Risk Factors

The Company needs to identify as well as 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. It 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, it 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 it’s 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 may not be available.

The Company may need to obtain additional funds through the issuance of bonds or public or private increase of its capital stock. 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 may not be able to maintain its pace of growth if it is affected by any of the following factors: (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, especially 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’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 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, while 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 Superintendency for the Development of the Northeast – SUDENE 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 2026.

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 October 2028, 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.

The Company’s operating results reflect the effect of seasonality of sales.

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. During Carnival, for example, 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.

The Company is subject to logistical errors and delays caused by problems in its logistics centers and with the transportation company.

Most of the raw materials used by the Company and its products are transported by road. If there is a problem in the Company’s logistics chain, which comprises 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, customs and eventual strike of workers in this sector, or even in the transport carried out by the group’s transportation company, the distribution of merchandise to the stores may be affected, compromising the operating result.

Problems in information technology systems, or the inability of constantly update them, may adversely impact the Company’s operations and inventory control.

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. Problems in the operation or management of these systems, as well as the inability to consistently and satisfactorily update them, can lead to their interruption or malfunction. 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. If repairs or updates are not performed in a timely manner and if such interruption or malfunction is further extended, the Company's business and financial and operating controls may be adversely affected, compromising its results.

In addition, any information system is exposed to viruses, fraud through software, and other problems that may unexpectedly impact its operation, such as breakdowns and failures, which may lead to interruptions, delays, loss of data or inability to accept and meet customer demands. Thus, disruptions to the Company’s systems or its underlying infrastructure could adversely affect the Company’s business, possibly resulting in financial losses, increased costs and/or general loss.

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 the “Riachuelo” 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 the Guararapes Group or the “Riachuelo” brand 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 operating results.

The resignation or dismissal of members of senior management may compromise the Company’s business.

The Company’s performance greatly depends on its efforts and the ability of its senior management. Any member of its senior management may choose to leave the Company and work with competitors or create new competing companies. There is no guarantee that their compensation or the non-compete clause signed by senior management will be sufficient or effective to prevent members from resigning from their positions in the Company to join competitors or create a competing company, or that any non-compete agreements are maintained by the Judiciary. The resignation or dismissal of any of the Company’s senior executives or controlling shareholders may adversely and materially affect the Company’s business, operating and financial results.

In addition, if any of these senior management professionals resign, the Company may find it difficult to find substitutes with the same qualification. If the Company is unable to attract or retain qualified professionals to manage and expand its operations, it may not be able to successfully conduct business. Even if it is able to hire, train and maintain qualified professionals, the Company cannot guarantee that it will not incur substantial costs to do so, which may, in any case, affect its operating and financial results.

The Company may not pay 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 the Brazilian Corporate Law, and will not be available for the payment of dividends. The Company may not pay dividends to its shareholders, in any fiscal year, as proposed by the Board of Directors, to be approved by the Annual Shareholders’ Meeting, when such payment is not advisable in view of the Company’s financial situation. In 2018, the Company distributed 25% of adjusted net income as interest on equity and dividends.

The Company may not succeed in renewing store lease agreements of strategic and high visibility locations.

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 is subject to the occurrence of events that are not covered by insurance companies and/or damages greater than the limits of coverage set forth in its policies. In addition, the quantification of the risk exposure in the current policies may be inadequate and/or insufficient, may imply reimbursement and/or lower-than-expected compensation. 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 market value of the Company’s shares may be negatively affected by 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 by its competitors, of relevant acquisitions, strategic partnerships, alienations or other strategic initiatives.

In case any of the events described above occurs, the market value of the Company’s shares may be negatively impacted.

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 the 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 interests of investors.

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.

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.

The Company is not subject to risks related to its shareholders.

If the Company is not able to acquire raw material, its sales may be adversely affected and its financial condition may be hampered.

The Company manufactures some of the products it sells and depends on raw materials widely used in the textile industry, such as cotton. The Company requests raw materials through purchase orders and does not have long-term contracts or that provide for exclusivity with any supplier or contracted third party. If the Company is not able to maintain a good relationship with its suppliers, or to obtain raw material in sufficient amount and on a reasonable commercial basis, its business and operating results may be hampered. In addition, 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, which may adversely affect the Company.

The Company is not able not ensure that its suppliers will 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 Company requires all its suppliers to have the certification and qualification issued by the Brazilian Association of Textile Retail (ABVTEX), in order to combat practices analogous to slave labor and/or child labor.

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 installments without interest. The Company’s results may be negatively affected in case it is not successful in its credit policy or if the payment capacity of customers who use the 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, an economic slowdown, depreciation of the real, inflation or a rise in interest rates, customer default rates may increase.

If the Brazilian economic conditions worsen and the sector’s customer default rates rise, the Company’s operating results may be adversely affected.

The Brazilian apparel manufacturing and retail sectors are characterized by intense and increasing competition.

The clothing retail sector in Brazil is highly competitive, with a large number of players and low entry barriers. 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 is not able to effectively stand up to the competition in the market in which it operates, its market share, operating result and financial situation may be adversely affected. In addition, a drop in the level of economic activity in Brazil may also negatively affect the results of the segments in which the Company operates.

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, which are described throughout item 4.2 of the Reference Form.

The Company is not subject to risks related to a foreign country.

The Company and its suppliers are subject to environmental laws and/or regulations.

Some of the activities carried out by the Company and/or its suppliers are subject to federal, state and municipal laws and regulations governing the protection of the environment, related to the following aspects: environmental licensing, solid waste management, water resources management – including effluent treatment and suppression of vegetation. Failure to comply with applicable laws and regulations may subject the Company to administrative sanctions that may result in fines depending on the violation, as well as criminal and civil liability (remediation of environmental damages). In additional to the fines, the Company and its suppliers may also be subjected to trade embargoes, total or partial suspension of activities, demolition, as well as the duty to repair any environmental damages, among others. These penalties also apply if the companies fail to meet the conditions established in the respective environmental licenses.

The Company uses chemicals in the manufacture of its merchandise.

The Company manufactures part of the merchandise it sells and uses chemical products for production, which 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 and the use of chemicals in clothing items is governed by national and international regulations. Failure to comply with such regulations and/or the use of prohibited and hazardous substances may have an adverse impact on the Company’s operating results and image. It is worth highlighting that the Company adopts the best practices to control possible environmental damages.

Last Update on June 14, 2019

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