FOX-WIZEL LTD. BOARD OF DIRECTORS' REPORT AS OF MARCH 31, 2018

Transcription

1 FOX-WIZEL LTD. BOARD OF DIRECTORS' REPORT AS OF MARCH 31, 2018 Hermon St. Airport-City P.O.B. 76; Ben-Gurion Airport Tel.: Fax:

2 FOX-WIZEL LTD. We are hereby pleased to present the report of the Board of Directors of Fox-Wizel Ltd. ("the Company") and its local and foreign investees (collectively, "the Group") for the three months ended March 31, 2018 ("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 to the Company's annual financial statements as of December 31, 2017, other than the matters discussed in Note 2 to the interim consolidated financial statements as of March 31, A. THE BOARD OF DIRECTORS' EXPLANATIONS FOR THE STATE OF THE COMPANY'S AFFAIRS 1. Condensed description of the Company and its business environment General The Group is engaged in the design, procurement, 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. 1.1 The segment of fashion and home fashion 1 Fashion and home fashion under the following brand names: FOX and American Eagle Outfitters in Israel and abroad - and FOX Home, Aerie, The Children's Place, Charles & Keith, Mango and Urban Outfitters in Israel. This operating segment is marketed through several marketing channels as follows: Local sales - through the Israeli retail chain - a chain of stores operated by the Company itself and/or through subcontracted operators ("directly operated sales" and/or "directly operated stores") and wholesales to institutional stores and entities in Israel ("sales to wholesalers and others in Israel"). Sales to international markets - sales to franchises and wholesalers abroad ("foreign franchise sales"). See more details of the fashion and home fashion operating segment in paragraphs and 3.1 to Chapter A to the Periodic Report as of December 31, The Charles & Keith brand operation was discontinued on December 31,

3 As of March 31, 2018, the Company's directly operated retail chain includes 318 stores as described below FOX stores * AE stores ** TCP stores C&K stores Mango stores Urban stores *** Total * FOX Home - starting from the second half of 2010, the Company operates a chain for selling housewares and home textile products through the FOX Home retail chain. As of March 31, 2018, the chain has 43 stores (and 29 additional mixed stores that sell clothing items along with houseware and home textile products). ** AE - as of March 31, 2018 there are 42 chain stores in leading shopping malls in Israel, of which two stand-alone Aerie stores. *** Urban Outfitters store. Foreign sales The Company operates abroad and aspires to expand the deployment of its fashion retail chain under the FOX and/or F&X brand to other international markets in collaboration with exclusive franchisees in each country. The foreign stores are established by the franchisees that bear the entire costs of construction, including the logistics and advertising costs. As of March 31, 2018, 125 stores/points of sale operate under the F&X and FOX brands in 11 countries around the globe. 1.2 The segment of aromatic bath and body care products The Laline store chain sells a variety of body and bath care products, beauty products, soaps, candles, body and bath oils, bath and shower accessories and gifts. Laline markets its products mainly through the retail chain in Israel. In addition, Laline markets its products to institutional customers in Israel. Laline operates overseas in 29 franchise stores under the name of Laline in Japan and the U.S. (California and Hawaii). In the first quarter of 2018, Laline opened a store owned by it on Casanova Street in Barcelona, Spain. Laline aims to expand the deployment of its stores in other international markets through designated franchisees in each country or through directly operated stores

4 Laline brand stores in Israel See more information on operations in the aromatic bath and body care products segment in paragraphs and 3.2 to Chapter A to the Periodic Report as of December 31, Other activities that do not constitute a reportable segment as specified below A.H. Fashion Manufacture and Marketing 3020 Ltd. ("Sacks") Billy Haus Ltd. ("Billy Haus") Yanga Ltd. ("Yanga") Retailors Ltd. ("Retailors") Terminal X the multi-brand fashion and lifestyle online retail website See more information on the Group's operations which do not aggregate to a reportable segment in paragraph to Chapter A to the Periodic Report as of December 31, Material events during the reporting period Long-term loan received by UFA Retail Ltd. - see details in Note 5a to the financial statements The Board's decision to distribute a dividend - see details in paragraph 4.4 below and in Note 5b to the financial statements Long-term loan received by Retailors Sports Inc. - see details in Note 5d to the financial statements Agreement with Leumi Card for setting up and operating a joint customers' club which the Company expects to launch in July see details in Note 5e to the financial statements Consummation of transaction for allocation of 25% of Terminal X to Smile Networks in return for advertising credit of NIS 50 million - see details in Note 5f to the financial statements Discontinuance of negotiations for entering into a transaction with a prospective buyer by the Company and the remaining shareholders in Laline - see details in Note 5g to the financial statements. 1.5 Material events after the reporting period The Company's engagement in agreement for purchase of 50% of Shesek and Shilav for approximately NIS 37.5 million - see details in Note 8 to the financial statements. 1.6 Legal proceedings and class actions - see details of claims and motions for approval of class actions against the Company and investees in Note 20a to the Company's annual financial statements as of December 31, 2017 and in Note 5c to the Company's financial statements as of March 31,

5 2. Segment analysis The table below details the structure of activities of the Company according to 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% of operations Abroad 100% of operations 100% of operations 100% of operations 100% of operations Adjustments financial statement FOX, Home, TCP, FOX Laline Billabong, Nike, Foot Subtotal - Fashion and home Less - 100% of sales C&K 2, Mango, AE, AE Kids Locker, Sacks, Yanga, fashion, aromatic bath and AE, Laline, Billabong, Urban Outfitters Terminal X body care and other Sacks, Yanga FOX, Home, TCP, C&K, Mango, AE, Urban Outfitters FOX, Home, TCP, C&K, Mango, AE, Urban Outfitters FOX AE Kids FOX AE Kids Laline Billabong, Nike, Foot Locker, Sacks, Yanga, Terminal X Laline (*) Operating income (*) Billabong, Nike, Foot Locker, Sacks, Yanga, Terminal X (*) Less excess of cost related to acquisition of the Nike brand in Israel and abroad. Subtotal - Fashion and home fashion, aromatic bath and body care and other Subtotal - Fashion and home fashion, aromatic bath and body care and other Less - 100% of gross profit AE, Laline, Billabong, Sacks, Yanga Less - 100% of operating income (*) AE, Laline, Billabong, Sacks, Yanga Add - 50% of equity earnings to companies AE, Laline, Billabong, Sacks, Yanga Sales FOX, Home, TCP, C&K, Mango, Nike, Foot Locker, Terminal X, Urban Outfitters Gross profit FOX, Home, TCP, C&K, Mango, Nike, Foot Locker, Terminal X, Urban Outfitters Operating income FOX, Home, TCP, C&K, Mango, Nike, Foot Locker, Terminal X, Urban Outfitters Add - 50% of equity earnings to companies AE, Laline, Billabong, Sacks, Yanga 2 The Charles & Keith brand operation was discontinued on December 31, 2017.

6 The Group's business results for the three months ended March 31, 2018 according to operating segments (NIS in thousands) In furtherance to 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 to 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 to present the segment's results based on the actual holding rate under the 'adjustments' column. 1-3/2018 Other - unallocated Fashion and (Billabong, Total home fashion Nike, Foot before (FOX, Home, AE, Aromatic Locker, adjustments Total TCP, Mango, bath and Sacks, based on consolidated Urban Outfitters) body care Yanga, 100% of the financial Israel Abroad (Laline) Terminal X operations Adjustments statement Revenues from external customers 409,519 10,972 48, , ,677 (165,903) 424,774 Inter-segment revenues (969) - Total revenues 410,488 10,972 48, , ,646 (166,872) 424,774 % of total revenues 69.4% 1.9% 8.2% 20.6% % - - Gross profit 239,470 3,640 31,825 69, ,078 (105,061) 239,017 Operating income 12,034 2,939 6,146 4,568 25,687 (6,639) 19,048 Profit margin 2.9% 26.8% 12.7% 3.8% % 1-3/2017 Other - unallocated Total Fashion and (Billabong, before home fashion Aromatic Nike, Foot adjustments Total (FOX, Home, AE, bath and Locker, based on consolidated TCP, C&K, Mango) body care Sacks, 100% of the financial Israel Abroad (Laline) Yanga) operations Adjustments statement Revenues from sales and services 378,517 5,451 41,860 68, ,948 (144,528) 349,420 % of total revenues 76.6% 1.1% 8.5% 13.8% 100% - - Gross profit 194,209 2,363 28,116 39, ,053 (89,253) 174,800 Operating income (loss) (13,681) 1,715 1,206 2,151 (8,609) 445 (8,164) Profit (loss) margin (3.6%) 31.5% 2.9% 3.2% - - (2.3%)

7 The table below details fixed and variable costs in each of the Company's operating segments in the three months ended March 31, 2018 and 2017: Fashion and home fashion (FOX, Home, AE, TCP, C&K, Mango, Urban Outfitters) Aromatic bath and body care (Laline) 1-3/ / / /2017 Revenues from sales and services 421, ,968 48,497 41,860 Gross profit 243, ,572 31,825 28,116 Fixed costs 137, ,743 15,979 18,369 Variable costs 90,239 86,795 9,700 8,541 Operating income (loss) 14,973 (11,966) 6,146 1,206 Following are details of the change in same store sales and of the income per sq. m. for each of the Company's operating segments in the three months ended March 31, 2018 and 2017: Same store sales Fashion and home fashion Aromatic bath and body care 1-3/ / / /2017 Total same store sales (NIS in thousands) *) 331, ,112 40,191 34,470 Sales per sq. m. (not in same stores) Fashion and home fashion Aromatic bath and body care 1-3/ / / /2017 Total sales per sq. m. (in NIS) **) 1,102 1,091 2,763 2,351 Total areas used in calculating sales per sq. m. (in sq. m. ***) 116, ,427 4,983 4,966 *) Stores used in calculating sales are only stores which operated continuously and regularly throughout the entire relevant periods in 2018 and 2017 with no change in area. **) The data of sales per sq. m. are not SS data and are also affected by changes in store size. The data of sales used in calculating sales per sq. m. included all forms of payment accepted by the store less VAT and less all discounts and promotions, including the redemption of Dream Card club credit points and discount 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 total area for the period in sq. m. was made relatively according to the number of operations of each store

8 2.1 The fashion and home fashion segment The fashion and home fashion segment in Israel Sales 1-3/ /2017 Rate of change Sales % The increase in sales turnover in the reporting period compared to the corresponding period of last year arises from the increase in net retail spaces and mainly from the increase in same store sales, among others due to the timing of Passover which fell earlier this year compared to last year, as a result of which the holiday sales were reflected in Q1 2018, compared with the holiday sales last year which were mainly reflected in Q Gross profit 1-3/ /2017 Change % of % of Rate of compared to Amount turnover Amount turnover change turnover Gross profit % % 23.3% 7.0% The increase in the gross profit margin in the reporting period compared to the corresponding period of last year is mainly due to the change in sales mix between final winter sales and the summer collection sales since the summer collection was launched earlier this year compared with the corresponding quarter of last year, the reduction in costs arising from the weakening of the average USD exchange rate in relation to the NIS compared to the corresponding period of 2017 and the improvement of procurement costs from suppliers. Operating income (loss) 1-3/ /2017 Change % of % of Rate of compared to Amount turnover Amount turnover change turnover Operating income (loss) % (13.7) (3.6%) - 6.5% The increase in the operating income margin in the reporting period compared to the corresponding period of last year mainly arises from the growth in same stores sales and the increase in the gross profit margin, offset by the increase in store operating expenses due to the addition to retail spaces and the increase in marketing and advertising expenses

9 2.1.2 The fashion segment abroad Sales 1-3/ /2017 Rate of change Sales % The main increase in sales in the reporting period compared to the corresponding period of last year derives from the increase in sales of the AE Kids brand to new customers, offset by the decrease in the average exchange rate of the NIS in relation to the USD in Q compared to Q Gross profit 1-3/ /2017 Change % of % of Rate of compared to Amount turnover Amount turnover change turnover Gross profit % % 54.0% (10.4%) The increase in gross profit in the reporting period compared to the corresponding period of last year is mainly due to sales of the AE Kids brand to new customers. Operating income 1-3/ /2017 Change % of % of Rate of compared to Amount turnover Amount turnover change turnover Operating income % % 71.4% (4.7%) The increase in operating income in the reporting period compared to the corresponding period of last year is mainly a result of the increase in gross profit

10 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 1-3/ /2017 Rate of change Sales % The increase in sales turnover in the reporting period compared to the corresponding period of last year mostly arises from the increase in same store sales, among others due to the timing of Passover which fell earlier this year compared to last year, as a result of which the holiday sales were reflected in Q1 2018, compared with the holiday sales last year which were mainly reflected in Q Gross profit 1-3/ /2017 Change % of % of Rate of compared to Amount turnover Amount turnover change turnover Gross profit % % 13.2% (1.5%) The decrease in the gross profit margin in the reporting period compared to the corresponding period of last year is mainly due to increased sale discounts in the retail chain in Q compared to Q Operating income 1-3/ /2017 Change % of % of Rate of compared to Amount turnover Amount turnover change turnover Operating income % % 409.6% 9.8% The increase in the operating income rate in the reporting period compared to the corresponding period of last year mainly derives from the increase in same store sales in the Laline retail chain and the closing of Laline's store in Times Square, Manhattan, New York

11 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 to 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) Quarter Year 1-3/ / Revenues from sales and services 424, ,420 1,619,421 Cost of sales 185, , ,663 Gross profit 239, , ,758 Gross profit margin 56.3% 50.0% 57.3% Selling and marketing expenses 217, , ,728 General and administrative expenses 6,157 3,431 18,652 Other income (93) (727) (641) Company's share of earnings (losses) of companies accounted for at equity, net 3,896 (558) 10,248 Operating income (loss) 19,048 (8,164) 116,267 Operating income (loss) margin 4.5% (2.3%) 7.2% Financial expenses (income), net (548) 14,897 21,577 Income (loss) before tax 19,596 (23,061) 94,690 Taxes on income (tax benefit) 3,908 (5,210) 18,803 Net income (loss) 15,688 (17,851) 75,887 Net income (loss) margin 3.7% (5.1%) 4.7%

12 Sales 1-3/ /2017 Rate of change Sales % The increase in sales turnover in the reporting period compared to the corresponding period of last year arises from the increase in same store sales, among others due to the timing of Passover which fell earlier this year compared to last year, as a result of which the holiday sales were reflected in Q1 2018, compared with the holiday sales last year which were mainly reflected in Q and also from the increased activity of the majority of brands, mainly Foot Locker which began operating in March Gross profit 1-3/ /2017 Change % of % of Rate of compared to Amount turnover Amount turnover change turnover Gross profit % % 36.7% 6.3% For an analysis of the gross profit, see the Group's business results according to operating segments in paragraph 2 above. Selling and marketing expenses 1-3/ /2017 Change % of % of Rate of compared to Amount turnover Amount turnover change turnover Selling and marketing expenses % % 21.2% (0.1%) The increase in selling and marketing expenses in the reporting period compared to the corresponding period of last year mainly arises from increased expenses due to the growth in net retail spaces, the increase in salary and related expenses, including expenses incurred in setting up the Terminal X online website which was launched in Q

13 General and administrative expenses 1-3/ /2017 Change % of % of Rate of compared to Amount turnover Amount turnover change turnover General and administrative expenses % % 79.5% 0.4% The increase in administrative expenses in the reporting period compared to the corresponding period of last year mainly arises from expenses in respect of payroll and professional services. Equity earnings (losses) 1-3/ /2017 Change % of % of Rate of compared to Amount turnover Amount turnover change turnover Equity earnings (losses) % (0.6) (0.2%) - 1.1% The increase in equity earnings is a result of the increase in net income in the associates, mainly in Laline. Operating income (loss) 1-3/ /2017 Change % of % of Rate of compared to Amount turnover Amount turnover change turnover Operating income (loss) % (8.2) (2.3%) - 6.8% For an analysis of the operating income, see the Group's business results according to operating segments in paragraph 2 above. Financial income/expenses Financial income in the reporting period resulted from foreign currency revaluation gains, net and hedges totaling approximately NIS 5.1 million, less interest expenses on long-term loans totaling approximately NIS 2.9 million, commissions and other expenses totaling approximately NIS 0.9 million and net revaluation losses and interest on securities totaling approximately NIS 0.8 million. Financial expenses, net in Q resulted from foreign currency revaluation losses, net and hedges totaling approximately NIS 12.3 million, interest expenses on long-term loans totaling approximately NIS 2.4 million and commissions totaling approximately NIS 1.0 million, offset by revaluation gains and interest on securities totaling approximately NIS 0.8 million

14 Tax benefit (burden) (*) For the 3-month period 1-3/ /2017 Tax benefit (burden) (24.9%) 23.2% (*) After offsetting equity earnings. Net income (loss) 1-3/ /2017 Change % of % of Rate of compared to Amount turnover Amount turnover change turnover Net income (loss) % (17.9) (5.1%) - 8.8% Net earnings (loss) per share For the 3-month period (in NIS) 1-3/ /2017 Basic net earnings (loss) per share 1.21 (1.34) Diluted net earnings (loss) per share 1.20 (1.33) 4. Financial position, equity, liquidity, financing resources and cash flows 4.1 Financial position The Company's total consolidated balance sheet as of March 31, 2018 amounted to approximately NIS 1,637.6 million compared to approximately NIS 1,334.7 million as of March 31, Below is an analysis of the major changes in the consolidated balance sheet items as of March 31, 2018 compared to the consolidated balance sheet as of March 31, 2017: Current assets - total current assets as of March 31, 2018 amounted to approximately NIS 1,029.5 million, representing about 62.97% of total balance sheet, compared to approximately NIS million, representing about 62.1% of total balance sheet as of March 31, The growth in current assets is a result of the increase in the balance of cash and cash equivalents, short-term investments, trade receivables and other accounts receivable, partly offset by the decrease in current maturity of securities measured at amortized cost. Non-current assets - total non-current assets as of March 31, 2018 amounted to approximately NIS million, representing about 37.1% of total balance sheet, compared to approximately NIS million, representing about 37.9% of total balance sheet as of March 31, The increase in non-current assets is mainly a result of the increase in securities measured at amortized cost, property, plant and equipment, other intangible assets and other long-term receivables, partly offset by the decrease in investments in companies accounted for at equity and store removal fees

15 Current liabilities - total current liabilities as of March 31, 2018 amounted to approximately NIS million, representing about 35.2% of total balance sheet, compared to approximately NIS million, representing about 30.4% of total balance sheet as of March 31, The growth in current liabilities is a result of the increase in trade payables and other accounts payable, credit from banks and dividend declared. Non-current liabilities - total non-current liabilities as of March 31, 2018 amounted to approximately NIS million, representing about 23.0% of total balance sheet, compared to approximately NIS million, representing about 27.7% of total balance sheet as of March 31, The increase in non-current liabilities is mainly a result of the increase in long-term loans from banks. The Company's consolidated working capital as of March 31, 2018 amounted to approximately NIS million, compared to approximately NIS million as of March 31, The Company's consolidated current ratio as of March 31, 2018 is 1.78 compared to 2.04 as of March 31, The Company's consolidated quick ratio as of March 31, 2018 is 1.22 compared to 1.24 as of March 31, Equity The Company's equity as of March 31, 2018 amounted to approximately NIS million, compared to approximately NIS million as of March 31, In the reporting period, the Company's equity increased by approximately NIS 28.3 million. The increase is mainly a result of comprehensive income of approximately NIS 15.9 million, cost of share-based payment of approximately NIS 0.5 million and the issuance of shares of Terminal X Ltd. totaling NIS 50 million, offset by a dividend declared in a total of approximately NIS 38.1 million. The ratio of equity to total consolidated balance sheet as of March 31, 2018 is about 41.8% compared to about 41.9% as of March 31, Liquidity and financing resources As of March 31, 2018, the Company holds financial assets that consist of cash, short-term investments, short-term deposit and current maturity of securities measured at amortized cost totaling approximately NIS million, net of short-term financial liabilities that consist of short-term credit from banks totaling NIS million. Total short-term net financial balances amount to approximately NIS million. As of March 31, 2017, the Company held financial assets that consisted of cash, short-term investments and current maturity of securities measured at amortized cost totaling approximately NIS million net of short-term financial liabilities that consisted of short-term credit from banks totaling NIS 82.9 million. Total short-term net financial balances amounted to approximately NIS million

16 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% of the distributable earnings retained in the year addressed in the financial statements. The Board will be entitled to modify the dividend policy and the actual distribution according to the Company's needs. On March 18, 2018, the Company declared a dividend of approximately NIS 38.1 million in respect of the Company's retained earnings for The dividend was paid on April 23, Condensed consolidated statements of cash flows (NIS in thousands) Three months ended March 31, Net cash provided by operating activities 40,863 24,280 Net cash used in investing activities: a. Net cash used in purchasing property, plant and equipment and intangible assets (20,025) (15,133) b. Net cash used in other investments in financial assets (22,677) 2,889 c. Repayment of loan from others Net cash used in financing activities (9,410) (21,005) Adjustment arising from translating balances of cash (7) (77) Decrease in cash and cash equivalents (11,001) (9,046) 4.6 Cash flows from operating activities Net cash provided by operating activities in the reporting period totaled approximately NIS 40.9 million, compared to net cash provided by operating activities totaling approximately NIS 24.3 million in the corresponding period of last year. Cash flows from operating activities in the reporting period derived from net income of approximately NIS 15.7 million, positive cash flows of approximately NIS 11.0 million in respect of adjustments to profit and loss items, positive cash flows of approximately NIS 0.8 million from the decrease in working capital items, net against net payments for interest, taxes and dividend received totaling approximately NIS 13.4 million. Cash flows from operating activities in the corresponding period of last year derived from a net loss of approximately NIS 17.9 million, positive cash flows of approximately NIS 21.7 million in respect of adjustments to profit and loss items, positive cash flows of approximately NIS 26.3 million from the decrease in working capital items, net against net payments for interest and taxes totaling approximately NIS 5.9 million

17 4.7 Cash flows from financing activities Net cash used in financing activities in the reporting period totaled approximately NIS 9.4 million, compared to net cash provided by financing activities totaling approximately NIS 21.0 million in the corresponding period of last year. Net cash used in financing activities in the reporting period included the repayment of longterm loans totaling approximately NIS 28.5 million, the repayment of short-term credit totaling approximately NIS 4.0 million, offset by the receipt of long-term loans approximately NIS 23.1 million. Net cash used in financing activities in Q included the repayment of long-term loans totaling approximately NIS 16.5 million and the repayment of short-term credit totaling approximately NIS 4.5 million

18 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 in the Company is Mr. Shahar Rania, the Company's CFO. See details of Mr. Shahar Rania in Regulation 26a to Chapter D to the Periodic Report as of December 31, Description of market risks The Company's activities involve external risk factors that are liable to have a material effect on the Company's business operations and which cannot be quantified. The Company is exposed to a variety of market risks in the ordinary course of its business, mainly to 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 to changes in foreign currency exchange rates given that most of the Company's products are purchased in U.S. dollars and sold in NIS. In addition, the Company is exposed to suppliers' credit and customers' credit abroad in respect of changes in the U.S. dollar exchange rate. The credit extended to the Company's Israeli customers is in NIS and does not bear interest. The Company's market risk management policy There has been no change in the Company's risk management policy, see the Company's Periodic Report as of December 31,

19 Derivative positions as of March 31, 2018 The Company entered into complex (*) dollar/nis forward transactions totaling US$ 72.5 million as specified below: Maturity date Amount in US$ in thousands Future rate Knock-in rate April , April , April , April , April , May , May , May , May , June , June , June , July , July , July , July , July , August , August , August , August , August , August , August , September , September , September , September , December , January , January , February , June , Total 72, (*) 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

20 The Company entered into Euro/NIS hedging forward transactions totaling 4.0 million as specified below: Maturity date Amount in Euro in thousands Future rate April , May , Total 4, Derivative positions as of March 31, 2017 The Company entered into complex (*) dollar/nis forward transactions totaling US$ 57.0 million as specified below: Maturity date Amount in US$ in thousands Future rate Knock-in rate April , April , May , May , June , July , July , July , July , July , July , July , August , August , August , August , September , September , September , September , October , November , December , Total 51, April , May , June , July , August , September , Total 6, Total 57, (*) 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

21 The Company entered into Euro/NIS hedging forward transactions totaling 16.5 million as specified below: Maturity date Amount in Euro in thousands Future Rate May , June , July , August , September , October , November , December , Total 16, The Company entered into complex (*) Euro/NIS forward transactions totaling 8.5 million as specified below: Maturity date Amount in Euro in thousands Future rate Knock-in rate April , May , June , December , Total 8, (*) 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 supervision and implementation of the market risk management policy There has been no change in the Company's market risk management policy and its implementation, see the Company's Periodic Report as of December 31, As of March 31, 2018, there is an exposure of excess liabilities over assets to changes in the Israeli CPI in the amount of approximately NIS 1.7 million, an exposure of excess assets over liabilities to changes in the USD exchange rate totaling approximately NIS 16.8 million and an exposure of excess liabilities over assets to changes in the Euro exchange rate totaling approximately NIS 3.7 million. The Company's exposure to foreign currencies other than the USD and Euro is immaterial

22 Report of linkage bases (consolidated) March 31, 2018 March 31, 2017 Nonmonetary In unlinked In CPIlinked In or linked In or linked items Total NIS NIS to USD to Euro Nonmonetary items In unlinked In CPIlinked In or linked In or linked NIS NIS to USD to Euro Total NIS in thousands NIS in thousands Assets: Cash and cash equivalents 168,463-18,035 20, , ,509-9,392 15, ,037 Short-term investments *184,677-23, ,279 *128,310-22, ,337 Short-term deposits , , Trade receivables 182,615-4, , ,528-3, ,710 Other accounts receivable 38,936 4, , ,262 35,104 8, ,179 64,586 Inventories , , , ,142 Property, plant and equipment, net , , , ,066 Securities measured at amortized cost 60, ,554 51, ,451 Deferred taxes ,721 11, ,613 12,613 Store removal fees ,814 16, ,353 19,353 Intangible assets, net ,263 29, ,340 15,340 Goodwill ,915 17, ,504 15,504 Investments in companies accounted for at equity , , , ,562 Total assets 635,245 4,724 63,969 20, ,550 1,637, ,902 8,066 34,838 15, ,759 1,334,701 Liabilities: Credit from banks 14, , Trade payables 134,279-36,124 23, ,197 64,022-23,305 25, ,731 Other accounts payable 93,936 6,376 3, , ,333 75,685 1,276 8,660 6,179 84, ,775 Dividend declared 38, ,101 32, ,672 Loans from banks 456,430-6, , , ,966 Employee benefit liabilities, net ,812 9, ,076 7,076 Deferred taxes ,592 4, ,028 5,028 Liability for franchise Total liabilities 737,221 6,376 47,132 23, , , ,345 1,276 32,617 31,583 97, ,900 Net balance sheet balance (101,976) (1,652) 16,837 (3,679) 774, ,118 (158,443) 6,790 2,221 (16,447) 725, ,801 *) 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

23 Sensitivity tests Following are data regarding the Group's assets and liabilities as of March 31, 2018: - The Company has entered into complex (*) U.S. dollar/nis forward transactions totaling US$ 72.5 million. - The Company has entered into forward transactions to purchase 4.0 million in return for approximately NIS 16.8 million. - The Company has excess assets over liabilities linked to the U.S. dollar totaling approximately NIS 16,837 thousand. - The Company has excess liabilities over assets linked to the Euro totaling approximately NIS 3,679 thousand. Sensitivity to changes in the NIS/USD exchange rates (in NIS in thousands) (**) Gain (loss) from the changes Gain (loss) from the changes +10% +5% Fair value -5% -10% $ 1=NIS $ 1=NIS $ 1=NIS $ 1=NIS $ 1=NIS Complex NIS/USD forward transactions (*) 16,384 7,790 (2,046) (8,946) (18,169) NIS/USD forward transactions 4,990 3,883 (5,518) (5,087) (9,076) Exposure in linked balances - USD 1, ,837 (842) (1,684) Total 23,058 12,515 13,365 (14,875) (28,929) (*) 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. (**) The sensitivity test was preformed according to the change in the future spot rate, intrinsic value only regardless fair value adjustments

24 Sensitivity to changes in the NIS/Euro exchange rates (in NIS in thousands) (**) Gain (loss) from the changes Gain (loss) from the changes +10% +5% Fair value -5% -10% 1=NIS =NIS =NIS =NIS =NIS NIS/Euro forward transactions 1, (866) (1,732) Exposure in linked balances - Euro (368) (183) (3,679) Total 1,364 (683) (3,162) (683) (1,364) (**) The sensitivity test was preformed according to the change in the future spot rate, intrinsic value only regardless fair value adjustments. Sensitivity to changes in the Israeli CPI (in NIS in thousands) Gain (loss) from the changes Gain (loss) from the changes +10% +5% Fair value -5% -10% Exposure in linked balances (165) (83) (1,652) Sensitivity to changes in security rates (in NIS in thousands) Gain (loss) from the changes Gain (loss) from the changes +10% +5% Fair value -5% -10% Exposure in linked balances 20,828 10, ,279 (10,414) (20,818)

25 C. CORPORATE GOVERNANCE ASPECTS 5. The Company's donation policy The Company believes in community involvement and in nurturing populations with potential. The Company's donations are directed at education and helping others, at the Board's discretion. The Company also donates goods to welfare and charity organizations and associations on a regular basis. Among others, for many years, the Company supports an educational project in Lod. In the reporting period, the Company donated an amount of approximately NIS 200 thousand. 6. Composition of the Company's Board and its Committees There has been no change in the reporting period compared to the Periodic Report for D. DISCLOSURE REGARDING THE CORPORATION'S FINANCIAL REPORTING 7. Disclosure of critical accounting estimates There has been no change in the reporting period compared to the Periodic Report for Harel Wizel CEO and Director Avraham Zeldman Chairman of the Board Date: May 22,