U.S. Markets close in 6 hrs 16 mins

Edited Transcript of LREN3.SA earnings conference call or presentation 26-Apr-17 4:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Lojas Renner SA Earnings Call

RS Apr 29, 2017 (Thomson StreetEvents) -- Edited Transcript of Lojas Renner SA earnings conference call or presentation Wednesday, April 26, 2017 at 4:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Jose Galló

Lojas Renner S.A. - CEO, MD and Director

* Laurence Beltrão Gomes

Lojas Renner S.A. - CFO and IR Officer

================================================================================

Conference Call Participants

================================================================================

* Fábio Monteiro

Banco BTG Pactual S.A., Research Division - Analyst

* Franco T Abelardo

Morgan Stanley, Research Division - Equity Analyst

* Guilherme Assis

Brasil Plural Corretora de Cambio, Titulose Valores Mobiliários S.A., Research Division - Analyst

* Gustavo Piras Oliveira

UBS Investment Bank, Research Division - Executive Director, Head of LatAm Research, and Latin America Consumer Analyst

* Irma Sgarz

Goldman Sachs Group Inc., Research Division - Equity Analyst

* João Mamede

Santander, Equity Research - Head of Retail and Consumer Goods and Research Analyst

* Maria Paula Cantusio

BB-Banco de Investimento S.A., Research Division - Senior Analyst

* Robert Erick Ford Aguilar

BofA Merrill Lynch, Research Division - MD in Equity Research

* Thiago Capucci Macruz

Itaú Corretora de Valores S.A., Research Division - Research Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good afternoon, ladies and gentlemen, and thank you for waiting. Welcome to Lojas Renner's conference call to discuss the results of the first quarter of 2017. We would like to inform you that today's live webcast is being recorded and translated simultaneously. The slides are being presented at www.lojasrenner.com.br at the Investor Relations section, on the webcast platform and also on the Engage-X platform. We would like to remind you that questions will be taken by telephone and by the platform. (Operator Instructions) We would like to remind you that questions from journalists will be taken by our press office at 55 (11) 3165-9586.

Before proceeding, we would like to mention that forward-looking statements that might be made during this call related to the business perspectives of the company, operating and financial projections and targets are beliefs and assumptions of Lojas Renner's management as well as information currently available to the company. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions as they relate to future events and, therefore, depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions and other operating factors may also affect the future results of Lojas Renner and may cause results to differ materially from those expressed in such forward-looking statements.

Now I would like to turn the conference over to Mr. Laurence Gomes. Mr. Gomes, you have the floor.

--------------------------------------------------------------------------------

Laurence Beltrão Gomes, Lojas Renner S.A. - CFO and IR Officer [2]

--------------------------------------------------------------------------------

Good afternoon, everyone. This is Laurence, and we are gathered here to talk about the results of the first quarter of this year. Today, with me I have Jose Galló, CEO; Paula Picinini, Investor Relations Manager; and Luciano Agliardi, Controller. At this time, according to suggestions that we received and also according to (inaudible). My remarks follow the slides of the presentation. I will be talking about the highlights of the quarter, and afterwards, we are going to open to receive your questions. Anyway, the presentation will be available at the webcast platform as a support should you need to refer to it. Initially, I would like to say that when we concluded our budget for 2017, we estimated some pressure on our EBITDA margin as we have a very uncertain scenario for sales and also major challenges regarding our expenses. And we also had non-comparable items in other operating results and profit-sharing level that was lower than our historical levels, which I (inaudible) said when we published our annual results in February. We had almost BRL 60 million additional in operating expenses related to such projects that are underway, such as supply chain, the Uruguay operation, the new Financial Products platform and also the incorporation of our consumer finance company, Realize. (inaudible) are initiatives to improve our retailing operations with a higher degree of integration between stores and procurement and also specialization of our businesses. Therefore, we understand that the first quarter of the year (inaudible) was marked by 2 important factors and that exceeded our expectations. The first one were the sales, with revenue 14.7% higher and our same-store sales 9.1%, which, considering the numbers compared to -- in the official statistics, lead us to believe that we are gaining market share. And the second were expenses, that, in spite of still under pressure by the factors that I have just talked about, were lower than we projected, say, at 43.5% of our net revenue with a 50 bps dilution. All this helped us to have a quarter, in our view, a very positive one because we saw a good acceptance of our collections and also signs of improvement in client traffic in our stores and other items -- and more items per bag. Nevertheless, 3 months only cannot be totally thought as a complete inflection of what we lived in the past year. These are positive signs, undoubtedly, but we continue to be very attentive to the combination of sales growth and expense control, trying to neutralize the non-comparable effects of 2016 and, therefore, seeking margins that may be similar to the past year.

And another remarks regarding our Retailing Operation and that deserves to be highlighted about our commercial management. The gross margin during the first quarter was 120 bps lower than last year, and this is part of our decisions to guarantee our competitiveness. And also, here, I believe that it is important to point to the fact that (inaudible) with the commercial strategy in a way -- in such a way as to guarantee competitive prices consistent with our market position, seeking opportunities in order to maintain our inventories and our sales aligned in the first quarter of '17, which was not different. That is to say we carried out the necessary markdowns, and we evaluated opportunities for markup, and we worked on our price (inaudible) in such a way as to guarantee our competitiveness. And we also had the effect of the higher exchange rate, which will become favorable to us as of the second semester of 2017. Having said that and according to our strategy, the higher-priced items that are more visible to our consumers and more affected by the exchange rates were -- they were, in fact, adjusted in a rational fashion so that we could adapt ourselves to our clients' expectations.

And another point related to the commercial side of our operations are our inventories because the fact that they have gone up 36% is due, in fact, to the low level that we operated in the first half of 2016. And today's levels are adequate, and we do not expect any additional markdowns for the second quarter of 2017. And as we said in our February call, our annual gross margin should be maintained stable because as of the second half of 2017, we expect to reverse these pressures with a more favorable exchange rate and a better -- economic scenario that could be better. And as a consequence, in this promotional environment, a reality that we already started to seize now in April.

Before concluding, I would like to say a few words about our credit operation, which also delivered good results in the first quarter. On the revenue side, we had positive growth both for private label and Meu Cartão. And in (inaudible), we said we continued to improve our credit quality of all our portfolios, and all those stems from the initiatives that we adopted in the last few years in order to improve credit assignments and also to maintain the correct updates of the credit limit and also as a consequence of the improvements in our collection activities.

As to our operating expenses of Financial Products, I would like to remind you that we do continue to be under pressure as we are currently migrating to the new credit platform and also concluding the incorporation of our financial institutions.

These were my remarks, and we try to focus here on the highlights of the quarter. And now I would like to remain at your disposal to answer any questions that you might have. And you may be certain that we are paying keen attention to whatever is happening right now and all the decisions that we make continue to be focused on the long run.

Now we can open for your questions. Thank you very much.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from Mr. Thiago Macruz from Banco Itaú.

--------------------------------------------------------------------------------

Thiago Capucci Macruz, Itaú Corretora de Valores S.A., Research Division - Research Analyst [2]

--------------------------------------------------------------------------------

Still talking about the gross margin, I would like to understand. Let's say we can exclude the effect of the exchange rate, what kind of pressure would we see year-on-year in a more competitive environment? And going back to competition, do you have any sense of normalization, that is to say more rational behavior because of an incipient improvement in construction? And the other one has to do with consumer finance. You were very much in pressure (inaudible) consumer finance. I would like to understand if it would make sense for you to increase again the levels of credit assignment. Would that make sense? So these are my 2 questions.

--------------------------------------------------------------------------------

Laurence Beltrão Gomes, Lojas Renner S.A. - CFO and IR Officer [3]

--------------------------------------------------------------------------------

Thank you, Thiago, for your questions. The first point, I think we said that we -- well, we have already been talking about, at the beginning of the year, about our expectations. It was a year in a very competitive environment, very promotional. And our focus, as always, is disciplined in maintaining our position, maintaining our competitiveness. And the figures have been showing that even last year, when we had more market share, we were able to gain market share. And we also saw a recovery of these levels in the first quarter, according to official data, and the difference between the official data and our performance -- or a difference similar to the one that we saw in 2014 and 2015, when we also had a good result. So we already expected a more competitive environment and, therefore, a higher degree of difficulty in terms of expanding our margins this year. But net of the exchange rate effect, which is the gist of your question, it would have been half. Exchange rate accounted for 50% of the reduction in our gross margin. So this was your first question. And the second question, I think it's important to show that we are rather satisfied with the drop in delinquency that we achieved, and we saw a major evolution in this regard in 2016. And we made great strides in private label in the second half and in the fourth quarter, especially in the Meu Cartão. In the first quarter, we also saw very good progress in personal loans, and our tactics is (inaudible) and different, and we're using more information. We specialized. And we are also seeing an action plan to capture our inactive cards, and we invested in our database, and we were able to achieve a good result. So the limit or the cap, they are reviewed every single month, and we believe it's important to do that and also the consolidation and the improvement of the main macro variables and indicators to bring about an improvement and also the reduction of interest rates. And all this take some time to really reflect on the real economy. So we're expecting more positive signs -- the last variable to recover that we see are the positive signs that we mentioned. We see that there is a slight recovery in consumer confidence already. Have I answered your questions, Thiago?

--------------------------------------------------------------------------------

Thiago Capucci Macruz, Itaú Corretora de Valores S.A., Research Division - Research Analyst [4]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Operator [5]

--------------------------------------------------------------------------------

Please stand by while we wait for questions.

--------------------------------------------------------------------------------

Guilherme Assis, Brasil Plural Corretora de Cambio, Titulose Valores Mobiliários S.A., Research Division - Analyst [6]

--------------------------------------------------------------------------------

This is Guilherme Assis from Brasil Plural. I would like to go back to gross margin, Laurence. It's important for us to understand this, 120 bps that you -- half of that from the exchange rate, and I would like to understand about the other half, the other 50%. We see your inventory levels that are better adjusted when we compare with last year, so I believe you had more merchandise to make promotions. And does it have to do with inventories? Does it have to do with the competitive environment, I mean, the other 50%? We would like to understand how much of the sales in this quarter were from marked-down items, whether markdown was higher than last year's. And another thing is, do you have any movement in prices because of competition? I'm not talking about the marked-down items but the ones that are fully priced. And another question now about the same-store sales, 9%. Could you tell us about the evolution in the quarter and the trend from March through April? If you already have something about April that you could share with us to know whether we can expect a higher same-store sales. Do you have any signs that you could share with us for April?

--------------------------------------------------------------------------------

Laurence Beltrão Gomes, Lojas Renner S.A. - CFO and IR Officer [7]

--------------------------------------------------------------------------------

Thank you for the participation, Guilherme. First, the second half of the margin reduction, the other 50% reduction in the margin, had no relation whatsoever with the inventory level. As we said during our call, since the third quarter of last year, we saw improvement in our operations, and we placed our bets on having a better inventory situation at the turn of the year and having a changed situation in the first quarter. And we could have had that last year if we had more supply in the first half last year. We had some issues related to the quality of our suppliers and imports last year. So this year, we'll have a better situation regarding supply. And over the year, this will become more and more normal. It's important for you to see the consolidated -- this in a consolidated way, and you can see that if it matches the sales in the period -- so it is much more related to our tactics, something regarding an adjustment of some prices and some items that had a higher price, and that were adjusted to adopt to all market situations in order to have a fine-tuning of our market position, which is (inaudible) fashioned at competitive prices for the prices that are our target our audience. So according to what we had already said previously in the last few quarters and also in the last conference call, it is more related to this. And there are some positive signs also -- also, no, already answered your second question, same-store differences from the last quarters. The average ticket was 1 point higher, and this is important, this is good news and very positive, vis-à-vis traffic in our stores and the number of items per bag and per ticket. Also, it's a bigger bag than our clients are buying, and this is also important. Could you go back to the first question, please?

--------------------------------------------------------------------------------

Guilherme Assis, Brasil Plural Corretora de Cambio, Titulose Valores Mobiliários S.A., Research Division - Analyst [8]

--------------------------------------------------------------------------------

About your inventory. I know about the competitive prices and the competitive situation. I would like to know whether the competition was marking down. What causes this promotional environment? I would like to understand what is done by your competitors. And do you think that in the second quarter, we will have a different situation?

--------------------------------------------------------------------------------

Jose Galló, Lojas Renner S.A. - CEO, MD and Director [9]

--------------------------------------------------------------------------------

This is Galló, Guilherme. Our prices have to be comparable with our market position. On the other hand, it's interesting to see that prices normally are the third item in the choice of a product. Usually, the variety of fashion, the quality of the service at the store, and the third one is the price. What happens is that in this price -- we have a range of prices that is evaluated by the client. And after the client finds the product that he or she wants, with a difference of 15%, 20%, they will go and buy it, but not if the price is higher than what they expected in this range. So in reality, what we had was a situation in where the prices went or became higher than what the market expected for these items. So all this is on a long-term basis. We are not going to create an image of a highly priced store because we want to deliver our items, our products at a reasonable and affordable price for our consumers. And this was historical. Whenever you have winter coming, and for everybody, every time you have winter coming, if you are the consumer, what do you think about the prices? They will say, will all the apparel items have higher prices than last year? But this is not true because they are comparing the summer items to the winter items. And normally, if you have heavier garments, that usually have higher prices, and we are not going to hinder our position or our image because of 3 or 4 months. We have to maintain our prices on the long run. Thank you.

--------------------------------------------------------------------------------

Operator [10]

--------------------------------------------------------------------------------

Fábio Monteiro from BTG Pactual. Mr. Monteiro?

--------------------------------------------------------------------------------

Fábio Monteiro, Banco BTG Pactual S.A., Research Division - Analyst [11]

--------------------------------------------------------------------------------

Could we talk about sales and inventories? Because you've said that the collection or the launch of the fall-winter collection was different, and you have a new strategy to supply your stores in order to avoid simply a stock-out. And Laurence talked about the average ticket and more items per bag and the increase in traffic. So do you have any metrics to reduce stock-out? And also, the launch of the collection, and you supplied all the stores in one single day. What about the contribution of this new strategy to a reduction in your inventory levels, this new format that you used in order to launch the fall-winter collection? And what should we think about inventories in the next few quarters? So your strategies to reduce stock-out and the contribution of each item to the increase in inventory days. And what about your inventory in the Q2?

--------------------------------------------------------------------------------

Laurence Beltrão Gomes, Lojas Renner S.A. - CFO and IR Officer [12]

--------------------------------------------------------------------------------

There are 2 parts there. It has to do with the push and pull and connotation of push and pull, we are according to schedule. And our objective continues to be the formal penetration of the basics by the end of this year. So we have been evolving, and we have been increasing the number of items. But we are not going to use every metrics. We are not measuring yet the (inaudible) figures about that. But the main metrics for the result of our push-and-pull strategy and system is the increase in the service level. That is translated into the increase in the number of SKUs in the stores. So this is what we have been seeing so far, the increase of presence, and we're very pleased with this result and the increase in the presence of SKUs per store, with a possibility of reducing our inventory at the stores. So this is one of the first results that we have been achieving from our push-and-pull system. And regarding our inventory days, we saw a negative impact that was mentioned since last year, but our expectation for the end of this year is to go back to normal levels and that our inventory may grow less than the growth in our sales. That is to say aligning these 2 things.

--------------------------------------------------------------------------------

Jose Galló, Lojas Renner S.A. - CEO, MD and Director [13]

--------------------------------------------------------------------------------

This is Galló. So to make it clear for everybody, when we launch a collection -- this is for the first time that we did this at Renner. And all the models that were shown during the fashion show, and we're talking about over 200, 250 different items, on the next day, all of them were present in the 300 stores of Renner. So it was really an excellent result. In this case, we had to increase our inventories and (inaudible). But on the other hand, it also helped us regarding our same-store sales, the impact of collection. The available, at the same time, in all stores led us to have very interesting results of same-store sales growth in February and March. And in practice, we have to integrate what we have been doing and having these full packages coming all at the same time at our stores. And this has a lot to do with push-pull, and the possibility of the automated DCs allow us...

--------------------------------------------------------------------------------

Fábio Monteiro, Banco BTG Pactual S.A., Research Division - Analyst [14]

--------------------------------------------------------------------------------

One last question about promotions. I'm not talking about you. You have already talked about your market and prices and some categories. But I would like to ask about competition because in the last few quarters, we saw a very aggressive competition regarding their promotions, and they were higher than the historical levels. I would like to know if there is any difference in the last few months, in the last quarter, mainly after all your competitors launched their fall-winter collections. Could you describe the behavior of your main competitors in this regard, please?

--------------------------------------------------------------------------------

Laurence Beltrão Gomes, Lojas Renner S.A. - CFO and IR Officer [15]

--------------------------------------------------------------------------------

I believe it went back to normal in January and February. We saw extremely high discounts, very high percentages. And now I think we got into a normal process. That is to say we are back on track, and we see that there are some few exceptions, but if you go around a shopping center or shopping mall, you'll see that it is really going back to normal, I believe, becoming normal again with some few exceptions. But we no longer see the strongly promotional environment such as we saw in January and February.

--------------------------------------------------------------------------------

Operator [16]

--------------------------------------------------------------------------------

Robert Ford from Banco America.

--------------------------------------------------------------------------------

Robert Erick Ford Aguilar, BofA Merrill Lynch, Research Division - MD in Equity Research [17]

--------------------------------------------------------------------------------

You have many important projects underway, such as your consumer finance company, the push-and-pull system. Could you give us an update regarding the deadline that you expect for these operations?

--------------------------------------------------------------------------------

Laurence Beltrão Gomes, Lojas Renner S.A. - CFO and IR Officer [18]

--------------------------------------------------------------------------------

As we mentioned, we have the implementation of our consumer finance company, and that will start operations in June. We also have the Uruguay project, where there'll be a platform that will allow us to operate even in all the countries if necessary. You have to adapt, of course, because of many different reasons. And also, regarding suppliers, we have a very strong program for supplier support. And many years ago, we didn't have, really, engineers in our company, and today, we have some engineers that are involved in our productivity and, of course, this results to an endorsement. And also some structures of our company in terms of receiving more assertive information regarding shopping practices and also the pace by which we open new stores. Of course, those increases our expenses at that specific moment. So not only the 25 Renner stores but also our 15 Youcom stores -- 25 and 15 of Camicado. And of course, we need to train people to open these new stores. So we're not focusing on this specifically. We have to focus on the next 10 or 20 years. So we have to launch and open new spaces for Renner because we have very good areas, very good locations and -- both for Renner and Youcom and Camicado. And you have to take advantage of that today because when our economy goes back to normal, we will be fully prepared to gain share in all our businesses, even more so than today.

--------------------------------------------------------------------------------

Operator [19]

--------------------------------------------------------------------------------

Gustavo Piras from UBS.

--------------------------------------------------------------------------------

Gustavo Piras Oliveira, UBS Investment Bank, Research Division - Executive Director, Head of LatAm Research, and Latin America Consumer Analyst [20]

--------------------------------------------------------------------------------

I'm still under pressure regarding gross margin. Let's talk about the 60 BPS coming from the exchange rate. What about the behavior for the next quarter. You had growth of 3.4 and last year it was 3.5. It's a little bit less bad than last year, but it's also higher than the first quarter. Do you believe you would be able to keep the 60 BPS in the second quarter, would it be higher? I would like to understand the dynamics involved and also for the second half of the year? I believe well maybe the exchange rate will be even more favorable, what do you think?

--------------------------------------------------------------------------------

Laurence Beltrão Gomes, Lojas Renner S.A. - CFO and IR Officer [21]

--------------------------------------------------------------------------------

We cannot talk about future margins or give you any guidance. But the second quarter, the exchange rate is lower than it was in the first quarter. It is lower than we had for the third quarter and in the second half of the year, if we see a contribution because the last year, it will be favorable to us, if you compare the half year of 2016 to '17.

--------------------------------------------------------------------------------

Gustavo Piras Oliveira, UBS Investment Bank, Research Division - Executive Director, Head of LatAm Research, and Latin America Consumer Analyst [22]

--------------------------------------------------------------------------------

But what about the mix for the second quarter? Do you believe there could be a lot of pressure on your margin?

--------------------------------------------------------------------------------

Laurence Beltrão Gomes, Lojas Renner S.A. - CFO and IR Officer [23]

--------------------------------------------------------------------------------

No, because the impact of the exchange rate will be lower, but they are other variables coming into play and also we have less promotions that we already seen here. That we see a less promotional environment. We see some signs of that, but it will depend once again in this dynamic, our position and the market position that is to say how the market behaves. We cannot give you more color about the gross margin for the second quarter that's as far we can go. A question about the other ticket. For the first time in, I believe, 2.5 years the average ticket for the card grew more than Renner as a whole.

--------------------------------------------------------------------------------

Gustavo Piras Oliveira, UBS Investment Bank, Research Division - Executive Director, Head of LatAm Research, and Latin America Consumer Analyst [24]

--------------------------------------------------------------------------------

Was it because of trade up? Your more loyal clients have had your cards chartered by more, more things than they used to buy. But you start to lose the clients that was trading down, and maybe the client that was trading down is looking for another store. Was this an affect or is it because you gave a higher discount for the more expensive products and they became more affordable for your loyal clients, but you do not have the necessary volume to offset the purchases made in the trade up? Could you talk about the dynamics of your ticket, is it merchandising or what?

--------------------------------------------------------------------------------

Laurence Beltrão Gomes, Lojas Renner S.A. - CFO and IR Officer [25]

--------------------------------------------------------------------------------

What we saw was an increase in traffic stores. As we have data about that, we see growth in terms of income bracket withdrawal and no [dispersion]. Maybe this was the reason why, maybe the more loyal client, maybe because the improvement in the purchasing power. I believe, these are the questions involved, that is to say this is rather normal. Also the increase in sales overall and it ends up diluting the participation of the card. So we didn't detect anything relevant regarding this change, maybe a low intensity, but we continue to see a very good traffic in all segments.

--------------------------------------------------------------------------------

Operator [26]

--------------------------------------------------------------------------------

Irma Sgarz from Goldman Sachs.

--------------------------------------------------------------------------------

Irma Sgarz, Goldman Sachs Group Inc., Research Division - Equity Analyst [27]

--------------------------------------------------------------------------------

I have 2 quick questions. Last year, there was a problem with our domestic suppliers and the exchange rate environment became more favorable for import, more than last year. But I would like to know what kind of interaction could we expect for this year compared to the previous year? And the second question is what about the help of the chain in Brazil, have yours recovered? -- I apologize going back to the gross margin, once again, it's not really clear to me. What you expect the half, the 50% and the other 50%? Was the pressure related more to promotions or to adjustments in the collection? Was it something like a one-off situation more related to promotions or was it because of an adjustment to the architecture itself? And could we expect that for the next few quarters as well?

--------------------------------------------------------------------------------

Laurence Beltrão Gomes, Lojas Renner S.A. - CFO and IR Officer [28]

--------------------------------------------------------------------------------

Irma, thank you for the question. Gross margin, once again, it was related to our tactic position and adjustment in some items. It's not structure. It also has to deal with the exchange rate. This also impacted our gross margin. Whatever is not exchange rate, it has to deal with price adjustment. And as we had some markdowns in some items. We also had some price increases in other category. So it has to do with the seasonal adjustments, and that is related to market environment. It's more related to that, in fact. And from now on, we do not see any need for additional markdowns. The signs that we are seeing are very positive. But once again, it will depend on the environment itself or the market and there are some uncertainties also ahead of us, but we have to track this consolidation and the recovery of consumer confidence.

--------------------------------------------------------------------------------

Jose Galló, Lojas Renner S.A. - CEO, MD and Director [29]

--------------------------------------------------------------------------------

This is Galló, good afternoon. With largely our suppliers, we have a situation that is either different from what we had last year. And with this issue of new exchange rate, company has also suffered this impact. So our national our domestic suppliers have a different situation today than last year. So there is no difficulty there. And when you talk about the health of our supply chain, we track this very closely and we're very close to our suppliers, so much so that we are not worried about that only. I talked about our concerns with (inaudible) productivity with the reduction of the consumption of water. It has suppliers and reduction in the cost of energy. And we're working head and head with them. We were able to reduce 40% in laundry operation for this. And we also concern ourselves with the help of our suppliers, and we were able to get a credit facility with the (inaudible) that we transferred to our suppliers at a very good cost. And this generates a high degree of trust between our suppliers and [win it]. You know very well that if you have a retail operation, you depend much more on the local supply chain. It would be very hard for us to exceed 30% in imports. So we're very careful regarding our suppliers. We have to be closer and closer to them, and we promote events and meetings during which we discuss quality, and we take very good care of our suppliers. If we want to be fast, we have to have our suppliers very close to us.

--------------------------------------------------------------------------------

Operator [30]

--------------------------------------------------------------------------------

Franco Abelardo, Morgan Stanley.

--------------------------------------------------------------------------------

Franco T Abelardo, Morgan Stanley, Research Division - Equity Analyst [31]

--------------------------------------------------------------------------------

First, what is the contribution of e-commerce in same-store sales for the first quarter? The second has to do with additional expense of the $60 million that you mentioned. How much of these expenses were posted in the first quarter? And which line items in your result should we see these expenses included? And the third question has to do with other operating expenses. There were some nonrecurring expenses last year and the level was about 0.5% of sales. Could we think about something close to 1.5% or 2% of sales in your Other operating expenses line? So 3 questions.

--------------------------------------------------------------------------------

Laurence Beltrão Gomes, Lojas Renner S.A. - CFO and IR Officer [32]

--------------------------------------------------------------------------------

So thank you for the questions. Regarding e-commerce, we do not disclose the participation of e-commerce. What we can say is that e-commerce has been gaining share in our total sales and same-store sales as well. We are growing much more than the growth in apparel. So a good result coming from e-commerce than our expectations. Our initial expectation was to reach in 2021 the level that we can, understand we believe that the target for 2021 will be reached before 2021. But I think it's important to say that in our e-commerce, operation is profitable, which is an operation that it's not really only a matter of gaining share, it has to do with profitability. And the second point, additional expenses that we talked about, $60 million, were related to long-term projects, structural projects as Galló said, project that will bring long-term results. And also try to -- should take it in a linear fashion, in a straight line fashion for the second quarter. And regarding all other operating expenses, maybe normalized level in terms of reference would be. Looking at 2014, that is to say before 2015, maybe this is what we should consider as a normal level, okay. Okay. So it would be more, let's say, close to 2%, such as you had in 2014.

--------------------------------------------------------------------------------

Franco T Abelardo, Morgan Stanley, Research Division - Equity Analyst [33]

--------------------------------------------------------------------------------

What about your target for 2021? Was it to reach 5% of your sales and do you expect to reach this before 2021? And what was this level in 2016, can you talk about that? And the second follow-up has to do with being profitable. It is profitable that -- is it less profitable than brick and mortar stores or similar to it?

--------------------------------------------------------------------------------

Laurence Beltrão Gomes, Lojas Renner S.A. - CFO and IR Officer [34]

--------------------------------------------------------------------------------

Well, the first question is correct. The initial estimate was to reach 5% by 2021. And as we said, we believe that this will be reached before 2021. Regarding profitability, it's important to say that this operation is a new operation. Their store -- and a run top of operating margins, and as we said we delivered many important projects last year. One of them was the update of our [CRT], which is a IT platform. And this was an important step in order to strengthen and improve all our tools and all (inaudible) conditions of our e-commerce operations. It's important to say that we're still in the ramp up. We are on the right track. And what we see is that today our margins are lower than the pure players in retail.

--------------------------------------------------------------------------------

Operator [35]

--------------------------------------------------------------------------------

(inaudible) from Santander.

(inaudible) from Crédit Suisse.

--------------------------------------------------------------------------------

Unidentified Analyst, [36]

--------------------------------------------------------------------------------

Just to clarify this $15 million that you talk about, are these projects that will come on track after 2018 or is it today and then next year you agree to dilute that? They do not -- they did not exist in 2016, so they are part of our strategy now. So this year, we're not still reaping the benefits -- the positive benefit that they will bring to our revenues because you're a consumer finance company. Are you just waiting for the approval by the Central Bank and what could change regarding the result of this company? Do you have any idea of the expenses? Will they change? Is there something you can tell us about your consumer finance company and the expenses related to it?

--------------------------------------------------------------------------------

Laurence Beltrão Gomes, Lojas Renner S.A. - CFO and IR Officer [37]

--------------------------------------------------------------------------------

Well, first of all the objective is to have a more agile, more flexible platform for this business. And this will give us a lot of independence and flexibility to be important. There are some points regarding the top line and the benefits. And of course, we believe and we expect to have an optimization in our funding cost. However, we have an expense structure that is bigger structure -- operating structure is bigger than it was, but also the bottom line. We believe that besides having this agility and the benefits, we will also gain in terms of governance, we'll have a more robust governance because of that, a bit more elasticity in this operation. And I believe, this will contribute, one way or another to our bottom line.

--------------------------------------------------------------------------------

Unidentified Analyst, [38]

--------------------------------------------------------------------------------

So this is the level of expenses, right? And whatever you haven't, have to do with the funding cost and taxes, et cetera?

--------------------------------------------------------------------------------

Laurence Beltrão Gomes, Lojas Renner S.A. - CFO and IR Officer [39]

--------------------------------------------------------------------------------

Yes. Correct. Yes.

--------------------------------------------------------------------------------

Operator [40]

--------------------------------------------------------------------------------

Maria Paula from B de Investimento.

--------------------------------------------------------------------------------

Maria Paula Cantusio, BB-Banco de Investimento S.A., Research Division - Senior Analyst [41]

--------------------------------------------------------------------------------

Could you talk about the Camicado (inaudible) margin, because the behavior was different from the consolidated gross margin? Does it have to do with less price sensitivity of Camicado consumers? And the second question has to do with the company going international. Could you go more in-depth and tell us about the opening of stores in Uruguay, what you have been seeing in the local market there? And we expect to open stores in other countries because you mentioned that you're setting up a platform that will be ready also to serve other clients -- other countries.

--------------------------------------------------------------------------------

Laurence Beltrão Gomes, Lojas Renner S.A. - CFO and IR Officer [42]

--------------------------------------------------------------------------------

About Camicado, it has to do with the improvement to the product mix regarding variety and quality and a more adequate assortment. In 2016, we made very consistent strides in our product mix in Camicado. So we have a more attractive store. It is more colorful now, more attractive. And regarding the participation of imported products as well. In spite of the exchange rate, we have a better margin there. So these are the 2 main factors. Camicado is also -- was also quite resilient in 2016 and this was also important. So it has to do with the better product mix and also the increase in imports.

--------------------------------------------------------------------------------

Jose Galló, Lojas Renner S.A. - CEO, MD and Director [43]

--------------------------------------------------------------------------------

This is Galló. Regarding Uruguay. As we said at the beginning, we are experimenting. There are issues involved such as the exchange rate and taxes. We do not have a study right now that works as a basis (inaudible) in other countries. 30% of Uruguay has a higher average income and a better distribution of social classes. And also the lifestyle is very similar to the Brazilian lifestyle. So these are the reasons why we have already 4 contract signed, 2 certainly for this year and the 2 other ones for next year, (inaudible) happen in November. And we will be tracking the situation to see how they grow. We believe this is very interesting. And we will be competitive in Uruguay price wise and product wise. So far, we can only talk about our impressions. They are still impressions, but they are all good. So it will depend also on the execution too. This is what we have right now.

--------------------------------------------------------------------------------

Operator [44]

--------------------------------------------------------------------------------

Joao Mamede from Santander.

--------------------------------------------------------------------------------

João Mamede, Santander, Equity Research - Head of Retail and Consumer Goods and Research Analyst [45]

--------------------------------------------------------------------------------

I have 2 questions about same-store sales. Was there an adjustment because last year it was a leap year, so there is a slight percentage that brings it up, and more doesn't have a lot of entrants regarding financial services, we see a drop in the (inaudible) for each. Should (inaudible) change the strategy of your consumer finance with a projection of a lower Selic rate? Of course, you could have a quicker improvement because of your funding costs. So do you intend to start transferring the drop of the Selic rate to consumers because last year you increased the 0+8 rate. So do you expect to lower it if Selic goes down to 1 digit?

--------------------------------------------------------------------------------

Laurence Beltrão Gomes, Lojas Renner S.A. - CFO and IR Officer [46]

--------------------------------------------------------------------------------

Thank you for the question. And I will start by your second question. Yes, we expect to transfer this to our consumers at some point in time. The drop in the funding cost, the drop of the Selic rate. However, it's very important for us to see the consolidation of these signs of improvement in the economy, mainly in the unemployment rate, which is available that we see as the very important for our business. So we will try to look for the (inaudible) with a new rules about the revolving credit, we will be reducing the rates of (inaudible). Maybe the next quarter, we'll have a higher visibility regarding the timings of that. But this is what we can say. This will be the (inaudible) for the time being. About the first question, it could be that this is an assumption that could be true.

--------------------------------------------------------------------------------

Operator [47]

--------------------------------------------------------------------------------

(Operator Instructions)

We have a question from the webcast platform and I'm going to read it. It says, some time ago we were talking about the increase in gross margin because of the investments made, and now it is no longer the situation. Are you going to reinvest in your value proposition or in operating costs, such as more engineers be hired?

--------------------------------------------------------------------------------

Unidentified Company Representative, [48]

--------------------------------------------------------------------------------

And we talked about margin increase. We always talked about long term. We believe that what happened here in this quarter was rather well clarified here, and we acclaim the situation regarding the high promotional level that we had and after -- the adaptation of our prices, maybe at the higher priced items. And regarding the cost of our requisition that was around $4. Our value proposition says that -- well, let's go to the operating costs. And you mentioned, engineers. This is really irrelevant. This is a very small cost proportionally, and you cannot show that this is going to affect the cost structure of the company. And what we will gain with that will be a higher efficiency, vis-a-vis our suppliers, the higher productivity as well with a positive impact on our costs. So all those 4 make us more competitive.

--------------------------------------------------------------------------------

Laurence Beltrão Gomes, Lojas Renner S.A. - CFO and IR Officer [49]

--------------------------------------------------------------------------------

This is Laurence. We still have another question from the webcast platform. And the question is the following. About (inaudible), consumer finance company. Could you talk more about these operations and what you expect in terms of results from this investment? When are you going to start up (inaudible) and when if the new source of revenue for the net -- we have already talked about this financial situation during this call. We talked about the objective, the strategy of this dual culture to (inaudible). We expect it to start operations in June. They're still waiting for the preoperational inspection by the Central Bank. And we expect this to happen now in May. And as we've said, financial product (inaudible) consumer finance company is just a platform for this operation that already exists.

I believe that if there are no more questions, we will be closing this conference call. And we thank you very much for participating in this call. And we hope to see you, again, in the next quarter. Thank you very much.