Management Report 3. Balance Sheets 21. Statements of Income 23. Statements of Cash Flows 24. Statements of Comprehensive Income 25

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2 TABLE OF CONTENTS Management Report 3 Balance Sheets 21 Statements of Income 23 Statements of Cash Flows 24 Statements of Comprehensive Income 25 Statements of Changes in Equity Parent Company (BRGAAP) and Consolidated (IFRS and BRGAAP) 26 Statement of Value Added 27 Notes to the Financial Statements Of Board of Directors, Board of Executive Officers and Controlling 70 Independent Auditor s Report on the Financial Statements 71 Opinion of the Fiscal Council 73 Management Proposal for Capital Expenditures Budget 74 Statement from the Board of Executive Officers on the Financial Statements Declaration of the Board of Executive Officers on the Report of the Independent Auditors

3 MANAGEMENT REPORT 2010 MESSAGE FROM THE MANAGEMENT Dear Shareholders, The year in review has seen a recovery following the financial crisis which began at the end of 2008 and impacted the first half of In 2010, economic indicators were consistently very positive with levels of unemployment reaching their lowest levels on record and creating a high degree of consumer confidence. In addition, the availability of credit and the low degree of non-performance continued to favor consumption. Real incomes were another indicator meriting particular note, wages in the industrial sector once more reporting increases and thus feeding through to a continuing virtuous cycle of economic growth. On the operational front, we opened 14 new stores in various parts of Brazil, consolidating our footprint in the domestic market. In 2010, we rolled out our compact store project which will result in the opening of approximately 100 stores in this format over the next five years. Furthermore, we reiterate our expectations for the potential number of stores in the traditional format. Considering both formats together we will see a network of approximately 250 units in operation by As to the management aspect of the business, efforts have focused on the standardization of processes and work flows to ensure the uniformity of our operations and to support more aggressive expansion plans. We revisited our logistics strategy and established new standards of work which will also serve to guarantee the stability of the operations over the next ten years. Another point meriting mention during the year was work carried out in developing domestic suppliers and international sourcing with a significant reduction in the time taken for interning imported goods. In the financial area, particular attention was directed towards the setting up of a Credit Rights Investment Fund (FIDC) to provide support for Renner Card operations involving interest-bearing credit sales and nonperforming receivables through a financing structure at a lower cost and with longer tenors. The main thrust of the Human Resources area was on the preparation of people and on a larger number of trainees destined to be future managers of the new operations. We were again featured among The Best Companies for You to Work for in Você S/A and Exame magazines and were placed third in the The Best in People Management ranking published by Valor Carreira magazine in the category of companies with more than 10,000 employees. In the financial services segment, special attention was dedicated to the launch in September 2010 of the Mastercard and Visa cobranded cards. Renner was the first retailer worldwide to be an issuer of credit cards without the backing of a financial institution. All these initiatives translated into significant results for the Company: Net Revenues from Merchandise Sales increased 16.4%, Same Store Sales were up by 10.3%, while Gross Margin reached 52% (without account reclassifications made by the end of the year this would have been 49.4%) against 50.1% in the preceding year (without account reclassifications, 47.5%), and expenses were stable in relation to Net Revenues from Merchandise Sales. Operating Cash Generation (EBITDA) including Retail and Financial Services was R$ million (without account reclassifications, this would have been R$ million) against R$ million in 2009 (before account reclassifications, this was R$ million), thus reporting growth of 41.9%, with margins exceeding 2009 fiscal year levels by 3.7 percentage points from 16.8% to 20.5% in 2010 (without account reclassifications, this would have been 21.1% in 2010 against 17.7%). During the year we invested R$ million in new stores rollouts, remodeling, IT systems and technology and in the distribution centers, against a total of R$ 69.1 million in In 2010, we had the additional satisfaction of holding a Shareholders Meeting with the largest quorum on record since the introduction of the new widely-held corporate model in The presence of shareholders representing 37.7% of our capital stock was the recognition of efforts made over the past years to develop voting processes and shareholder participation in corporate events. Again, Lojas Renner was the first company in Brazil to use the Public Request for a Power of 3

4 Attorney. In this context, we are proud to register that in 2010 we were honored with various awards such as The Best of Dinheiro Magazine 2010, first place in the Best Companies for Shareholders" ranking in Capital Aberto magazine, The Most Admired Companies in Brazil 2010 in Carta Capital magazine and first place in the sector of Consumption and Retail in Latin America in Institutional Investor magazine s in three categories. We have also made important progress in the Social Responsibility area. During the year we invested more than R$ 3.7 million in 81 job and income creation projects directly benefiting 6,972 low-income women and young people in 12 Brazilian states. Lojas Renner was a winner of the Doar para Transformar (Donate to Transform) award presented by the ELAS Social Fund and the UNO Women Brazil and the Southern Cone for the Mais Eu Campaign. All this has been and will continue to be possible due to the endeavor and dedication of our 12,423 employees to whom we especially thank at this moment. It is for this reason that we are always alert to the best personnel management practices, training our employees so that they are professionally equipped to provide the ongoing improvement in the support of the operation. In making our comments on 2010, we cannot fail to pay tribute to ex-chairman of the Board of Directors and Member of the Company s Compensation Committee, Francisco Roberto André Gros, who passed away last May. Francisco Gros contributed much to the corporate model adopted in 2005 at the time of the Public Offering of Shares, having contributed during his term of office on the board to the structuring of the Company s Governance, Management and Transparency. His experience and endeavor were fundamental to Renner s sustained growth and the creation of shareholder value. The year 2011 is shaping up to be a promising one in which we are to rollout about 30 stores in the compact and traditional formats. The macroeconomic environment is expected to remain stable and Lojas Renner stands ready to capture all the opportunities which this scenario presents. Finally, in the name of the entire management, we would like to extend thanks to our employees, suppliers, customers, shareholders and the community at large that have accompanied us over the year and have been instrumental in Renner being recognized with first place in the Sectorial Highlight ranking among all the companies in the Retail Sector and 10th in Interbrand Brasil s most valuable brand name ranking in Brazil. Our thanks to all for the confidence entrusted in us. CLAUDIO THOMAZ LOBO SONDER Chairman of the Board JOSÉ GALLÓ Chief Executive Officer 4

5 The following financial and operational information, except where otherwise indicated, is in accordance with International Financial Reporting Standard (IFRS) issued by the International Accounting Standards Board (IASB) and the accounting practices adopted in Brazil (BRGAAP), including the pronouncements issued by the CPC (Brazilian Accounting Standards Committee). RECLASSIFICATIONS IN THE INCOME STATEMENT TO BETTER REFLECT THE ESSENCE OF THE OPERATIONS IN LINE WITH BRGAAP AND IFRS PRINCIPLES In accordance with the BRGAAP and IFRS s principles that the essence of the operations must prevail over their form in the evaluation process for defining accounting treatment, operations were revised and some amendments made in the income statements. These are designed to reflect the essence of the operations with improved quality and clarity permitting a reclassification of some items in the income statement without however modifying reported net income. Details of the amendments can be found below: Advertising values received from suppliers, previously entered as offsetting entries to Selling Expenses, have now been booked to Cost of Goods Sold, thereby generating an increase in the Company s Selling Expenses and a reduction in the Cost of Goods Sold, as a result increasing Gross Margin. Discounts on prepayments to suppliers, previously booked in two parts (in the Other Operating Income and Net Financial Results lines) are now booked entirely to Cost of Goods Sold, benefiting the Company s Gross Margin and consequently reducing the balance of the accounts for Other Operating Results and Financial Income; and The CDCI operation for Financing Delinquent Customers, previously recognized as an expense to Net Financial Income, is now booked to Results for Financial Services, thus producing a reduction in this result as well as in the Company s Total EBITDA. OPERATING PERFORMANCE The year proved to be a positive one for Brazilian retailing as a whole, a growth trajectory being resumed in the wake of the world crisis. The increased numbers of the emerging classes joining the formal consumer market, the greater purchasing power of middle class consumers and the reduction in informality through effective government initiatives have all helped generate opportunities for the retail sector. In 2010, expansion plans were revisited resulting in acceleration in activity. The evolution in macroeconomic environment in 2010 opened up opportunities to Lojas Renner for the creation of a new compact model of store which will allow the company to expand into smaller markets and consolidate the brand in Brazil as well as serving to test the store model focused exclusively on female lines and to launch the internet e-commerce business. 5

6 Operating Data (R$ MM) Besides the positive macroeconomic aspects during 2010, some important operational initiatives also warrant attention. These include the implementation of structured processes, an improvement in supply chain management and the launch of the complete mix for online sales through the internet, together with the rollout of pilot units of the new store models. The consolidation of the Financial Services business which has contributed positively to EBITDA margin together with the launch of co-branded cards in conjunction with Mastercard and Visa, were equally important during the period. In 2010, Lojas Renner recorded a 16.4% year-on-year increase in Net Revenues from Merchandise Sales to total R$ 2,462.7 million. Based on the Same Store Sales concept, growth was 10.3% compared to fiscal year Total Company s Net Revenue 2, , ,183.4 Net Revenues from Merchandise Sales 2, , ,956.4 Net Revenues from Merchandise Sales Nominal Growth over Previous Year Same Stores Sales Growth Nominal Growth over Previous Year Number of Stores End of December Sales Area (in thousand m 2 ) End of December Net Revenue per m 2 (R$ per m 2 ) Net Revenue per Average Sales Area Number of Employees End of December 16.4% 8.2% 11.7% 10.3% 1.4% 2.7% ,488 8,830 9,101 12,423 10,489 9,647 During the year, the Company continued to implement its store network expansion program, rolling out another 14 units, three in the South Region, seven in the Southeast, three in the Northeast and one in the North. At the year-end, Lojas Renner had a total network of 134 stores in operation nationwide with a sales area of thousand square meters, an increase of 10.0% over the preceding year. Investment in new stores totaled R$ 72.5 million while other investments such as store remodeling, logistics and IT equipment and systems accounted for another R$ 87.8 million. Store productivity in the period increased 7.5% from R$ 8.8 thousand per m 2 to R$ 9.5 thousand per m 2. The Company also launched its project for compact stores, to be rolled out as from 2011, following the opening of three pilot operations in The compact stores will not only be smaller in size but will also have important differentials in the way they operate through better vertical use of spaces, different product displays, adjustment in areas dedicated to each brand, more frequent delivery logistics and a differentiated cost structure. The operations will tend to enjoy better returns as well as a shorter maturation period. The Company envisages an estimated potential of approximately stores in this format, to be installed over a five-year period. In 2010, a compact store carrying an exclusively female product line was opened in Caxias do Sul, state of Rio Grande do Sul. Over the past few years, Lojas Renner has been endeavoring to enhance the turnover of inventory and improve stock management as a whole. In this context, the Company began a strategic logistics project to be introduced over the next three years, for the purpose of meeting higher demand in the light of a more aggressive expansion plan, higher volumes of imported items that require greater manipulation and for satisfying demand from compact stores which will need more frequent product deliveries due to their reduced backroom storage areas. Company believes that this project can bring improvements in inventory and margins as a result of better allocation of stock and less need of markdowns. 6

7 Lojas Renner has more than 1,300 registered suppliers, about 700 of them active. The Company takes the view that its domestic supplier base is extremely important for ensuring agility and flexibility of inventory adjustments in accordance with sales patterns, rapidly meeting customer demand and complying with basic fast fashion principles, albeit without any integrated production process. In 2010, the Company worked hard to develop its domestic suppliers through a greater approximation with a view to developing shared policies, training and development at the Renner Corporate University and by the sharing of medium and long-term plans for greater investments in industrial capacity and in cost savings. Triangular negotiations (direct negotiations with the textile companies to ensure that the Company s garment suppliers enjoy lower costs), strategic management of the principal suppliers, development of new partners and the certification of the latter through the medium of a company specialized in quality control are some of the other initiatives which have also been implemented. Over the years, Renner has been developing its expertise in procurement in the international market through intermediate companies or directly with the suppliers. The Company was able to develop both new markets and suppliers during the course of the year. Work on consolidating relationships with the largest suppliers and on negotiations involving larger categories was also largely completed. Initiatives by Lojas Renner to reduce the time taken to intern imported products were implemented, with a reduction from more than 120 days to about 70 days during the course of the year. Despite enjoying wider margins, imported items also involve greater resource commitment since payment is effected following the shipment and recognized as part of the Company s inventory immediately on leaving their point of origin. The quality and standardization of products increasingly represents a differential at Renner and on the basis of this concept some important projects have been developed over the past few years. These include the periodic assessment of domestic or international suppliers, their installations and their production capacity (undertaken by an international specialized company), through the Renner Quality Project (onsite inspection) and the greater standardization of products, principally where related to size. Items of apparel and footwear are inspected at source of production and when delivered to the distribution centers, are already packaged, ticketed, and separated into exact quantities in accordance with the requirements of the executed orders. In the case of internet operations, quality control covers all product supplies in order to ensure the greater efficiency. Lojas Renner was the first company in Brazil to use a specific system for managing its inventory on the basis of color, size and product mix. This has been instrumental in implementing a more responsive logistics process in conjunction with integrated systems for managing inventory and procurement planning. This system is making a positive contribution to margin gains, providing the skills and tools necessary to organize product selection, meeting the needs of different markets in line with temperatures, social groups and other key variables. It was on this basis during 2010 that the Company improved its offer of products and margins through a better understanding of the peculiarities of each market. In 2010, Lojas Renner reported Gross Profit from Retailing Operation of R$ 1,280.3 million, recording an important year-on-year increase of 20.8%. Gross margin was 52.0% in the period, a 1.9 percentage point increase on a 2009 gross margin of 50.1%. If account reclassifications are ignored, then the variation would have been 49.4% against 47.5%, Gross Profit increasing from R$ 1,004.4 million to R$ 1,216.7 million. Advances in the consolidation of the brand name have also been an important factor in increasing customer traffic flows through the stores. Equally, each year the Company has been successfully consolidating the Lifestyle Concept, the model now enjoying widespread recognition and acceptance at the points of sale. The Company organizes its stores into areas comprising the labels of the various Lifestyles as opposed to arranging them solely by product category - to ensure that the concept achieves its objective of providing an agreeable shopping experience. This strategy is not merely for the purposes of a differentiated product display but rather because the concept has as its principal thrust increased cross selling, avoiding the overlapping of models and consequently faster inventory turnover and reduced levels of markdowns with a direct impact on gross margins. 7

8 Two more editions of the Renner magazine were published during the year serving as a powerful instrument for leveraging sales. The magazine is created and developed by a team of professionals highly experienced in the publishing market, with the Company s partners and suppliers providing advertising. The publication is distributed free in the stores and through direct mailing shots to selected customers and opinion forming entities. In the Financial Products segment, the greater contribution of the new financial services are also worthy of mention. Launched in 2005, these encompass a 0+8 interest-bearing installment plan, Personal Loans, Capitalization Bonds (annuities) and insurance products, all of them sold in the credit areas of the stores, called Realize. Currently with more than 17 million Renner Card customers, the Company sees this database as an important asset that is generating a significant increase in profitability as well as creating additional shareholder value. The market-wide launch of the co-branded cards denominated Meu Cartão, which will be branded with Mastercard or Visa, took place on September 29. Renner innovated in several ways in this new venture: as the first non-financial institution in the world certified by MasterCard and Visa to issue credit cards, in the simultaneous launch of two brand flags in Brazil as well as allowing the customer to choose payment method either in the form of an invoice or carnê booklet physically payable at its stores. Renner selected the first 120 thousand customers to receive the offer of the new product as part of the process of strengthening the customer/issuer relationship in the card market. Meu Cartão functionalities were tested for a time with Company employees. It was then offered to the network s store customers, currently bearers of the private label card, initially located in three cities, and allowing them to use it at Renner as well as internationally. The Meu Cartão has the security of a chip and password, reducing the risk of fraud, and an exclusive limit for purchases at Lojas Renner. The customer is free to choose how much, where and how he effects payment. A limit for emergency drawings by the card holder may also be used. In addition to these functions, the card user is offered alternatives for card personalization, such as, among others, card design as well as incentives for usage such as discounts on tariffs for in-store payments, prize-winning invoices, etc. Further innovative initiatives are envisaged for 2011 in order to strengthen the relationship with the customer base. The co-branded cards can be expected to add value to the Company s business over the coming years. Lojas Renner believes that this initiative will generate even more value to the business by encouraging greater store card activity as well as enhancing fee income from the use of plastic in other establishments and from the implementation of other financial services. It should also strengthen the relationship with the customers thanks to the greater visibility of the brand in daily activities. It is worth mentioning certain operational initiatives that are generating important results for the Financial Products segment and considerably reducing past levels of delinquency. In 2010, the Renner Card posted losses of 2.8% and this percentage is well down on the 4.3% reported in 2009, and similar to levels posted in 2005 before the introduction of the 0+8 interest-bearing installment plan which has historically shown a higher degree of risk. This result reflects the centralization of the credit granting process initiated at the end of 2009 and the continuous improvement of the credit models which involve more than 600 variables in defining the customer profile through a neural networks system, as well as guaranteeing a greater standardization of the process, more specialization on the part of dedicated personnel and less risk of fraud. The neural system evaluates customer credit scores through a combination of statistics based on data contained in the Renner Card customer database. The maintenance of the collection strategy aligned with the macroeconomic condition and the profile of the past-dues portfolio combined with greater accuracy of risk propensity models for offering products on the back of CRM initiatives also contributed to the reported results. Thus, Operational Cash Generation (EBITDA) in 2010, including results from retailing and Financial Services, was R$ million, a growth of 41.9% over The EBITDA margin in turn was 20.5% in 2010, an increase over the 16.8% reported When the account reclassifications are excluded 8

9 from the result, Company EBITDA would have totaled R$ million against R$ million, with the EBITDA margin increasing from 17.7% to 21.1% in All the foregoing factors are essential for the continuity of the businesses and can be expected to have a positive impact on results in Management believes that there is still scope for improvements in systems and the administration of inventory and procurement with corresponding greater agility and reduced markdowns. There are also opportunities latent in Renner Card and Financial Services segments RESULTS RETAIL OPERATION Net Revenues In 2010, Net Revenues from Merchandise Sales reported an increase of 16.4% in relation to the same period 2009 from R$ 2,116.0 million to R$ 2,462.7 million. Same Store Sales recorded a growth of 10.3% over the preceding year. This reflected the improved environment for consumption where in spite of the higher comparative base at the year end, sales continued at a brisk rate. Better inventory mix and product selection also contributed to results. Gross Profit GROSS PROFIT FROM MERCHANDISE SALES (R$ MM) Gross Profit from Merchandise Sales 3, , ,616.6 Deductions of Goods Sold (815.3) (703.1) (660.2) Net Revenues from Merchandise Sales 2, , ,956.4 Cost of Goods Sold (1,182.4) (1,055.8) (996.4) Gross Profit from Merchandise Sales 1, , Gross Margin from Retailing Operation 52.0% 50.1% 49.1% Gross Profit from Merchandise Sales reported growth of 20.8% compared with fiscal year 2009, increasing from R$ 1,060.2 million to R$ 1,280.3 million. Gross Margin posted a notable 1.9 percentage point improvement to 52.0% against 50.1% in These items would have been R$ 1,216.7 million against R$ 1,004.4 million while gross margin would have risen from 47.5% to 49.4% if account reclassifications are excluded from the result. The improved 2010 Gross Margin reflects some operational initiatives implemented over the past few years such as the greater use of the stock management system based on color and size, more fruitful negotiations with local and international suppliers as well as a better stock mix when compared with The appreciation of the Real against the US dollar also contributed to the better margins on imported goods, more especially during the first half of the year. Operating Expenses Selling Expenses rose 15.7% from R$ million in 2009 to R$ million in In relation to Net Revenues from Merchandise Sales, Selling Expenses were 26.1%, slightly below the 26.2% in Excluding reclassification of income statement accounts, these expenses would have totaled R$ million in 2010 against R$ million in 2009, translating into a percentage of Net Revenues from Merchandise Sales of 24.8% versus 25.1% in These results reflect the dilution of fixed 9

10 expenses over the course of the first half of the year. In the second semester of 2010, operating leverage was not maintained largely due to heavier expenditures in the period - principally related to the larger number of store rollouts which in turn generated a larger volume of pre-operating expenses. The Company s cost structure with a high percentage of fixed costs also impacted expenses given the inauguration of a large number of stores near the year-end and thus contributing little to sales turnover. Average expenses per store reported a rise of 4.8% in 2010 from R$ 4,821.5 thousand to R$ 5,052.8 thousand, these figures according to the new accounting standard. General and Administrative Expenses increased by 17.4%, totaling R$ million in 2010, against the R$ million reported for the same period in The percentage of Net Revenues from Merchandise Sales was 8.6% against 8.5% in These increases are due to a higher volume of expenditures linked to special projects such as the compact stores, e-commerce business and logistics, all of which began to impact overheads in the second half of the year. Average expenses per store increased 6.3% from R$ 1,568.2 thousand to R$ 1,667.4 thousand. Profit Sharing Program overheads totaled R$ 21.9 million against R$ 19.1 million in This increase reflects Company results beating the 2010 budget and meeting all corporate targets - among them sales, gross margin, EBITDA, operating result and the number of new store card customers. This expense is recorded in the Other Operating Income line. EBITDA from the Retailing Operation The Retailing Operation generated an EBITDA of R$ million versus R$ million in 2009, an annual rate of growth of 33.2%. The EBITDA Margin from Retailing Operation reached 15.6% in 2010 versus 13.6%. Excluding income statement account reclassifications, EBITDA from the Retailing Operation would be R$ million against R$ million in 2009 with an EBITDA Margin on the Retailing Operation of 15.1% versus 13.1% in These results reflect the good performance of sales during the period, linked to significant gains in gross margin and dilution of expenses, principally in the first half of EBITDA FROM RETAILING OPERATION (R$ MM) Gross Profit from Merchandise Sales 1, , Operating Expenses from Retailing Operation (Selling, G&A, Manag. Remuneration and Taxes) (884.1) (754.5) (711.5) Other Operating Results (12.1) (17.4) (3.1) EBITDA from Retailing Operation EBITDA Margins from the Retailing Operation (over Net Revenue from Merchandise Sales) 15.6% 13.6% 12.5% 10

11 FINANCIAL SERVICES RESULT FROM FINANCIAL SERVICES BREAKDOWN (R$ MM) Revenues, Net of Funding and Taxes Recovery of Past Due Receivables (Sales in the Interest-free Plan) Sales in the Interest-bearing Plan Personal Loans and Other Financial Services Credit Losses, Net of Recoveries (88.2) (112.4) (111.1) Sales in the Interest-free Plan (21.0) (36.4) (38.1) Sales in the Interest-bearing Plan (46.9) (53.8) (50.5) Personal Loans (20.3) (22.2) (22.5) Operating Expenses (Renner Card & Financial Services) (52.4) (38.5) (38.1) Total % of EBITDA 24.0% 19.0% 17.4% The Result from Financial Services posted a significant improvement increasing from R$ 67.6 million in 2009 to R$ million in 2010, with a year-on-year growth of 79.1%. This result is net of the cost of financing delinquent customers which totaled R$ 27.1 million in the year and is due to the better performance of the 0+8 interest-bearing installment plan as well as less credit delinquency combined with a continuous improvement in credit performance and the greater accuracy of risk propensity models for offering products in support of CRM actions. Consequently, the Result from Financial Services represented 24.0% of EBITDA compared to 19.0% reported in Before account reclassifications, the Result from Financial Services would have been R$ million in The outstanding loan portfolio totaled R$ 98.5 million in December 2010, including interest charges (R$ 72.0 million adjusted to present value). During 2010, R$ million was granted in loans (principal), against R$ 94.9 million in This operation has an average ticket of R$ (principal) and an average tenor of 8.3 months. Credit Losses, Net of Recoveries from Renner Card sales represented 2.8% of Net Revenues from Merchandise Sales in 2010 against 4.3% in As to Personal Loans, the provisions for losses on credits are constituted on the basis of the risk classification of the operations similar to the classification criteria for credit operations laid down by the Central Bank of Brazil and in line with the same policy as adopted by the financial institutions. Provisions are based on a classification of risk which at the highest level of risk, this considers the entire amount including the portion still not due, and not merely the amount overdue (Dragging Method, where customer debt with different installments of different contracts, distributed across the portfolio, is transferred to a worst case overdue classification, consolidated and provisioned). The percentage provisioned gradually increases as payment delay increases with the outstanding amount in excess of 180 days being 100% provisioned. In 2010, expenses from provisions and losses on Personal Loans recorded R$ 20.3 million in 2010 against R$ 22.2 million in The Financial Services Result is made up of the following items: Revenues, Net of Funding and Taxes: this item reports revenues arising from the collection of delayed credit payments as well as revenues generated from the intermediation of credit sales under the 0+8 interest-bearing installment plan and from Personal Loans net of taxes and funding costs. Revenues from commission on Capitalization Bonds (annuities) and from Insurance Policies are also recognized in this line. 11

12 Credit Losses, Net of Recoveries: this item records the provision for losses on credits associated with the retailing operation in 0+5 interest-free installments and 0+8 interest-bearing installment plan. Under this item, losses registered are deducted from recoveries of losses written off in previous periods. Losses generated from the intermediation of Personal Loans are also booked to this item. Operating Expenses: this item books those expenses related to financial services products, including all costs arising from this business as well as all collection expenses incurred with Financial Services and the Renner Card, both with respect to the 0+5 interest- free and the 0+8 interest-bearing installment plans. Renner Card The Renner Card, now in its 37th year of activities, accounted for 56.6% of total sales in 2010 against 60.2% for the same period in the preceding year, the reduced participation largely reflecting the significant number of store rollouts which took place between 2006 and This implies a larger number of new customers who in the first instance choose to use other forms of payment thus reducing the percentage of store card business in relation to total sales. The larger share of traditional credit cards is also having an impact on these results. However, the Company believes that the offer of co-branded Mastercard and Visa credit cards, which begun on September , could see a recovery in share Card sales, generating greater use and activating payment with plastic. The average ticket on sales using the Renner Card increased to R$ in 2010, compared with R$ in 2009 an increase of 8.1%. The 0+8 installments with interest credit plan represented 13.0% of total sales in 2010, against 12.1% in The 0+5 installments plan accounted for 43.6% in 2010 against 48.1% in the preceding year. During the year a further 1.9 million of new cards was issued, the Company recording a total of 17.1 million cards in December Meu Cartão Since September , the Company has had a new vehicle for purchasing its products: the Meu Cartão Mastercard or Visa co-branded credit card. During the course of the final quarter the first customers were selected and contacted, these initially being restricted to existing bearers of the store card in the cities of Salvador, Campinas and Florianópolis. The average ticket of Meu Cartão in Renner stores was R$ 147,00. The Meu Cartão holder has the security of a chip and password, minimizing the risk of fraud and carries an exclusive limit for purchases at Lojas Renner. The customer is free to choose how much, where and how he effects payment. A limit for emergency drawings by the card holder is also to be provided. Additionally, the card bearer will enjoy various options for personalizing the card such as the choice of the card design with which he most identifies. Incentives for encouraging usage and a loyalty program are to be implemented during the course of

13 EBITDA EBITDA = Earnings before Net Financial Expenses, Income Tax and Social Contribution on Profit, Depreciation, Amortization, Stock Option Plan Expenses, Results from writte-offs of Fixed Assets and Extraordinary Expenses. EBITDA is not a measure used in Brazilian accounting practices and does not represent cash flow for the periods under review. It should not be considered as an alternative for net income, as an indicator of operating performance or as an alternative for cash flow in the form of an indicator of liquidity. EBITDA does not have a standardized meaning and the Company s definition of EBITDA may not be comparable with the adjusted EBITDA of other companies. While in accordance with accounting practices used in Brazil EBITDA does not provide a measure of operating cash flow, Management uses it to measure operating performance. In addition, the Company understands that certain investors and financial analysts use EBITDA as an indicator of the operating performance of a company and/or its cash flow. EBITDA in 2010 was R$ million against R$ million in the preceding year, reporting a growth of 41.9%, with the EBITDA Margin on Net Revenues from Merchandise Sales reaching 20.5%, against 16.8% in These increases in EBITDA and in EBITDA Margin are the results of improvements reported for the retailing operation due to good sales performance, the improvement in gross margin, as well as dilution of expenses in the first half of the year and to the excellent results from financial services. If income statement account reclassifications are excluded, EBITDA for 2010 would be R$ million against R$ million for the preceding year and the EBITDA Margin would have been 21.1% against 17.7% in EBITDA RECONCILIATION (R$ MM) Net Income (+) Income & SC Taxes and Statutory Participation (+) Result from Write-off of Fixed Assets (+) Financial Result (27.3) (7.6) (4.2) (+) Depreciation and Amortization (+) Stock Option Plan EBITDA EBITDA Margin (over Net Revenue from Merchandise Sales) 20.5% 16.8% 15.2% STOCK OPTION PLAN In 2010, the Company recognized R$ 17.4 million against R$ 17.2 million in 2009 as an expense on its Stock Option Plan. This expense corresponds to the fair value of the respective financial instruments, calculated as from the date of the grant of stock options based on the Black&Scholes model and is registered on a pro rata temporis basis during the period in which services are rendered by the plan member, beginning on the grant date through to the date on which the beneficiary acquires the right to exercise the option. This model uses assumptions such as market value of the share on the date the options grant, the strike price of the option, the volatility of the price of the Company s shares, the risk free interest rate and the duration of the vesting period contract. 13

14 FINANCIAL RESULT, NET FINANCIAL RESULT (R$ MM) Financial Revenues 36,1 20,1 10,5 Financial Expenses (11,5) (12,3) (10,5) Net Effect of Adj. of LT Taxes to Present Value 2,7 (0,5) 3,8 Foreign Exchange Variation, Net 0,0 0,3 0,4 Financial Result, Net 27,3 7,6 4,2 The Company s Net Financial Result was R$ 27.3 million in 2010 against R$ 7.6 million in 2009, already excluding financial expenses relative to the CDCI operation for financing delinquent customers. If the reclassifications for income statement accounts are excluded then the Company s Financial Result in 2010 would be R$ 11.9 million against a negative R$ 10.7 million in This increase is basically due to a larger position in cash and cash equivalents compared with the preceding year. NET INCOME In the light of the foregoing factors, the Company terminated the fiscal year 2010 reporting a Net Income of R$ million, 62.5% up on the R$ million recorded in The Net Margin was 12.5% in 2010, greater than the 9.0% for the preceding fiscal year. CASH & CASH EQUIVALENTS, NET NET CASH (R$ MM) Dec.10 Dec.09 Dec.08 Cash and Cash Equivalents Total Loans and Financing (48.7) (44.2) (29.8) Short Term (12.3) (8.9) (0.1) Long Term (36.4) (35.3) (29.7) Net Cash Cash and Cash Equivalents at the end of the period amounted to R$ million, an increase of 66.2% compared with R$ million in December This increase is related to the stronger generation of cash during 2010 and to R$ million in resources following the constitution of the credit rights investment fund FDIC, still not allocated to the acquisition of receivables. On December , Loans and Financing stood at R$ 48.7 million reflecting the long-term funding from the Banco do Nordeste. The short-term operation with Banco Santander to finance delinquent customers, being an operational financing linked to a credit asset, ceased to be part of the Company s Loans and Financing. Consequently, the Company ended the year with Net Cash of R$ million against R$ million at the end of

15 CAPITAL EXPENDITURES CAPEX SUMMARY (R$ MM) New Stores Remodeling of Installations IT Equipment & Systems Others Total In 2010, Lojas Renner s investments in fixed assets totaled R$ million. Of this amount, R$ 72.5 million was allocated to store openings. A further R$ 22.3 million was invested in the remodeling of installations and another R$ 37.8 million in modernizing IT systems and equipment. Other capital expenditures amounted to R$ 27.7 million of which R$ 17.7 million was dedicated to expanding storage and processing capacity at the Distribution Centers for handling greater volumes of imported goods as well as additional demand from the units inaugurated in 2010 and those to be rolled out over the next few years. As part of the continued strategy of expansion, in 2010 Lojas Renner inaugurated 14 new stores, thus ending the year with a nationwide network of 134 units in operation. Store Openings City Location Total Area (m2) Format Date 01 Maceió AL Shopping Iguatemi Maceió 3,765 Traditional March, Joinville SC Joinville Garten Shopping 3,096 Traditional April,14 03 São Paulo SP Avenida Paulista 3,200 Traditional May, Campo Grande RJ West Shopping 3,290 Traditional June, São Paulo SP Shopping Raposo Tavares 2,717 Traditional June, Palmas TO Shopping Center Capim Dourado 2,732 Traditional August, Belo Horizonte MG Boulevard Shopping BH 3,705 Traditional October, Caxias dos Sul RS San Pelegrino Shopping Mall 1,495 Compact November, Salvador BA Salvador Norte Shopping 2,772 Traditional November, Cotia SP Shopping Granja Vianna 2,342 Traditional November, Salvador BA Shopping Center Paralela 1,822 Compact December, São Gonçalo RJ Shopping Boulevard São Gonçalo 2,543 Traditional December, Santa Maria RS Royal Plaza Shopping Center 2,069 Traditional December, Franca SP Franca Shopping Center 2,108 Compact December, 15 Depreciation and Amortization expenses increased 2.3% from R$ 74.1 million in 2009 to R$ 75.8 million in 2010, a reflection of higher capital expenditures in fixed assets for expanding the store network. 15

16 EMPLOYEES AND MANAGEMENT OF SOCIO-ENVIRONMENTAL RESPONSIBILITY EMPLOYEES Lojas Renner believes that the career development of its employees is critical to the progress of its business and the successful implementation of the growth strategy. In this context, the Company uses the owner of the business leadership concept. With a sense of urgency, attitude and obstinacy in the quest for results, Renner has a team which is always alert to opportunities in the market place and takes actions to ensure the perpetuation of the Company. Thus, results are a function of the degree of commitment and knowledge which employees have in relation to corporate strategies and objectives and the role of each one in the execution of these plans. The alignment of company strategies to requirements is undertaken on an annual basis and applied to projects and goals for all corporate leaders. The management model at Lojas Renner is particularly important in ensuring that the Company s strategies are put into practice. The model is characterized by systematized monthly meetings for discussing best company practices and immediate actions to be taken to correct any deviation from an agreed direction. In 2010, the Company expanded its payroll to support its expansion plan, at the end of the year employing 12,423 at its 134 units located throughout Brazil, at the distribution centers and at corporate headquarters. Investment in employee training is one of the Company s hallmarks: in 2010, each employee received 144 hours of training through the Renner Retail Academy and the Renner University, both of which offer classroom - and online courses. Supporting Company growth are programs for the formation of Leaders based on three pillars: Culture, Management and Value Proposition: PLF Fundamental Leadership Program for coordinators and supervisors; Trainees for the formation of Supervisors and Managers; and PLE Executive Leadership Program for personnel at managerial level. Implemented in 2007, a considerable amount of work was conducted under the Succession Program during the year through the systematized process of surveying and identification of executives deemed as being of high potential. As a consequence of this process, Individual Development Plans PDI are prepared to accelerate the formation of potential successors for the new challenges in order to meet Company expansion and growth necessities. The organizational climate is a factor of extreme importance for the Company: a healthy environment contributes to ensuring commitment, maximum use of the potential of each one and consequently generating exceptional results. With this in mind since 1996, Lojas Renner has conducted an Organizational Climate Survey. This formalizes the opportunity for all employees to express their opinion of the Company, the working environment, benefits, compensation, leadership, communication and what contributes to the improvement of practices and organizational development. In 2010 there was a 92% response to the survey, underlining the importance of this practice to the Company and to its employees. MANAGEMENT OF SOCIO-ENVIRONMENTAL RESPONSIBILITY Lojas Renner believes that real changes, both in the company and society, only occur through the participation of individuals and the ethical and transparent relationship with all stakeholders. In this context, the Company implements projects in partnership with employees, the local community, companies, civil society and government in addition to practices where there is a focus on the environment. Internal Engagement One of the pillars governing the Socio-Environmental Responsibility Program both within and outside the Company is to develop the mobilizing potential of the employee. With this in mind, Lojas Renner took various initiatives during the course of the year: 16

17 Solidarity Style: a voluntary corporate program currently with 45 groups of volunteers at different units of the Company. Through the intermediary of this program the employee is able to effectively act in the community surrounding his unit, identifying needs and taking steps to satisfy them whenever possible. Pescar Project: a professional development program for young people in situations of social vulnerability and sponsored by Renner for the past six years. Annually, 40 youngsters are trained in the day-to-day of customer service and logistics, always focusing on the Renner Culture. Courses: during the year, several training schemes in socio-environmental responsibility were run for employees and involving themes such as the Code of Ethics and Conduct and the Code for the Volunteer Worker. Various projects were begun in the area of environmental management in 2010 with a long term impact. One of the initiatives is the Solid Waste Management Program. This involves the management of all waste generated by the business, disposal of materials through reverse logistics for recycling or to industrial landfills. The entire process is certified by specialized companies. The implementation of the Green IT Program also proved an important project in This seeks to minimize environmental impacts through the acquisition and use of equipment with reduced energy consumption and the correct disposal of equipment once it is no longer required. At the end of the year, Lojas Renner signed up to the Carbon Efficient Index ICO2 launched by BM&FBOVESPA. This index seeks to highlight those companies showing concern for green house gas emissions and adopting environmental management practices in the context of climate change. Local Development Lojas Renner is investing in the community close to its corporate headquarters as part of its objective of promoting local development. With a population of a little more than 35 thousand, the district is seen as one of the most socially vulnerable in Porto Alegre. Aware of this reality, Lojas Renner has launched the Rede Bom Jesus a project which provides technical and financial support to the area s social organizations. Currently, nine organizations are given financial support and are undertaking projects for the insertion of the community in the labor market, training and qualifying productive groups as well as for the integration of children and young people in educative and sporting programs. Female Protagonism The Lojas Renner Institute is a non-profit organization responsible for managing the Company s Private Social Investment. The Institute is committed to the insertion of the woman in the labor market and as such puts into practice the Renner value proposition a company which is an accomplice to the modern woman investing in professional development projects for the woman. In 2010, the investment in entrepreneurial social actions undertaken by civil society organizations was R$ 3.7 million. Approximately seven thousand women and young people benefited from these resources through the medium of 81 projects in 12 Brazilian states. The objective of the Mais Eu Campaign, the Company s Cause-Related Marketing initiative, is to allocate 5% of net merchandise sales of all the stores in the network during four days in August to social projects focused on the empowerment of women. In 2010 the campaign exceeded all expectations by raising more than R$ 1.0 million, a result 20% higher than Through this action, the Company is able to mobilize employees, suppliers and customers in support of a single cause. 17

18 CAPITAL MARKETS AND CORPORATE GOVERNANCE In 2010, Lojas Renner commemorated its fifth year of operations as a widely-held company. In this period from July 2005 to the end of 2010, several initiatives were adopted to ensure the best practices in Corporate Governance, among these worthy of mention being a permanent Fiscal Council, a Compensation Committee, the Manual for Participation in Shareholders Meetings, dedicated internal charters for the Board of Directors, Fiscal Council and Compensation Committee, mechanisms for the formal appraisal of the Board of Directors, Chairman of the Board and the Compensation Committee and the creation of the post of Company Secretary to the Board of Directors. During the year, the Board of Directors met monthly to discuss Company strategy, investments, operations, and risk management and audit reports. On April 22 nd, 2010, at the fifth Annual General Meeting (AGM) as a widely-held institution, the Company achieved the largest quorum for participation in a corporate event since The participation of shareholders representing 37.7% of the capital stock was testimony to the positive result initiatives adopted over the past years have produced in terms of shareholder commitment to the new procedures for operations in the Brazilian capital markets. Lojas Renner is extremely proud to be part of this story and believes that its contributions have been acknowledged through some important awards and positions in the various rankings during the course of the year. These include The Best of Dinheiro Magazine 2010 Best in Retail/Corporate Governance, first place in "The Best Companies for Shareholders" ranking in Capital Aberto magazine - market capitalization category up to R$ 5 billion, The Most Admired Companies in Brazil 2010 in the Carta Capital magazine - The Most Admired Company (Textile Retailing) and first place in Institutional Investor magazine s Consumption and Retail sector in Latin America ranking in the categories Best CEO, Best IR Professional and Best IR Program, following a poll of sell- and buy-side analysts. The AGM of April 2010 approved the financial statements for fiscal year 2009, the distribution of dividends and the election of members of the Board of Directors and Fiscal Council as well as the aggregate compensation of Management. Dividend payments were also declared and approved for fiscal year 2009 for R$ million, corresponding to R$ per share, representing a 75% pay-out effected on April The distribution of dividends in the form of interest on equity was declared and approved on December for fiscal year 2010 amounting to R$ 70.2 million, corresponding to R$ per share with payout scheduled for within ten days following the AGM of Management is further proposing the distribution of R$ million (R$ per share) as dividends subject to the approval by the AGM for 2011, to be held in April. Thus, shareholder remuneration, including payment to be approved at the Shareholders Meeting will amount to R$ million (R$ per share), equivalent to a pay-out of 75% and a dividend yield of 3.3% (dividend per share on the share price) on the basis of the price of R$ at December The remaining balance of net income after the proposal for payment of dividends and interest on capital has been allocated to an earnings reserve for investment and expansion in the amount of R$ 77.0 million. This reserve is to be used to fund part of the capital expenditures in the Company s expansion plan to be executed in the course of fiscal year As a means of reconciling the interests of the Management with those of the Shareholders, since May Lojas Renner has been operating a Stock Options Plan (POCA) eligible to the members of management and the Company s principal executives. Since the outset of the Plan, 6,046.4 thousand7 stock options have been granted (adjusted in line with the stock split of October ), equivalent to 4.9% of the Company s total Appreciation of the Stock since the Public Offering shares. Lojas Renner s common shares, trading under the LREN3 symbol, recorded a 43.5% appreciation during the year, increasing from R$ per share on December to R$ on December The appreciation of the shares during the year was in excess of the performance of the Ibovespa, reflecting 18