Guararapes - Riachuelo Case November, 2011

Transcrição

1 Riachuel (Guararapes) Guararapes is amng the leading fashin business grups the Brazil, it is the cntrller f Ljas Riachuel, ne f the largest fashin retailers in Brazil, cmpeting with C&A, Renner and Marisa. We hereby refer t the grup as Riachuel, given the greater familiarity f ur investrs with this name. The grup has 6 clthing manufacturing plants, lcated in Ceará and Ri Grande d Nrte, perating n a integrated manner and fcusing f supplying the retail peratins at the subsidiary Ljas Riachuel. The grup is als the sle wner f Midway Financeira, the grup s main surce f cstumer financing and Midway Mall Shpping Center. It is als the nly retail grup, amng the afre mentined cmpanies, that perate the three pillars f the retail business manufacturing, retail and cstumer finance in an exclusive manner, thus capturing the excellent synergy between them. Fr cmparisn, we demnstrate belw key evaluatin metrics between the grup and its listed direct cmpetitrs. It is wrth mentining that fr this cmparisn, we have excluded the impact f Midway Mall (shpping center) frm the grup s revenues, EBITDA and net prfit. Net Receita Revenues Líquida frm cm a Direct Venda Sales de Mercadrias (R$ 2010 MM) (R$ MM) Receita Net Revenues Líquida Op. frm Financeira Financial Transactins 2010 (R$ MM) (R$ MM) Riachuel Riachuel 384 Renner Renner 289 Marisa Marisa 373 EBITDA 2010 (R$ MM) Lucr Líquid Cnsliad Net Prfits (R$ MM) 2010 (R$ MM) Riachuel 515 Riachuel 318 Renner 505 Renner 308 Marisa 384 Marisa 209 Surce: Perfin; as f 31st Octber, 2011

2 Valr Net de Wrth Mercad (R$ (R$ MM) MM) Marisa Renner Riachuel Surce: Perfin; as f 31st Octber, 2011 The last graph, in particular, is what intrigues us the mst and mtivated t lk at the grup in greater detail. Riachuel s net wrth is mre than 20% belw that f Renner althugh bth cmpanies, in abslute terms, have similar reprted figures fr EBITDA and Net Prfit. Since then we are dedicated t seeking reasns that justify this distrtin n the market s valuatins between firms. In this reprt we carefully examine bth the factrs cnsidered by us t be the causes fr this distrtin the key drivers f ur expectatin n the cmpany s great capability t create value. Distrtin Causes Sharehlder Structure Crprate Gvernance Real Estate Ownership Key Drivers Greater Prductin Chain Integratin Grwth Opprtunities Custmer Finance Operatins Over the past fur years the cmpany has been underging majr transfrmatins that put the executin f their integrated peratin amng the tp f the cuntry. We have als nticed a gradual breakdwn f sme very strng cultural barriers previusly present n the decisin making prcess f the cmpany, alngside relevant changes n the cnductin f the cmpany. In time, these changes shuld create a great deal f value t its sharehlders. Althugh cnsidered subtle fr a market dminated by precnceived ntins, the fllwing initiatives taken by the cmpany will surely create sufficient cnditins fr the cmpany t significantly enhance its cmpetitiveness, prfitability and als supprt the recently annunced acceleratin n their stre expansin plan. Our clsest and lngest investrs knw the imprtance we give t qualitative aspects f any cmpany, as it is ur understanding that, n the lng run, this aspects indeed has a relevant impact n the ecnmics f a cmpany, and cnsequently n the return f any investment. Therefre, we will list belw a series f qualitative aspects, in additinal t the current and future ecnmics f this cmpany, which lead us t believe that we are facing a great investment pprtunity. Crprate Gvernance and Sharehlder Strcture This issue, tgether with the lw liquidity f this stck, is the biggest discunt factr fr the market, given that there is still much t advance n the cmpany s crprate gvernance. The cmpany has the same quantity f Cmmn and Preferred shares listed at the Bvespa, and it is cntrlled by the funder f the cmpany, Mr. Nevald Rcha, and his three sns. It is wrth mentining that the cmpany is nt listed int any particular Crprate Gvernance segment f the BM&F Bvespa.

3 Our investment cnsists slely n Preferred Shares, withut any vting rights except thse prvisined by Brazilian law. Because we see these particular cmmn shares nn deserving f the market premium, relative t their preferred shares, as the current cntrllers wns mre f the preferred (82.75% f ttal utstanding) than cmmn (75.78 % f ttal utstanding) shares, which reduces the chances f minrity PN being intentinally harmed by the cntrllers, in additin t ensuring a dividend yield f 10% higher than thse attributed t the cmmn shares The cmpany has a Bard f Directrs with nly three members; all f them are frm the funder s family, sending a clear message that this is cmpany has an wner. This structure, althugh prhibiting any third party (i.e. minrity sharehlders) interference n the cmpany s peratins, can help t prevent excesses n the part f the fficers. Mrever, the cmpany has a Fiscal Cuncil with a 3 t 5 members appinted by the cntrllers but, t sme extent, with the participatin f third parties. Experience has shwn us that gvernance is built thrugh attitudes and being listed int any particular Crprate Gvernance segment is nt a guarantee f prtectin t minrity investrs frm the cntrller s creativity r ill intended investment banks. Furthermre, we shuld pint ut that Mr. Nevald and ne f his sns have a R$ 55 millin lan agreement with the cmpany paying 99% f the CDI, nt fr the cmpany necessities but because Mr. Nevald believes that these resurces, as prceeds f a distributin f dividends, shuld nt be invested anywhere else ther than n the cmpany. Nt t mentin that we maintain a transparent and straight frward relatinship with the cmpany s management, hlding frequent meetings with all the cmpany s fficers. Real Estate Ownership Retail peratins, especially true fr listed cmpanies, have a clear tendency f being asset light cmpanies. That entails, in principle, that they immbilize the minimum pssible amunt f capital in wned stres as a way t free resurces t be reinvested int peratins (lgistics, manufacturing, and cstumer-finance) r returned thrugh the sharehlders thrugh dividends distributin r any ther legal mechanism. Overall, the investrs tend t pay a higher premium fr this mdel in return t higher yields t invested capital (ROIC), after all it is preferred t rely with the industry standards rather than perfrming a thrugh due diligence f the cmpany s investments. Thrughut Riachuel s histry, the cmpany pted t use a hybrid mdel mixing rental and significant prtfli f fully wned prperties. These stres have thusand m² (equivalent t 1.3 millin ft²) f sales area (representing 35% f the cmpany s ttal sales area) and net revenues clse t R$ 1 billin, as reprted fr The relevance f these figures shuld decline cnstantly ver time, as management reviewed this cncept and mved away frm stre wnership a few years ag, thus n lnger immbilizing capital int stre wnership. This means that the cmpany s marginal ROIC f the investments made ver the past years, thrugh prfit reinvestment, actually is far greater t its cnslidated ROIC bringing it clser t its cmpetitrs. As Riachuel des nt pay rent n these prperties, we decided nt t make adjustments frm the ptential market value f these prperties int the cmpany s market value, given that we als did nt carried this adjustments int the EBITDA. This particular cause fr distrting the cmpany s net wrth, relative t its listed cmpetitrs, becmes evident when we estimate the ptential market value fr the Midway Mall, fully wned by Riachuel. This shpping mall has 231 thusand m² (2.486 millin ft²) f built area, divided int 3 flrs and a ttal land and cnstructin investment f apprximately R$ 265 millin. The mall s activities began in April 2005 a currently has 287 stres distributed int 13 anchr stres, 226 satellite shps, ne theater 7 cinema screening rms, 36 fast fd and 4 restaurants

4 Shpping Midway Mall Fnte: Empresa In rder t crrectly evaluate the asset, we must cnsider a cap rate f 9% ver the Net Operating Incme (NOI) f the Mall s peratins. As Riachuel currently d nt disclse Midway Mall s NOI we decided t cnservatively cnsider the mall s reprted EBITDA, which, differently frm NOI, is impacted by G&A expenses. If we cnsider the cap rate used n recent acquisitins by a majr cnslidatr player in this industry, BR Malls, we will be lking at an average between 9 and 9.5%. Fr an asset such as the Midway it is pssible fr the cnslidatr t pay a better (smaller) cap rate given the ability t increase revenues with simple initiatives such as, fr instance, charging fr parking currently free and the relcatin f Riachuel s call center, currently inside the mall free f cst, amng thers. Midway Mall ( R$ Milhões) E Net Revenues 32,5 35,6 40,3 EBITDA 32,5 31,3 35,3 Net Prfit 18,4 18,0 20,0 Surce: Empresa BRMalls Weighted Avg. Cap Rate (Entrance) 9,0% 8,5% 11,6% 9,9% 9,4% 9,5% Transactins (R$ MM) Surce: BRMalls Cap Rate Midway 9% NOI Midway 35,3 Net Wrth 392,4 Anther way t calculate the ptential value fr the Midway Mall is t analyze the multiple Price / FFO, whereas FFO cnsists f net peratinal incme peratins plus depreciatin. The table belw demnstrates this multiple fr listed mall cmpanies. Mrever, we estimate the market value f the Midway by applying a 25% discunt t the average traded multiple fr this sectr in the Bvespa. Cmpany Multiplan BRMalls Iguatemi Aliansce Average P/FFO 2010A 28,4x 15,1x 17,0x 30,8x 22,8x P/FFO 2011E 22,2x 19,2x 17,6x 20,4x 19,9x Implicit Yield 4,5% 5,2% 5,7% 4,9% 5,1%

5 Fnte: Credit Suisse, 1 de Nv. de Midway ( with 25% discunt) Múltipl Value P/FFO 2010A 17,1x 458,1 Implicit Yield 5,8% P/FFO 2011E 14,9x 437,7 Implicit Yield 6,7% In cnclusin, after analyzing the earning reprts fr Midway Mall fr 2009 and 2010, using similar multiples bserved n the last acquisitins made in this industry alngside the market value estimated by Delitte Tuche, we estimate that the fair net wrth value f this mall is apprximately R$ 450 millin. Cnsidering that market des nt take int accunt the value f these assets n the verall cmpany valuatin, the wnership f them can becme interesting when analyzed thrugh tw different lenses: (i) A hedge against either a scenari f high, increasing inflatin r, and mst relevant t ur pint f view, a scenari f decreasing real interest rates. (ii) Since these cmpanies are gradually becming mre reliant n financial transactins and/r credit receivables bth very sensitive t credit cnditins, these assets becme a buffer zne frm future lsses cming frm these sied f the business. Therefre, we d recgnize that this immbilizatin f capital is creating a distrtin n the markets perceived valuatin fr this cmpany, especially the shpping mall because it is nt within the cre line f business f the cmpany hwever, instead f simply absrbing the market s views and valuatins discunts as true, we pted t analyze further the shpping mall peratins which included visits t the site and we cncluded that the market is nt crrect in cntinue t penalize the cmpany fr wning it. Chain Integratin The benefits f an peratin that integrates manufacturing and retail have lng been demnstrated by large glbal cnglmerates such as Inditex (wner f Zara, amng thers) and H&M. Currently the Guararapes manufacturers devte their entire utput t Riachuel, crrespnding t apprximately half f the sales f the retailer. If we excluding bed and bath segment, respnsible fr 10% f the retailer s annual net revenues, the representatin f the manufacture utput n sales jumps t 56%. The grup s prductin mdel has evlved cnsiderably in recent years. With adjustment and investment n prcesses, the cmpany is clse t cmplete cntrl f its integrated mdel, becming extremely agile in respnding t the sales flr demands fluctuatins. While in the previus mdel the manufacturers pushed prducts int the retail side f the business, thus always perating in full capacity with its utput divided int large prductin lines, the present mdel substitutes the large prductin lines were by individual prductin cells capable f respnding with greater flexibility t the retail stres demands. Under this mdel, the manufacturers utput is nw driven by sales. In ther wrds, they successfully managed t make the manufacturing t wrk fr the retail side f the business, nt the ther way arund (as it used t). It is imprtant t nte that all links in the chain must be well aligned; thus, the manufacturing peratin must be in clse alignment with the distributin and lgistics peratin, which in turn must be well in tune with the retailing stres. Hwever, utput flexibility will nly be beneficial if the cmpany has cmplete cntrl f the lgistic system therwise, if the cmpany is nt agile in meeting the stres demand, having a flexible prductin line mst certainly will harm the cmpany s results. T deal with this issue, the cmpany cmpleted the autmatin f its 3 distributin centers in 2010, enabling them t perate with a cmmn inventry at the DCs fr all stres, substituting the traditinal, but nt cst effective, in-

6 stre inventry. The primary result f this autmatin prcess was felt bth by the increase n the amunt f prducts available fr each stre cmbined with a substantial imprvement n the verall dispatch ability. Turnarund speed than becmes crucial fr fast fashin retail peratins, such as Riachuel, where successful prduct bets must be readily restcked, seeking t minimize the risk f missing prducts n the stre, since the cst f a lst sale is far greater than the inventry carrying cst. We expect a gradual reductin n the cnslidated inventry, which can be nticed by the imprvements n the average finished prducts inventry carrying time. The fllwing graph cmpares Riachuel s perfrmance with its lcal peers that currently des nt have an integrated peratinal system, reinfrcing the ntin that there is a still rm fr imprvement. Dias de Estque Inventry de Prduts Perid Acabads f Finished (em Gds dias de (in CPV days) de Mercadrias) Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 Renner Riachuel Marisa Surce: Riachuel, Marisa, Renner and Perfin Anther relevant cntributin frm this greater flexibility and agility in the prductin and distributin f prducts thrughut the chain cmes frm imprvements n the assertiveness n the likelihd f cllectins success, as it allws the cmpany t better respnd and supply its retail peratin with best selling prducts. One f the big prblems fr any retail peratin is the re-pricing perids, translated by the reductin f prices (mark ups), cmmnly seen during sales perids dne as a way t stimulate additinal sales but with the main gal f liquidating the cmpany s remaining inventry, freeing up space fr new cllectins. Generally clthing with a high fashin cmpnent has a shrt stre shelf life, increasing significantly the implicit risk when determining the cllectin; as an errr in the cllectin can cmprmise quarterly sales and yearend results frcing the cmpany t have huge discunt sales, cnsequently dramatically cutting its prfitability. We understand that the Sales perid are bth healthy and a necessary evil, hwever it is very imprtant t track f the number items and their respective vlume f merchandize that will be submitted t these sales, as the yearend result is inversely prprtinal t these figures. Therefre imprvements n the assertiveness f the cllectin success likelihd, as a functin f quicker and mre agile respnses t the stre sales perfrmance, allw the integrated mdel als t serve as a way t cntrl prduct left ver, thus diminishing the needs, frequency f big sales perids. The imprvements abve mentined can be nticed n the Operatinal Grss Margin (OGM). As we can see n the graph belw, Riachuel has experienced a crucial increment fr this metric, when cmpared t the last year, reaching levels higher than its listed cmpetitrs.

7 Margem Sales Bruta Grss na Prfit Venda Margin de Mercadrias 52,5% 52,3% 52,6% 52,0% 50,8% 51,1% 50,6% 50,6% 50,1% 49,1% 49,1% 54,1% 53,6% 53,5% 52,8% 53,2% 53,3% 47,0% S10 1S11 Riachuel Renner Marisa Surce: Renner, Marisa, Riachuel and Perfin We wuld like t pint ut that while Riachuel s OGM gain was a direct cnsequence f integratin, it s cmpetitrs gains can be largely attributed by a higher increasingly vlumes f imprts n their prduct mix. The initiative f cmpsing the sales mix with greater reliance n imprts began, fr Riachuel, in When the cmpany decided t establish its wn prspecting ffice in Shanghai, instead f utsurcing as many f its cmpetitr currently des. As such, frm this year nwards the cmpany will experience further additinal OGM gains frm imprts. Putting things int perspective while in 2010 imprts were equivalent t apprximately 9% f the ttal revenues, the cmpany expects that this figure jumps clse t 20% by the end f Riachuel s imprt strategies cnsists f bth imprting the basic prducts, mitigating the manufacturing and cllectin risks, and using imprts as a way f utsurcing part f its high fashin prduct line, thus making the surcing management an imprtant surce f creatin f value. All the adjustments seeking t better structure its integrated peratins were cmpleted between 2009 and 2010, s the cmpany is still n its learning curve and, with the maturatin f these investments in the cming years, the full benefits f these adjustments are yet t be cnslidated and will gradually becme mre prnuncedly reflect n the upcming results. The mst interesting thing is that, when talking bth t ther peers f this industry r even service prviders, it becmes clear that Riachuel is a pineer n the initiatives afre mentined, wrking since 2008 in achieving full cntrl f all its peratins, while sme f its cmpetitrs, including listed nes, are starting t think abut adpting, implementing such measures. The last stage f this integratin prcess is the implementatin f system capable f mnitring inventries thrugh SKY (Stck Keeping Units) directly n the stres and pulls prducts frm the distributin centers and factries. At the end f this prcess, estimated t be fully implemented by the end f first quarter f 2012, the cmpany will be able t mnitr the speed f sales, enabling them nt nly t instantly detecting and classifying the best selling prducts but als t immediately react by increasing the supply f these prducts n the DCs, while substituting thse with lw sales perfrmance. As with any structural changes, the implementatin f these changes has nt been easy and until the readjustment perid is cmplete, negative quarterly impacts can happen be derived frm these changes. Hwever, we believe the cmpany is very clse in achieving full cntrl n the entire chain and part f the results frm this are already present, althugh there is still rm fr imprvements.

8 Grwth Opprtunities and Sales Area Anther aspect that reinfrces ur view that the cmpany changed its behavir can be seen n its current grwth strategy. As per previusly mentined, since 2008 the cmpany fcused its investments primarily n peratinal integratin and, thrughut this perid, at the expense f an aggressive expansin plan, especially when cmpared with its cmpetitrs. Hwever, given the advances and results bserved with the integrated system, the management understd that it was time t expand mre rapidly. As such, the management annunced its desire t increase the cmpany s ttal sales area by 45% by the end f 2013, even after cnservatively assuming that the management will be able t deliver 75% f the new penings annunces n its guidance reprt. 230,4 258,0 Stre Sales Area (000 m 2 ) Área de Vendas (mil m²) 363,3 314,5 277,7 418,8 474, E 2012E 2013E Surce: Riachuel and Perfin Retail Sales, as stated by Flávi Rcha, the cmpany s CEO, are the result f successful encunters between cstumers and precuts. A mre integrated peratin is allwing Riachuel t wrk with less depth but greater variety f in stre prducts. This, cupled with investment n visual merchandising, has substantially increased the custmers shpping experience, as it usually is translated int a larger and better prduct exhibitin per the stres square ftage. As a result, this increases the amunt f successful encunters, augmenting the success likelihd and, cnsequently, the sale itself. Given that the custmer recgnizes the quality f displayed prducts, as it is the case with Riachuel Accrding t the cmpany, there is sill ptential t prmte new penings f traditinal stres, with 2,400 m² (25,800 sq. ft.) f sales area and, n that grund, the management plans t pen between 60 t 80 stres by 2013 will priritize this type f stre. In additin, starting in 2012, the cmpany plans t launch Riachuel Mulher, a prject fcused slely n wmen and smaller stres (apprximately with 1,400 m² r 15,070 sq. ft.), t cmpete with similar initiatives frm Renner and Marisa. Fr strategically reasns the cmpany did nt release their expected ecnmics details and results frm Riachuel Mulher, but it assures that this mdel will generate rates f returns ver invested capital superir t the nes bserved n the traditinal stres. Mrever, the smaller sales area will nw allw the cmpany t access regins, markets, cnsiderate t be unprfitable fr larger the traditinal stres. The cmpany s management believe that there additinal grwth frnts t be explred. One f the, discussed internally, cnsists in better explring the strength f the brand Pl thrugh its brand stre. But this initiative, unlike Riachuel Mulher that is already under implementatin, is still a prject under examinatin that culd becme reality n the near future. The willingness t pursue a mre aggressive expansin path leads the cmpany t breakthrugh anther decisin maker cultural barrier, the issuance f debt t finance an expansin plan. Due t the cmpany s significance n cuntry s textile and retail industries and substantial enhancements n the cmpany s capital structure, the management was able t raise virtually all the necessary funding with the BNDES (Brazilian Develpment Bank, a state wned bank and primary

9 lng term financing agent in the cuntry) under very attractive cnditins, terms and interest rates. The Bank s line f credit was established fr R$ 450 Millin and interest rates f TJLP (the Bank s lng term interest rate and much lwer than Brazil s SELIC, r CDI) plus a spread f between 0 and 3.7%. It is imprtant t keep in mind that the textile retail industry in Brazil still ffers a great ptential fr future cnslidatin, as the cmbined market share f the tp 5 players, C&A, Renner, Riachuel, Pernambucanas and Marisa, crrespnd t nly 16% f the market, nt cnsidering the shadw market which is estimated t increase the ttal market size by 40%. Midway Financeira The peratin f a retail department stre, such as Riachuel, Renner and C&A is highly reliant n the availability f credit. As such, t better structure and smewhat insulate the business frm the reductin f credits by banks r ther traditinal prviders the grup created Midway Financeira in January 2008, starting its peratins in July f the same year. Histrically, the installment payment plans (very cmmn fr Brazilians) ffered t custmers when purchasing at Riachuel, ffered thrugh the Riachule Credit Card, be it a prvate label r it s VISA/Mastercard versins, are: (i) Up t Five mnthly installments withut interest, (ii) Up t eight mnthly installments with interest accrual Additinally, thrugh midway, the cmpany was able t widen its ffering f financial prducts and services, including: Persnal Line f Credit Credit Card withdrawals Unemplyment Insurance Dental Care Insurance 24/7 Rad Side Assistance 24/7 Hme Assistance Credit Card Lss and Theft Prtectin Life Insurance Hme Insurance A cnsiderable prtin f the cmpany s yearend results cme frm these transactins, hereby classified as Financial Operatins (FO). The graph belw indicates the share f Midway Financeira results n Riachuel s cnslidated EBTIDA, nt including any cntributin frm the Midway Mall. Midway Participaçã Financeira da Op. Share Financeira f Grup s n EBITDA Cnslidated Cnslidad EBITDA ex Midway Mall Mall (%) (%) 23,9% 22,0% 26,8% 24,2% e Surce: Riachuel and Perfin The significance f the FO results n the verall cmpany perfrmance tends t increase substantially if ne cnsiders that this market has a tendency f substituting private labels credit cards by VISA r Mastercard peratins, thrugh the purchase f these private labels cards by a financial institutin.

10 This type f credit card substitutin is very lucrative fr retailers as nt nly it represents an alternative relatively cheap surce f funding, but als it drastically reduces bth the cstumer credit risk taken by the cmpany and peratinal leverage when financing their purchases thrugh the installment plans and has been has been n the tp f financial institutins interest. Fr instance, the Bank Itaú established this kind f partnerships with Ljas Americanas, Pã de Açucar, Marisa, Magazine Luiza, amng thers; Bradesc stle the headlines when, in June 2009, it purchased the Bank IBI, cntrlled by C&A. Unfrtunately the specific details f these peratins were nt made public, making impssible the precise accrual f the acquisitins multiples used n them, hwever, we highlight belw a summary f the majr transactins in recent years: Octber 2008 : Marisa and Itaú signed a cmmercial agreement with 10 year tenure, creating a new, cbranded, credit card. Itaú s Investment: R$ 120 millin. Itaú s Participatin: 50% June 2009: Bradesc acquires 100% f Banc Ibi (C&A) Bradesc s Investment: R$ 1,4 billin August 2009: The Grup Pã de Açúcar and Itaú reviews the FIC s assciatin agreement remving the Itaú s exclusivity clause, cnsidering that the bank became a partner n Walmart s Financial Operatin, inherited by the merger with Unibanc. In additin, the agreement fresaw the renvatin f the bank s partnership with Pnt Fri, ending in 2011, and cntemplated a 5 year extensin t the assciatin term, until Itaú s Investment: R$ 600 millin. Itaú s Participatin: 50% Nvember 2009: The Magazine Luiza e Itaú signed an assciatin agreement, thrugh Luizacred, fr the cmmercializatin f financial prducts and services with exclusitivy until Itaú s Investment: R$ 250 millin Itaú s Participatin: 50% December 2010: The Ljas Maia (cntrlled by Magazine Luiza) and e Itaú signed an assciatin agreement, thrugh Luizacred, fr the cmmercializatin f financial prducts and services with exclusitivy until Itaú s Investment: R$ 160 millin Itaú s Participatin: 50% The table belw highlights the implicit valuatin and multiples analyses f sme f the abve mentined transactins. All figures were estimated using the published earning reprts f the preceding quarter f the annuncement. Mrever, we wuld like t pint ut that the transactin with Banc IBi was mre delicated given the bank s prven mismanagement and reckless credit cncessin which was a great mtivatr fr the sale f the bank by C&A significantly reducing the sellers bargaining pwer and multiples used t determine the bank s price.

11 Cmpany Implicit Value Equity Grss Credit Prtfli R$ Millin Net Credit Prtfli Ttal Assets Net Earnings 2008 Net Earnings 2009 Banc IBI 1.368,0 862, , , ,7 58,6 N/A FIC (Prfrma Glbex) 1.200,0 406, , , ,2 45,1 86,0 Luizacred 500,0 69, , , ,6-46,7 29,4 Financeira Price /Equity Price / Net Credit Prtfli Price / Grss Credit Prtfli Price / Assets Price / Earnings 2008 Price / Earnings 2009 Banc IBI 1,39x 0,44x 0,33x 0,31x 23,35x N/A FIC (Prfrma Glbex) 2,95x 0,40x 0,31x 0,45x 26,63x 13,96x Luizacred 7,22x 0,41x 0,34x 0,37x N/A 17,03x Average 3,85x 0,42x 0,33x 0,38x 24,99x 15,49x Surce: BCB and Perfin Estimates The fllwing graph demnstrates the return rates, measured by Return n Equity (ROE), f the abve mentined FO. As we can see Midway has ne f the largest ROE, with the lwest experienced vlatility. 35,2% 31,5% 11,2% 44,9% 43,8% 21,5% 15,8% 41,8% 15,2% 15,4% 8,6% -23,2% LTM Banc IBI FIC (Prfrma Investcred) Luizacred Midway Financeira Surce: BCB and Perfin Despite the small sample f FO, when cnsidering their assciated multiples (Price / Equity, Price / Prfits which, in ur pinin, is the best way in estimating the fair value fr Midway Financeira (r any ther FO). One disclaimer, when lking at the P/E multiples n the Ibi, we disregarded the price paid fr the bank as, by the time f the deal with Bradesc Ibi s Equity did nt reflect the expected lsses n their receivables prtfli. This matter is clarified when we lked at the 2009 Bank s Annual Reprt, pst deal, and nticed a prvisin fr credit lsses f R$ 1.2 billin, apprximately 63% f its financial intermediatin revenues.

12 Midway Financeira R$ millin Multiple Impl. Value Net Earningds ,6 15,5x 1.605,2 P/BV 256,3 5,1x 1.303,2 Average 1.454,0 Surce: Perfin The table abve lead us t believe that Midways Financeira fair value is expected t be abve R$ 1.3 billin. We pint ut that the principal factr f attractiveness f FOs in general fr larger retail banks, such as Itaú and Bradesc, falls n the large number f clients that carry a private label credit card frm the retailers, thrugh their FOs subsidiaries, but still yet t pen a bank accunt a very cmmn practice fr the Brazilian reality. Furthermre, after recent meetings with the fficers f Midway Financeira, we were very impressed with their knwhw in managing cnsumer credit, acquired ver a decade managing this part f the business. In recent years the cmpany made imprtant investments n their Credit, Cllectin and Behavir Scre systems, respnsible fr analyzing the cstumer behavir, likelihd f delinquency and determine the cllectin methds while imprving the cllectin s prcedures. This brught mre efficiency n the cncessin f credit, with a substantial reductin n bth refusal and delinquency rates. Midway Carteira Financeira de Crédit Midway Credit Financeira Prtfli - R$ MM 771,0 618,0 647,7 639,5 652,5 531,7 537,4 529,0 808,0 665,9 710,7 572,0 770,2 639, Q10 2Q10 3Q10 4Q10 1Q11 2Q11 Carteira Grss de Crédit (Brut) Carteira Net de Crédit (Líquida) Fnte: Riachuel e Perfin The sftware used by Riachuel t manage its credit card peratin was fully develped in huse and has been peratinal fr ver 24 years, and cnstantly been reviewed and updated. Mrever, prir t launching its private label credit card, Midway hired tw specialized cnsulting cmpanies t analyze its sftware and cmpare with ther existent credit card systems. The main cnclusin was the in huse system was, in fact, as gd as any ther and minr adjustments wuld be necessary t perate the credit card, as t any ther system n the market.

13 Delinquency Rate - Riachuel s Persnal Lans and Credit Card Credit Card Persnal Lans Surce: Riachuel Cnclusin We understand that the investment n Riachuel allw us t take advantage f the ptential grwth expected fr the Textile Retail Industry, while capitalizing the gains by investing in a cmpany with at a much lwer multiples with n apparent reasn t be as ther listed cmpanies f this industry, such as Renner and Marisa. Additinally, the cmpany becmes mre attractive if we adjust (exclude) its valuatin fr the nn-cre assets Midway Mall, althugh we recgnize that such assets can becme an imprtant Equity prtectin under a stress scenari with lsses cn the retail peratin. In spite f the cntrller nt indicating any future changes n the wnership structure f the cmpany r gvernance issues, we understand that this will be gradually and naturally dealt as the successin t the next family generatin starts t ccur. Cncurrently, we d nt expect any sale lease back transactins regarding the fixed assets, such as the Shpping Mall, factries r even the privately wned prperties, but we cannt disregard its market values. In cnclusin, what primarily drive us t invest in Guararapes is the ptential f value existent slely n the future cash flw f the cnslidated peratin, taking int cnsideratin the grwth ptential f the retail peratins previusly described. In ther wrds, the discunted cash flw analysis alne indicates that this investment is attractive, perceptin much increased after perfrming a clser due diligence f the grups underlying assets.