Magazine Luiza : 1Q19 Earnings Release

May 6, 2019

Magazine Luiza S.A. (B3: MGLU3)

1st Quarter 2019 Earnings Release (IFRS equivalent)

1Q19 HIGHLIGHTS

E-commerce grew 50%, reaching R$2.4 billion and 41% of total sales

Marketplace grew 244%, reaching 18% of total e-commerce

Physical store sales grew 16%, while same store sales rose 8%

Total sales rose 28%, reaching R$5.7 billion

EBITDA Pro Forma grew 6% to R$318 million, 7.4% margin

Net profit Pro Forma reached R$139 million, 3.2% margin

Net cash position of R$1.4 billion in Mar/19

∙

∙Consistent market share gains. In 1Q19, total sales (physical stores, traditional e-commerce (1P) and marketplace (3P)) increased 28.0% to R$5.7 billion, reflecting growth of 50.1% in e-commerce (on top of 64.6% growth in 1Q18) and 16.0% in physical stores (same store sales growth of 8.1% on top of 15.9% growth in 1Q18). It is worth highlighting the performance of the 102 new stores that generated sales above our expectations, expanding total physical store sales growth by 8 p.p.. By contrast, in the first 2 months of the year, retail market grew only 3.8%, according to IBGE.

∙Accelerated growth in e-commerce. E-commerce sales grew 50.1% in 1Q19, reaching 41.4% of total sales, compared to market growth of 12.9% (E-bit). In traditional e-commerce, sales grew 33.3%, and the marketplace contributed with additional sales of R$432.4 million (reaching 18.3% of total e-commerce). Magalu's market share gains were driven by the app performance that reached more than 33 million downloads), increase in sellers base and assortment at marketplace, the maturation of multichannel projects, faster delivery and the maintenance of our RA1000 ranking.

∙Evolution of gross profit. In 1Q19, gross profit increased 16.1% to R$1.2 billion. Gross margin decreased 90 bps to 28.0% reflecting the significant increase in tradicional e-commerce (1P) and the end of "Lei do Bem", partially offseted by accelerated marketplace growth and commercial strategy.

∙Dilution of fixed expenses, growth of investments in level of service and new customer acquisition. In 1Q19, operating expenses Pro Forma were diluted by 60 bps to 20.6% of net revenues. This amount includes additional investment in the level of service and the acquisition of new customers.

∙Significant Luizacred growth. The Luiza Card base increased 26.3% YoY reaching 4.4 million cards. In the same period, the Luiza Card revenue grew 36.8% to R$5.7 billion. The total portfolio grew impressive 48.3% in 1Q19 reaching R$8.8 billion. Considering the accounting practices established by the Brazilian Central Bank, so excluding the IFRS 9 effects, Luizacred's net income was R$35.6 million in 1Q19.

∙EBITDA and net income growth. In 1Q19, EBITDA Pro Forma increased 6.0% to R$318.5 million (7.4% margin). High sales growth, the positive contribution of e-commerce and the dilution of expenses were responsible for EBITDA growth. Due to these factors, the Company posted R$138.6 million of net income Pro Forma (ROE of 23%). Considering Luizacred results according to the accounting practices established by the Brazilian Central Bank, Magalu´s net income Pro forma would have been R$156.8 million in 1Q19.

∙Strong cash flow generation and ROIC. Cash flow from operations Pro forma, adjusted by receivables, reached R$732,6 million in LTM, due to improved results and disciplined working capital management. Once again, the Company presented high growth with high ROIC and strong cash generation. In 1Q19, annualized ROIC Pro Forma reached 20% and 35% LTM.

∙Increase of net cash position Pro Forma and optimization of the capital structure. In the last 12 months, the Company increased adjusted net cash from R$1.3 billion in Mar/18 to R$1.4 billion in Mar/19. As of this date the Company reached a total cash position of R$1.8 billion, with cash and securities of R$0.5 billion and credit card receivables of R$1.3 billion.

MGLU3: R$ 200.21 per share	Conference call: May 7, 2019 (Tuesday)	Investor Relations: Tel. [phone]
Total Shares: 190,591,464	10:00AM in US Time (EST): [phone]	www.magazineluiza.com.br/ri
Market Cap: R$ 38,2 billion	11:00AM in Brazil Time: [phone]	[e-mail]

Magalu

1Q19 Earnings Release

	R$ million (except when otherwise indicated)			1Q19			1Q18			% Chg
	Total Sales¹ (including marketplace)	5,718.0	4,466.2		28.0%
			-	-
	Gross Revenue	5,313.2	4,366.3		21.7%
	Net Revenue	4,329.0	3,613.3		19.8%
	Gross Income	1,211.4	1,043.4		16.1%
	Gross Margin	28.0%	28.9%		-90 bps
	EBITDA	395.4	300.5		31.6%
	EBITDA Margin	9.1%	8.3%		80 bps
	EBITDA Pro-Forma	318.5	300.5		6.0%
	EBITDA Margin Pro-Forma	7.4%	8.3%		-90 bps
	Net Income	132.1	147.5		-10.4%
	Net Margin	3.1%	4.1%		-100 bps
			-	-		-
	Net Income Pro-Forma	138.6	147.5		-6.0%
	Net Margin Pro-Forma	3.2%	4.1%		-90 bps
	Same Physical Store Sales Growth	8.1%	15.9%		-
	Total Physical Store Sales Growth	16.0%	21.4%		-
	Internet Sales Growth (1P)	33.3%	53.7%		-
	Total E-commerce Sales Growth	50.1%	64.6%		-
	E-commerce Share in Total Sale	41.4%	35.3%		6.1 pp
	Number of Stores - End of Period	959	858		101 stores
	Sales Area - End of Period (M2)	574,797	526,052		9.3%

(1)Total Sales includes sales from physical stores, traditional e-commerce (1P) and marketplace (3P).

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Magalu

1Q19 Earnings Release

IFRS 16

IFRS 16 introduced a single model for the accounting of leases in the balance sheet of lessees. As a result, the Company, as lessee, recognized as assets the right to use underlying assets and their corresponding lease liabilities.

As a result, 1Q19 results are already adequate to the new methodology. For better understanding and comparability with 1Q18, 1Q19 results are also being presented in a 1Q19 Pro Forma view, disregarding the IFRS 16 effects.

	IFRS 16 - PRO FORMACONSOLIDATED INCOME			1Q19			V.A.			IFRS 16			1Q19			V.A.
	STATEMENT (R$ million)									Pro-forma
	Gross Revenue	5,313.2		122.7%	-	5,313.2	122.7%
	Net Revenue	4,329.0		100.0%	-	4,329.0	100.0%
	Gross Income	1,211.4		28.0%	-	1,211.4	28.0%
	Selling Expenses	(693.0)	-16.0%	(56.5)	(749.5)	-17.3%
	General and Administrative Expenses	(136.3)	-3.1%	(20.4)	(156.7)	-3.6%
	Provisions for Loan Losses	(12.4)	-0.3%	-	(12.4)	-0.3%
	Other Operating Revenues, Net	25.5	0.6%	-	25.5	0.6%
	Equity in Subsidiaries	0.1	0.0%	-	0.1	0.0%
	Total Operating Expenses	(816.0)	-18.9%	(76.9)	(893.0)	-20.6%
	EBITDA	395.4	9.1%	(76.9)	318.5	7.4%
	Depreciation and Amortization	(103.9)	-2.4%	65.4	(38.5)	-0.9%
	EBIT	291.4	6.7%	(11.5)	280.0	6.5%
	Financial Results	(98.9)	-2.3%	21.3	(77.7)	-1.8%
	Operating Income	192.5	4.4%	9.8	202.3	4.7%
	Income Tax and Social Contribution	(60.4)	-1.4%	(3.3)	(63.7)	-1.5%
	Net Income	132.1	3.1%	6.5	138.6	3.2%

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Magalu

1Q19 Earnings Release

MESSAGE FROM THE EXECUTIVE DIRECTORS

In the beginning of the year we announced that in addition to a customer-centric focus, Magalu's strategy from now on would also be focused on growth. But not just any growth. What we call exponential growth, which does not happen step by step-but rather, in leaps and bounds. Our goal is to digitalize Brazil through the use of technology, along the way growing our customer base; number of app users; number of Luiza cardholders; the number of sellers on our marketplace; the number of categories in our marketplace, the number of services that we offer our customers and much, much more, all with the fastest delivery speeds and best retail experience in Brazil.

After the first three months of 2019, we are able to affirm that the strategy has indeed become a reality.

In the first quarter, our active customer base reached 18.2 million, up 34% from the same period last year (68% in e-commerce and 23% in physical stores). Our overall sales grew 28% from January to March. Our e-commerce operations grew over 50% in sales, and the number of distinct items sold more than doubled. We gained market share in all channels of our sales and customer relationship platform.

We also grew our marketplace significantly. Today, Magalu's platform has 5.4 million items, sold by us and another 5,000 sellers, 1,600 of which were added in the first 90 days of this year. During this period, the marketplace reached R$432 million in sales, accounting for 18% of total e-commerce sales. It also represents a growth of 244% in relation to the same period last year. Out of every 100 of our e-commerce customers, 28 purchased items from the marketplace.

Within the concept of Magalu as a Service, which consists of making available to third parties the services we already offer for our own e-commerce operation,Magalu Payments now has around 3,750 participating sellers and offers, in fully-digital process, services like discounting of receivables. We are making progress in the pilot version of Magalu Deliveries, a service which offers marketplace sellers all of the benefits of the Luiza Network, with 20 sellers. To date, the Magalu Deliveries pilot has yielded promising results, suggesting potential reductions in cost and delivery times.

We also initiated a marketing campaign called, #MagaluHasIt, in which we show our customers that we sell and deliver almost anything that they need or want.

In line with our strategy to expand into new categories, on this year's World Book Day (April 23) we launched a book category on our platform that offers over 240,000 titles from our own inventory and marketplace sellers'. This is another opportunity that permits customers to enjoy the benefits of a multichannel platform like in-store pick up and multichannel exchange.

In order to grow our customer base, enter into new categories and increase our purchase frequency, we announced, on April 29th, an agreement for the acquisition of Netshoes, a leading e-commerce retailer of clothing, footwear and sporting goods. Completion of the acquisition is conditional upon the satisfaction of certain prior conditions, including, among others, the approval by 2/3 of the shareholders of Netshoes present at a general meeting (Magalu has already secured the approval of shareholders holding 48% of the capital stock) and by the Administrative Council for Economic Defense - CADE, the Brazilian anti-trust agency.

We are working to transform the Magalu app into a superapp and the first phase of this process is to expand the mix of categories. At the end of the first quarter, we reached 33 million downloads with significant growth in customer usage: our average number of monthly active users grew 130% compared to the same period in 2018 and exceeded the 6 million mark.

At the same time, physical store sales continue to grow at a fast pace. We grew 16% in the first quarter compared to the same period last year despite the strong comparison basis and including World Cup seasonal sales. It is worth noting that the accumulated sales growth in the physical stores in the last three years exceeds 60%, reflecting dramatic market share gains during the period.

We started the process of opening 48 stores in the States of Pará, which marks our entry into the North of the country, and Maranhão. In addition, we will invest in a new distribution center in the region, aiming to better serve customers online and offline, in line with our multi-channel strategy. With the new stores and distribution center, the delivery time of products purchased online by consumers in these regions will be reduced significantly.

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Magalu

1Q19 Earnings Release

Since January we have had the end of "Lei do Bem", a law that determined the return of PIS/Cofins taxes on revenue for some categories of electronic products, like smartphones. In the first quarter, we noticed that most of our competitors did not pass along this tax increase to customers. Given this more competitive scenario and our focus on sales growth, we did not fully pass on the tax value to the final price of the products, with consequent impact on the gross margin, which was mitigated by revenue from services with a prominence in the marketplace.

It is worth mentioning that at the end of April, Magalu was successful in one of its lawsuits regarding the unconstitutionality of the inclusion of the Tax on the Circulation of Goods and Services (ICMS) in the PIS / Cofins calculation basis. As a result, we have recognized the right to offset amounts already collected that represent approximately R $ 750 million.

At Luizacred, we also achieved significant growth, making Luizacred the country's largest credit card company, with a portfolio of R$ 8.8 billion. The Luiza Card cardholder base grew 26%, reaching 4.4 million at the end of the first quarter. Driven by an increase in activation and purchase frequency, Luizacred's total sales increased by 36% to R$ 5.7 billion, with a 40% increase in sales within Magalu. All of this with a default rate at one of the lowest historical levels and far below the market average.

In the same way that Magalu has become digital, Luizacred is becoming an increasingly digital financial company. The credit approval process is now done by the salesperson on his or her smartphone in a few minutes; the printing of the credit card is done in real time at the store, and the cardholder has access to a wealth of card information via the Luiza Card App. The number of users of the Luiza Card App reached 465,000, in less than six months, with a current penetration of 45% of new accounts. All of these changes have improved Luizacred's NPS and contributed to its productivity - the efficiency ratio improved 3 percentage points this quarter, reaching 41%, one of the best in its history.

For yet another quarter, we maintained the RA1000 Seal of Excellence in both physical and e-commerce stores, a rating that reflects our total e-commerce sales -- our own products as well as those of the marketplace. Our customer indicators continue to advance: compared to the first quarter of 2018 we reduced formal complaints by almost 60%, the percentage of calls solved by our customer service center during the first call is now 26% higher and we increased our NPS. Today, we have a call center that operates 24 hours a day, 7 days a week, and we enable customers to accompany all order tracking via whatsapp, from purchase approval to final delivery.

We continue to invest in the fastest delivery system in Brazilian retail, whether to the client's home or in store pick up. The Luiza Network features around 2,000 micro transport delivery companies and our last mile delivery solution, Logbee, is already present in more than 40 cities and continues to grow. . Pickup at Store accounts for approximately 32% of our e-commerce sales, and at 855 stores, if the ordered product is available in the store, the customer can pick it up in less than 2 hours. Express delivery - promised and delivered within 48 hours - is now available in more than 250 cities and has reached 33% of total deliveries realized at the customer's home. In cities such as São Paulo and Belo Horizonte, in the express delivery, 95% of orders are actually delivered in less than 24 hours.

We remain confident in our business model and are excited about the opportunities and challenges that lie ahead. We thank our customers, employees, shareholders and suppliers, once again, for their partnership with us on this journey.

For the latest technology trends, listen to the Luizalabs podcast, available at http://www.cabecadelab.com.br/and on Spotify, Itunes, Anchor, and Soundcloud platforms.

EXECUTIVE MANAGEMENT TEAM

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