FOX-WIZEL LTD. BOARD OF DIRECTORS' REPORT AS OF JUNE 30, 2017

Transcription

1 FOX-WIZEL LTD. BOARD OF DIRECTORS' REPORT AS OF JUNE 30, 2017 Hermon St. Airport-City P.O.B. 76; Ben-Gurion Airport Tel.: Fax:

2 FOX-WIZEL LTD. We are hereby pleased present the report of the Board of Direcrs of Fox-Wizel Ltd. ("the Company") and its local and foreign subsidiaries (collectively, "the Group") for the six months ended June 30, 2017 ("the reporting period"), in conformity with the Israeli Securities Regulations (Periodic and Immediate Reports), The attached financial statements have been prepared in conformity with International Financial Reporting Standards ("IFRS"). See additional information in Note 2 the Company's annual financial statements as of December 31, A. THE BOARD OF DIRECTORS' EXPLANATIONS FOR THE STATE OF THE COMPANY'S AFFAIRS 1. Condensed description of the Group and its business environment General The Group is engaged in the design, acquisition, marketing and distribution of clothes, fashion accessories, underclothing, footwear and home products. The Group also sells aromatic bath and body care products. The Group is active in two main operating segments: 1. Fashion and home fashion under the brands FOX - in Israel and abroad - FOX Home, American Eagle Outfitters, Aerie, The Children's Place, Charles & Keith and Mango in Israel. 2. Aromatic bath and body care products through the Laline brand in Israel and abroad. See more information below: - 2 -

3 1.1 The segment of fashion and home fashion This operating segment is marketed through several marketing channels as follows: Local sales - through the Israeli retail chain - a chain of sres operated by the Company itself and/or through subcontracted operars ("directly operated sales" and/or "directly operated sres") and wholesales institutional sres and entities in Israel ("sales wholesalers and others in Israel"). Foreign sales - sales franchises and wholesalers abroad ("foreign franchise sales"). Local sales The FOX and FOX Home brands The Group's major activities in the Israeli fashion industry are performed under the FOX brand. The Company also sells housewares and home textile products in the FOX Home retail chain. The FOX and FOX Home brands are some of Israel's leading fashion and home fashion brand. The Company's brands have maintained their p position by following current trends, practicing innovation and developing a variety of models while maintaining product quality, using structured marketing and positioning strategies and operating an advanced logistic system. The American Eagle and Aerie brands ("AE") The AE retail chain launched its Israeli operations on February 2, American Eagle Outfitters is a well-known and leading clothing, apparel and footwear brand in the United States which sells casual fashionable clothing at affordable prices. The Aerie underwear brand is generally sold in a sre-in-sre format or in side-by-side format. There are also four stand-alone sres of the Aerie brand. The Company began collaborating with American Eagle Outfitters in the U.S. for launching a limited children's collection for boys and girls sizes 4-16 that will be exclusively sold in Israel. The collection is designed in the spirit of the AE brand and in keeping with the brand's signature designs and was first launched on March 1, 2016 under a sre-in-sre concept. As of June 30, 2017, there are 21 chain sres that carry the children's collection. The Children's Place brand ("TCP") The TCP retail chain launched its Israeli operations on March 7, The TCP brand is the largest children's wear brand in the U.S. which offers a wide collection of clothing items designed for boys and girls, from casual trendy. The chain sells clothing items, accessories and footwear for babies from New Born size 14 at high quality and affordable prices

4 Manago brand ("Mango") The Mango retail chain started its operations under FOX Group control on January 5, The Mango brand is a leading multinational European fashion brand which offers trendy apparel, footwear and accessories for women, men and kids at premium quality and competitive prices. Charles & Keith brand ("C&K") The C&K retail chain launched its Israeli operations in February The C&K brand is a leading international fashion brand from Singapore which offers a variety of trendy footwear, bags and accessories for women at premium quality and affordable prices. The brand offers tal look fast fashion collections of shoes, bags and fashion accessories. As of June 30, 2017, the Company's directly operated retail chain includes 323 sres as described below FOX sres (*) AE sres (**) TCP sres C&K sres Mango sres Total (*) FOX Home - starting from the second half of 2010, the Company operates the FOX Home retail chain. As of June 30, 2017, the chain has 40 sres (and 27 additional mixed sres that sell clothing items along with houseware and textile products). (**) AE - as of June 30, 2017 there are 43 chain sres in leading shopping malls in Israel, of which four stand-alone Aerie sres. Foreign sales The Company operates abroad and plans expand the deployment of its fashion retail chain under the FOX and/or F&X brand other international markets in collaboration with exclusive franchisees in each country. The foreign sres are established by the franchisees that bear the entire costs of construction, including the logistics and advertising costs. As of June 30, 2017, 126 sres/points of sale operate under the F&X and FOX brands in 11 countries around the globe

5 1.2 The segment of aromatic bath and body care products The Laline sre chain sells a variety of soaps, candles, body oils, bath products, body care products, baby care products, accessories and gifts. Laline markets its products mainly through the retail chain in Israel. In addition, Laline markets its products institutional cusmers in Israel. Laline operates overseas in 25 franchise sres operating the name of Laline in Japan and the U.S. (California and Hawaii). Laline plans expand the deployment of its sres in other international markets through designated franchisees in each country. On Ocber 27, 2015, Laline US Holdings Inc. was founded ("Laline Inc.") which sells lotions, ambiance products, soaps, accessories etc. in a directly-operated sre in Times Square, Manhattan, NYC. Laline owns 100 the authorized share capital of Laline Inc Laline retail chain in Israel Other activities that do not constitute a reportable segment A.H. Fashion Manufacture and Marketing 3020 Ltd. ("Sacks") - the Company holds 50 the share capital of Sacks. Sacks manufactures and markets women's fashion products under the Sacks brand local and foreign wholesalers and operates boutique sres in Israel that offer trendy and luxurious designs for women. As of the reporting date, Sacks operates 19 sres in leading shopping malls in Israel and markets its products abroad wholesalers in the Netherlands, Denmark, Switzerland, England, Greece, Germany, Austria, France, Australia, Argentina, Singapore, Spain, Croatia, Madagascar, Japan and Canada. In addition, Sacks operates a website for marketing its brand worldwide. Billy Haus Ltd. ("Billy Haus") - the Company holds 50 the share capital of Billy Haus which imports and sells youth surfing and extreme sports apparel and accessories. Its main brands include VZ, Billabong and Element. Billy Haus markets the products through a retail chain that, as of the reporting date, consists of 38 sres in leading shopping malls in Israel. Yanga Ltd. ("Yanga") - starting August 28, 2014, the Company holds 50 the share capital of Yanga. Yanga is engaged in the acquisition, production and marketing of vintage-romantic style boutique fashion for women under the Yanga brand retailers in Israel. As of the reporting date, Yanga operates 24 sres in leading shopping malls across Israel. Retailors Ltd. ("Retailors") - starting March 1, 2015, the Company holds 90 the share capital of Retailors. Retailors is one of Nike's franchisees in Israel that markets and sells Nike's sports shoes, apparel and accessories

6 On Ocber 26, 2016, Retailors signed an agreement with Foot Locker Europe BV ("Foot Locker") according which Foot Locker granted Retailors a franchise set up and operate a sre chain in Israel that will sell footwear and sports apparel of p international life style brands under the "Foot Locker" brand. As of the reporting date, Retailors operates 22 sres in leading shopping malls across Israel, of which 18 Nike sres and 4 Foot Locker sres (from March 2017). 1.4 Material events during the reporting period On April 21, 2017, an agreement was signed between the subsidiary, Retailors, and Nike Canada Corp. ("Nike"), a subsidiary of Nike Inc., according which Nike granted Retailors a franchise for a period of seven years for setting up and operating a sre chain in Canada, excluding the province of British Columbia ("the terriry"), for the sale of Nike footwear, clothing and sports apparel. Each Nike approved new operated sre will be granted a seven-year franchise. In Canada, similarly Israel and worldwide, there are retail multi-brand sports sres and chains that sell a variety of sports brands including the Nike brand. The operation franchised by Retailors will focus on setting up and operating mono-brand sres that carry the Nike brand only On June 15, 2017, the Company reported the advanced negotiations being held with Urban Outfitters Inc. ("Urban") for setting up and operating a retail chain of the Urban brands, Urban Outfitters, Anthropologie and Free People, in Israel ("the Urban brands") and for selling the Urban brands on a multi-brand retail website that is currently under construction. Subject the successful completion of the negotiations and the signing of a binding agreement, the Company plans establish a wholly-controlled subsidiary that will set up and operate a retail chain for selling the Urban brands in Israel. The sres will be opened based on a business plan agreed upon between the parties On September 27, 2017, the Company signed an agreement with Horowitz Yang Holdings Ltd. ("Horowitz Yang Holdings") for establishing a limited partnership, Terminal X Online Limited ("the partnership"), which will serve as a platform for a multi-brand retail website. The partnership was established in January 2017 and began operating in April The Company will hold 75 the partnership's share capital and Horowitz Yang Holdings will hold the remaining 25% (in the first two years of the partnership's operation, the distribution of profits between the partners will be 90% the Company and 10% Horowitz Yang Holdings) Receipt of long-term credit - see details of long-term credit received from banks in Notes 5b and 5c the Company's interim financial statements as of June 30, Remuneration policy - see details of the amendment of the Company's remuneration policy in paragraph 6 below. 1.5 Class actions - see details of class actions filed against the Company and investees in Note 20a the Company's annual financial statements as of December 31,

7 2. Segment analysis The table below details the structure of activities of the Company according the presentation in segment and accounting reporting: Revenues from sales and services Gross profit Operating income Segment reporting Accounting reporting Total before Fashion and Aromatic bath Other - adjustments Total home fashion and body care unallocated based on consolidated In Israel 100 operations Abroad 100% of operations 100% of operations 100% of operations 100% of operations Adjustments financial statement FOX, Home, TCP, C&K, Mango, AE FOX, Home, TCP, C&K, Mango, AE FOX, Home, TCP, C&K, Mango, AE *) Less excess of cost related acquisition. FOX Laline Billabong, Nike, Sacks, Foot Locker, Yanga, Terminal-X FOX Laline Billabong, Nike, Foot Locker, Sacks, Yanga, Terminal-X FOX Laline (*) Operating income (*) Billabong, Nike, Foot Locker, Sacks, Yanga, Terminal-X Subtal - Fashion and home fashion, aromatic bath and body care and other Subtal - Fashion and home fashion, aromatic bath and body care and other Subtal - Fashion and home fashion, aromatic bath and body care and other Less sales AE, Laline, Billabong, Sacks, Yanga Less gross profit AE, Laline, Billabong, Sacks, Yanga Less operating income (*) AE, Laline, Billabong, Sacks, Yanga Add - 50 equity earnings companies AE, Laline, Billabong, Sacks, Yanga Sales FOX, Home, TCP, C&K, Mango, Nike, Foot Locker, Terminal-X Gross profit FOX, Home, TCP, C&K, Mango, Nike, Foot Locker, Terminal-X Operating income FOX, Home, TCP, C&K, Mango, Nike, Foot Locker Add - 50 equity earnings companies AE, Laline, Billabong, Sacks, Yanga, Terminal-X

8 The Group's business operating results for the six and three months ended June 30, 2017 and 2016 according operating segments (NIS in thousands) In furtherance the application of IFRS 11, the results of the reported companies (Laline, Sacks, Billy Haus, Yanga and FWS) are now accounted for using the equity method. In order present segment reporting results based on the areas of operation of the Company and the information that is reviewed by the chief operating decision maker (the CODM) the data for sales and segment income of companies that are reported using the equity method are presented at full holding rate (100%) and a corresponding adjustment of sales and segment income was made present the segment's results based on the actual holding rate under the 'adjustments' column. For the 6-month periods (NIS in thousands) 1-6/2017 Other - unallocated Fashion and (Billabong, Total before home fashion Aromatic Nike, adjustments Total (FOX, Home, AE, bath and Foot Locker, based on consolidated TCP, C&K, Mango) body care Sacks, Yanga, 100 the financial Israel Abroad (Laline) Terminal-X) operations Adjustments statement Revenues from sales and services 807,013 11,051 89, ,077 1,065,606 (328,925) 736,681 Gross profit 465,559 4,663 60,467 93, ,590 (209,475) 415,115 Operating income 25,262 3,355 7,880 14,109 50,606 (12,238) 38,368 Profit margin 3.1% 30.4% 8.8% 8.9% 5.2% 1-6/2016 Other - unallocated Fashion and (Billabong, Total before home fashion Aromatic Nike, adjustments Total (FOX, Home, AE, bath and Foot Locker, based on consolidated TCP, C&K, Mango) body care Sacks, Yanga, 100 the financial Israel Abroad (Laline) Terminal-X) operations Adjustments statement Revenues from sales and services 768,461 13,804 80, ,591 1,002,994 (322,054) 680,940 Gross profit 443,375 5,914 53,289 84, ,973 (205,417) 381,556 Operating income 15,707 4,305 4,895 13,540 38,447 (8,078) 30,369 Profit margin 2.0% 31.2% 6.1% 9.6% 4.5%

9 For the 3-month periods (NIS in thousands) 4-6/2017 Other - unallocated Fashion and (Billabong, Total before home fashion Aromatic Nike, adjustments Total (FOX, Home, AE, bath and Foot Locker, based on consolidated TCP, C&K, Mango) body care Sacks, Yanga, 100 the financial Israel Abroad (Laline) Terminal-X) operations Adjustments statement Revenues from sales and services 428,496 5,600 47,605 89, ,658 (184,397) 387,261 Gross profit 271,350 2,300 32,351 54, ,537 (120,222) 240,315 Operating income 38,943 1,640 6,674 11,958 59,215 (12,683) 46,532 Profit margin 9.1% 29.3% 14.0% 13.3% 12.0% 4-6/2016 Other - unallocated Fashion and (Billabong, Total before home fashion Aromatic Nike, adjustments Total (FOX, Home, AE, bath and Foot Locker, based on consolidated TCP, C&K, Mango) body care Sacks, Yanga, 100 the financial Israel Abroad (Laline) Terminal-X) operations Adjustments statement Revenues from sales and services 421,643 8,032 40,521 76, ,143 (175,341) 371,802 Gross profit 263,678 3,425 26,990 47, ,735 (114,580) 227,155 Operating income 37,651 2,655 3,111 11,343 54,760 (6,528) 48,232 Profit margin 8.9% 33.1% 7.7% 14.7% 13.0% The table below details fixed and variable costs in each of the Company's operating segments in the three months ended June 30, 2017 and 2016 (NIS in thousands): Fashion and home fashion (FOX, Home, AE, TCP, C&K, Mango) Aromatic bath and body care (Laline) 1-6/ / / /2016 Revenues from sales and services 818, ,265 89,465 80,138 Gross profit 470, ,289 60,467 53,289 Fixed costs 266, ,332 34,335 34,450 Variable costs 174, ,945 18,252 13,944 Operating income *) 28,617 20,012 7,880 4,895 Fashion and home fashion (FOX, Home, AE, TCP, C&K, Mango) Aromatic bath and body care (Laline) 4-6/ / / /2016 Revenues from sales and services 434, ,675 47,605 40,521 Gross profit 273, ,103 32,351 26,990 Fixed costs 144, ,654 15,964 16,828 Variable costs 88,111 92,143 9,713 7,051 Operating income *) 40,583 40,306 6,674 3,111 *) After offsetting the Company's share of earnings of companies accounted for at equity, net

10 Following are details of the change in same sre sales and of the income per sq. m. for each of the Company's operating segments in the six and three months ended June 30, 2017 and 2016: For the 6-month periods Same sre sales (NIS in thousands) Fashion and home fashion Aromatic bath and body care 1-6/ / / /2016 Total same sre sales *) 682, ,438 71,737 71,836 Sales per sq. m. (not in same sres) (NIS in thousands) Fashion and home fashion Aromatic bath and body care 1-6/ / / /2016 Total sales per sq. m. (in NIS) **) 1,144 1,139 2,585 2,598 Total areas used in calculating sales per sq. m. (in sq. m. ***) 115, ,120 5,027 4,883 For the 3-month periods Same sre sales (NIS in thousands) Fashion and home fashion Aromatic bath and body care 1-6/ / / /2016 Total same sre sales *) 374, ,809 37,681 38,794 Sales per sq. m. (not in same sres) (NIS in thousands) Fashion and home fashion Aromatic bath and body care 1-6/ / / /2016 Total sales per sq. m. (in NIS) **) 1,198 1,231 2,723 2,798 Total areas used in calculating sales per sq. m. (in sq. m. ***) 117, ,309 5,064 4,859 *) Sres used in calculating sales are only sres which operated continuously and regularly throughout the entire relevant periods in 2017 and 2016 with no change in area. **) The data of sales per sq. m. are not same sre data and are also affected by changes in sre size. The data of sales used in calculating sales per sq. m. included all forms of payment accepted by the sre less VAT and less all discounts and promotions, including the redemption of Citrus Club Card points and discounts vouchers and gift cards. ***) The data of area in sq. m. used in the calculation are in net terms and exclude public areas and warehouses. The calculation of tal area for the period in sq. m. was made relatively according the number of operations of each sre

11 2.1 The fashion and home fashion segment The fashion and home fashion segment in Israel Sales For the 6-month periods (NIS in millions) 1-6/ /2016 Rate of change Sales % For the 3-month periods (NIS in millions) 4-6/ /2016 Rate of change Sales % The increase in sales turnover in the first half of 2017 the corresponding period of last year arises from the increase in same sre sales and the growth in operations of most of the brands following the increase in net retail spaces. The increase in sales turnover in the second quarter of 2017 the corresponding quarter of last year arises from the increase in the operations of most of the brands following the increase in net retail spaces, offset by the effect of the timing of Passover which was earlier this year with last year as a result of which some of the pre-holiday sales were included in the first quarter of 2017 whereas in the corresponding quarter of 2016 the majority of pre-holiday sales were included in the second quarter of the year. Gross profit For the 6-month periods (NIS in millions) Amount 1-6/ /2016 Change turnover Amount turnover Rate of change turnover Gross profit % % 5.0% - For the 3-month periods (NIS in millions) Amount 4-6/ /2016 Change turnover Amount turnover Rate of change turnover Gross profit % % 2.9% 0.8% The increase in the gross profit margin in the second quarter of 2017 the corresponding quarter of last year is due the decrease in purchasing costs also due the devaluation of the U.S. dollar in relation the NIS with the corresponding period of

12 Operating income For the 6-month periods (NIS in millions) Amount 1-6/ /2016 Change turnover Amount turnover Rate of change turnover Operating income % % 61.1% 1.1% For the 3-month periods (NIS in millions) Amount 4-6/ /2016 Change turnover Amount turnover Rate of change turnover Operating income % % 3.2% 0.2% The increase in the operating income margin in the first half of 2017 the corresponding period of last year mainly arises from the growth in same sres sales. The increase in the operating income margin in the second quarter of 2017 the corresponding quarter of last year mainly stems from the increase in the gross profit margin from the sales turnover in this segment with the corresponding period of The fashion segment abroad Sales For the 6-month periods (NIS in millions) 1-6/ /2016 Rate of change Sales % For the 3-month periods (NIS in millions) 4-6/ /2016 Rate of change Sales % The main decrease in sales in the reporting periods the corresponding periods of last year derives from the decrease in sales the Company's cusmers and the decrease in the average exchange rate of the NIS in relation the U.S. dollar

13 Gross profit For the 6-month periods (NIS in millions) 1-6/ /2016 Change Rate of Gross profit % % -20.3% -0.5% For the 3-month periods (NIS in millions) 4-6/ /2016 Change Rate of Gross profit % % -32.4% -3.8% Operating income For the 6-month periods (NIS in millions) 1-6/ /2016 Change Rate of Operating income % % -20.9% -0.8% For the 3-month periods (NIS in millions) 4-6/ /2016 Change Rate of Operating income % % -40.7% -3.8%

14 2.1.3 The aromatic bath and body care segment The operating results of the aromatic bath and body care segment ("Laline Candles and Soaps Ltd.") are presented at full holding rate (100%). Sales For the 6-month periods (NIS in millions) 1-6/ /2016 Rate of change Sales % For the 3-month periods (NIS in millions) 4-6/ /2016 Rate of change Sales % The increase in sales turnover in the first half o 2017 the corresponding period of last year arises from the increase in operations, mainly in the sre chain due the increase in net retail spaces. The increase in sales turnover in the second quarter of 2017 with the corresponding quarter of 2016 arises from the increase in the operations of all the sales channels, mainly in the sre chain due the increase in net retail spaces, offset by the effect of the timing of Passover which was earlier this year with last year as a result of which some of the pre-holiday sales were included in the first quarter of 2017 whereas in the corresponding quarter of 2016 the majority of pre-holiday sales were included in the second quarter of the year. Gross profit For the 6-month periods (NIS in millions) 1-6/ /2016 Change Rate of Gross profit % % 13.5% 1.1% For the 3-month periods (NIS in millions) 4-6/ /2016 Change Rate of Gross profit % % 20.0% 1.4% The increase in the gross profit margin in the reporting periods the corresponding periods of last year mainly arises from the improvement in purchase costs due the devaluation of the average exchange rate of the U.S. dollar in relation the NIS

15 Operating income For the 6-month periods (NIS in millions) 1-6/ /2016 Change Rate of Operating income % % 61.2% 2.7% For the 3-month periods (NIS in millions) 4-6/ /2016 Change Rate of Operating income % % 116.1% 6.3% The increase in the operating income margin in the reporting periods the corresponding periods of last year mainly derives from the improvement in the gross profit in the retail sres simultaneously with the decrease in the operating loss of Laline's sre in Times Square, NYC

16 3. The Group's business results ACCOUNTING REPORT a. The Company's revenues are affected by seasonality, which is generally expressed by increased sales during Passover, the Jewish Holiday season and the fourth quarter of the year as a result of the effect of winter sales. b. The Company has elected as its accounting policy present the equity earnings of companies accounted for at equity in operating income since the investment in these companies forms part of the Company's operating and strategic activity. Condensed consolidated accounting statements of profit or loss (NIS in thousands) Periods Quarters Year 1-6/ / / / Revenues from sales and services 736, , , ,802 1,463,611 Cost of sales 321, , , , ,683 Gross profit 415, , , , ,928 Gross profit margin 56.3% 56.0% 62.1% 61.1% 56.9% Selling and marketing expenses 375, , , , ,985 General and administrative expenses 7,760 7,400 4,329 3,778 16,186 Other expenses (income) (641) (21) Company's share of earnings of companies accounted for at equity, net 5,395 2,972 5,953 3,873 4,758 Operating income 38,368 30,369 46,532 48,232 95,536 Operating income margin 5.2% 4.5% 12.0% 13.0% 6.5% Finance expenses (income), net 22,308 3,158 7,411 (4,709) 8,572 Income before taxes on income 16,060 27,211 39,121 52,941 86,964 Taxes on income 2,544 6,310 7,754 12,425 20,932 Net income 13,516 20,901 31,367 40,516 66,032 Net income margin 1.8% 3.1% 8.1% 10.9% 4.5% Sales For the 6-month periods (NIS in millions) 1-6/ /2016 Rate of change Sales % For the 3-month periods (NIS in millions) 4-6/ /2016 Rate of change Sales % The increase in sales turnover in the first half of 2017 the corresponding period of last year arises from the growth in same sre sales and in the operations of most of the brands following the increase in net retail spaces as well as the increase in the activity of the newly introduced brand, Foot Locker, which began its operation in March

17 The increase in sales turnover in the second quarter of 2017 the corresponding quarter of last year arises from the increase in the operations of most of the brands following the increase in net retail spaces, including the launching of the Foot Locker brand activity, offset by the effect of the timing of Passover which was earlier this year with last year as a result of which some of the pre-holiday sales were included in the first quarter of 2017 whereas in the corresponding quarter of 2016 the majority of pre-holiday sales were included in the second quarter of the year. Gross profit For the 6-month periods (NIS in millions) 1-6/ /2016 Change Rate of Gross profit % % 8.8% 0.3% For the 3-month periods (NIS in millions) 4-6/ /2016 Change Rate of Gross profit % % 5.8% 1.0% For an analysis of the gross profit, see the Group's business results according operating segments in paragraph 2. Selling and marketing expenses For the 6-month periods (NIS in millions) 1-6/ /2016 Change Rate of Selling and marketing expenses % % 8.1% - For the 3-month periods (NIS in millions) 4-6/ /2016 Change Rate of Selling and marketing expenses % % 9.1% 2.3% The increase in selling and marketing expenses in the reporting periods the corresponding periods of last year mainly arises from expenses incurred due the growth in net retail spaces, the increase in marketing and advertising expenses and in expenses involving the construction of the Group's retail website

18 General and administrative expenses For the 6-month periods (NIS in millions) 1-6/ /2016 Change Rate of General and administrative expenses % % 5.4% - For the 3-month periods (NIS in millions) 4-6/ /2016 Change Rate of General and administrative expenses % % 13.2% 0.1% Equity earnings For the 6-month periods (NIS in millions) 1-6/ /2016 Change Rate of Equity earnings % % 80.0% 0.3% For the 3-month periods (NIS in millions) 4-6/ /2016 Change Rate of Equity earnings % % 53.8% 0.5% Operating income For the 6-month periods (NIS in millions) 1-6/ /2016 Change Rate of Operating income % % 26.3% 0.7% For the 3-month periods (NIS in millions) 4-6/ /2016 Change Rate of Operating income % % -3.5% -1.0% For an analysis of the operating income, see the Group's business results according operating segments in paragraph

19 Finance expenses Finance expenses in the first half of 2017 resulted from foreign currency revaluation losses, net and hedges taling approximately NIS 18.1 million, interest expenses on long-term loans taling approximately NIS 4.8 million, commissions and miscellaneous expenses taling approximately NIS 1.6 million, less revaluation gains and interest on securities, net taling approximately NIS 2.1 million. Finance expenses in the first half of 2016 resulted from foreign currency revaluation losses, net and hedges taling approximately NIS 1.2 million, interest expenses on long-term loans taling approximately NIS 4.8 million, commissions and miscellaneous expenses taling approximately NIS 1.1 million, less revaluation gains and interest on securities, net taling approximately NIS 3.9 million. Finance expenses in the second quarter of 2017 resulted from foreign currency revaluation losses, net and hedges taling approximately NIS 5.8 million, interest expenses on long-term loans taling approximately NIS 2.4 million, commissions and miscellaneous expenses taling approximately NIS 0.6 million, less revaluation gains and interest on securities, net taling approximately NIS 1.3 million. Finance income in the second quarter of 2016 resulted from foreign currency revaluation gains, net and hedges taling approximately NIS 5.2 million, revaluation gains and interest on securities, net taling approximately NIS 2.7 million, offset by interest expenses on long-term loans taling approximately NIS 2.5 million, commissions and miscellaneous expenses taling approximately NIS 0.7 million. Tax burden (*) For the 6-month periods 1-6/ /2016 Tax burden 23.9% 26.0% For the 3-month periods 4-6/ /2016 Tax burden 23.4% 25.3% (*) After offsetting equity earnings

20 Net income For the 6-month periods (NIS in millions) 1-6/ /2016 Change Rate of Net income % % 35.4 % -1.3% For the 3-month periods (NIS in millions) 4-6/ /2016 Change Rate of Net income % % 22.5 % -2.8% Net earnings per share For the 6-month periods (in NIS) 1-6/ /2016 Net earnings per share For the 3-month periods (in NIS) 4-6/ /2016 Net earnings per share

21 4. Financial position, equity, liquidity, financing resources and cash flows 4.1 Financial position The Company's tal consolidated balance sheet as of June 30, 2017 amounted approximately NIS 1,407.7 million approximately NIS 1,308.1 million as of June 30, Below is an analysis of the major changes in the consolidated balance sheet items as of June 30, 2017 the consolidated balance sheet as of June 30, 2016: Current assets - tal current assets as of June 30, 2017 amounted approximately NIS million, representing about 62.8 tal balance sheet, approximately NIS million, representing about 59.2 tal balance sheet as of June 30, The increase in current assets is a result of the growth in the balance of cash and cash equivalents, current maturity of securities measured at amortized cost, short-term investments and trade receivables, partly offset by the decrease in invenries and other accounts receivable. Non-current assets - tal non-current assets as of June 30, 2017 amounted approximately NIS million, representing about 37.2 tal balance sheet, approximately NIS million, representing about 40.8 tal balance sheet as of June 30, The decrease in non-current assets is mainly a result of the decrease in securities measured at amortized cost, investments in companies accounted for at equity and other intangible assets, offset by the increase in property, plant and equipment, deferred taxes and sre removal fees. Current liabilities - tal current liabilities as of June 30, 2017 amounted approximately NIS million, representing about 28.6 tal balance sheet, approximately NIS million, representing about 23.4 tal balance sheet as of June 30, The increase in current liabilities is a result of the increase in credit from banks and other accounts payable, partly offset by the decrease in trade payables. Non-current liabilities - tal non-current liabilities as of June 30, 2017 amounted approximately NIS million, representing about 29.4 tal balance sheet, approximately NIS million, representing about 33.5 tal balance sheet as of June 30, The decrease in non-current liabilities is mainly a result of the decrease in long-term loans from banks. The Company's consolidated working capital as of June 30, 2017 amounted approximately NIS million, approximately NIS million as of June 30, The Company's consolidated current ratio as of June 30, 2017 is as of June 30, The Company's consolidated quick ratio as of June 30, 2017 is as of June 30,

22 4.2 Equity The Company's equity as of June 30, 2017 amounted approximately NIS million, approximately NIS million as of June 30, In the first six months of 2017, the Company's equity decreased by approximately NIS 19.0 million. The decrease is a result of a dividend declared in a tal of approximately NIS 32.7 million, partly offset by comprehensive income of approximately NIS 13.2 million. The ratio of equity tal consolidated balance sheet as of June 30, 2017 is about 42.0% about 43.1% as of June 30, Liquidity and financing resources As of June 30, 2017, the Company holds financial assets that consist of cash, short-term investments and current maturity of securities measured at amortized cost taling approximately NIS million net of short-term financial liabilities that consist of short-term credit from banks taling NIS million. Total short-term net financial balances amount approximately NIS million. As of June 30, 2016, the Company held financial assets that consisted of cash, short-term investments and current maturity of securities measured at amortized cost taling approximately NIS million net of short-term financial liabilities that consist of short-term credit from banks taling NIS 51.9 million. Total short-term net financial balances amounted approximately NIS million. 4.4 Dividends In the Board's meeting of March 27, 2016, it was decided that effective from 2016, the Company will distribute a dividend once a year, after issuing the annual financial statements as of December 31 each year. The dividend will be in the amount of at least 50 the distributable earnings retained in the year addressed in the financial statements. The Board will be entitled modify the dividend policy and the actual distribution according the Company's needs. On March 19, 2017, the Company declared a dividend of approximately NIS 32.7 million in respect of the Company's retained earnings for The dividend was paid on April 25,

23 4.5 Condensed consolidated statements of cash flows (NIS in thousands) Three months ended June 30, Net cash provided by operating activities 93,705 98,984 Net cash used in investing activities: a. Net cash used in purchasing property, plant and equipment and intangible assets, net (36,106) (19,178) b. Net cash used in other investments in financial assets, net (21,426) (46,894) c. Grant of loan others - (1,000) Net cash provided by financing activities 21,906 10,028 Adjustment arising from translating balances of cash (92) (162) Increase in cash and cash equivalents 57,987 41, Cash flows from operating activities Net cash provided by operating activities in the reporting period taled approximately NIS 93.7 million, net cash provided by operating activities taling approximately NIS 99.0 million in the corresponding period last year. Cash flows in the reporting period derived from net income of approximately NIS 13.5 million, positive cash flows of approximately NIS 40.6 million in respect of adjustments profit and loss items, positive cash flows of approximately NIS 51.2 million from the decrease in working capital items, net against net payments for interest, taxes and dividend received taling approximately NIS 11.5 million. Cash flows in the corresponding period of last year derived from net income of approximately NIS 20.9 million, positive cash flows of approximately NIS 32.7 million in respect of adjustments profit and loss items, positive cash flows of approximately NIS 48.7 million from the decrease in working capital items, net against net payments for interest and taxes taling approximately NIS 3.3 million. 4.7 Cash flows from financing activities Net cash provided by financing activities in the reporting period taled approximately NIS 21.9 million, net cash provided by financing activities taling approximately NIS 10.0 million in the corresponding period of last year. Net cash provided by financing activities in the reporting period included receipt of bank loans taling NIS 75.0 million, receipt of short-term loans, net taling approximately NIS 11.8 million, offset by repayment of long-term loans in the amount of approximately NIS 32.3 million and a dividend paid in the amount of approximately NIS 32.7 million. Net cash provided by financing activities in the corresponding period of last year included receipt of bank loans taling NIS million, repayment of short-term loans, net taling approximately NIS 56.4 million, repayment of long-term loans in the amount of approximately NIS 14.6 million and a dividend paid in the amount of approximately NIS 19.0 million

24 B. DETAILS OF EXPOSURE TO AND MANAGEMENT OF MARKET RISKS The Company's market risk management officer The person in charge of managing market risks at the Company is Mr. Shahar Rania, the Company's CFO. See details of Mr. Shahar Rania in Regulation 26a Chapter D the Periodic Report as of December 31, Description of market risks The Company's activities involve external risk facrs that are liable have a material effect on the Company's business operations and which cannot be quantified. The Company is exposed a variety of market risks in the ordinary course of its business, mainly fluctuations in interest rates, in the Israeli Consumer Price Index, in foreign currency rates (mainly the U.S. dollar and the Euro) and in quoted market prices of its securities traded in Israel arising from the securities portfolio that it holds, which directly and indirectly affect the Company's liquid assets, liabilities and business results. Many market risks such as changes in minimum wages, in the standard of living, in the security situation, in fashion trends and in the weather are not under the Company's control and cannot be hedged. In contrast, the Company hedges itself against risks of changes in foreign currency rates and erosion of liquid assets, as detailed below. In its Israeli activities, the Group is exposed changes in foreign currency exchange rates given that most of the Company's products are purchased in U.S. dollar and Euro and sold in NIS. In addition, the Company is exposed suppliers' credit and cusmers' credit abroad in respect of changes in the U.S. dollar and Euro exchange rates. The credit extended the Company's Israeli cusmers is in NIS and does not bear interest

25 The Company's market risk management policy The Company's policy is perform a complete cash flow hedge against fluctuations in exchange rates (that do not constitute an accounting hedge pursuant IAS 39), from the date of making the invenry order until the payment date. The Company occasionally uses future currency transactions, currency forward transactions and option writing and purchasing hedges against changes in exchange rates when making future payments. The Company also carries out hedge transactions in amounts derived from the scope of foreign suppliers' orders. The maturity dates of these transactions are determined based on the expected payment dates foreign suppliers. The Company's management invests the excess liquid assets according two business models: a. The first model - a financial asset portfolio that is mainly comprised of investment in assets in various channels as part of the cash flow hedge on the principal and interest repayment of the Company's liabilities and investment in short-term NIS and dollar channels (15%-25 the portfolio) through deposits, trust funds, Government bonds and corporate debentures. This portfolio is managed on the basis of fair value and its performance is measured at fair value in order achieve adequate return on excess liquid assets. b. The second model - a portfolio designed hold financial assets in order collect the projected cash flow therefrom simultaneously with the maturity dates of part of the Company's long-term liabilities and as part of the cash flow hedge on the Company's long-term liabilities. According the excess liquidity hedging policy as above, it was determined that these balances will be only invested in high quality Government bonds, short-term Government loans, corporate bonds and mutual funds. Moreover, the Company manages the investments based on the average life of the liabilities they hedge

26 Derivative positions as of June 30, 2017 The Company has entered in complex (*) dollar/nis forward transactions taling US$ 58.0 million as specified below: Maturity date Amount in US$ in thousands Future rate Knock-in rate July , July , July , July , July , July , July , August , August , August , August , August , September , September , September , September , September , Ocber , November , December , December , January , April , May , December , Total 54, July , July , August , September , Total 4, Total 58, (*) Complex - the foreign currency purchase rate will be calculated as the rate between the stated future rate and the knock-in rate. If the dollar's closing rate on the date of consummation of the transaction is at the knock-in rate or lower, the foreign currency will be purchased at the stated future rate

27 The Company has entered in Euro/NIS hedging forward transactions taling 12.0 million as specified below: Maturity date Amount in Euro in thousands Future Rate July , August , September , Ocber , November , December , Total 12, The Company has entered in complex (*) Euro/NIS forward transactions taling 1.7 million as specified below: Maturity date Amount in Euro in thousands Future rate Knock-in rate December , Total 1, (*) Complex - the foreign currency purchase rate will be calculated as the rate between the stated future rate and the knock-in rate. If the Euro's closing rate on the date of consummation of the transaction is at the knock-in rate or lower, the foreign currency will be purchased at the stated future rate

28 Derivative positions as of June 30, 2016 The Company entered in dollar/nis complex hedging forward transactions taling US$ 9.0 million as specified below: Maturity date Amount in US$ in thousands Future rate July , August , September , Ocber , Total 9, The Company entered in complex (*) dollar/nis forward transactions taling US$ 34.5 million as specified below: Maturity date Amount in US$ in thousands Future rate Knock-in rate July , July , July , July , August , August , August , August , September , September , September , Ocber , Ocber , November , November , December , December , Total 34, (*) Complex - the foreign currency purchase rate will be calculated as the rate between the stated future rate and the knock-in rate. If the dollar's closing rate on the date of consummation of the transaction is at the knock-in rate or lower, the foreign currency will be purchased at the stated future rate

29 The Company entered in Euro/NIS hedging forward transactions taling 8.0 million as specified below: Maturity date Amount in Euro in thousands Future rate August , August , August , September , September , Ocber , Total 8, The Company entered in complex (*) Euro/NIS hedging forward transactions taling 3 million as specified below: Maturity date Amount in Euro in thousands Future rate Knock-in rate August , Ocber , Total 3, (*) Complex - the foreign currency purchase rate will be calculated as the rate between the stated future rate and the knock-in rate. If the Euro's closing rate on the date of consummation of the transaction is at the knock-in rate or lower, the foreign currency will be purchased at the stated future rate. The Company entered in Singapore dollar/nis hedging forward transactions taling SGD 1.25 million as specified below: Maturity date Amount in SGD in thousands Future rate July August September Total 1,

30 The supervision and implementation of the market risk management policy The Company's Board, through the Financial Risk Management Committee, discusses the Company's risk facrs and market risk management policy. The Board decides on the steps and/or changes that need be adopted in the policy based on the data presented it and the decision of the Financial Risk Management Committee, as above. The Financial Risk Management Committee determined the criteria for special circumstances that will necessitate the reexamination of market risks and risk facrs and also periodically and at least annually examines the Company's securities portfolio investment policy based on the circumstances and events in financial markets. In addition, once a quarter, as part of the financial statement approval process, the Financial Statement Approval Committee (with the participation of all the members of the Financial Risk Management Committee) discusses the Company's investments in securities and existing currency hedges as of the end of the reported quarter. In this discussion, the results of the securities portfolios and currency hedges performed in accordance with the determined policy are presented the Financial Statement Approval Committee. As of June 30, 2017, there is an exposure of excess assets over liabilities changes in the Israeli CPI in the amount of approximately NIS 6.1 million, an exposure of excess liabilities over assets changes in the U.S. dollar exchange rate taling approximately NIS 20.3 million and an exposure of excess liabilities over assets changes in the Euro exchange rate taling approximately NIS 2.2 million. The Company's exposure foreign currencies other than the dollar and the Euro is immaterial

31 Report of linkage bases (consolidated) In unlinked NIS In CPI-linked NIS June 30, 2017 June 30, 2016 Nonmonetary In In In or linked unlinked CPI-linked U.S. items Total NIS NIS dollar In or linked U.S. dollar Nonmonetary items In or linked Euro In or linked Euro Total NIS in thousands NIS in thousands Assets: Cash and cash equivalents 179,744-6,916 22, ,070 81,109-25,437 11, ,304 Short-term investments * 158,783-18, , ,508-19, ,038 Trade receivables 111,325-4, ,125 99,518-6, ,806 Other accounts receivable 37,812 8, ,258 62,308 55,252 - (447) 1,529 18,229 74,563 Invenries , , , ,089 Property, plant and equipment, net , , , ,823 Securities measured at amortized cost 49, ,131 53, ,207 Deferred taxes ,275 9, ,130 7,130 Sre removal fees ,410 19, ,644 18,644 Intangible assets, net ,492 15, ,265 16,265 Goodwill ,504 15, ,504 15,504 Investments in companies accounted for at equity , , , ,746 Total assets 536,795 8,066 29,936 22, ,494 1,407, ,594-50,808 13, ,430 1,303,119 Liabilities: Credit from banks 7,401-8, , Trade payables 75,816-25,713 23, ,554 69,417-49,450 19, ,906 Other accounts payable 65,279 1,956 15,004 1,592 79, ,429 48,881 1, , ,873 Loans from banks 499, , , ,026 Employee benefit liabilities, net ,136 7, ,279 8,279 Deferred taxes ,970 4, ,632 5,632 Liability for franchise Total liabilities 647,664 1,956 50,282 24,617 91, , ,324 1,366 50,223 19,039 79, ,407 Net balance sheet balance (110,869) 6,110 (20,346) (2,207) 718, ,478 (166,730) (1,366) 585 (5,752) 736, ,712 *) The Company has securities bearing CPI-linked interest. The changes in the value of these securities are affected by quoted market prices and future expectations