Investor Relations

Market

Macroeconomic View

The clothing sector is very sensitive to macroeconomic changes, since its main cost comes from the acquisition of raw material – cotton – the prices of which are established by the world market, in US dollars.

On the other hand, the textile retail segment is highly correlated with changes in GDP (Gross Domestic Product) and with the evolution of credit. Accordingly, the economic growth presented in recent years, along with the expansion of credit, has boosted sales in the retail sector as a whole, and particularly in the clothing segment. The stabilization of price levels observed in recent years has also provided a real income gain for the population, contributing toward an increase in consumers’ purchasing power.

The Brazilian fashion retail market is rather fragmented. It is estimated that the top five players combined have less than 15% of market share, while most of the market still belongs to the informal sector. Such fragmentation notwithstanding, the retail business in Brazil is very competitive. We compete directly for sales and store locations with other local, national and international department stores, specialty stores, discount stores, and supermarkets. The most significant differences between competitors on the retail market include store layout, product quality, prices, merchandise, brands offered, and the availability of ancillary services such as customer credit and repairs/alterations of clothing purchased at our stores.

The sector’s high informality generates major impacts, mainly on retail chains and department stores that comply with tax, labor and environmental laws. Even with all the illegal competition, the major chains have been growing strongly in recent years due to the following factors:
(i) differentiation;
(ii) segmentation;
(iii) quality;
(iv) advances in technology and control;
(v) gains in scale.

The Company’s market positioning works with the concept of fashion democratization, offering all the attributes of fashion at competitive prices to the various social classes, aimed at drawing consumers from the informal to the formal market, in addition to providing specific payment terms according to the income level of its customers.

The retail sector’s performance is also impacted by factors relating to unemployment, credit availability, and interest rates. Improvement in the macroeconomic scenario in recent years has increased the purchasing power of a significant portion of the population, which has also started to benefit from social programs developed by the government, mainly in the Northeast and North regions, where the Company has strong brand appeal. However, the COVID-19 pandemic that started in 2020 significantly affected the retail sector. To minimize the impact of the pandemic, tax incentive and job preservation policies were introduced, as well as income support measures, which benefited economic sectors at different levels. Throughout 2021, the Company followed the progress of vaccination against COVID-19, the relaxing of social distancing measures, and the gradual resuming of the flow of customers at our physical stores.

Fiscal Incentives’ Description

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. 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 2026.

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.

The Company benefited from the incentive under the Rio Grande do Norte Industrial Development Support Program – PROADI until July 31, 2019, being replaced as of August 1, 2019 by the Rio Grande do Norte Industrial Development Stimulus Program. Norte – PROEDI, created by Decree No. 29,030/2019 and guaranteed by State Law No. 10,640 of December 26, 2019, in the form of presumed credit of 75% to 80% of the ICMS amount payable.