Risk Factors

Before making investment decisions, potential investors should carefully consider all the information available on this website, specially the risks described below. Guararapes-Riachuelo’s business, financial situation and operating results may be materially and adversely affected by any of these risks and, consequently, have a negative impact on the securities issued by the Company.

The risks described below are those known by Guararapes-Riachuelo and which the Company believes may materially affect the Company. Additional risks unknown to Guararapes-Riachuelo or risks deemed immaterial may also affect its business.

The Company needs to identify and promptly and successfully respond to changes in fashion trends and consumer preferences.

The Company’s sales and operating result depend on its ability to manage inventory and predict, identify and promptly respond to changes in fashion trends and consumer preferences. The Company cannot predict consumer preferences with certainty and these preferences change over time. While the development and orders of the Company’s products should be submitted before the applicable sales season, the Company needs to swiftly react to market trends, offering attractive and desirable goods at competitive prices. The delay between development and/or purchase orders and the availability of specific products at the stores may hamper a quick response to new trends. If the Company is not able to predict, identify or respond to emerging style trends or consumer preferences or if it makes an inaccurate analysis of the market for its goods or any new product line, there might be a substantial volume of unsold inventory. In response to these situations, the Company may be compelled to lower prices or have promotional sales to clear inventory, which would negatively affect its operating results.

The Company may need additional funds in the future, which will not necessarily be available.

The Company may need to obtain additional funds through public or private funding by issuing bonds or shares. Additional funds raised through the issue of shares may dilute the shareholders’ interest in the Company’s capital stock.

The Company may not be able to maintain the same pace of growth.

The Company’s turnover has increased over time. Factors which may influence this growth include: (i) capacity to promptly respond to new fashion and consumption trends; (ii) ability to attract and maintain customers; (iii) economic growth of the areas where the Company has stores; (iv) changes in credit policies; (v) competition from the informal market and imported products, specially from China; and (iv) climate variations.

Future operating results depend on the Company’s capacity to open new stores and increase sales in existing stores.

The Company also grows through increasing the number of stores and renovating the existing stores, providing customers with a better shopping experience in more fashionable stores.

The Company’s capacity to continue opening new stores and increasing its sales area depends on its capacity to find appropriate sites and obtain and analyze market and demographic data; to negotiate reasonable lease agreements for new stores; to design store construction and renovation projects; to attract, hire, train and retain qualified personnel; and to manage the expansion project, as well as on new segment players and the growth of current competitors, which may increase competition for strategic points of sale.

Investments in store openings may reduce the Company’s profitability margins until these investments reach the maturity stage. In addition, the renovation of existing stores may affect the Company’s sales while they are not operating at their full capacity. Therefore, the Company may not be able to maintain the same growth rates for net revenue and profitability per square meter in the future, which may negatively affect the Company’s operating results.

The Company depends on the flow of customers generated by the shopping malls where its stores are located.

The Company’s sales largely depend on having stores located in prominent places with large flows of people, and partially on the capacity of other stores to attract consumers to their surroundings, as well as on the preference for shopping malls as a shopping destination. Shopping mall traffic and sales volume may be affected by external factors beyond the Company’s control, such as a decline in the economic activity of a certain region, the opening of new shopping malls and the reduction in attractiveness of other stores in the shopping malls where we are located.

The Company’s business depends on intense customer traffic in its stores and an effective marketing strategy in order to generate such traffic.

The Company allocates substantial funds to marketing and advertising. The Company’s sales and profitability depend largely on its capacity to identify its target audience, decide on the advertising message and appropriate media to reach this audience and promote the knowledge of and attraction to the Company’s brands, among others.

If the Company’s marketing and advertising strategies are not successfully designed, planned and executed, its financial situation and operating result may be negatively affected.

The loss of tax benefits or the Company’s failure to renew them may negatively affect its results.

The Company has income tax benefits on the sale of products manufactured at its industrial plants located in Natal and Fortaleza. The benefits granted by the extinct SUDENE are still in effect and consist of the exemption or a 75% reduction in the income tax on the results posted by each plant for periods finishing until reference year 2017.

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

In addition, the Company has benefits within the scope of the Program for Supporting the Industrial Development of Rio Grande do Norte - PROADI granted until May 2019, in the form of financing equivalent to 75% of the ICMS tax. Financing is subject to an annual interest at the rate of 3% and monetary restatement based on the reference rate (TR) variation. Amortization of the installments will occur with a 99% discount of the restated amount, after a two-month grace period.

The loss of tax benefits or the Company’s failure to renew them may negatively affect its results.

Historically, the Company’s operating results reflect the effect of seasonality of sales. The share price may be affected by these variations.

The Company’s operating results present a significant variation from quarter to quarter and we believe that these variations will continue to occur in the future. These variations are caused by the seasonality of some products’ sales and the sensitivity of the apparel manufacturing and retail markets to macroeconomic conditions. Historically, the Company’s revenue and profitability reach their highest levels during Christmas and other special dates. However, during Carnival there is a substantial decline in sales. In addition, since a large share of the products offered by the Company may be considered unessential, the sector tends to have negative results during periods of economic stagnation. Any long-lasting reduction in consumer goods purchase may adversely affect the Company’s business and operating results.

Climate variations may have a negative impact on the Company’s operating result.

Long-lasting periods of higher temperatures in the winter or lower temperatures in the summer may render part of the inventory incompatible with such unexpected conditions. Thus, periods of altered climate may compel the Company to sell its excess inventory at lower prices, reducing its margins, which may adversely affect its business.

Logistics

If there is a problem in the Company’s logistics chain, which comprises the industrial activities, currently located in Natal and Fortaleza, the supply that comes from its logistics centers, currently located in Guarulhos/SP, Manaus/AM and Natal/RN, and the transport carried out by the group’s transportation company, it may affect the distribution of merchandise to the stores, compromising the operating result.

Information systems to operate the activities.

The Company depends on the integrity, functionality, availability, stability and security of several information systems, such as points of sale at stores, credit systems, logistics systems, communication systems and several applications to control production, inventory and operational, sales and financial performance reports.

Failures in maintenance or security or lack of updates in information systems can cause interruptions in operations in the manufacturing plants, logistics centers, the store chain and the shopping mall, compromising the Company’s results.

The failure or incapacity to protect the Company’s intellectual property or the violation of third party’s intellectual property may have negative impacts on its business.

Unauthorized use or misappropriation of the Company’s trademarks may deteriorate the value of Riachuelo’s brand and store concept, the value of the Group’s proprietary brands or its reputation and compromise its business. Any infringement or violation of intellectual property against Guararapes Group/Riachuelo may result in long and costly litigation, which may cause delays or interruption in the delivery of products or require the payment of royalties or license fees, compromising the operating results.

The death or departure of members of senior management may compromise the Company’s business.

Payment of dividends to shareholders.

The Company’s Bylaws establish a minimum payment of 25% of adjusted annual net income as dividends or interest on equity. However, net income can be capitalized to offset losses or retained, in accordance with Brazilian Corporate Law, and thus will not be available for the payment of dividends. The Company may not pay dividends to its shareholders in any fiscal year if the Board of Directors decides that this payment would not be advisable in view of the Company’s financial situation and this decision is ratified by the Annual Shareholders’ Meeting . In 2015, the Company distributed 46% of adjusted net income as interest on equity.

Renewal or maintenance of store lease agreements.

A relevant share of the properties where the stores are located are leased. Given that the strategic location of our stores is a very relevant factor for the development of our commercial strategy, if a substantial number of lease agreements is terminated or not renewed, we may be negatively impacted.

The Company may be affected by losses not covered by the contracted insurance.

The Company enters into insurance contracts in accordance with usual market practices in order to insure against losses in our stores and distribution centers. However, certain types of risks are not insured by insurance companies, such as war and force majeure events that cause the interruption of certain activities. In case any event not covered by the contracts occurs, the Company will incur financial losses in order to replace or renovate the assets affected by said events. The Company may also be legally liable to pay for damages to third parties.

The interests of the Company’s controlling shareholder may be in conflict with the interests of investors.

The powers of the Company’s controlling shareholder include, but are not limited to, electing the majority of the members of the Company’s Board of Directors, establishing the result of any resolution demanding shareholders’ approval, including corporate restructuring, alienation and payment of any future dividends provided that the minimum dividend payment required by Brazilian Corporate Law is complied with. Therefore, the Company’s controlling shareholder may decide on acquisitions, alienations, financing or similar operations and resolve on dividend distribution policies which may be in conflict with the interest of investors.

The death or departure of members of senior management may compromise the Company’s business.

In the case of death or departure of a member of senior management or the group of controlling shareholders who has extensive knowledge of the operations, this may affect the Company’s business.

The market value of the Company’s shares may be negatively affected by the market volatility.

The market value of the shares issued by the Company may be subject to significant fluctuations. The factors which may affect the market value of the Company’s shares include:

  • Present or future variations in same store sales or results of operations;
  • Changes in analysts’ financial estimates;
  • Present or future changes in the Brazilian economy or the apparel manufacturing or retail markets; and
  • Announcements made by the Company or its competitors of relevant acquisitions, strategic partnerships, alienations or other strategic initiatives.
  • Shareholders may not receive dividends.

    According to the Company’s Bylaws and Brazilian Corporate Law, shareholders have the right to receive minimum dividends of 25% of adjusted annual net income. The Company may not pay dividends to its shareholders in any fiscal year if the Board of Directors decides that this payment would not be advisable in view of the Company’s financial situation.

    The Company may need additional funds in the future, which will not necessarily be available.

    The Company may need to obtain additional funds through public or private funding by issuing bonds or shares. Additional funds raised through the issue of shares may dilute the shareholders’ interest in the Company’s capital stock.

Dependence on the activities of subsidiaries.
Our subsidiaries include:

Lojas Riachuelo S/A, a retail company that was acquired by Guararapes Confecções in April 1979 in order to integrate manufacturing and retail. It currently absorbs all the Company’s production through its 257 stores distributed nationwide;

Transportadora Casa Verde Ltda., a highway transportation company, which transports the products and materials of the Company and Lojas Riachuelo S.A. across the country;

Riachuelo Participações Ltda., created in October 2006, whose main purpose is to hold an interest in Midway S.A. - Crédito, Financiamento e Investimento, intermediating the transactions carried out at Lojas Riachuelo S.A.;

Midway Financeira S.A. - Crédito, Financiamento e Investimento, created in January 2008 and operating as of the beginning of July of the same year. Its creation had the strategic objective of offering financing operations to the consumers of the products and services of Lojas Riachuelo S.A.;

Midway Shopping Center Ltda., located in the city of Natal, in the state of Rio Grande do Norte, with the purpose of managing a shopping mall. The project, with its own facilities, occupies an area of 67,987.71 m² and has a built area of 231,000 m² divided into three floors.

Future operating results depend on the Company’s capacity to open new stores and increase sales in existing stores.

The Company also grows through increasing the number of stores and renovating the existing stores, providing customers with a better shopping experience in more fashionable stores.

The Company’s capacity to continue opening new stores and increasing its sales area depends on its capacity to find appropriate sites and obtain and analyze market and demographic data; to negotiate reasonable lease agreements for new stores; to design store construction and renovation projects; to attract, hire, train and retain qualified personnel; and to manage the expansion project, as well as on new segment players and the growth of current competitors, which may increase competition for strategic points of sale.

Investments in store openings may reduce the Company’s profitability margins until these investments reach the maturity stage. In addition, the renovation of existing stores may affect the Company’s sales while they are not operating at their full capacity. Therefore, the Company may not be able to maintain the same growth rates for net revenue and profitability per square meter in the future, which may negatively affect the Company’s operating results.

The Company’s business depends on intense customer traffic in its stores and effective marketing in order to generate such traffic.

The Company allocates substantial funds to marketing and advertising. The Company’s sales and profitability depend largely on its capacity to identify its target audience, decide on the advertising message and appropriate media to reach this audience and promote the knowledge of and attraction to the Company’s brands, among others.

If the Company’s marketing and advertising strategies are not successfully designed, planned and executed, its financial situation and operating result may be negatively affected.

Consumer financing is a significant risk for the Company.

The Riachuelo private label card represents a significant share of the Company’s sales. Customers who use the Riachuelo private label card in their purchases have a payment plan of up to 5 monthly payments without interest or up to 8 monthly payments with interest. The Company’s results may be negatively affected in case the Company is not successful in its credit policy or if the payment capacity of customers who use Riachuelo private label card to make purchases is affected, leading to an increase in our customers’ default levels.

A rise in default rates may adversely affect the Company’s results.

Adverse changes in Brazilian economic conditions may lead to an increase in losses and provisions for doubtful accounts.

If the economic conditions in Brazil worsen due to, among other factors:

(a) an economic slowdown;

(b) depreciation of the real;

(c) inflation; or

(d) a rise in interest rates, then customer default rates may increase. If the Brazilian economic conditions worsen and the sector’s customer default rates rise, its results may be adversely affected.

The offering of financial products may be discontinued.

Through Midway Financeira, the company offers financial products such as unemployment, residential, personal accident, auto and dental insurance in partnership with contracted companies. We run the risk that these products will no longer be offered to Lojas Riachuelo’s customers if Midway Financeira terminates the contracts it maintains with these partnering companies.

Delivery of raw materials and merchandise after the deadline and not within the specified requirements.

There may be delays in the delivery of raw materials for the production of clothing items and merchandise for its stores or not within the specified requirements. There are no guarantees for regular supply of the plants and stores, which requires us to search for new suppliers that meet the Company’s terms and conditions. These factors may compromise supply to the group’s stores.

Ensure that suppliers do not use irregular practices.

Due to the substantial fragmentation and outsourcing of the suppliers’ production chain, the Company does not have control over their operations and irregularities. As a result, it is not possible to guarantee that some of these suppliers will not present problems related to labor, environmental or sustainability issues, outsourcing of the production chain and inadequate safety conditions or use these irregularities to reduce the costs of their products. The Company’s image with its customers may be tarnished, if a significant number of its suppliers present said irregularities.

The Guararapes Group/Riachuelo cannot predict whether it will be able to pass any increase in the cost of merchandise through to customers in the future.

In the selection of suppliers, price, merchandise quality, delivery terms and the suppliers’ financial situation are taken into account. However, due to certain factors beyond their control, such as regulations and government policies, national and international economic conditions, inflation and other macroeconomic factors, suppliers may increase the price of their merchandise. The Company cannot predict if it will be able to pass any increase in merchandise costs through to customers in the future and if the negative impact of this upturn in costs will affect its operating results.

Consumer financing is a significant risk for the Company.

The Riachuelo private label card represents a significant share of the Company’s sales. Customers who use the Riachuelo private label card in their purchases have a payment plan of up to 5 monthly payments without interest. The Company’s results may be negatively affected in case the Company is not successful in its credit policy or if the payment capacity of customers who use Riachuelo private label card to make purchases is affected, leading to an increase in our customers’ default levels.

A rise in default rates may adversely affect the Company’s results.

Adverse changes in Brazilian economic conditions may lead to an increase in losses and provisions for doubtful accounts.

If the economic conditions in Brazil worsen due to, among other factors:

(a) an economic slowdown;
(b) depreciation of the real;
(c) inflation; or
(d) a rise in interest rates, then customer default rates may increase. If the Brazilian economic conditions worsen and the sector’s customer default rates rise, its results may be adversely affected.

Although the Company is one of Brazil’s largest apparel manufacturing companies and the parent company of one of the country’s largest retail chains, with stores distributed nationwide, Lojas Riachuelo has several different competitors at local and national level. The competition is characterized by several factors, including variety of goods, number and location of stores, marketing and advertising strategy, pricing policy, merchandise quality, customer service, brand strength and consumer credit availability. If the Company does not effectively stand up to the competition, its operating result and financial situation may be adversely affected.

New participants in the Brazilian apparel manufacturing and retail sectors, including great retailers based abroad, informal market and imported products.

New participants in the Brazilian apparel manufacturing and retail sectors, including retailers based abroad, informal market and imported products, especially from China, may give rise to sudden changes in the competitive scenario. The Company also faces competition from smaller manufacturing and retail companies which often profit from the ineffectiveness of the Brazilian tax collection system, import control and labor laws.

The apparel manufacturing and retail sectors are sensitive to reductions in consumer purchasing power and unfavorable economic cycles.

In the last few years, these sectors have been susceptible to general economic slowdown periods which have led to a decrease in consumer spending. The success of these sectors’ operations depends on factors related to consumer spending and/or affecting consumer income, including the general economic scenario, interest rates, inflation, availability of consumer credit, taxes, consumer confidence in future economic conditions, employment and wage levels.

An economic setback may considerably reduce consumer spending and available income, which would negatively affect sales, operating results and the financial performance of the sector as a whole. Any negative effect on the Company’s financial performance would probably lead to a decrease in the price of its shares.

The Company is not subject to direct risks arising from specific government regulation of the industry in which it operates, except for risks related to government regulation of inflation, interest and exchange rates, and macroeconomic conditions.

Although it does not operate in foreign countries, the Company opened a purchase office in Shanghai, China, in order to improve the process of importation from Asian suppliers. If, for any reason, the Company is not able to maintain the imports from these suppliers, it will not be possible to ensure that it will be able to immediately replace these imports and, for that reason, its operations and results may be affected, with a reduction in the supply of these products.

Environmental

Water

Water is a very important input for the textile industry, especially in the fabric dyeing and treatment stage. Its shortage may compromise the production process, with an adverse impact on production volume. If this occurs, the Company will have to buy ready fabric, which may impact costs.

Cotton

Cotton is one of the main raw materials of the textile industry. The lack of this component in production may impact costs and production capacity.

Chemicals

Chemicals are present in fabric processing in the dyeing, printing and finishing stages. The handling, transportation, treatment and disposal of chemicals must comply with the environmental legislation.

Social

Consumers

The use of chemicals in clothing items is governed by national and international regulations. The use of prohibited and hazardous substances may cause health problems for consumers and impact the company’s reputation.

Suppliers

The Company establishes rules of conduct with suppliers for observing and monitoring working conditions. Any violation, especially child or forced labor, represents a risk to the commercial relationship with the supplier and to the Company’s image and reputation.

Last Update on July 17, 2017

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