ADDITIONAL INFORMATION TO THE COMPLETE CONSOLIDATED QUARTERLY REPORT FOR Q3 2017

Transcription

1 ADDITIONAL INFORMATION TO THE COMPLETE CONSOLIDATED QUARTERLY REPORT FOR Q Name and registered office of the Company: REDAN S.A., ul. Żniwna 10/14, Łódź Registry court and entry number in the National Court Register: District Court for Łódź-Śródmieście in Łódź 20th Division of the National Court Register, KRS Principal business activity of the Company and its subsidiaries according to the Polish Classification of Business Activity (PKD) 2007: Z wholesale of clothing and footwear, and Z retail sale of clothing. REDAN S.A. s shares are listed on the main market of the Warsaw Stock Exchange in the trade sector. The duration of the Company is indefinite.

2 Table of contents MANAGEMENT S DISCUSSION AND ANALYSIS OF PERFORMANCE IN Q1 Q FACTORS AND EVENTS WITH MATERIAL EFFECT ON FINANCIAL PERFORMANCE IN Q1 Q Analysis of performance in Q1 Q Structure of the Redan Group s sale of goods The Redan Group s distribution channels 7 2 THE REDAN GROUP'S PROFIT/LOSS IN Q1 Q BY DISTRIBUTION CHANNELS Performance of the discount segment Performance of the fashion segment Events subsequent to the end of the reporting period 14 3 FACTORS WHICH WILL AFFECT THE PERFORMANCE AT LEAST IN THE FORTHCOMING QUARTER 14 4 STRUCTURE OF THE REDAN GROUP Organisation of the Redan Group Consolidated subsidiaries 16 5 ACCOUNTING POLICIES Significant accounting policies Accounting policies 18 6 ADDITIONAL INFORMATION Management Board s opinion regarding the feasibility of meeting previously published forecasts Adjustments of provisions, deferred tax liabilities and assets, and impairment losses on assets Seasonality or cyclicality in the Company s business during the reporting period Segment information The Company's issued capital Dividends Court proceedings Related party transactions Loans, borrowings, sureties and guarantees Other information which is material for the assessment of the staffing levels, assets, financial standing and financial performance of the Company, or any changes therein, and information relevant to the assessment of the Company s ability to meet its obigations 22 7 MANAGEMENT BOARD'S REPRESENTATION 22 Page 2 of 23

3 Management s discussion and analysis of performance in Q1 Q In Q1 Q3 2017, the Redan Group posted an operating loss of PLN 24.4m, which was PLN 23m greater than a year before. This mainly resulted from the fact that costs of operations grew faster (up 13.8%, or PLN 25.2m) than the sales margin (up 1.2%, or PLN 2.2m). The Group also recorded a PLN 2.4m year-on-year drop in net finance income/costs. This stemmed from: (i) a foreign exchange loss of PLN 0.9m, and (ii) an increase in finance costs to PLN 1.6m. In 2017, comprehensive income attributable to shareholders of Redan dropped by PLN 10m year on year, resulting in a comprehensive loss of PLN 15m. However, in contrast to previous years, the performance of the fashion segment improved, reaching the break-even point (EBIT higher by PLN 8.1m year on year). EBIT in the discount segment dropped significantly by PLN 24.3m. The worse performance of the TXM network was mainly attributable to unsuccessful implementation of a management support system in February 2017 and the resulting problems with the proper stocking of stores, as well as a failure to properly modify the product mix to adjust it to larger stores operated as part of the new concept. The negative consequences of lower average sales per square metre were mostly seen in the first half of the year, while in the third quarter the Company implemented short-term corrective measures aimed at increasing sales and reducing inventories. These measures included: (i) sales on an above-average scale for the discount segment; (ii) intensified marketing efforts to attract more customers; and (iii) strict verification of orders of goods. As a result of these activities the average sales per square metre increased and inventory turnover and volume improved, but this came at the price of a drop in the percentage margin and higher marketing expenses. In the third quarter of 2017, the change in the composition of the Management Board of TXM S.A. actually took effect. The new, experienced management staff began to act with a view to restoring profitability of the discount segment and bringing it back to the growth path. A positive fact is that its worse performance was caused by internal factors, while the external environment remains favourable. The discount segment is the fastest growing segment of the clothing market, which will help improve TXM s performance. In the nine months of 2017, the fashion segment recorded an operating profit of PLN 0.4m, and cumulatively for the last 12 months operating profit was PLN 4.1m. This confirms that the strategy which was revised at the end of 2015 has brought tangible results in the form of generated profit. The source of success is the improved choice management. New collections are more diverse. This allows us to sell products with higher margins and at the same time reduce the scale of sales of products from previous seasons thanks to their lower volume. Costs of operations are also controlled effectively. In each of the three quarters of the year Top Secret reported a year-on-year growth in operating results. This confirms that the upward trend is sustainable and stems from the introduced changes. The unexpected deterioration of performance of the discount segment caused a breach of financial covenants under credit facility agreements concluded with banks. There have been no disruptions in cooperation with PKO BP S.A. and ING Bank Śląski S.A., which finance TXM S.A.'s operations. Despite the improved performance of the fashion segment, HSBC Bank Polska S.A., which finances the segment, intends to reduce its commitment. Page 3 of 23

4 1 Factors and events with material effect on financial performance in Q1 Q Analysis of performance in Q1 Q The table below presents the analysis of the Redan Group s consolidated performance in Q1 Q and Q1 Q Table 1. Selected items from the Redan Group s statement of comprehensive income for Q1 Q and Q1 Q PLN thousand Q1 Q Q1 Q Change (%) Change (Δ) Revenue 437, , % 2,226 Gross profit/(loss) 183, , % 2,171 Gross margin 42.0% 41.7% 0.3% Distribution costs and administrative expenses 207, , % 25,199 Profit/(loss) on sales -24,258-1,230-1,873% -23,028 Gross margin on sales -5.5% -0.3% -5.3% Net other income/expenses % -108 Operating profit/(loss) -24,441-1,305-1,773% -23,136 EBIT margin -5.6% -0.3% -5.3% EBITDA -16,015 4, % -20,660 Net finance income/costs -2,448 1, % -3,531 Other gain/(loss) leave from the Group Profit/(loss) before tax -26, ,021% -26,655 Pre-tax margin -6.1% -0.1% -6.1% Income tax expense -3,616 2, % -6,374 Net profit/(loss) -23,261-2, % -20,281 Net margin -5.3% -0.7% -4.6% Exchange differences on translating foreign operations % -563 Total comprehensive income -24,123-3, % -20,844 Total comprehensive income attributable to non-controlling interests Total comprehensive income attributable to owners of the parent Total margin -5.5% -0.8% -4.8% -9,140 1, % -10,835-14,983-4, % -10,009 In the period from January to the end of September 2017, the Redan Group suffered a gross loss of PLN 24.3m, which was greater by PLN 23m than in the corresponding period of the previous year. It resulted from a loss incurred in the discounted segment (performance weaker by PLN 31.4m), which was partly offset by an improved result and a profit recorded in the fashion segment (up by PLN 8.2m). The performance of both segments is discussed in detail in Section 3. At the end of Q3 2017, net other expenses were PLN 0.2m, down by PLN 0.1m over the same period of the previous year. Page 4 of 23

5 Table 2. Operating income and expenses in Q1 Q and Q1 Q Q1 Q Q1 Q Other Revaluation of liabilities Grants Donations Net gain/loss on sale of non-financial assets Provisions for receivables Net recognised/reversed impairment losses on property, plant and equipment The key items include: Other income/expenses These items include other income and expenses which are not classified under other items, including PLN 141 thousand of received compensation and sale of capital expenditure to the owner of premises, which agreed to participate in investment costs. Revaluation of liabilities In 2017, these mainly related to written-down, past due liabilities. Grants The item covers grants for modernisation of stores accounted for at amortised cost. Donations The item includes donations transferred to the Happy Kids Children s Aid Foundation, which represent the margin on the sale of advertising bags with the logo of the foundation at stores. Change in provisions for receivables The key factor which determined the amount of this item was the recognition of an allowance for debts of PLN 0.3m and writing down past due and cancelled receivables of PLN 0.2m. In Q1 Q3 2017, the Group reversed allowances for receivables in the amount of PLN 0.1. Net recognised/reversed impairment losses on property, plant and equipment This item includes the provision for the discount segment s property, plant and equipment located in unprofitable stores. In Q1 Q3 2017, net finance costs amounted to PLN 2.4m, representing a drop in finance income/expenses by PLN 3.5m over the same period of the previous year. Details are presented in the table below. Table 3. Finance income and costs in Q1 Q and Q1 Q Q1 Q Q1 Q Interest expense, commissions, etc. -1,589-1,326 Exchange differences ,518 Other Total -2,448 1,083 Page 5 of 23

6 The key items include: Interest expense These relate to the Group s debt under bank borrowings, loans and leases. Exchange differences In Q1 Q3 2017, the Group incurred a foreign exchange loss. Due to a rapid appreciation of the US dollar against the złoty in Q and based on a recommendation of the Group s advisor on its currency exposure management, the Group increased the value of its forward contracts to buy US dollars. Such transactions were also executed in Q An unexpected reversal of the trend and weakening of the US dollar against the złoty resulted in a loss incurred by the Group on these transactions, which exceeded the foreign exchange gains under US dollar-denominated liabilities. Other The net income recorded in 2016 resulted from a reversal of provisions for potential use of guarantees of rental payments related to stores, which were recognised at the end of Following the conclusion with lessors of agreements improving the terms of lease of store premises, the risk of using the guarantees was significantly reduced and the relevant provisions could be reversed. In 2017, the item other amounted to PLN 12 thousand. In 2017, the effect of income tax on the net profit/loss was reversed. The Group s income tax had a positive effect on net profit/loss. This resulted from the recognition of a deferred tax asset of PLN 4.3m as a result of losses incurred at the companies in the discount segment, which was partially offset by current tax expense of PLN 0.7m. The net profit/(loss) also reflects exchange differences arising on the translation of the financial statements of foreign operations into Polish złoty. In Q1 Q3 2017, the net foreign exchange loss was PLN 0.9m, whereas in 2016 it was PLN 0.3m. The loss incurred in2017 was mainly attributable to two currencies: the Romanian leu (RON) and the Russian ruble (RUB). The depreciation of RON by 4.3% resulted in a loss of PLN 0.2m and the weakening of RUB by 9.6% translated into a loss of PLN 0.6m. In Q1 Q3 2017, total comprehensive income attributable to non-controlling interests was down by PLN 10.8m year on year, resulting in a loss of PLN 9.1m. This item shows the share of comprehensive income of a subsidiary TXM S.A. attributable to non-controlling interests holding 43.55% of shares in the subsidiary. The total comprehensive loss attributable to non-controlling interests results from a loss suffered by TXM S.A. In aggregate, total comprehensive income dropped year on year by PLN 20.8m. This mainly resulted from: (i) weaker sales performance in the discount segment, (ii) stronger sales performance in the fashion segment, and (iii) net finance costs (instead of finance income), including a net foreign exchange loss on translating foreign operations. 1.2 Structure of the Redan Group s sale of goods The table below presents the structure of the Redan Group s consolidated revenue. Table 4. Structure of the Redan Group s revenue in Q1 Q and Q1 Q PLN thousand Q1 Q Share Q1 Q Share Change Sale of goods 427, % 429, % -0.3% Sale of services 9, % 6, % 52.6% Total sales 437, , % In Q1 Q3 2017, revenue from sale of services increased by 52.6%, or PLN 3.3m. The rise was attributable Page 6 of 23

7 to the discount segment and resulted from the introduction of mobile phone charging and sale of logistics services. Table 5. Structure of the Redan Group s sale of goods by segments in Q1 Q and Q1 Q PLN thousand Q1 Q Share Q1 Q Share Change Discount segment 264, % 259, % 2.1% Fashion segment 163, % 169, % -3.9% Total sale of goods 427, , % * The data presented in the table above does not accurately correspond with the segments identified in accordance with IFRS 8, as disclosed in Note 4 to the financial statements, because in the opinion of the Redan Group intragroup wholesale, which must be disclosed separately under IFRS 8, does not strictly constitute a separate operating segment and is not analysed for management purposes. In 2017, the discount segment s share in total sales improved by 2.1 pp, which was primarily a consequence of the rapid expansion of the retail space of TXM textilmarket stores, with revenue in the fashion segment relatively unchanged compared with the previous year. Table 6. Structure of the Redan Group s sale of goods in Q1 Q and Q1 Q by region PLN thousand Q1 Q Share Q1 Q Share Change Sales in Poland 370, % 389, % -5.1% Sales abroad 57, % 39, % 47.8% Total sale of goods 427, , % In 2017, the share of sale of goods in foreign markets increased, which mainly resulted from the expansion of the TXM textilmarket chain in Slovakia and Romania. 1.3 The Redan Group s distribution channels At the end of September 2017, total retail space of stores was: approximately thousand m 2 (399 own stores) in the discount segment in Poland and abroad, having increased by 18% compared with the end of the same period in 2016; approximately 37.5 thousand m 2 (271 stores, including 30 own stores, 236 franchise stores and 5 multi-brand franchise corners) in the fashion segment in Poland and abroad, having decreased by about 9% compared with the end of September In the reporting period, the Redan Group companies also sold goods through the following online stores: in the fashion segment; in the discount segment. 2 The Redan Group's profit/loss in Q1 Q by distribution channels The table below presents the profit earned/loss incurred by individual distribution channels of the Redan Group in Q1 Q Table 7. The Redan Group s statement of comprehensive income in Q1 Q by distribution channels PLN thousand Discount segment Fashion segment Administrative expenses and nonoperating activities The Redan Group Page 7 of 23

8 Revenue 269, , ,610 Gross profit/(loss) 108,103 75, ,737 Distribution costs and administrative expenses Gross margin 40.2% 44.9% 0.0% 42.0% 132,200 75, ,995 Profit/(loss) on sales -24, ,258 Gross margin on sales -9.0% 0.2% 0.0% -5.5% Net other income/expenses Operating profit/(loss) -24, ,441 EBIT margin -9.0% 0.3% 0.0% -5.6% EBITDA -18,062 1, ,015 Net finance income/costs , ,448 Profit/(loss) on leaving the Group Profit/(loss) before tax -24,736-1, ,877 The data on individual distribution channels covers: Pre-tax margin -9.2% -0.8% 0.0% -6.1% Discount segment (TXM textilmarket chain) performance of TXM S.A., which operates a network of TXM textilmarket discount stores in Poland and abroad as well as the txm24.pl online store, consolidated with the results of Adesso Sp. z o.o. (a tenant of the logistics base for the discount network), foreign subsidiaries of TXM and Redan S.A. s margin on the sale of goods to TXM S.A. Fashion segment (Top Secret, Troll and Drywash brands) sales and margin attributable to the Top Secret, Troll and Drywash brands in Poland and abroad, online stores, cost of operating retail stores and direct distribution channels, full cost of design, purchases, marketing and logistics related to those brands, margins and cost of sales from Redan S.A. to external customers. Administrative expenses and non-operating activities Redan S.A. s administrative expenses and costs of transactions which are not related to the core business of the Redan Group, i.e. the sale of clothing. Because the transactions related to individual distribution channels may occur at different Redan Group companies, relevant data on sales, margins and costs is presented in accordance with the rules of consolidation of financial statements. 2.1 Performance of the discount segment Inexpensive and fashionable clothes for the whole family The performance of the discount segment in Q1-Q is presented in the table below. Table 8. Selected items from the statement of comprehensive income related to the discount segment for Q1 Q and Q1 Q PLN thousand Q1 Q Q1 Q Change (%) Change (Δ) Revenue 269, , % 9,492 Gross profit/(loss) 108, , % -170 Gross margin 40.2% 41.7% -1.5% Distribution costs and administrative expenses 132, , % 31,275 Profit/(loss) on sales -24,097 7, % -31,445 Page 8 of 23

9 Gross margin on sales -9.0% 2.8% -11.8% Net other income/expenses % 168 Operating profit/(loss) -24,267 7, % -31,277 EBIT margin -9.0% 2.7% -11.7% EBITDA -18,062 10, % -28,862 Net finance income/costs % 99 Other gain/(loss) leave from the Group Profit/(loss) before tax -24,736 6, % -31,166 Pre-tax margin -9.2% 2.5% -11.7% The amounts presented above differ from the relevant amounts disclosed in the consolidated financial statements of TXM S.A. due to the following differences: (i) addition of margin and allocation of costs, including finance costs, related to the imports of goods by Redan for TXM S.A., and (ii) elimination of transactions between Redan and discount segment companies (depreciation and amortisation etc.) and differences resulting from different dates of consolidation (depreciation and amortisation). In Q1 Q3 2017, the TXM Group suffered a gross loss of PLN 24.1m, which directly resulted from the fact that revenue grew at a slower pace than the Group s operating expenses, which were driven by the expansion of retail space and the scale of operations. I. Identified causes of weaker performance The key reasons behind the recorded results were as follows: Incorrect stock replenishment at stores as a result of unsuccessful implementation of a new IT system What most significantly weighted on the average sales per square metre in H1 2017, and consequently in Q1 Q3 2017, was incorrect stock replenishment at stores. The irregularities consisted of: o insufficient deliveries of goods from warehouses to stores (in February and March 2017), which resulted in insufficient quantities of stock in stores; o wrong deliveries of goods to stores, and o delays in the delivery of goods to stores. These problems resulted from: o incorrect operation of the new management support system implemented in February 2017 In particular, in the first period (February and March of 2017) the new solutions did not make it possible to issue documents for the part of goods dispatched from the warehouse. This problem was solved at the end of March. For several months, due to the improper operation of interfaces, the information on stock levels at stores and the margin was not fully reliable. o incorrect definition of store capacity At the stage of system implementation, the changes related to stock levels consisted in defining store capacity taking into account its equipment and assigning specific product groups to such available equipment. In the case of certain stores the capacity of such equipment was specified incorrectly. In particular, this resulted in excess build-up of stocks at smaller stores and insufficient stocks at larger stores. In addition, stocks were replenished based on such fixed capacities, without taking into account the rotation of individual product groups at individual stores. As full management information was virtually not available immediately after the implementation of the new system, the irregularities were not identified until Q o delays in deliveries of goods from suppliers Higher retail space results in more goods displayed at stores. Failure to meet sales targets associated with the expansion of retail space caused an increase in liabilities to suppliers for goods supplied, including past due liabilities. For TXM this was an unusual situation, as the Company has Page 9 of 23

10 been a very reliable counterparty and it did not have in place any relevant procedures for maintaining relationships with trading partners in such circumstances. In effect, some suppliers limited or temporarily suspended the supply of goods. At present, the Company remains in contact with suppliers and negotiates debt repayment schedules and extension of repayment dates (in line with standard market terms). In the majority of cases the Company is not subject to any restrictions regarding the purchase of goods. The consequences of these problems included: o deficiencies in stock replenishment between February and mid-april; o inefficient stocking of the chain stores they were stocked with available goods, but lack of up-todate information on stock levels sometimes caused goods to not be supplied to the stores which should have received them; o after a period of insufficient supplies, in late March and early April the stores received excessive supplies of delayed spring collections, which should have been delivered in February and early March, and at that time the sales period was slowly coming to an end; o significant delay in the availability of the spring-summer offering, especially in Romania, as well as reduced possibility of displaying it; o unavailability of the offering relevant for the season and its incompleteness resulted in a lower number of customer visits at stores and a lower number of transactions. Design of a sub-optimal choice structure for the new concept of larger stores In 2015, TXM decided to launch a new format of stores. The retail space was intended to be larger, up to approximately square metres (compared with the existing ca. 220 square metres), so that they could accommodate a wider product range and be more competitive, including in large cities. In particular, the extended offering was expected to include product categories other than clothing, mainly homewares, in order to reduce the impact of weather changes on sales. Unfortunately, the strategic approach to the change of the store format was not implemented along with the necessary extension of the product mix, which should have been offered to customers at these stores, and addition of homewares proved unsuccessful (longer rotation periods, lack of higher margin). In effect, on average the new format stores had lower stock levels than smaller stores. The irregularities in the offering structure at the stores in the new, larger format, consisted in: o generally insufficient stocks: -22% per square metre compared with smaller stores in the previous format; o failure to introduce a wider product range and extend the choice for customers; additional stocks at these stores resulted from adding more items of the same model; o defining an incorrect structure of stocks at such stores, as a result of which they directly contributed to lower sales per square metre of these stores, which led to their worse performance. These factors are particularly noticeable in Romania, where new stores were opened only in the larger format. Taking into account all these issues as well as additional factors that make the Romanian market different from the Polish market, which were also not reflected in the offering (including slightly different weather changes during the year, somewhat different customer expectations, such as no sales of tights and socks in the summer, or differences between holidays and events that are important to the market, e.g. back to school), sales per square metre generated in the Romanian market were significantly lower than in Poland. II. Short-term corrective measures in Q Given the performance recorded in H1 2017, in Q the company implemented short-term corrective measures aimed at increasing sales and reducing inventories. These included: o sales on an above-average scale for the discount segment; o intensified marketing efforts involving higher frequency and greater coverage of issued promotional catalogues to attract more customers; Page 10 of 23

11 o strict verification of orders of goods. As a result of these activities the average sales per square metre increased and inventory turnover and volume improved, but this came at the price of a drop in the percentage margin and higher marketing expenses. In Q3 2017, as a result of the measures taken the average sales per square metre is different only by 7% from the amount recorded in 2016, while in Q1 and Q2 the difference was approximately 20%. The improved sales per square metre was directly affected by higher number of customer visits at TXM stores the year-on-year change in H was -14%, while in Q it decreased to -6%. The sales efforts and strict procurement policy resulting directly from the prepared plans resulted in the fact that the inventory turnover in Q was the same as in the previous year. The value of average stocks per square metre at 30 September was higher year on year by only 2%, while at the end of Q the year-on-year change was 18%. The change in the percentage margin in Q resulted from deliberate steps taken to boost sales and liquidate part of off-season or slowly moving stock. III. Restoration of profitability and growth of the TXM network In the opinion of the Management Board of TXM, the current situation a drop in sales is caused by the Company s internal factors rather than developments in the external environment. The discount market is still the fastest growing segment of the clothing industry. The new management of TXM has set two directions of efforts to be pursued simultaneously: (i) continuation of ongoing short-term corrective measures, and (ii) implementation of strategic changes. In the short term, efforts are made to ensure optimum stocking of stores with products that customers look for and expect. The Company continues, albeit to a more limited, target-focused extent, its sales efforts, transfers of merchandise between stores and the implementation of plans with respect to sale, purchase and supply of merchandise. Extensive work is carried out with respect to long-term activities and projects aimed at: increasing sales per square metre, The key initiatives include: (i) change of the design of the product offering for customers to take into account the diversity of the sales network; (ii) launch of a new customer communication strategy; and (iii) improvement of operational efficiency. increasing sales margin, The key initiatives include: (i) further increase of the share of direct imports in purchases of goods, in the case of which the margin is higher by several percentage points (in Q3 2017, direct imports accounted for approximately 24% of total sales, but orders placed for H already represent some 35%); (ii) launch of a new product lifecycle management process; and (iii) rollout of a new, more efficient procurement, sales, allocation and stock planning process. optimising operating costs related to both the sales network and the head office, reducing network growth rate, which does not rule out opening of new stores, store relocation or remodelling. The effects of these efforts will be visible in the results recorded in In Q1-Q3 2017, costs of day-to-day operations rose by PLN 31.3m, chiefly as a result of: o PLN 22m (24% year-on-year) increase in the costs of operations of the store network in Poland and abroad, with a concurrent average increase in the retail space of 21%. The cost per square metre went up in the period by 4%, which chiefly resulted from the growing share of new stores in higher rent locations; o PLN 1.6m (34%) increase in marketing costs, which stemmed from, among other things, more intense Page 11 of 23

12 marketing efforts in Q3 2017; o PLN 2.8m growth in costs of logistics (up 24%), which were directly inflated by the expansion of the retail network the need to ensure proper stock levels. The increase is reflected in, among other items, salaries and wages (up PLN 1.5m) and the cost of rental of logistics facilities related their expansion (up PLN 1.1m); o PLN 0.8m rise in the costs of IT services (up 27%) as a result of: (i) the implementation of a new system, and (ii) higher number of stores; o PLN 0.3m decrease in the costs attributable to foreign head offices, which is related to: (i) withdrawal from the Czech market; (ii) higher costs of operations in Romania and Slovakia; o PLN 1.4m rise (up 21%) in the costs of the sales department, driven by growing imports and introduction of new product categories, including homewares; o PLN 0.9m increase (up 37%) in back office costs, consisting of the costs of a new controlling team and the development of a data warehouse, as well as the costs of lease of a larger office; o PLN 0.2m of one-off costs of securing financing from BnP and ING banks; o PLN 0.4m of one-off costs of legal services related to the liquidation of business in the Czech Republic; o PLN 0.4m of one-off severance payments related to changes in management staff. 2.2 Performance of the fashion segment Best fashion world to express yourself The performance of the fashion segment in Q1-Q is presented in the table below. Table 9. Selected items from the statement of comprehensive income related to the fashion segment for Q1 Q and Q1 Q PLN thousand Q1 Q3 Q1 Q Change (%) 2017 Change (Δ) Revenue 168, , % -7,266 Gross profit/(loss) 75,635 73, % 2,341 Gross margin 44.9% 41.7% 3.2% Distribution costs and administrative expenses 75,277 81, % -5,836 Profit/(loss) on sales 358-7, % 8,177 Gross margin on sales 0.2% -4.5% 4.7% Net other income/expenses % -42 Operating profit/(loss) 434-7, % 8,135 EBIT margin 0.3% -4.4% 4.6% EBITDA 1,681-6, % 8,186 Net finance income/costs -1,830 1, % -3,750 Gain/(loss) on restructuring unprofitable stores Profit/(loss) before tax -1,397-5,782 76% 4,385 Pre-tax margin -0.8% -3.3% 2.5% In Q1 Q3 2017, the fashion segment earned an operating profit of PLN 0.4m, which is a radical improvement by PLN 8.1m year on year. The increase resulted from a 3.2 pp higher gross margin, with a concurrent drop in distribution costs and administrative expenses by more than 7%. In the first nine months of 2017, sales in the fashion segment dropped by 4%, or PLN 7.2m. This chiefly Page 12 of 23

13 resulted from the shift of distribution of the Troll brand mainly to e-commerce. In effect, in the period the average retail space of the brand's stores fell by 3.2 thousand m 2, and revenue decreased by more than PLN 8m (approximately 80% year on year). Although the decline in sales resulting from the change of the distribution strategy for the Troll brand was not compensated for in other distribution channels, we managed to more than offset the lost sales margin of this channel. Despite lower sales, the generated sales volume increased by PLN 2.3m, while the percentage margin improved by 3.2 pp year on year. The improvement in gross margin resulted from: structural changes in collection to reduce markdowns following the introduction of a wide range of basic products as a fixed offering, among other things. As a result of these structural changes the year-on-year increase in margin at Top Secret stores in Poland in Q was 4%, in Q it reached 18%, and in Q it was as high as 22%. conceptual changes in the collection consisting in stronger diversification of prices and product quality during the season, ensuring even better matching of the available collection with the time of sale, which improved sales at full prices and reduced markdowns; significantly lower share in total revenue of the Troll brand products at brick-and-mortar stores, which were sold at a lower margin than the Top Secret brand products. The process of moving the Troll brand to e-commerce has continued, which is expected to contribute to an increase in the brand s sales margin. The sale of goods from previous seasons, which generated a gross loss of PLN 44 thousand, had an adverse effect on the margin of Top Secret products in Poland. However, the sale was significantly reduced in Q2 and Q3 by 62% and 80%, respectively, compared to the corresponding quarters of the previous year. The second driver of the improved performance was a reduction in the costs of day-to-day operations by PLN 5.8m. The costs changed as a result of: a year-on-year decrease of PLN 2.1m (or 7%) in total franchise fees, caused by: (i) reduced fees related to the Troll brand network by PLN 2.5m due to the change in the brand's distribution channels referred to above, and (ii) a PLN 0.4m increase in fees attributable to other franchise stores pro rata to their improved sales results; a reduction of logistics costs of PLN 1.2m related to higher efficiency of warehouse processes and reduced scale of operations resulting from scaling down traditional distribution channels of the Troll brand and lower sales of goods from previous seasons through e-commerce; a decrease of PLN 0.8m in the cost of operating own stores in Poland, caused by reduced average retail space of the stores in the first nine months by 12% year on year and 7% higher average cost of their operation per square metre. This followed from closing down of unprofitable stores, which combined with higher margin resulted in improved performance of this distribution channel by PLN 0.8m; savings of PLN 0.7m resulting from optimisation of costs of operations at the head office; a decrease in costs of central services (mainly IT services) by PLN 0.6m; lower costs of foreign operations by PLN 0.4m due to the reorganisation of companies operating in Ukraine. In Q1 Q3 2017, the fashion segment incurred net finance cost of PLN 1.8m, which compares with a net finance income of PLN 1.9m in the previous year. This chiefly results from a net foreign exchange loss in the period, compared with net foreign exchange gains a year before. In 2016, the recorded foreign exchange gains were PLN 1.8m, which resulted from, among other things, more effective management of currency exposure (including a PLN 1m profit on hedging transactions). Due to a rapid appreciation of the US dollar against the złoty in Q and based on a recommendation of the Group s advisor on its currency exposure management, the Group increased the value of its forward contracts to buy US dollars. Such transactions were also executed in Q An Page 13 of 23

14 unexpected reversal of the trend and weakening of the US dollar against the złoty resulted in a loss incurred by the Group on these transactions, which exceeded the foreign exchange gains under US dollardenominated liabilities. In aggregate, in Q1 Q net foreign exchange losses and losses on hedges of the foreign currency exposure in the fashion segment amounted to PLN 1.1m. The 2016 financial result was positively affected by a reversal of provisions for potential use of guarantees of rental payments related to own stores in the fashion segment. Following the conclusion with lessors of agreements improving the terms of lease of store premises, the risk of using the guarantees was significantly reduced and the relevant provisions could be reversed. The resulting finance income in 2016 was PLN 0.7m. In 2017, no such transactions were made. In 2017, interest expense amounted to PLN 0.5m, having increased by 80% relative to the previous year. At the end of September 2017, the fashion segment s retail space in Poland and abroad was 37.5 thousand m 2, which covered 271 stores, including 30 own stores, 236 franchise stores and 5 multi-brand franchise corners. In terms of location, these included 228 stores in Poland (excluding multi-brand corners) and 43 stores abroad (in Ukraine and Russia). In the opinion of the Management Board, Q was yet another period of consistent improvement of the fashion segment s performance. The chart below presents the evolution of the 12-month rolling EBIT attributable to this market. Chart month rolling EBIT in the fashion segment (PLN million) In autumn 2015, a decision was made to change the strategy for the fashion segment. The new strategy provided for increasing the sales margin by lowering the prices of goods and reducing markdowns. It was necessary to introduce changes in the collection and begin cooperation with some new suppliers, which required time. As of Q the introduced changes gradually begin to bring the expected results and the fashion segment starts to generate profits. 2.3 Events subsequent to the end of the reporting period The following significant events that have an impact on the financial standing of the Company occurred after the reporting date: On 18 October 2017, an annex was signed to the credit facility agreement between Redan S.A. and Top Secret Sp. z o.o. with HSBC to set the repayment date of the import credit facility at 30 November 2017 and extend the term of availability of the letter of credit facility until 31 May 2018, which was described in detail in Current Report No. 33/2017. On 30 October 2017, Jacek Jaśkiewicz tendered his resignation as a Member of the Supervisory Board of Redan. 3 Factors which will affect the performance at least in the forthcoming quarter The key factors which will affect the Redan Group s consolidated performance at least in the forthcoming quarter include: economic growth and disposable income of customers in Poland and in the countries where the Group Page 14 of 23

15 operates, and the related customers propensity to consume; the exchange rate of the złoty against the USD and CNY (imports) and EUR (purchases of goods and rental payments denominated in that currency); a change in the exchange rate of the Romanian leu, the Ukrainian hryvnia, the Russian ruble and the euro against the Polish złoty, because part of the sales is denominated in these currencies; maintaining by the Redan Group of the existing capacity to purchase goods with deferred payment dates; the level of available letter of credit limits and the resulting possibility of imports in the assumed volumes and with the assumed structure of the countries of purchase; the progress of reorganisation and restoring the optimum and intended structure of stocks at the retail network in the discount segment, which was significantly distorted in the period from February to April 2017; the amount of working capital, including the sale of goods from previous seasons; Redan's ability to secure a new source of financing in connection with the need to refinance the import credit facility provided by HSBC Bank Polska S.A., which will fall due and payable on 30 November 2017, or negotiate a new repayment schedule for this facility; the result of the test for impairment of the protective rights to the Troll trademark, which will be carried out at the end of the year due to lower revenue from the sale of goods under this trademark in Structure of the Redan Group 4.1 Organisation of the Redan Group In H1 2017, Adesso TXM s.r.o. operating in the discount segment in the Czech Republic was sold to a non- Group buyer. Redan S.A. and its subsidiaries form the Redan Group. Currently, the key Group companies are: Redan S.A. the parent carries out logistics operations (logistics centre in Łódź is operated by Loger Sp. z o.o.) for the fashion segment (Top Secret, Troll and Drywash brands) and coordinates the growth of foreign operations. However, it focuses more and more on the Group s management, implementation of IT projects and centralisation of highly specialised services provided to the Group companies; TXM S.A. operates a network of TXM textilmarket retail stores and the online store. In manages the selection, purchase and sale of goods, the locations of the chain stores and carries out store adaptation work on its own. It has a warehouse and logistics centre in Mysłowice (operated by Adesso Sp. z o.o.) for TXM textilmarket stores; Top Secret Sp. z o.o. a company managing the brands in the fashion segment (Top Secret, Troll and Drywash), responsible for design work, purchase and sale of goods; it also operates a chain of retail stores in Poland and carries out online sales through Delta-Ukraina T.O.W. a Ukrainian company through which sales at all fashion stores are carried out in Ukraine; Redan Moscow OOO a Russian company through which sales at all fashion stores are carried out in Russia; Adesso Slovakia s.r.o. a Slovakian company through which sales at TXM textilmarket chain stores are carried out in Slovakia; Adesso TXM Romania s.r.l. a Romanian company through which sales at TXM textilmarket chain stores are carried out in Romania. Other Redan Group companies include: retailers whose activities are instrumental to the Group's business, i.e. their principal business consists in the operation of retail stores of the Redan Group s fashion and discount brands; companies incorporated in Cyprus, which are also instrumental to the Group s operations, i.e. their business consists in implementation of projects related to financing and organisation of the Group s Page 15 of 23

16 operations. The Group s organisational chart is presented on the next page. 4.2 Consolidated subsidiaries The consolidated financial statements incorporate the financial statements of Redan S.A. and its subsidiaries. Subsidiaries are consolidated starting from the date when Redan gains control over them and cease to be consolidated when control is lost. At 30 September 2017, the following companies were consolidated: REDAN S.A. as the parent, subsidiaries: TXM S.A., Top Secret Sp. z o.o., Adesso Sp. z o.o., Adesso Slovakia s.r.o., Adesso Czechy s.r.o. (sold on 24 May 2017), Adesso Romania s.r.l., ACB Sp. z o.o., Perfect Consument Care Sp. z o.o., TXM Beta Sp. z o.o., Adesso Consumer Acquisition Sp. z o.o., Shopping Alfa s.r.l., Krux Sp. z o.o., Kadmus Sp. z o.o., T.O.W. Beta Reda Ukraina, T.O.W. Delta Ukraina, O.O.O. Redan Moskwa, O.O.O. Top Secret RS, Loger Sp. z o.o., Lunar Sp. z o.o., R-Moda Sp. z o.o., R-Style Sp. z o.o., R-Shop Sp. z o.o., R-Trendy Sp. z o.o., R- Fashion Sp. z o.o., R-Line Sp. z o.o., R-Colection Sp. z o.o., Gravicinta Ltd, and Raionio Ltd. Page 16 of 23

17 Diagram 1. Structure of the Redan Group at the reporting date Companies incorporated in Cyprus (100%) Gravacinta Limited Raionio Limited (in liquidation) Discount segment Fashion segment Poland Foreign markets Poland Foreign markets TXM S.A. (56.45%) Adesso Slovakia s.r.o (56.45%) TXM Slovakia s.r.o. (SKL) Top Secret Sp. z o.o. (100%) Beta-Reda T.O.W. Ukraina (100%) ADESSO Sp. z o.o. (56.45%) Adesso Romania s.r.l. (56.45%) TXM Shopping Alfa s.r.l. TXM Shopping Beta s.r.l. Loger Sp. z o.o. (100%) Delta T.O.W. Ukraina (100%) Redan Moscow O.O.O. (100%) Top Secret O.O.O. (99%) Retailers (56.45%) R-Shop Sp. z o.o. (PL) PerfectConsumentCare Sp. z o.o. (PL) Adesso Consumer Brand Sp. z o.o. (PL) Adesso Consumer Aquisition Sp. z o.o. (PL) TXM Beta Sp. z o.o. Retailers (100%) Kadmus Sp. z o.o. Krux Sp. z o.o. R-Fashion Sp. z o.o. Lunar Sp. z o.o. R-Moda Sp. z o.o. R-Trendy Sp. z o.o. R-Style Sp. z o.o. R-Colection Sp. z o.o. Page 17 of 23

18 5 Accounting policies 5.1 Significant accounting policies Basis of preparation of consolidated financial statements The report has been prepared on the basis of overriding accounting policies, while the valuation of assets and equity and liabilities and calculation of the financial result was made on the assumption that the Group will be able to continue as a going concern in the foreseeable future. One of the key objectives for the preparation of the report was to ensure the comparability of data. The consolidated financial statements of the Redan Group have been prepared in accordance with the standards published or adopted by the International Accounting Standards Board and interpretations published by the Standing Interpretations Committee at the IASB. The consolidated financial statements are prepared based on the historical cost basis, except for derivative financial instruments and financial assets available for sale, which are measured at fair value. 5.2 Accounting policies The accounting policies and calculation methods applied in the preparation of these quarterly condensed consolidated financial statements are the same as those described in the audited consolidated financial statements for the year ended 31 December 2016 prepared in accordance with IFRS (Notes to the consolidated financial statements of the Redan Group for 2016 prepared in accordance with IFRS). 6 Additional information 6.1 Management Board s opinion regarding the feasibility of meeting previously published forecasts The Redan Group did not publish any financial forecast for Adjustments of provisions, deferred tax liabilities and assets, and impairment losses on assets The changes in impairment losses on assets at 30 September 2017 and 31 December 2016 are presented in the consolidated financial statements of the Redan Group for Q in the notes on individual groups of assets and in the separate financial statements of Redan S.A. for Q in Note 9 Impairment losses recognised in the year. 6.3 Seasonality or cyclicality in the Company s business during the reporting period In retail sales of clothing in the fashion market, the rule is that the high season is followed by months of sales, when lower margins are recorded, leading to weaker financial performance. Sales are usually made in the first and third quarter of the year. The sales periods are characterised by a relatively lower margin and the resulting weaker performance. The discount segment is not affected by such seasonality of sales. It is characterised by stable margins. The best quarter in terms of sale of clothing is the fourth quarter, when in line with general trends in the economy retail sale reaches the highest level in the year with relatively high margins. 6.4 Segment information In accordance with IFRS 8 the Group identifies operating segments based on internal reports related to these components of the Group. They are presented in the consolidated financial statements of the Redan Page 18 of 23

19 Group for Q in Notes Segment information. 6.5 The Company's issued capital Issue of equity securities In the period from January until the date of this additional information, no activities were carried out with a view to issuing new shares of the Company Issue, redemption and repayment of non-equity securities At the date of this additional information, the Company did not carry any outstanding debt securities Shareholders holding over 5% of total voting rights at the General Meeting The table below presents the list of shareholders holding more than 5% of shares in Redan S.A. at the date of preparation of this additional information. Table 10. List of shareholders holding 5% or more of Redan S.A. s shares at the date of this report Shareholder Radosław Wiśniewski together with a subsidiary Redral Sp. z o.o. Sp. k. Piengjai Wiśniewska together with a subsidiary Ores Sp. z o.o. Other shareholders that are parties to Shareholder agreements Number of shares % of share capital % % of total Number of vote at votes the General Meeting P_9 May ,080, % 25,785, % P_9 May ,031, % 2,031, % the agreement of 9 May 2016 (Teresa P_9 May , % 140, % Wiśniewska) Free Float n/a 12,457, % 12,802, % TOTAL 35,709,244 40,759,244 Description on shareholder agreements: P_9 May 2016 On 9 May 2016, the shareholders Radosław Wiśniewski, Piengjai Wiśniewska, Teresa Wiśniewska, Redral spółka z ograniczoną odpowiedzialnością sp.k. of Łódź, and Ores Sp. z o.o. of Łódź, entered into an agreement on, among other things, voting in concert at the Company s General Meeting, as referred to in Art ) of the Public Offering Act of 29 July 2005 (Dz. U. of 2013, item 1382, as amended), which was described in detail in Current Report No. 10/2016 of 10 May 2016 and Current Report No. 30/2016 of 21 June Shares in Redan S.A. held by members of the Management Board No Company shares were held by Redan S.A., the Group companies and persons acting on their behalf Number of Redan S.A. s shares held by Supervisory Board members The table below presents the number of Redan shares held by Supervisory Board members at the date of this additional information. Page 19 of 23