November 5, 2018

Magazine Luiza S.A. (B3: MGLU3)

3rd Quarter 2018 Earnings Release (IFRS equivalent)

3Q18 HIGHLIGHTS

E-Commerce grew 55%, reaching R$1.7 billion and 36% of total sales

Physical store sales grew 24%, while same store sales rose 16%

Total sales rose 34%, reaching R$4.6 billion

EBITDA grew 11% to R$279 million, 7.6% margin Net profit grew 29% to R$120 million, 3.3% margin

Net cash position of R$1.3 billion in Sep/18

  • Consistent market share gains. In 3Q18, total sales (physical stores, traditional e-commerce (1P) and marketplace (3P)) increased 33.6% to R$4.6 billion, reflecting growth of 54.6% in e-commerce (on top of 64.7% growth in 3Q17) and 24.0% in physical stores (on top of 18.6% growth in 3Q17). It is worth highlighting the performance of the 87 stores opened during the last 12 months (29 of which were opened in 3Q18), that generated sales above our expectations, expanding total physical store sales growth by 8 p.p.. Magalu continued to gain market share across all channels, regions and product categories. By contrast, in the first eight months of the year, the market for furniture and electronics fell 2.2%, according to IBGE.

  • Accelerated growth in e-commerce. E-commerce sales grew 54.6% in 3Q18, reaching 36.2% of total sales, compared to market growth of 8.0% (E-bit). In traditional e-commerce, sales grew 43.8%, and the marketplace contributed with additional sales of R$213.3 million. Magalu's market share gains were driven by: (i) increased sales on mobile platforms (the app reached 19 million downloads), (ii) higher conversion rates across all channels, (iii) the maturation of multichannel projects, especially, In-Store Pick-Up and (iv) continuously improving levels of customer service which enabled us to maintain our RA1000 ranking.

  • Evolution of gross profit. In 3Q18, gross profit increased 23.5% to R$1.1 billion. Gross margin decreased 120 bps to 29.7% reflecting the significant increase in e-commerce, from 31.3% of total sales to 36.2%.

  • Dilution of fixed expenses, growth of investments in level of service and new customer acquisition. In 3Q18, operating expenses were diluted by 50 bps to 22.4% of net revenues. Of this total, additional investment in the level of service and the acquisition of new customers represented nearly 100bps of net revenues.

  • Strong EBITDA growth, reduction of financial expenses and evolution of net income. In 3Q18, EBITDA increased 11.4% to R$278.9 million (7.6% margin). High sales growth, the positive contribution of e-commerce and the dilution of expenses were responsible for the EBITDA growth. In addition, financial expenses were diluted by 100 bps to 1.9% of net revenue as a result of the significant reduction in net debt and the decline in the CDI rate. Due to these factors, the Company posted R$119.6 million of net profit, an increase of 29.3% YoY (ROE of 21%).

  • Strong cash flow generation and ROIC. Cash flow from operations, adjusted by receivables, reached R$0.8 billion during the last 12 months, due to improved results and disciplined working capital management. Once again, the Company presented high growth with high ROIC and strong cash generation. In 3Q18, annualized ROIC reached 21% and 31% over the last 12 months.

  • Reduction of net debt and optimization of the capital structure. In the last 12 months, the Company reduced adjusted net debt by R$1.3 billion, from a break even position in Sep/17 to a net cash position of R$1.3 billion in Sep/18. As of this date the Company reached a total cash position of R$1.9 billion, with cash and securities of R$0.7 billion and credit card receivables of R$1.2billion.

MGLU3: R$ 172.96 per share

Conference call: November 6, 2018 (Tuesday)

Investor Relations: Tel. +55 11 3504-2727

Total Shares: 190,591,464

8:00AM in US Time (EST): +1 646 828-8246

www.magazineluiza.com.br/ri

Market Cap: R$ 33.0 billion

11:00AM in Brazil Time: +55 11 3193-1001

ri@magazineluiza.com.br

R$ million (except when otherwise indicated)

3Q18

3Q17

% Chg

9M18

9M17

% Chg

Total Sales¹ (including marketplace)

4,640.6

3,473.3

33.6%

13,725.5

10,035.4

36.8%

Gross Revenue

4,444.5

3,430.3

29.6%

13,298.0

9,998.5

33.0%

Net Revenue

3,670.5

2,856.3

28.5%

10,979.9

8,362.4

31.3%

Gross Income

1,089.9

882.8

23.5%

3,241.2

2,550.2

27.1%

Gross Margin

29.7%

30.9%

-120 bps

29.5%

30.5%

-100 bps

EBITDA

278.9

250.4

11.4%

891.8

718.0

24.2%

EBITDA Margin

7.6%

8.8%

-120 bps

8.1%

8.6%

-50 bps

Net Income

119.6

92.5

29.3%

407.8

223.4

82.5%

Net Margin

3.3%

3.2%

10 bps

3.7%

2.7%

100.0 pp

Same Physical Store Sales Growth

16.3%

15.0%

-

19.7%

14.0%

-

Total Physical Store Sales Growth

24.0%

18.6%

-

26.4%

16.3%

-

Internet Sales Growth (1P)

43.8%

54.6%

-

50.5%

55.5%

-

Total E-commerce Sales Growth

54.6%

64.7%

-

61.4%

61.4%

-

E-commerce Share of Total Sale

36.2%

31.3%

4.9 pp

34.9%

29.5%

5.3 pp

Number of Stores - End of Period

913

830

83 stores

913

830

83 stores

Sales Area - End of Period (M2)

551,432

516,598

6.7%

551,432

516,598

6.7%

2

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

MESSAGE FROM THE EXECUTIVE DIRECTORS

In the beginning of the year, we announced that 2018 would be the Year of the Customer at Magalu. It is normal for certain expressions to become jargon in the business world. They are often so recurrent in executive speeches and organizational narratives that they become banal, meaningless, purposeless, and unsuccessful. And few terms were as banalized as those connected to customers: focus, obsession and centricity. But for us, at Magalu, the focus on the customer was never an instrument of rhetoric or corporate fad, it was a part of our DNA.

We genuinely believe that businesses that seek long-term sustainability are not dedicated to producing or selling goods and services. They exist to serve the customer. Their structures revolve around the customer and they organize themselves accordingly. By doing so, these businesses consistently generate value, maintain their relevance and create their own competition. Magazine Luiza was born more than 60 years ago as a customer-focused company. It was not something planned. It simply happened because its founders wanted it to be so. Luiza Trajano Donato and Pelegrino Donato knew each of the customers of their first store in Franca. They knew what they liked, what they needed and how they could pay. Intuitively, they performed as powerful, humanized big data systems.

Our challenge today is to work the same way, on a scale millions of times larger. It is to use the resources of the digital economy and the power of data to provide unique experiences, tailor-made for each of the millions of individuals in our databases.

This is the goal, for example, of the more than 500 developers at Luizalabs, our innovation laboratory. From their first day of work at Magalu, they know that technology is not an end in itself. It is a powerful way to turn a buying process into a memorable experience. To enable the company to treat its millions of customers not as a homogeneous mass, but as unique individuals - people with their own characteristics, habits, and histories. To help transform consumers into advocates of our brand.

CUSTOMER METRICS

In order to distance ourselves from the subjective and hyperbolic nature of discourse surrounding the "customer", we have adopted a series of objective indicators to measure our level of customer service and satisfaction. Today, these indicators are just as important, if not more so, than our financial metrics and have cascaded throughout the organization - from the president to the stockboys, from developers to sellers. We implemented these metrics in order to ensure that each of our 25,000 employees is committed to these goals. Let us now examine our evolution in greater detail.

To begin with, we put greater emphasis on increasing the number of active customers and purchase frequency. In the period of one year, we achieved a 31% increase in the number of unique customers who bought at Magalu (22% growth in physical stores and 61% in e-commerce). The number of active app customers, who typically have a higher purchase frequency, has grown significantly and app sales more than doubled over the last year. We have exceeded 1 million monthly downloads and achieved a total base of 19 million downloads. Traffic from mobile devices has already surpassed 75% of the accesses to our e-commerce platform.

The marketplace plays an essential role in increasing purchase frequency. In the period between the second and third quarters of this year, more than 500 new sellers have joined the Magalu marketplace and almost 1 million items have been added. Even with the most selective approval process in the industry, the speed with which new sellers enter the platform has been rising. The monthly amount of new sellers entering the platform was 100 on average, rose to 250 in September and reached 400 in October.

We are investing heavily in Luiza Card as an important relationship and loyalty tool. This is because customers who make purchases with the card have a purchase frequency much higher than customers who use cash or other payment methods. In the third quarter, we issued an additional 150,000 new cards per month, even with very conservative approval rates. This represents an increase of 82% compared to the third quarter of last year. With this, Luizacred reached an installed base of 4 million cards, with 95% of them active. Sales made using Luiza Card within Magalu grew 54% in the third quarter and its share increased by 7 percentage points in physical stores.

Our logistics operation is now structured to serve our customers as quickly as possible. We ended the quarter with 12 distribution centers (including 2 opened this year: in Hidrolândia, Goiás and more recently in Teresina, Piauí) and more than 1,900 micro transport delivery partners. Express delivery - orders promised and delivered within 48 hours to the customer's home - has reached more than 150 cities, including 15 capitals, and already represents more than 30% of all deliveries. To better serve our customers in the delivery of light products, we began the expansion of Logbee - the last mile delivery technology startup that we acquired in May - to the metropolitan areas of Porto Alegre, Campinas and Belo Horizonte.

Our goal is to extend all the advantages of our first-party logistics platform to third-party sellers on our marketplace platform. In furtherance of this objective, we started a pilot in September with 10 sellers, in which seller's products were collected and delivered by drivers from our network, especially Logbee, using technology developed by Luizalabs. The results are encouraging: on average, we reduced order delivery times by more than 60%, further improving the customer experience in our marketplace.

Our sellers are also our customers. In the beginning of October, we launched our payment platform for marketplace sellers, Magalu Pagamentos, which was developed by Luizalabs. With the new platform, we began to act as a sub-acquirer, reducing acquisition costs and dividing payments, anticipating receivables and depositing the outlays into a digital account created for each seller. As a result, we have improved the experience of our sellers and increased the profitability of the marketplace.

We have made, and will continue to make, great efforts to improve the post-sales experience. Because the experience of consumption does not end, and should not end, with the sale. In the first nine months of 2018, we increased the percentage of calls resolved by our call center during first contact by 14 percentage points. Another important metric was related to the time it took to effectuate reverse logistics in the case of product exchanges and cancellations - which fell by 60%.

The satisfaction index for our customer service center increased from 64% to 86% in a one-year period. Complaints lodged with consumer protection agencies, such as Procon, fell by 40%. And Magalu retained in both e-commerce and physical stores it's RA1000 rating, the highest rating given by ReclameAqui, a site that ranks companies according to their levels of customer service.

FINANCIAL RESULTS AND OTHER HIGHLIGHTS

In terms of financial metrics, in the third quarter, we again showed excellent performance. E-commerce continues to grow and represents more than 36% of the Company's sales. In addition to the substantial growth of e-commerce from our own stock, the marketplace has contributed significantly. There are already more than 2,000 sellers offering more than 3.5 million items on our platform, with a wide variety of categories and products, from pet food to smart TVs, from diapers and shampoos to decorative items, from tires to espresso capsules. Considering the sales of the month of September, the marketplace already surpassed the R$ 1 billion level in annualized terms.

In physical stores, sales grew by 24%, with 16% coming from same-store sales. We also highlight the excellent performance of new stores that, with results above expectations, contributed 8 percentage points to sales growth. In the last 12 months, we inaugurated 87 stores, 29 of them in the third quarter, entering new regions and consolidating our position in existing markets.

To support this strategy, we invested approximately R$ 36 million this quarter, or around 100 bps of EBITDA margin. These investments in customer acquisition and service level improvements raise short term operating expenses, but increase the value of our customers over the long term. Investments were made in a variety of areas including: logistics (2 new distribution centers, route frequency and express delivery); service in stores; service at the customer service center, and in marketing and promotions, with a focus on the app and the Luiza Card.

In this quarter, we were able to invest more in the customer, while maintaining the Company's net profitability at the same level as last year, above 3% of net revenues. Our business model has combined high growth, high return on invested capital and strong cash flow generation. We increased our investments, while simultaneously diluting financial expenses by 1 percentage point and maintained a very solid capital structure, with net cash position, of R$ 1.3 billion.

Once again, Magalu is on the list of the best companies to work for, according to the Great Place to Work Institute, this time in second place in the overall ranking and first in retail. This result reflects the dedication of our employees in caring for one another and further strengthens the Company's culture and values.

In October, we inaugurated a new space in Franca, Sao Paulo that is the new home of part of the Luizalabs team and the customer service center. With more than 5 thousand square meters, the space has room for about 1 thousand employees and has a collaborative environment that facilitates interaction among teams.

FINAL CONSIDERATIONS

We begin the fourth quarter excited and prepared for the important events that lie ahead: Black Friday and Christmas. We will continue to invest in our customers, thinking about the long term and the sustainability of our business. Our sincerest thanks, once again, to you, our customers, employees, shareholders and suppliers for your trust and camaraderie on this journey.

If you have not already downloaded our app,click here and enjoy!

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Magazine Luiza SA published this content on 05 November 2018 and is solely responsible for the information contained herein. Distributed by Public, unedited and unaltered, on 05 November 2018 21:15:29 UTC