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.
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.