Brazilian population, generating a retail sector recovery and purchase power expansion.

The sector’s high degree of informality has major impacts, especially on retail and department store chains that comply with tax, labor and environmental regulations. Even with all the illegal competition, however, the leading chains have recorded strong growth in the last few years due to the following factors:

(i) differentiation;
(ii) segmentation;
(iii) quality;
(iv) technology and control development;
(v) scale gains.

The company benefits from fiscal incentives on Income Tax and State Added value Tax (ICMS) over specific products sales. Income Tax benefits incur in the production sales from items manufactured in Natal (RN) and Fortaleza (CE) plants. All resulting incentive must be provisioned as Capital Reserves.

These incentives, provided by SUDENE (Northeast Development Board), consist of a 75% reduction in or exemption from income tax on the results of each factory unit, until the base year of 2017.

The Company also receives incentives from the FDI (Ceará Industrial Development Fund) until August 2023, corresponding to financing equivalent to 75% of ICMS tax due, adjusted by the TJLP (long-term interest rate) and amortized with a 99% discount after a one-month grace period.

Additionally, the Company receives tax incentives from PROADI (Rio Grande do Norte Industrial Development Support Program) until May 2019, also corresponding to financing equivalent to 75% of ICMS due, subject to interest of 3% p.a. and monetary restatement in accordance with the TR reference rate. Installments are amortized with a 99% discount on the restated amount, following a two-month grace period.

Last Update on July 13, 2017

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