(Convenience Translation into English from the Original Previously Issued in Portuguese) Cia. Hering

Transcription

1 (Convenience Translation into English from the Original Previously Issued in Portuguese) Cia. Hering Financial Statements for the Year Ended December 31, 2016 and Independent Auditor s Report Deloitte Touche Tohmatsu Auditores Independentes

2 Deloitte Touche Tohmatsu Rua Pasteur, 463 1º andar cj. 101 e 103 e 5 andar Bairro Batel Curitiba PR Brasil Tel: + 55 (41) Fax: +55 (41) (Convenience Translation into English from the Original Previously Issued in Portuguese) INDEPENDENT AUDITOR S REPORT To the Shareholders and Management of Cia. Hering Blumenau, SC Opinion We have audited the accompanying individual and consolidated financial statements of Cia. Hering ( Company ), identified as Parent and Consolidated, respectively, which comprise the balance sheet as at December 31, 2016, and the income statement, statement of comprehensive income, statement of changes in equity and statement of cash flows for the year then ended, and notes to the individual and consolidated financial statements, including a summary of significant accounting policies. In our opinion, the individual and consolidated financial statements present fairly, in all material respects, the individual and consolidated financial position of the Cia. Hering as at December 31, 2016, and of its individual and consolidated financial performance and its individual and consolidated cash flows for the year then ended in accordance with accounting practices adopted in Brazil and International Financial Reporting Standards ( IFRSs ) issued by the International Accounting Standards Board ( IASB ). Basis for Opinion We conducted our audit in accordance with Brazilian and International Standards on Auditing. Our responsibilities under those standards are further described in the Auditor s Responsibilities for the Audit of the Individual and Consolidated Financial Statements section of our report. We are independent of the Company and its subsidiaries in accordance with the relevant ethical requirements in the Code of Ethics for Professional Accountants and the professional standards issued by the Federal Accounting Council ( CFC ), and we have fulfilled our other ethical responsibilities in accordance with these standards. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Key Audit Matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the individual and consolidated financial statements of the current period. These matters were addressed in the context of our audit of the individual and consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee ("DTTL"), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as "Deloitte Global") does not provide services to clients. Please see for a more detailed description of DTTL and its member firms. Deloitte provides audit, consulting, financial advisory, risk management, tax and relates services to public and private clients spanning multiple industries. Deloitte serves four out of five Fortune Global 500 companies through a globally connected network of member firms in more than 150 countries bringing world-class capabilities, insights, and high-quality service to address clients most complex business challenges. To learn more about how Deloitte s approximately 225,000 professionals make an impact that matters, please connect with us on Facebook, LinkedIn or Twitter Deloitte Touche Tohmatsu. All rights reserved.

3 Revenue recognition Cia. Hering conducts a significant portion of its sales through retailers and its franchise chain in the domestic and foreign markets. The revenue from these transactions is recognized after the billing and shipment of the goods from the Company s plants, as disclosed in Notes 3(o) and 28. These sales transactions are material and there could be a time gap between the issue of the goods sales invoices and the timing of the actual transfer of the risks and rewards of ownership of the goods sold to retailers and franchisees. For this reason, the Company monitors the time of delivery to these customers and makes adjustments to operating revenue so that revenue reflects the sales that meet all the accounting criteria for recognition by the end of the reporting period. Due to the volume of sales transactions subject to this monitoring and the use of material estimates to determine the adjustments to operating revenue by Management, we considered this a key audit matter. Our audit procedures relating to revenue recognition included, among others, understanding and testing relevant internal control to ensure the recognition of revenue in the appropriate reporting period, comprising testing the billing basis in order to determine the reporting period and assess the average delivery time of the goods, per region. We also checked the consistent application of the revenue recognition accounting policy by testing the sales transactions conducted during and at the end of the year. Compulsory loans As disclosed in Note 12, in 2016 Cia. Hering recognized receivables arising from Compulsory Loans of Eletrobrás as a result of the events that occurred in the second and third quarters. These events resulted from the lawsuits filed in the past to claim payment of these credits and, in the Management and its legal counsel assessment, these amounts, at that time, had the likelihood of a favorable outcome considered virtually certain. As a result of new events that occurred in the last quarter of 2016, the Company s Management revised its assessment, taking into account that likelihood of receiving said amounts was no longer virtually certain, and thus recognized an allowance for 100% of the previously recognized receivables. Due to the complexity of this matter and because recognizing these receivables and the related allowance involves significant Management judgment, we considered this a key audit matter. Our audit procedures included, among others, understanding the lawsuit from the Company s legal counsel, reviewing the documentation on the court decisions and other documents used as basis to recognize the receivables at first, and reviewing the new events that gave rise to the recognition of the allowance for losses on these receivables. Our procedures also included the assessment of the disclosures made by the Company on this matter. Employee benefits As disclosed in Notes 3(k) and 22, the Company sponsors defined benefit pension plans for its employees, in addition to sponsoring healthcare plans. The plans classified as defined benefit plans generate material liabilities, which are calculated using as reference actuarial assumptions that include a discount rate, an estimated inflation rate, and a mortality table. These liabilities can be fully or partially offset by the fair values of the related plans assets. In addition, the healthcare plans include age factors and future increases in the cost of the plans to determine the related liabilities. Due to the fact that these refer to material amounts that involve significant Management judgment to define the assumptions involved in the valuation of the plan assets and the measurement of the actuarial liabilities of the defined benefit pension and supplementary healthcare plans, we considered this a key audit matter Deloitte Touche Tohmatsu. All rights reserved. 2

4 Our audit procedures included, among others, testing on a sampling basis, the consistency of the participants data that were used by the actuary responsible for the 2016 actuarial valuation; assessing the main criteria used to determine the individual reserve of selected participants, and assessing the actuarial estimates and assumptions adopted by the actuary, such as the mortality table, the discount rate, the inflation rate, and the salary growth rate as compared to the relevant legislation and market practices. Our procedures were performed with the assistance of our actuarial specialists and also included the assessment of the disclosures made by Cia. Hering in the financial statements. Other Matters Statements of value added The individual and consolidated statements of value added ( DVA ) for the year ended December 31, 2016, prepared under the responsibility of the Company s Management and disclosed as supplemental information for purposes of the IFRS, were subject to audit procedures performed together with the audit of the Company s financial statements. In forming our opinion, we assess whether these statements are reconciled with the financial statements and the accounting records, as applicable, and whether their form and content are in accordance with the criteria set out in technical pronouncement CPC 09 - Statement of Value Added. In our opinion, these statements of value added have been prepared, in all material respects, in accordance with the criteria set out in such technical pronouncement and are consistent in relation to the individual and consolidated financial statements, taken as a whole. Other Information Accompanying the Financial Statements and the Independent Auditor s Report Management is responsible for the other information that comprises the Management Report. Our opinion on the individual and consolidated financial statements does not cover the Management Report and we do not express any form of audit conclusion thereon. In connection with our audit of the individual and consolidated financial statements, our responsibility is to read the Management Report and, in doing so, consider whether such report is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of the Management Report, we are required to report that fact. We have nothing to report in this regard. Responsibilities of Management and Those Charged with Governance for the Individual and Consolidated Financial Statements Management is responsible for the preparation and fair presentation of the individual and consolidated financial statements in accordance with accounting practices adopted in Brazil and the International Financial Reporting Standards ( IFRSs ), issued by the International Accounting Standards Board ( IASB ), and for such internal control as Management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the individual and consolidated financial statements, Management is responsible for assessing the Company s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless Management either intends to liquidate the Company and its subsidiaries or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Company s and its subsidiaries financial reporting process Deloitte Touche Tohmatsu. All rights reserved. 3

5 Auditor s Responsibilities for the Audit of the Individual and Consolidated Financial Statements Our objectives are to obtain reasonable assurance about whether the individual and consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Brazilian and International Standards on Auditing will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. As part of an audit in accordance with Brazilian and International Standards on Auditing, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: Identify and assess the risks of material misstatement of the individual and consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the internal control of the Company and its subsidiaries. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by Management. Conclude on the appropriateness of Management s use of the going concern basis of accounting and based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the ability of the Company and its subsidiaries to continue as going concerns. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor s report to the related disclosures in the individual and consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor s report. However, future events or conditions may cause the Company and its subsidiaries to cease to continue as going concern. Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the individual and consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation. Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion Deloitte Touche Tohmatsu. All rights reserved. 4

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7 Cia. Hering (Publicly-held company) Financial statements December 31, 2016 and 2015 Table of contents Performance report 7-17 Balance sheets 18 Statements of income 19 Statements of comprehensive income 20 Statements of changes in equity 21 Statements of cash flows 22 Statements of added value 23 Notes to the financial statements 24-80

8 MESSAGE FROM MANAGEMENT The year of 2016 was marked by important company evolutions in a difficult sales scenario as a result of political and economic crises in the country over the year. The strategy based on the combination of Product and Store Fronts (P&S), started in the previous year, advanced in 2016 and we remain confident that its proper execution, coupled with improvement in consumer sentiment, will drive the company into the next growth cycle. Shopping experience improvement in our stores was at the center of attention this year. After a sequential growth in store network, we prioritize the existing base in 2016, with initiatives to renovate points of sale and to improve the execution of store operation. The refurbishment plan, the largest executed by the company covering 100 Hering Store in 18 states, was successfully completed and was crucial for approximately one third of brand s stores be already in the latest format. We also promoted improvements in shopping experience through visual merchandising (VM) and store assortment enhancement, favoring better inventory management that, despite challenging sales scenario, improved quality, with a reduction in leftovers and lower volume of past collections. We ended the year with 834 stores - six less than of which 18 in other South American countries. Other channels stand out in building bases for future gains. In e-commerce, advances in technology and greater exploration of digital sales platform, with new functionalities implemented such as more accurate recommendations, customized campaigns, responsive layout and product descriptions improvement with photos and videos translated into double-digit growth in visits and sales. These evolutions, meant to improve traffic and conversion, contributed to the good result in the year and leave us optimistic with the perspective of channel s accelerated growth in the future. In multibrand, the conclusion of the segmentation project, in 2016, will allow greater customization to policies and incentives on each customer profile aiming to increase sales from 2017 on. We ended the year with 5 websites and 17,538 active multibrand clients. Another set of work fronts was developed to strengthen Product, seeking better value equation to the consumer (Value for Money) with perceived increase of quality and better pricing. Since the beginning of the year we started revisiting the development of collections process (or Product Lifecycle Management) delivering efficiency gains in the process. We also redesigned scope and attributions of Engineering and Research & Development teams to greater engagement in the collection process, being at the service of brand structures, and we launched Remodelar and Qualidade Total projects, whose attributions are, respectively, to ensure consistency and measures standardization in our products and to enhance aspects related to quality in our products from the selection of materials, through production and training of suppliers, up to the delivery to final consumer. These initiatives will gradually be part of the collections developing process over the next few years. 7

9 Activities related to our brands also deserve to be on the spotlight. Hering brand, once again among the 25 th Most Valuable Brazilian Brands, according to Interbrand research, promoted relevant improvements in store and product fronts, mentioned above, and also made important investments in leadership development. In children's brands, PUC established new partnerships and its results already presented stabilization signs, while Hering Kids had the highest network expansion and the best sales results of the company in Hering for you brand, after two years of tests and feasibility assessments, stopped operating exclusive stores, and become a product line within Hering brand (its product line can be found in selected Hering Stores, multibrand and webstore). DZARM. brand continues consolidating its new brand positioning and inaugurated its first light franchise: smaller surfaces with lower set up cost involved in the opening. The project will be monitored and could become an important path to growth outside metropolis. At the corporate level, important advances were made in technology, logistics, governance, talent management and succession areas. The extension of SAP system to logistics, invoicing and order fulfillment areas was concluded in the first quarter. We invested in logistics automation with the acquisition of a state-of-the-art sorter, the company's largest investment in the year. The company's governance structures were strengthened with the addition of two new independent board members and with the Strategy Committee creation, whose main functions include supporting the Strategic Plan elaboration and revisiting investment opportunities. Last but not least, we made investments for ours employees to ensure business continuity in the long run. Talent management was reinforced with Jovens Empreendedores program and with the realization of both competency and mentoring assessments to leadership, in line with our succession plan. Despite the above-mentioned developments, our results, especially sales, were negatively affected by the economic recession and its effects on consumption environment. Net revenue declined 7.2% in 2016, mainly due to weak performance of both multibrand and franchises channels. Gross margin remained stable, with margin gain coming from lower volume of markdowns and better inventories and leftovers management, offset by non-dilution of fixed costs. Earnings before interest, taxes, depreciation and amortization (EBITDA) was R$ million, 21.0% lower than 2015, and net income reached R$ million. Balance sheet at the end of December had low indebtedness and net cash position of R$ million, in line with our conservative financial policy. Our investments in the year totaled R$ 51.3 million and were mainly directed to industry and stores. Despite EBITDA decrease, free cash flow generation was favored by better working capital management and lower investments, accumulating R$ million in 2016, 82.5% higher than Finally, we remain confident in our business strategy and in our ability to resume company's growth from a differentiated business model, strong brands and solid management and leadership base. Management 8

10 SALES PERFORMANCE Gross Revenues - R$ thous Chan ge / Gross Revenue 1,74 8,432 1,90 0, % Domestic Market 1,706,324 1,857, % Foreign Market 42,108 42, % Domestic Market Gross Revenue 1,70 6,324 1,85 7, % Hering 1,270,664 1,415, % Hering Kids 218, , % PUC 118, , % DZARM. 64,603 82, % Other 34,161 24, % Domestic Market Share Chan ge / Multibrand 722, , % Franchise 646, , % Owned Stores 265, , % Webstore 38,027 31, % Total 1,67 2,163 1,83 2, % Multibrand 43.2% 44.5% -130 bp Franchise 38.6% 39.7% -110 bp Owned Stores 15.9% 14.1% 180 bp Webstore 2.3% 1.7% 60 bp Total 100.0% % - The channel breakdown does not consider Others. Gross sales totaled R$ 1.7 billion in 2016, a 8.0% decrease compared to 2015, mainly impacted by the effects of both economic recession and political instability especially on multibrand s performance. In 2016, the company continued to focus its efforts on the Product offer improvement ("Value for Money") with greater consistency in collections from year-end on and better Store experience (P&S). Such initiatives, however, were insufficient to offset negative effects of the economic environment. The multibrand channel decreased by 11.4%, due to lower sales to existing customers and net closing of approximately 700 points of sale. Sales to franchises declined 11.1% on lower orders throughout the year, as a consequence of sales drop to final consumers observed in the store network. Stores operated by the company registered a 2.9% increase, mainly influenced by the net addition of 5 stores in the period, good performance in outlets and better store management, mainly related to visual merchandising and supply improvements. Webstores maintained double-digit growth (+20.3%), as a result of technological advances in its platforms, digital media investments and launch of online outlet (Espaço Hering), generating increase of both traffic and conversion. Hering brand, widely accepted by all socio-economic classes and age groups and that stands out for its democratic positioning, with good cost-benefit, reported 10.2% sales decline, negatively impacted by the weak performance of multibrand and franchise channels. Throughout 2016, the brand focused its efforts on P&S fronts: Product, by reviewing the collection development process (or Product Lifecycle Management) generating efficiency gains in the process and in leadership development, and Stores, contemplating important investments in shopping experience, including stores remodeling. 9

11 In children's brands, the company continued improving their combined strategy by working with two brands of different profiles and styles, but complementary. PUC brand, focused on fashion and colorful clothes to children s public from classes A and B, posted 8.8% sales decrease mainly impacted by the net closing of 9 stores and sales decrease in the multibrand channel. The brand, which went through adjustments in its value proposition and distribution network, showed signs of stabilization in results by the end of the year. Hering Kids, focused on children of all social classes, offering casual clothing with good cost-benefit ratio, grew by 6.6%, company s best result, supported by good product offering, store experience and communication. The brand expanded its stores network, accounting the net opening of 13 stores in the year. DZARM., focused on urban women of classes A and B, who wants to express their power and selfconfidence, continued investing to consolidate their new positioning that led to men's line exclusion, which accounted approximately 30% of sales. The brand inaugurated its first light franchise store in 2016, characterized by smaller surfaces with lower set up cost. The project will be monitored and could become an important path for growth. Sales fell 21.6% in the year as a result of the greater customer s selectivity in the multibrand channel, in line with the brand's new positioning. Despite short-term impact, we believe the new positioning will bear good results in the future. DISTRIBUTION NETWORK Cia. Hering relies on a multichannel model of distribution that allows its products to reach the final consumer through 834 stores, 17,538 multibrand retailers and e 5 webstores. In 2016, gross sales in domestic market were distributed as follows: 10

12 STORES NETWORK In 2016, the company opened 26 stores, of which 13 Hering Kids, 12 Hering Store - one in the international market - and 1 DZARM. During the year were closed 32 units, of which 3 Hering for you stores whose points of sale were converted into Hering Kids. At the end of December the company totaled 834 stores distributed as follows: Number of Stores TOTAL Brazil Hering Store Owned Franchised Hering Kids Owned Franchised PU C Owned Franchised DZARM Owned Franchised Hering for you Owned Foreign - Franchised HERING STORES CHAIN PERFORMANCE Hering Store sales, which considers the sales from the stores network (owned and franchises) to final costumers ( sell-out ) decreased 8.9% totaling R$ 1.4 billion and same-store sales fell 8.6%. The negative effects of macroeconomic deterioration and consumption environment contributed to consumers flow reduction in stores across the country, resulting in decrease check-outs and, consequently, in units sold. Sales slowdown can also be partially attributed to temporary closure of stores as a result of Hering Store Refurbishment Program execution which covered 100 stores in 18 states. The current and modern design of the project, contemplated advances in consumer's shopping experience, through evolutions in VM, better lighting and organization, with redesigned sections for jeans and basics, among other improvements. The plan included incentives from the company of R$ 8.4 million as subsidy in addition to financing part of the amount invested. By the end of this cycle, approximately 1/3 of the stores network are already in the most up-to-date format. The outlet stores (Espaço Hering) showed good performance in the year. The segment grew doubledigit and contributed positively to the 3.0% growth in own stores sales. Average price per item increased 6.6% in the year and is explained, in part, by better inventory management over the year, resulting in fewer product leftovers, reducing sales of discounted items. In addition, better supply management led to healthier inventory levels, with fewer leftovers of past collections compared to previous year. 11

13 Hering Store Chain P erformanc e Chg / 2015 Number of Stores % Franchise % Owned % Sales (R$ thousand) ( 1 ) 1,436,8 34 1,5 77, % Franchise 1,198,684 1,346, % Owned 238, , % Same Store Sales growth ( 2 ) -8.6 % -3.5% bp Sales Area (sq. meter) 90,248 91, % Sales (R$ per sq. meter) 15,921 17, % Check-Outs 11,846,201 13,828, % Units 24,710,379 28,925, % Units per Check-Out % Average Sales Price (R$) % Average Sales Ticket (R$) % (1) The amounts referred to the sales to final costumers ('sell out') (2) Compared to the same period of the previous year 12

14 ECONOMIC AND FINANCIAL PERFORMANCE R$ Thousand 2016 Part. (%) 2015 Part. (%) Chg / 2015 Gross Revenue 1,748, % 1,900, % -8.0% Sales Deduction (273,295) -18.5% (311,212) -19.6% -12.2% Sales Deduction taxes (362,390) -24.6% (388,305) -24.4% -6.7% AVP (Adjustment to Present Value) (42,323) -2.9% (39,358) -2.5% 7.5% Sales Deduction Tax Incentives 131, % 116, % 12.9% Net Revenue 1,475, % 1,588, % -7.2% Total COGS - Excluding Depreciation and Amortization (865,031) -58.6% (935,487) -58.9% -7.5% Cost of Goods Sold (903,324) -61.2% (974,008) -61.3% -7.3% AVP (Adjustment to Present Value) 24, % 20, % 22.4% Subvention for Expenditure 13, % 18, % -26.3% Cash Gross Profit 610, % 653, % -6.6% Depreciation and Amortization (28,080) -1.9% (25,848) -1.6% 8.6% Gross Profit 582, % 627, % -7.3% Operating Expenses (431,104) -29.2% (411,855) -25.9% 4.7% Selling Expenses (325,344) -22.1% (318,494) -20.0% 2.2% Company (226,734) -15.4% (225,766) -14.2% 0.4% Fixed (121,660) -8.2% (119,891) -7.5% 1.5% Variable (105,074) -7.1% (105,875) -6.7% -0.8% Stores (98,610) -6.7% (92,728) -5.8% 6.3% Administrative and General Exp. and Mgmt Remun. (53,685) -3.6% (54,089) -3.4% -0.7% Depreciation and Amortization (28,567) -1.9% (21,329) -1.3% 33.9% Other Operating Income (Expenses), net (23,508) -1.6% (17,943) -1.1% 31.0% Operating Income Before Financial Results 150, % 215, % -30.0% Financial Income 90, % 77, % 16.7% Financial Expenses (44,289) -3.0% (38,485) -2.4% 15.1% Total Financial Income (Expenses) 46, % 39, % 18.2% Operating Income 197, % 255, % -22.6% Income and Social Contribution Taxes - Current 1, % 1, % 8.3% Income and Social Contribution Taxes - Deferred % 24, % -99.8% Net Income for the Period 199, % 281, % -29.1% Allocated to controlling shareholders 199, % 281, % -29.1% Earnings per share - R$ Allocated to controlling shareholders % EBITDA 207, % 262, % -21.0% EBITDA AND EBITDA MARGIN Earnings before interest, taxes, depreciation and amortization (EBITDA) reached R$ million, a 21.0% decrease in 2016, and EBITDA margin accounted 14.1% (-2.4 bp). The main factors associated with these results are: 8.0% decrease in gross sales; Gross margin of 39.5%, stable compared to The gain in margin resulting from better inventory management, which enabled lower leftovers of past collections, with a consequent volume reduction of markdown, was offset by non-dilution of fixed costs due to revenue retraction; Operating expenses increased 4.7%, result of (i) 2.2% growth in selling expenses, essentially due to wage readjustment, recognition of R$ 8.4 million as part of the subsidy to franchisees to refurbish Hering Stores and the net opening of 5 own stores in the year and (ii) a 31.0% increase in other operating income (expenses), mainly related to deposits on Protege Goiás Fund since April, partially offset by health and pension plan gains of an actuarial revaluation. 13

15 In 2016 there was no profit sharing as results were below planned. Reconciliation of EBITDA - R$ thousand NET INCOME AND NET MARGIN Chg / 2015 Net Income 199, , % (+) Income and Social Contribution Tax (1,817) (25,995) -93.0% (-) Net Financial Income (46,678) (39,476) 18.2% (+) Depreciation and Amortization 56,647 47, % (=) EBITDA 207, , % EBITDA Margin 14.1% 16. 5% bp Company's net income decreased 29.1%, amounting to R$ million, while net margin fell 420 bp. Affects the comparison base, the recognition of R$ 53.5 million gain in Income Tax and Social Contribution, in 2015, from the dissolution and liquidation of the subsidiary Hering Overseas and intercompany debt. The operating result deterioration, mentioned above, was partially offset by: Net financial income of R$ 46.7 million, 18.2% higher than the previous period, mainly due to higher volume of interest rate from customers and from financial operations, favored by the company's largest average cash position in the year; Positive effects in Income Tax and Social Contribution relating to the exclusion of (i) higher investment subsidy led by an increase in local products share in sales mix and (ii) Interest on Capital 35.5% higher than In the year, Operating Income (before taxes on profit) was lower than the total of these exclusions, which explains the gain in Income Tax and Social Contribution. CAPITAL EXPENDITURES Investments totaled R$ 51.3 million in 2016 and were allocated as follows: R$ 25.3 million to stores, focused on renovating own stores, opening 5 stores and acquiring points of sale; R$ 13.0 million to systems acquisition and to the implementation of SAP system concluded at the beginning of the year; R$ 12.5 million to industrial plants, a 74% reduction after investment cycle occurred in 2015, that culminated with the launch of São Luís de Montes Belos (GO) manufacturing plant, as well investments directed to the company's largest distribution center in Goiás. 14

16 CASH FLOWS In 2016, Cia. Hering posted positive free cash flow of R$ million, R$ 94.7 million higher than 2015, mainly due to a reduce in working capital needs and lower investments, that more than offset EBITDA decline in the period. As part of the Store Refurbishment plan, a portion of the amount invested by franchisees was financed by the company, and R$ 14.7 million remained as receivable, on December 31, recorded under 'other accounts receivable. Cash Flow - Consolidated (R$ thousand) Chg. EBITDA 207, ,876 (5 5,3 0 7) No cash items 21,176 25,693 (4,517) AVP (Adjustment to Present Value) - Clients and Suppliers 20,326 18,219 2,107 Current Income tax and Social Contribution 1,766 1, Working Capital Capex 9,847 (96,812) 106,659 Decrease in trade accounts receivable 29,688 9,931 19,757 (Increase) decrease in inventories 4,020 (28,908) 32,928 Increase (decrease) in accounts payable to suppliers 21,081 (20,420) 41,501 (Decrease) in taxes payable (14,707) (24,745) 10,038 Refurbishment Project - Franchisee Financing (14,665) (734) (13,931) Others (15,570) (31,936) 16,366 CapEx (5 1,314) (96,9 15) 4 5,6 0 1 Free Cash Flow 209, ,692 94,678 Reconciliation from accounting Cash flow to adjusted Cash flow (R$ thousand) Chg. DFC - Cash provided by operating activities 287, ,654 55,092 Adjustment Financial items allocated to operating cash (27,062) (21,047) (6,015) Unrealized exchange and monetary variation (804) (663) (141) Financial Result (46,678) (39,476) (7,202) AVP (Adjustment to Present Value) - Clients and Suppliers 20,326 18,219 2,107 Interest paid on loans (779) DFC - Cash flows from investing activities (51,314) (96,915) 45,601 Free Cash Flow 209, ,692 94,678 * The adjusted cash flow as presented above is not a Brazilian Generally Accepted Accounting Practice and IFRS financial performance measurement. The information on this table was calculated for the management of the Company and has not been audited by independent auditors. ** Working Capital provisions in this Cash Flow Statement were reported as Non-cash items, which explains the difference between the reported figures in the balance sheet. INDEBTEDNESS For another year Cia. Hering ends the fiscal year with net cash, aligned with a conservative financial management policy. At the end of 2016 there was R$ million in cash and cash equivalents and a net cash position of R$ million. The increase in cash is due to the strong cash generation in the year, as mentioned in the respective section. % of % of Indebtedness - R$ thousand total debt total debt Short Term (2,123) 8% (1,308) 100% Long Term (25,612) 92% - 0% Total (27, 735) 100% (1, 308) 100% (-) Cash and Cash Equivalents 204, ,093 (=) Net Cash 177, ,785 15

17 SHAREHOLDERS COMPENSATION Dividend payout already paid for the fiscal year 2016 totaled R$ million, as detailed below: On May 24, 2016, the Company s Board of Directors approved R$ 42.1 million (R$ per share) paid on June 28, On October 26, 2016, were approved R$ 40.0 million (R$ per share) based on the shareholder s position dated November 4, The payment was made on November 29, On November 30, 2016 were approved R$ 42.0 million in interest on capital (R$ per share) based on the shareholder s position date December 7, The payment was made on December 16, In addition to the amount already distributed, Management will submit to the Annual Shareholders' Meeting to be held in April 2017 the approval of R$ 75.0 million in additional dividends, which, if approved, will represent a payout ratio for the year of 99.8%, as shown below. Payout Proposal R$ million R$ per share¹ Aproved in Record date Paid in Already paid Interest on capital /24/ /30/ /28/2016 Dividends /26/ /04/ /29/2016 Interest on capital /30/ /07/ /16/ Proposed Additional dividends ² To be defined ² To be defined ² To be defined ² = Total payout proposed ² Net Income - Attributable to shareholders Payout ratio 99.8% ¹ Value per share net of treasury shares - when applicable. ² To be approved at General Shareholders' Meeting. BUYBACK PROGRAM There was no share buyback related to the program approved at a meeting held on 07/29/2015, authorizing the acquisition of up to 8 million shares, corresponding to 6.38% of total outstanding shares, which ended on 07/27/2016. On 07/28/2016 the Board of Directors approved the renovation of the program for another 12 months and therefore will be closed on 7/27/2017. Under this program, there was no share repurchases in ACKNOWLEDGEMENTS In 2016, Cia. Hering received important awards that reflected the market s acknowledgement to its performance: 25 th Most Valuable Brazilian Brands (Interbrand) Excellence in Franchising 2016 (ABF) Most Admired Companies in Brazil (Officina Sophia) Most Democratic Brands in Brazil (Consumidor Moderno magazine) Estadão Best Textile Retail Services (Estadão) 100 Best Companies in Corporate Citizenship (Gestão RH magazine) Top of Mind (Instituto Mapa in partnership with Grupo RBS) 16

18 The most admired HR in Brazil (Gestão RH magazine) Estadão Empresas Mais (Estadão) Transparency Cup 2016 (ANEFAC) EMPLOYEES During 2016, we improved our people management actions, enabling greater focus on our business through a structure based on brand management in order to improve our skills to support our future growth. The Company ended the year with 7,195 employees. CAPITAL BUDGET - MANAGEMENT S PROPOSAL The Company presents in the table below, the capital budget for the fiscal year of 2017, according to the Normative Instruction 480/09, published by CVM on December 07, Capital budget and working capital Investments R$ thousand Stores 22,000 Industry 14,725 Logistics 14,347 IT 16,829 Total 67,901 Company Capital (Cash flow from operation) 67,901 INDEPENDENT AUDITORS Cia. Hering policy with its independent auditors is referred to the provision of services not related to external auditing based on principles that preserve the independence of the auditors. These principles are based on the fact that the auditor should not assess his/her own work, nor carry out managerial functions or even advocate for its customer. During the period ended on December 31, 2016, the Company s independent auditors were not hire for other services beyond the examination of the financial statements of the period. ARBITRATION CLAUSE The Company, its shareholders, managers and the Fiscal Board (when needed) members undertake to resolve by arbitration, every and all dispute or controversy which may arise among them, especially related to or derived from enforcement, validity, effectiveness, construal, violation and its effects of provisions contained in the Brazilian Corporation Law number 6,404/76, in the Company s Bylaws, in the rules issued by the Brazilian Monetary Committee (CMN), by the Brazilian Central Bank and by the Brazilian Securities and Exchange Commission (CVM), as well as other rules related to the capital markets operation in general besides those included in the Novo Mercado Listing Regulation, in the Novo Mercado Listing Agreement and in the Arbitration Regulation of the Market Arbitration Panel. 17

19 (Convenience Translation into English from the Original Previously Issued in Portuguese) CIA. HERING BALANCE SHEETS AS AT DECEMBER 31, 2016 AND 2015 (In thousands of Brazilian Reais - R$) Assets Parent company Consolidated Parent company Consolidated Liabilities Note Note Current assets Current liabilities 1.0Cash and cash equivalents 5 201, , , , Borrowings and financing 16 2,123 1,308 2,123 1, Trade accounts receivable 7 448, , , , Trade payables 172, , , , Inventories 9 308, , , , Payroll and related taxes 44,733 42,214 44,733 42, Recoverable taxes 10 25,352 32,635 25,358 32, Taxes in installments Derivative financial liabilities 23-4,620-4,620 Income and social contribution taxes Other accounts receivable 8 18,926 6,058 18,926 6, Taxes payable 18 20,526 20,148 20,557 20, Prepaid expenses 1,678 1,024 1,678 1, Provisions for risks 20 2,000 1,700 2,000 1,700 Other provisions 20 24,865 20,954 24,865 20,954 1,004, ,509 1,007, , Tax incentive obligations 19 1,501 11,332 1,501 11, Interest on equity and dividends payable Related parties 21 1,548 1, Derivative financial liabilities 23 1,525-1, Other accounts payable 2,378 9,742 4,109 11, , , , ,072 Noncurrent assets Noncurrent liabilities 1.0Interest-earning bank deposits 6 4,824 2,994 4,824 2, Recoverable taxes 10 24,631 14,515 24,631 14,515 Borrowings and financing 16 25,612-25, Deferred taxes 11 42,680 39,638 42,680 39, Taxes in installments 17 3,339 7,488 3,339 7,488 Trade accounts receivable 7 4,078-4, Provisions for risks 20 10,908 9,471 10,908 9,471 Other accounts receivable 8 18,154 10,730 18,154 10, Other provisions 20 1,983 1,788 1,983 1,788 Employee Benefits , ,372 Investments in subsidiaries 13 2,702 3, Tax incentive obligations 19 2,029 3,218 2,029 3,218 Property, plant and equipment , , , , Other accounts payable Intangible assets , , , , ,025 36,337 44,132 36, , , , , Shareholders' equity 24 Capital 359, , , , Capital reserve 26,085 20,569 26,085 20,569 Treasury shares (4,614) (41,323) (4,614) (41,323) 2.05Earnings reserve 822, , , , Valuation adjustments to equity 5,648 11,577 5,648 11, Additional dividends proposed - 39,994-39,994 Controlling shareholders 1,209,407 1,173,964 1,209,407 1,173,964 1,528,282 1,471,948 1,528,691 1,472,492 1,528,282 1,471,948 1,528,691 1,472,492 The notes are integral part of these financial statements

20 (Convenience Translation into English from the Original Previously Issued in Portuguese) CIA. HERING INCOME STATEMENTS YEARS ENDED IN DECEMBER 31, 2016 AND 2015 (In thousands of Brazilian Reais - R$) Parent company Consolidated Note Net revenue 28 1,471,249 1,585,293 1,475,137 1,588, Cost of goods sold 29 (893,111) (961,335) (893,111) (961,335) Gross profit 578, , , ,554 Operating income (expenses) Selling expenses 30 (325,344) (318,478) (325,344) (318,494) Administrative and general expenses 31 (44,572) (45,504) (44,601) (45,511) Management remuneration 21 (9,041) (8,544) (9,084) (8,578) Depreciation and amortization (28,567) (21,329) (28,567) (21,329) Other operating income (expenses), net 32 (23,067) (17,796) (23,508) (17,943) Operating income before financial results 147, , , , Financial income 33 90,911 76,198 90,967 77,961 Financial expenses 33 (43,926) (40,575) (44,289) (38,485) Financial result, net 46,985 35,623 46,678 39, Equity in income 13 2,644 6, Net income before income and social contribution taxes 197, , , , Income and contribution taxes - current 34 2,190 2,041 1,766 1, Income and contribution taxes - deferred , ,364 Net income for the period 199, , , ,170 Allocated to: Controlling shareholders 199, , , ,170 Earnings per share - R$ Basic earnings per share Diluted earnings per share The notes are integral part of these financial statements. 19

21 (Convenience Translation into English from the Original Previously Issued in Portuguese) CIA. HERING STATEMENT OF COMPREHENSIVE INCOME YEARS ENDED IN DECEMBER 31, 2016 AND 2015 (In thousands of Brazilian Reais - R$) Parent company Consolidated Note Net income 199, , , ,170 Other comprehensive income Items that will not be reclassified to profit: Employees benefits - Private pension plan 22 (46) 215 (46) 215 Employees benefits - Health Plan 22 (57) (1,506) (57) (1,506) (103) (1,291) (103) (1,291) Items that can be subsequently reclassified to profit: Fair value of financial instruments of cash flow hedge 23 (5,702) (525) (5,702) (525) (5,702) (525) (5,702) (525) (5,805) (1,816) (5,805) (1,816) Comprehensive income 193, , , ,354 Profit allocated to: Controlling shareholders 193, , , ,354 The notes are integral part of these financial statements. 20

22 (Convenience Translation into English from the Original Previously Issued in Portuguese) CIA. HERING STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY YEARS ENDED IN DECEMBER 31, 2016 AND 2015 (In thousands of Brazilian Reais - R$) Parent company Profit reserves Capital Capital reserve Tax incentives Legal reserve Profit retention Treasury shares Additional dividends proposed Accumulated profit Equity valuation adjustment Other comprehensive income Total Interest of noncontrolling shareholders Total shareholders' equity Balances at December, ,086 14, ,888 47, ,125 (11,882) 49,998-12,332 1,076, ,076,077 Actuarial adjustment employee benefits - pension plan and health (note 22) (1,291) (1,291) - (1,291) Transfer actuarial adjustment employee benefits - pension plan and health (note 22) (1,291) 1, Stock option plan (note 27) - 5, ,573-5,573 Treasury shares (44,988) (44,988) - (44,988) Treasury shares cancel (15,547) 15, Realization of indexation of PP&E (230) Adjustment financial instruments (terminated) - hedge accounting (3,483) (3,483) - (3,483) Adjustment financial instruments (outstanding) - hedge accounting ,958 2,958-2,958 Additional dividends proposed in 2014 paid in (49,998) - - (49,998) - (49,998) Capital increase to legal reserve 33, (33,282) Transfer of tax incentive reserve - - (12) Non-controlling interests in the equity (9) (9) Net income for period , , ,170 Destinations: Legal reserve (note 24.d) , (14,059) Tax incentives reserve (note 24.d) , (106,422) Dividends and Interest on shareholders' equity (note 24.e and 25) (92,045) - (92,045) - (92,045) Additional dividends proposed (note 24.e) ,994 (39,994) Proposition of a profit retention reserve (note 24.d) , (27,601) Balances at December, ,368 20, ,298 28, ,179 (41,323) 39,994-11,577 1,173,964-1,173,964 Actuarial adjustment employee benefits - pension plan and health (note 22) (103) (103) - (103) Transfer actuarial adjustment employee benefits - pension plan and health (note 22) (103) Stock option plan (note 27) - 5, ,516-5,516 Treasury shares cancel (36,323) 36, Treasury shares sold (10) Realization of indexation of PP&E (227) Adjustment financial instruments (terminated) - hedge accounting (4,092) (4,092) - (4,092) Adjustment financial instruments (outstanding) - hedge accounting (1,610) (1,610) - (1,610) Additional dividends proposed in 2015 paid in (39,994) - - (39,994) - (39,994) Capital increase to profit retention reserve 13, (13,056) Net income for period , , ,417 Destinations: Legal reserve (note 24.d) , (9,971) Tax incentives reserve (note 24.d) , (130,226) Dividends and Interest on shareholders' equity (note 24.e and 25) (124,067) - (124,067) - (124,067) Use of profit retention reserve for payment of dividends and interest on shareholders' equity (64,723) , Balances at December, ,424 26, ,524 38, ,067 (4,614) - - 5,648 1,209,407-1,209,407 The notes are integral part of these financial statements. - 21