Magazine Luiza : 3Q17 Earnings Release

October 31st, 2017

Magazine Luiza S.A. (B3: MGLU3) 3rd Quarter 2017 Earnings Release (IFRS equivalent) 3Q17 HIGHLIGHTS E-Commerce grew 55% reaching 30% of total sales Physical store sales grew 19% (15% same store) Total sales rose 27%, reaching R$3.4 billion EBITDA grew 39% to R$250 million (8.8% margin) Net profit grew 273% to R$92 million (3.2% margin) Cash flow from operations grew to R$974 million over the last 12 months Net debt was reduced by R$722 million over the last 12 months

• Highest quarterly growth in the last 5 years. In 3Q17, consolidated gross sales increased 27.3% to R$3.4 billion, reflecting growth of 54.6% in e-commerce and 18.6% in physical stores. Magalu again gained market share across all channels and major product categories. According to IBGE data (PMC), nominal sales of furniture and electronics grew 6.9% for the first eight months of the year, compared to the Company's growth of 25.3% in 9M17.

• Accelerated growth in e-commerce. E-commerce sales grew 54.6% in 3Q17 (compared to market growth of 9.4%, according to the E-bit), reaching 30.0% of total sales. This market share gain was the result of: (i) increased sales on mobile platforms, mainly through the app, which reached 7.7 million downloads, (ii) higher conversion rates across all channels,

  (iii) implementation of multichannel projects, especially, In-Store Pick-Up and (iv) maintaining the RA1000 seal of excellence in service.

• Evolution of gross profit. In 3Q17, gross profit increased 23.3% to R$882.8 million. Gross margin decreased 80 bps to 30.9% in 3Q17, reflecting: (i) a significant increase in e-commerce share (+530 bps vs. 3Q16) and (ii) preservation of gross margin across all channels, the result of increased commercial assertiveness, better inventory management and greater price rationality in the online and offline markets.

• Significant dilution of operating expenses. In 3Q17, operating expenses were diluted by 160 bps to 22.9% of net revenue. Expenses grew only 18.4% versus net revenue growth of 26.5%, resulting in significant operating leverage. This dilution reflects the growth of e-commerce, the continuity of the Zero Base Budget (OBZ) and Matrix Expense Management (GMD) programs implemented by the Company, as well as the maturation of digital transformation projects, such as the Mobile Sales application and In-Store Pick-Up.

• Strong EBITDA growth, reduction of financial expenses and evolution of net income. In 3Q17, EBITDA increased 38.8% to R$250.4 million (+80 bps to 8.8% margin). High sales growth, the positive contribution of e-commerce and the dilution of expenses contributed to the achievement of the highest EBITDA margin since the Company's IPO in 2011. In addition, financial expenses were diluted by 230 bps to 2.9% of net revenue, as a result of the significant reduction in net debt and the decline in the CDI rate (without considering the proceeds of the Secondary Offering). As a result, the Company posted the highest quarterly profit in its history, rising from R$24.8 million to R$92.5 million (ROIC of 36% and ROE of 43%).

• Strong cash flow generation. Cash flow from operations reached R$974.0 million in the last 12 months, due to improved results and working capital management. In 3Q17, the Company improved it's inventory turnover by 9 days (to 70 days) and the average purchase period by 4 days (to 91 days). In the last 12 months, the change in working capital contributed R$390.0 million to operating cash generation.

• Reduction of net debt and optimization of the capital structure. In the last 12 months, the Company reduced adjusted net debt by R$721.6 million, from R$750.3 million in Sep/16 to only R$28.7 million in Sep/17 (with a reduction of R$238.9 million in 3Q17). With the funds from the Secondary Offering, received in Oct/17, in the amount of R$1,14 billion, the Company would have a net cash position of R$1.1 billion.

MGLU3: R$ 63,75 per share Total Shares: 190,591,464	Conference call: November 1, 2017 (Wednesday) 08:00AM in US Time (EST): [phone]	Investor Relations: Tel. [phone] www.magazineluiza.com.br/ri
Market Cap: R$ 12,2 billion	10:00AM in Brazil Time: [phone]	[e-mail]

R$ million (except when otherwise indicated)	3Q17	3Q16	% Chg	9M17	9M16	% Chg
Gross Revenue	3,430.3	2,693.8	27.3%	9,998.5	7,979.0	25.3%
Net Revenue	2,856.3	2,258.7	26.5%	8,362.4	6,669.5	25.4%
Gross Income	882.8	715.9	23.3%	2,550.2	2,082.0	22.5%
Gross Margin	30.9%	31.7%	-80 bps	30.5%	31.2%	-70 bps
EBITDA	250.4	180.4	38.8%	718.0	487.7	47.2%
EBITDA Margin	8.8%	8.0%	80 bps	8.6%	7.3%	130 bps
Adjusted EBITDA	250.6	180.8	38.6%	720.2	512.4	40.5%
Adjusted EBITDA Margin	8.8%	8.0%	77 bps	8.6%	7.7%	93 bps
Net Income	92.5	24.8	272.6%	223.4	40.5	451.7%
Net Margin	3.2%	1.1%	210 bps	2.7%	0.6%	210 bps
-	-
Adjusted Net Income	92.6	25.1	268.8%	224.8	56.8	295.6%
Adjusted Net Margin	3.2%	1.1%	213 bps	2.7%	0.9%	183.6 pp
Same Store Sales Growth	24.9%	9.6%	-	23.7%	3.9%	-
Same Physical Store Sales Growth	15.0%	5.5%	-	14.0%	-1.9%	-
Internet Sales Growth	54.6%	24.3%	-	55.5%	27.9%	-
E-commerce Share in Total Sale	30.0%	24.7%	5.3 pp	28.8%	23.2%	5.6 pp
Number of Stores - End of Period	830	791	39 stores	830	791	39 stores
Sales Area - End of Period (M2)	516,598	500,239	3.3%	516,598	500,239	3.3%

MESSAGE FROM THE BOARD OF DIRECTORS

After a long period of recession, the Brazilian retail sector finally resumed a growth trajectory in the third quarter. According to the IBGE, sales of furniture and appliances grew 9.6% in July and 12.9% in August, compared to 5.6% in the first half. With this more favorable economic scenario, we continue to gain market share and accelerate our sales, achieving our highest growth rate in the last 5 years. Even considering a larger comparison basis (10.8% in 3Q16) and the end of FGTS withdrawals in July, we grew 27%. In this quarter, we also recorded the highest profit in Company history, R$92.5 million, without taking into account the positive impact of the secondary offering completed in Oct/17.

E-commerce

For the third consecutive quarter, e-commerce sales grew more than 50%. The Company's sales grew 55% compared to 9% growth for the overall market, according to E-bit. Our e-commerce sales reached 30% of total sales, without considering the GMV (Gross Merchandising Value) of the marketplace. As our e-commerce operation is fully integrated, this growth has contributed significantly to the Company's increased profitability and cash generation.

We continue to invest heavily in the experience of our customers through smartphones. This quarter we reached a milestone of

7.7 million downloads for our app in less than 2 years. Traffic through mobile devices has reached approximately 60% of total traffic, while sales through smartphones are already almost 40% of total e-commerce sales. In October, we launched Mercado Magalu, combining products from our inventory and the inventory of Marketplace sellers.

In this new category we are offering items for personal hygiene, cleaning, baby care, coffee and chocolate, among others. For products within our own inventory we offer our logistics, and the benefits of in-store pick-up.

Marketplace

Our Marketplace operation has also been performing very positively. We closed 3Q17 with more than 500 sellers, in different categories, who together added more than 1.2 million products, which represents double the number offered in 2Q17. This quarter, multiple important sellers joined our platform, including: Samsung, Electrolux, Acer, Home & Video, Star 10, Clik Baby, Vaio Store, Niazi Chohfi, Farmais and Kikos Fitness.

We recently launched the pilot of our ads platform for sellers and suppliers: Magalu Ads. This platform allows partners to invest in the exposure of their brand and products in several areas of our e-commerce platform. We have also launched a new process for the approval of sellers, based on credit score, accelerating the process of registration. In order to preserve our reputation and guarantee the same excellent level of service to our online and offline customers, we have so far rejected 27% of potential sellers.

Physical Stores

In our physical stores, we also accelerated our growth, achieving a total increase of 19% in same stores sales, even considering a higher comparison base (6% in 3Q16). Strong sales were experienced across all regions and main product categories. We inaugurated 16 new stores in the quarter and 39 stores in the last twelve months, totaling 830 points of sale in 16 states across the country.

The sale of digital services such as Lu Connect and Control Plan, which can be made by all of our sales associates with a few clicks using the Mobile Sales application, continue to grow significantly in the physical stores,. In October, we also started the pilot of DCC Digital, a new tool that will allow sellers to approve direct to consumer credit in a few minutes, digitizing the client's documents, recording their digital signature and capturing their facial biometrics to prevent fraud.

Multichannel

In-store pick-up, a system that allows customers to buy online and retrieve products at any of our physical stores, continues to evolve significantly, with a 250% increase in order numbers since the beginning of the year. The vast majority of in-store pick-up requests are delivered in less than 2 business days.

In furtherance of our multichannel strategy, we began a pilot program of selling marketplace products in our physical stores. We are currently testing the program with 20 qualified sellers in 10 stores and will soon be ready to scale the model rapidly.

Logistics

This quarter, our logistics operation reached the highest service rating in Company history, achieving a national performance rating above 98% in relation to meeting promised deadlines. By leveraging Malha Luiza, our fleet of over 1,000 micro transport companies, and our 10 distribution centers, we have consistently been able to deliver orders 25% faster than our competitors in regions where we have physical stores, according to our research. We are investing in even faster delivery times, completing almost 30% of orders in the greater São Paulo and Belo Horizonte metropolitan areas within one business day.

It is also worth mentioning that we have evolved the functionality of the Mobile Deliveries application, which is being used by more than 1,000 Malha Luiza transporters, allowing a more efficient route for drivers and better tracking of deliveries for our customers. After implementing the feature, the contact rate per order has decreased by 56% compared to the same period last year. We have also maintained our RA 1000 (Reclame Aqui) certification in e-commerce, which is a measure of the high quality of our logistics operation.

Luizalabs

Luizalabs, our technology and innovation laboratory, continues to develop new projects at the speed of a start-up. This quarter, we launched the "one click buy" option for in-store pick-up; we implemented an anti-fraud system using facial recognition for our direct to consumer credit business; we developed a dynamic pricing algorithm that uses machine learning to automatically generate prices for more than 10 thousand e-commerce products; we launched a platform for e-commerce ticket registrations capable of approving orders in less than 1 hour, reducing the order release time by up to 1 day; we were the first and only Brazilian retailer to accept Pay with Google since its launch; we have launched a new app for Quero de Casamento, our virtual list of wedding gifts; and we launched a pilot for advertisers on Magazine Voce, our social network-based direct sales platform, that also accept payments with credit card machines.

Stock Offering

In October, we successfully concluded a secondary offering of shares in the total value of R$1.56 billion, with the primary offering totaling R$1.14 billion. The main objective of the offering was to accelerate investments in long-term assets, including improvement and expansion of logistics, investments in technology, transformation of existing stores into "shoppable" distribution centers, inauguration of new stores and the acquisition of technology companies with operations in the digital segment. In addition, part of the proceeds will be allocated to the optimization of the capital structure, including the payment of short-term debt.

Over 80 investment funds participated in the offering, most of which were international investors, diversifying our shareholder base and improving liquidity. The average daily trading volume increased substantially, from R$23 million in 2Q17 to R$115 million in 3Q17, reaching more than R$200 million in September. With this volume, we should be included in indexes such as IBOVESPA, IBX50 and MSCI during their next revisions.

People Management

In August, Magalu was elected the 4th best company to work for in Brazil according to an extensive study conducted by Great Place to Work. This was an improvement of two positions compared to last year's ranking. Magalu was also elected as the Best Company to Work for in Retail. We are extremely proud of this achievement and have been consistently present on the list for more than 20 years.

Final Considerations

For the seventh consecutive quarter, we have improved our operating and financial results, achieving the best results in our Company's history. With the prospect of GDP growth, a reduction in inflation and, simultaneously, falling interest rates, we are optimistic about the growth potential of retail as a whole, and the durable goods sector in particular, which has already grown above the retail average. The transition from an analog signal to a digital signal, and the proximity of the World Cup, should also drive a very positive sales scenario in the coming quarters.

Additionally, using resources from the secondary offering, we are accelerating our digital transformation projects to increase our competitive advantage and our ability to gain marketshare in a sustainable manner. We are investing to be the best multichannel marketplace for our customers and sellers. Thank you once again your confidence.