Grupo FAMSA Tradition and Growth

Transcription

1 2007 ANNUAL REPORT

2 Grupo FAMSA Tradition and Growth Founded in 1970 as a household goods store in the city of Monterrey, Mexico, Grupo FAMSA is now one of the leaders in the consumer finance retail sector. Thanks to our expansion strategy and positioning, as well as our constant focus on the development of financing programs, we are able to enhance the quality of life of an important part of the population that demands personalized services and credit options unavailable through the traditional banking system. both the operating and financial performance of the group. Just one year after being listed in the Bolsa Mexicana de Valores, our shares have been included on the IPC stock index for the year We see this as recognition of our outstanding track record of more than 37 years in the sector and Grupo FAMSA s growth potential. Operating in both Mexico and the United States through an extended network of 390 retail stores and a committed work team of more than 18,000 employees, Grupo FAMSA is present in 77 cities in Mexico and 24 more in the United States, including those with the largest Hispanic populations. MEXICO 80.2% USA 19.8% Banco Ahorro FAMSA, a fundamental component of our growth strategy, started operations in January Our bank is sure to create important synergies that will impact positively SALES BY COUNTRY

3 Financial and Operational Highlights SALES CAGR: 11.3% EBITDA CAGR: 15.3% STORES RETAIL AREA CAGR: 8.0% CAGR: 12.0% 936 9,256 10,447 11,456 12,859 14,181 1,288 1,384 1,571 1, , , , , , Millions of Mexican Pesos CAGR: Compound Annual Growth Rate Millions of Mexican Pesos Square meters vs 2006 Operational Data Total Stores Mexico USA Banco Ahorro FAMSA % 9.0% 62.5% Active Accounts 1,444,073 1,251,502 1,182,061 1,042, , % Employees 18,207 16,093 14,605 13,088 12, % Financials (a) Net Sales Mexico USA Other Intersegment (b) 14,181 11,283 2,808 1, ,859 10,910 1,827 1, ,456 10,137 1,270 1, ,447 9,378 1, ,256 8, % 3.4% 53.7% -8.0% -5.7% Gross Income EBITDA Operating Income Net Income 6,489 1,654 1, ,592 1,571 1, ,901 1,384 1, ,373 1,288 1, , % 5.3% 3.9% -4.2% Gross Margin EBITDA Margin Net Margin 45.8% 11.7% 3.7% 43.5% 12.2% 4.2% 42.8% 12.1% 2.5% 41.9% 12.3% 4.9% 40.9% 10.1% 1.4% Balance Sheet (a) Assets Liabilities Stockholders Equity 16,317 9,838 6,479 14,105 8,114 5,991 12,071 8,123 3,948 10,912 7,158 3,754 10,115 6,787 3, % 21.2% 8.1% (a) Millions of Mexican Pesos of December 31, 2007 purchasing power, except percentages. (b) Intercompany sales. 1

4 A Message from the Chairman and the CEO Dear Fellow Shareholders: Throughout 2007, Grupo FAMSA achieved important goals that have strengthened our position in the market through the development of a solid business portfolio based on consumer financing. The rapid implementation of Banco Ahorro FAMSA and the expansion of our retail operations in both Mexico and the United States demonstrate our firm commitment to growth. In spite of the keen challenges posed by current economic circumstances, the great dedication and skill of all our collaborators have made this year s progress possible. All of these factors have made Grupo FAMSA a much more solid company, with a promising outlook as we go forward. FAMSA Mexico Grupo FAMSA s retail operation in Mexico, our core market, was strengthened through the opening of 29 new stores with a total sales area of 42,591 m 2 which represents a 12.1% increase in sales area compared to the close of Even though the Mexican economy has enjoyed general stability, a less optimistic outlook on the part of consumers slowed down consumption starting the second quarter of Nevertheless, FAMSA Mexico generated sales of P11,283 million, up by 3.4% versus the previous year. 2

5 FAMSA USA The growing popularity of our stores among Hispanic consumers in the U.S. was reflected by the 53.7% increase in sales during 2007, which amounted to a total of P2,808 million. Greater brand recognition, differentiated services, and the opening of 15 new stores in the course of the year were fundamental factors in our increased share of a market where our value offer significantly exceeds that of our competitors. The successful integration of the 12 stores acquired from La Canasta makes us confident of being able to take full advantage of other non-organic growth opportunities going forward. Banco Ahorro FAMSA One the most outstanding events in 2007 was the start-up of our new bank, Banco Ahorro FAMSA. After a rigorous process of certification, we began the first phase of operations with the opening of 176 branches within our stores across Mexico. The results have been extraordinary, with more than 84,000 savings accounts opened between January and December. The rapid progress in the overall implementation of our bank is a remarkable achievement that demonstrates Grupo FAMSA s execution capabilities. Our plan is to open bank branches in each one of our stores in Mexico, creating a powerful financial network that will encourage the use of banking services among a segment of the population that has been neglected by the traditional financial sector. Our bank provides savings and investment opportunities with all the trust and recognition that the FAMSA brand name conveys. Grupo FAMSA maintains its commitment to operating with the highest standards of corporate governance. We were pleased to receive recognition of our efforts in this area by being chosen as one of the few finalists for the Affinitas Good Corporate Governance in Latin America prize awarded at the 9th Latibex Forum in Madrid, Spain. Grupo FAMSA proudly closes out the current year with a solid operating and business platform. We will continue focusing our efforts on strengthening the fundamentals of our company and generating synergies among our three business areas. We underline our commitment to our shareholders, clients, suppliers, and the communities in which we operate, all of whom place their trust in us on a daily basis. Sincerely, Humberto Garza González Chairman of the Board Humberto Garza Valdéz Chief Executive Officer 3

6 Grupo FAMSA Business Portfolio FAMSA USA First store, 2001 Focused on serving the Hispanic market Segment with high growth potential RETAIL AND FINANCIAL COMPANY focused on serving the middle and lowermiddle income segments of the population through a complementary business portfolio based on consumer credit. 4

7 FAMSA Mexico First store, 1970 Focused on the middle and lowermiddle income segments, 68 million people Segment with limited access to traditional forms of credit 351 stores in 77 cities Value offer complmented with banking services in 2007 Financing option and efficiency through Banco Ahorro FAMSA Wide variety of products and services Banco Ahorro FAMSA First banking branch, 2007 Focused on serving FAMSA Mexico s segment 70% traget segment non-bankarized 84,000 savings accounts through FAMSA Mexico store traffic and brand recognition 176 banking branches within FAMSA Mexico stores Value offer similar to FAMSA Mexico, 10.7% real same store sales growth Healthy loan porfolio by leveraging FAMSA Mexico s experience 39 stores in 4 states 5

8 FAMSA Mexico The Mexican market holds great retail opportunities that we plan to develop to the maximum. Winning over new clients and differentiating ourselves is not simply an option, it is our chosen path and commitment. Rubén López, Vice President of FAMSA Mexico SALES 8,434 9,378 10,137 10,910 11,283 One of the main objectives of Grupo FAMSA has been to satisfy the needs of Mexican families, by providing confidence and reliability through products and services of the highest quality. This has allowed millions of families to gain access to goods and services that significantly enhance their quality of life Millions of Mexican Pesos STORES As of the close of 2007, we have expanded FAMSA s presence in Mexico through the opening of 29 new retail outlets, bringing our total number of stores to 351 in 77 cities. Each one of these branches offers thousands of articles and services that meet the needs of the household consumer, including furniture, home appliances, and electronics. Net sales increased by 3.4% in 2007, reaching P11,283 million. Owing to the challenging macro consumption conditions prevailing in Mexico, sales in stores that have been in operation for more than 12 months decreased by 2.7%. We intend to maintain our growth plan in the Mexican market through We will expand our retail network in order to continue increasing our customer base, consolidating our position in the market and seeking out further synergies among our businesses

9 RETAIL AREA BY REGION Northeast Center Gulf Northwest Pacific North 29% 25% 15% 14% 12% 5% 7

10 Flexible financing plans and personalized customer service % SALES BY PRODUCT LINE Products Furniture Mattresses Electronics White Goods Communication Computers Clothing Jewelry Seasonal Products Sporting Goods Car Products Appliances Services Banking Insurance Travel Extended Guarantees Personal Loans Remittances Currency Buy / Sell OTHER SEASONAL FURNITURE CLOTHING 6.2 COMMUNICATION ELECTRONICS 18.3 WHITE GOODS We are constantly seeking to broaden the large range of products and services offered through our flexible financing plans. The establishment of Banco Ahorro FAMSA constitutes an enormous step forward in our constant quest to providing a more comprehensive value offer to the Mexican families. 8

11 We will be expanding our retail network in Mexico with 30 new stores, which demonstrates Grupo FAMSA s long-term focus and the great potential we see in this market. The opportunity resides in the large size of the market and the particular characteristics of our segment, which includes more than 60% of the population in Mexico; an estimated 68 million people. Over the last decade, our market has shown an increased demand for goods and services as a result of the greater stability and growth of their purchasing power. Capitalizing on these trends, Grupo FAMSA now handles 1.29 million active accounts, more than 12% increase versus This is also reflected in a larger proportion of credit sales, which represent 77.7% of total retail sales, and are instrumental in building long-term relationships with our customers. The Mexican market holds great potential and continues to be the foundation of Grupo FAMSA. 68 million potential customers 1.29 million active accounts 77.7% credit sales Mexico: Demographics by Income C+: 3% A/B: 2% C: 15% TARGET 64% % 71.8% 73.5% 74.4% 77.7% D/D+: 49% Population: 106M people, 24M households Source: INEGI Millions of active accounts Credit sales as a percentage of retail sales 9

12 FAMSA is a strong and well recognized brand within our segment Our dynamic promotional strategy and marketing initiatives, along with a constant presence in the media, have strengthened our existing network of stores and accelerate the consolidation of newly opened branches. One of FAMSA México s main achievements in 2007 was the implementation of a comprehensive strategy to compensate for the adverse economic conditions. The Mexican market faced important challenges in the context of a slowdown in consumption due to a worsening consumer outlook regarding the economic situation. Promotions such as Gran Cheque, an intense advertising campaign, direct marketing, and the efforts of our Gran Crédito team are just some examples of initiatives focused on boosting sales. 10

13 We currently work with a delivery team that is managed by an interconnected real-time platform with automated processes that control merchandise delivery according to specific routes and timetables. Our system guarantees client delivery times of under 48 hours. Our logistical infrastructure includes 9 Distribution Centers, which receive products directly from our suppliers, and 32 Transfer Centers, strategically located in different parts of the country to receive orders and ensure prompt delivery. Our state-of-the-art technology, such as the Radio Frequency Barcode System, ensures the efficient operation of distribution centers and strict administrative control. We operate modern logistical and distribution systems which make for superior service and efficient operations. 11

14 FAMSA USA Hispanics are the largest minority in the United States, and are experiencing the fastest growth rates of any other demographic group. This represents an enormous potential, making it our main goal and challenge to keep consolidating ourselves as the leading retailer among the Hispanic market. Ignacio Ortiz, Vice President of FAMSA USA SALES 2,808 STORES 857 1,095 1,270 1,827 Grupo FAMSA began operations in the United States in 2001, with the vision of serving and benefiting Hispanic families through its products and services. We are currently present in the states of California, Texas, Arizona, and Nevada. Through a broad network of 39 stores in 24 cities, we meet the needs of the Hispanic population with a value offer that outweighs that of our competitors Millions of Mexican Pesos STORES The aggressive expansion plan carried out in 2007 included the acquisition and successful integration of the 12 La Canasta furniture stores in Los Angeles and Houston. We also continued our organic growth with the opening of 3 additional stores in Phoenix, Mesa (AZ), and Plano (TX). This represented a 59.4% increase in retail area, which totaled 98,984 m 2 at the close of the year. The growing recognition of our brand name, our aggressive expansion plan, and our specialized services such as FAMSA to FAMSA, along with the personalized attention of our staff, boosted total sales by 53.7%, with an increase in same store sales of 10.7%. Furthermore, the steady EBITDA growth, which rose 310 basis points, is a result of our operation reaching greater economies of scale

15 RETAIL AREA BY STATE California Texas Arizona Nevada 54% 38% 5% 2% 13

16 FAMSA to FAMSA Sales through our unique FAMSA to FAMSA service accounted for 9.3% of FAMSA USA s total sales, clearly demonstrating the advantages and synergies created by having a strong presence in Mexico. 14

17 Given the great potential of the Hispanic market in the United States, FAMSA USA is planning on further expanding its store network. Our segment of the population is the fastest-growing in the country in terms of both size and purchasing power. The U.S. Census Bureau 2004 estimates that the Hispanic population in the United States will grow from 44 million to almost 60 million in less than 15 years. Our strong position in the market, as well as the enormous potential of our segment, continued to be reflected in 52.0% growth in active accounts by year-end. 60 million Hispanics by 2020 US1.055 Trillion Hispanic purchasing power by ,000 active accounts Millions of Hispanics Source: U.S. Census Bureau 2004 Trillion dollars Source: HispanTelligence, 2005 Thousands of active accounts 15

18 16

19 Banco Ahorro FAMSA The non-bankarized lower income segments of the population represent a growth potential without precedent; our goal is to develop financial products and services that satisfy their needs. Adrián Lozano, Vice President of Banco Ahorro FAMSA BANKING BRANCHES 176 The commitment towards our clients has led us not only to seek out the best products and services, but also to develop new credit and financing options which ensure safe handling of funds, encourage healthy consumption, and enhance quality of life Banco Ahorro FAMSA started operations in January of Backed up by more than 37 years of experience in the consumer finance retail sector, the bank is fully certified in all of its operating processes, guaranteeing operational support, safe transactions, branch security and optimal business efficiency. 15 1Q07 2Q07 3Q07 4Q07 BRANCHES BY REGION Center Northeast Gulf Pacific North In its first implementation phase, Banco Ahorro FAMSA opened 176 branches located within FAMSA stores in 14 states in Mexico. The goal is to cover our entire retail network, increasing branches to a total of more than 300 before year-end branches were opened in the last three months of 2007 alone. This required an extensive coordination of our work teams to ensure that every branch initiated operations. The detailed process included the locating of each branch within the store, the full installation of equipment, and the recruiting and training of personnel. 17

20 We offer simple financial products with attractive yields and without commissions, extending the benefits of the commercial banking system to a segment of the market with enormous potential. The objective of our bank is to adapt financial services of the traditional banking system to the specific needs of our customers, and simplifying their perception of the financial system in the process. By doing this, we are starting to encourage the use of banking services within a segment of the population with low banking penetration. During its first phase, Banco Ahorro FAMSA is capturing savings from the public through savings and investment accounts. The bank is also granting personal loans for the acquisition of products and services not offered in our stores, providing our clientele with increased purchasing power through more formal financing mechanisms. Savings Products FAMSA Ahorro InverFamsa Pagare Ahorro Niños Checking 270 million pesos in savings Loan Products Personal Loans 150 million pesos in loans Millions of Mexican Pesos 84,000 savings accounts 84 Millions of Mexican Pesos 31,000 loan accounts New products are currently being developed to complement the bank s offer, making it more attractive to the public and unleashing important synergies with our other businesses. Funds deposited in the bank at the close of 2007 amounted to P270 million, and a balance of loans granted of P150 million. 1Q07 2Q07 3Q07 4Q07 1Q07 2Q07 3Q07 4Q07 1Q07 2Q07 3Q07 4Q07 Thousands of accounts 1Q07 2Q07 3Q07 4Q07 Thousands of accounts 18

21 With more than 9 million registered accounts in the commercial business, and the future development of new products (including credit cards and car loans), there are numerous opportunities to be capitalized in the near future. Recognition of the FAMSA brand name and customer traffic at the retail stores are factors that have contributed significantly to the outstanding performance of Banco Ahorro FAMSA 19

22 Management Team Humberto Garza Valdéz Chief Executive Officer Oziel Mario Garza Valdéz Vice President of Clothing and Real Estate Luis Gerardo Villarreal Rosales Chief Operating Officer Abelardo García Lozano Chief Financial Officer Héctor Padilla Ramos Vice President of Purchasing Héctor Hugo Hernández Lee Vice President of Human Resources Rubén López Zambada Vice President of FAMSA Mexico Ignacio Ortiz Lambretón Vice President of FAMSA USA Adrián Jorge Lozano Lozano Vice President of Banco Ahorro FAMSA

23 Board of Directors Don Humberto Garza González CHAIRMAN DIRECTORS Humberto Garza Valdéz Hernán Javier Garza Valdéz Oziel Mario Garza Valdéz Luis Gerardo Villarreal Rosales INDEPENDENT DIRECTORS Salvador Kalifa Assad Horacio Marchand Flores (a) Jorge Luis Ramos Santos Alejandro Sepúlveda Gutiérrez (a) (a) Member of the Audit Committee *44% of the Board Members are independent Audit Committee The company has an Audit Committee, which members are: Alejandro Sepúlveda Gutierrez (Chairman of the Committee), Salvador Llarena Arriola, and Horacio Marchand Flores. All of them, including the chairman, are independent board members under the terms of the Mexican Securities Law and two of the members qualify as financial experts. The Audit Committee is responsible, among other functions, for: Submitting an annual report on its activities to the Board of Directors and the Stockholders Assembly. Discuss the financial statements and issue a recommendation for approval or disapproval to the Board of Directors. Issuing opinions to the Board of Directors regarding the operation of the internal control systems. 21

24 Corporate Practices Committee The company established a Corporate Practices Committee by means of an Ordinary Shareholders Meeting held on 14 December The members are: Alejandro Sepúlveda Gutiérrez (Chairman of the Committee), Salvador Llarena Arriola, and Horacio Marchand Flores. All of them, including the chairman, are independent board members in accordance with the Mexican Securities Law. The Corporate Practices Committee is responsible, among others, for: Observations regarding the performance of relevant executives. Issuing opinions to the Board of Directors with regard to related-party transactions which by their nature and relevance they deem worthy of consideration. Convening Shareholders Meetings and entering those points they deem relevant into the corresponding agenda. Assisting the Board of Directors in elaborating the reports required by law. Board of Directors, Banco Ahorro FAMSA CHAIRMAN Francisco Jorge Patiño Leal DIRECTORS Hernán Javier Garza Valdéz Oziel Mario Garza Valdéz Luis Gerardo Villarreal Rosales Adrián Jorge Lozano Lozano Corporate Governance INDEPENDENT DIRECTORS Héctor Medina Aguiar Salvador Kalifa Assad Ernesto Ortiz Lambretón Bernardo Guerra Treviño The positive performance of our company rests on practices of sound corporate governance. Grupo FAMSA was one of the few finalists in the second edition of the Affinitas Awards for Good Corporate Governance in Latin America, held on November 22, 2007 as part of the 9th Latibex Forum in Madrid, Spain. More than 580 companies were evaluated by the jury and 12 finalists were chosen on the basis of criteria such as shareholders rights, equality, stakeholder involvement, communication and transparency, and responsibilities of the Board. 22

25 MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL RESULTS For the year ending December 31, 2007 Net Sales Consolidated net sales in 2007 totaled P14,181 million, representing an increase in real terms of 10.3% over the previous year. Consolidated sales from stores in operation for more than a year (same-store sales) were down by 1.3%. In Mexico, sales increased by 3.4% to P11,283 million, while same-store sales were down by 2.7%. This reflected a drop in consumer perception regarding their economic situation, which led customers to postpone certain purchases, especially those involving durable goods such as electronics, furniture, and household appliances. Net sales in the United States increased by 53.7% to P2,808 million, with same-store sales showing growth of 10.7%. These results are due to the aggressive expansion plan, which included the acquisition of 12 La Canasta furniture stores and the opening of three new outlets, as well as the increased recognition of the FAMSA brand among the Hispanic market. The great customer satisfaction through our differentiated services have also been key factors in our steady growth. Cost of Sales Cost of sales amounted to P7,692 million in 2007, up by 5.8% when compared to the previous year. Gross income totaled P6,489 million, an increase of 16.0% compared to 2006, and the gross margin was 45.8%, or 230 basis points above the 2006 figure. This was the result of an increased proportion of credit sales and a higher-margin product mix. Operating Expenses In absolute terms, operating expenses in 2007 increased by P848 million, or 19.7%, over the previous year. This was mainly a consequence of the additional expenses derived from the opening of 44 new stores and 176 branches of Banco Ahorro FAMSA in the course of the year. These figures reflect our aggressive expansion plan. 23

26 Operating Income Consolidated operating income in 2007 increased by 3.9% to P1,329 million, with an operating margin of 9.4%, down 50 basis points from Operating income was pressured by the decreased operating leverage resulting from a slowdown in consumption and the additional expenses generated by our aggressive expansion plan, which included the establishment of a bank and the opening of more stores across Mexico and the United States. These developments have contributed to building a solid complementary business portfolio around consumer finance. Comprehensive Financing Expense The comprehensive financing expense was P680 million in 2007, up by P113 million over the previous year, mainly as a result of an increase in interest expesed, derived from an increase in debt. The company significantly reduced debt with funds from its initial public offering during This year s additional debt was used to finance working capital and the opening of new stores that our growth plan requires. Net Income Net income was P518 million in 2007, down by 4.2% over the previous year. The net margin decreased from 4.2% in 2006 to 3.7% in 2007, mainly as a result of a slowdown in consumption, and of the additional expenses incurred by putting Banco Ahorro FAMSA into operation. Financial Structure As of the close of 2007, the group s cash and cash equivalents amounted to P324 million. This figure is down P217 million from the previous year, owing mainly to the use of resources for operations. Net debt totaled P5,470 million, up by 46.8% when compared to It is important to note that this increase is due to the significant reduction of debt in 2006 as a result of our initial public offering. This year we have used the additional debt mainly to finance working capital (reciebables, inventory, and equipment for new stores) as required by our expansion plan. 24

27 Consolidated Financial Statements GRUPO FAMSA, S. A. B. DE C. V. AND SUBSIDIARIES

28 CONTENTS Report of independent auditors Consolidated balance sheet Consolidated statement of income Consolidated statement of changes in stockholder s equity Consolidated statement of changes in financial position Notes to the consolidated financial statements

29 REPORT OF INDEPENDENT AUDITORS PricewaterhouseCoopers, S. C. Avenida Rufino Tamayo No. 100 Col. Valle Oriente Garza García, N.L. Teléfono: (81) Fax: (81) To the Stockholders of Grupo FAMSA, S. A. B. de C. V. Monterrey, N. L., March 31, 2008 We have audited the consolidated balance sheets of Grupo FAMSA, S. A. B. de C. V. and subsidiaries as of December 31, 2007 and 2006, and the related consolidated statements of income, of changes in stockholders equity and of changes in financial position for the years then ended. These financial statements are the responsibility of the Company s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in Mexico. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and that they were prepared in accordance with Mexican Financial Reporting Standards. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the financial reporting standards used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the aforementioned consolidated financial statements present fairly, in all material respects, the financial position of Grupo FAMSA, S. A. B. de C. V. and subsidiaries at December 31, 2007 and 2006, and the results of their operations, the changes in their stockholders equity and the changes in their financial position for the years then ended, in conformity with Mexican Financial Reporting Standards. PricewaterhouseCoopers C.P. Alejandro Moreno Anaya Audit Partner 27

30 CONSOLIDATED BALANCE SHEET GRUPO FAMSA, S. A. B. DE C. V. AND SUBSIDIARIES (NOTE 1) AT DECEMBER 31, 2007 WITH COMPARATIVE FIGURES FOR 2006 Thousands of Mexican Pesos of December 31, 2007 Purchasing Power CURRENT ASSETS: Cash and temporary investments (Note 2.c) Ps 324,074 Ps 541,460 Trade accounts receivable (Note 3) 9,793,858 7,865,575 Taxes recoverable 329, ,695 Other accounts receivable 427, ,305 Inventories (Notes 2.f and 4) 2,344,380 2,339,786 Total current assets 13,220,143 11,616,821 PROPERTY, LEASEHOLD IMPROVEMENTS AND FURNITURE AND EQUIPMENT (Note 5) 2,500,983 1,893,780 GOODWILL (Note 2.i) 241, ,096 DEFERRED CHARGES (Note 2.k) 281, ,377 OTHER ASSETS (Note 2.l) 73,798 87,284 Total assets Ps 16,317,463 Ps 14,105,358 CURRENT LIABILITIES: Short-term debt (Note 7) Ps 2,253,964 Ps 821,128 Suppliers 1,879,179 1,992,044 Deferred value added tax 667, ,473 Accounts payable and accrued expenses (Note 2.n) 706, ,144 Income tax and asset tax payable 31,974 39,779 Total current liabilities 5,539,728 3,789,568 LONG-TERM LIABILITIES: Long-term debt (Note 7) 3,540,139 3,445,405 Deferred income tax (Note 11) 618, ,192 Estimated liability for labor benefits (Notes 2.o and 8) 139, ,276 Total long-term liabilities 4,298,300 4,324,873 Total liabilities 9,838,028 8,114,441 STOCKHOLDERS EQUITY (Note 9): Capital stock 2,254,937 2,250,252 Paid in capital 2,111,763 2,055,544 Retained earnings 4,001,181 3,483,229 Deficit on restatement of capital (1,900,236) (1,809,589) Total majority interest 6,467,645 5,979,436 Minority interest 11,790 11,481 Total stockholders equity 6,479,435 5,990,917 COMMITMENT (Note 12) Total liabilities and stockholders equity Ps 16,317,463 Ps 14,105,358 The accompanying notes are an integral part of these financial statements. 28

31 CONSOLIDATED STATEMENT OF INCOME GRUPO FAMSA, S. A. B. DE C. V. AND SUBSIDIARIES (NOTE 1) FOR THE YEAR 2007 WITH COMPARATIVE FIGURES FOR 2006 Thousands of Mexican Pesos of December 31, 2007 Purchasing Power (*) Net sales Ps 14,181,236 Ps 12,859,234 Cost of sales (7,692,122) (7,267,574) Gross margin 6,489,114 5,591,660 Operating expenses (5,160,349) (4,312,472) Operating income 1,328,765 1,279,188 Comprehensive financing expense, net (Note 10) (680,289) (567,163) 648, ,025 Other (expenses) income, net (4,921) 14,111 Income before income tax 643, ,136 Income tax (Note 11) (125,344) (185,426) Consolidated net income 518, ,710 Net income corresponding to minority interest Net income corresponding to majority interest Ps 517,952 Ps 540,515 Earnings per share corresponding to majority interest, in pesos (Note 2.t) Ps 1.57 Ps 1.78 (*) Reclassified for comparative purposes. The accompanying notes are an integral part of these financial statements. 29

32 CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY Capital Paid in Retained stock capital earnings Balances at December 31, 2005 Ps 2,117,372 Ps 562,746 Ps 2,942,714 Increase in capital stock 132,880 1,492,798 Comprehensive income 540,515 Balances at December 31, ,250,252 2,055,544 3,483,229 Increase in capital stock 4,685 56,219 Comprehensive income 517,952 Balances at December 31, 2007 (Note 9) Ps 2,254,937 Ps 2,111,763 Ps 4,001,181 The accompanying notes are an integral part of these financial statements. 30

33 GRUPO FAMSA, S. A. B. DE C. V. Y SUBSIDIARIAS (NOTE 1) FOR THE YEAR 2007 WITH COMPARATIVE FIGURES FOR 2006 Thousands of Mexican Pesos of December 31, 2007 Purchasing Power Deficit on Total Total restatement majority Minority stockholders of capital interest interest equity (Ps 1,685,897) Ps 3,936,935 Ps 10,880 Ps 3,947,815 1,625,678 1,625,678 (123,692) 416, ,424 (1,809,589) 5,979,436 11,481 5,990,917 60,904 60,904 (90,647) 427, ,614 (Ps 1,900,236) Ps 6,467,645 Ps 11,790 Ps 6,479,435 31

34 CONSOLIDATED STATEMENT OF CHANGES IN FINANCIAL POSITION GRUPO FAMSA, S. A. B. DE C. V. AND SUBSIDIARIES (NOTE 1) FOR THE YEAR 2007 WITH COMPARATIVE FIGURES FOR 2006 Thousands of Mexican Pesos of December 31, 2007 Purchasing Power Operations Net income Ps 517,952 Ps 540,515 Items not affecting resources: Depreciation and amortization 325, ,353 Allowance for doubtful accounts 367, ,643 Deferred income tax (72,354) 66,709 Estimated liability for labor benefits 30,287 30,458 1,169,109 1,215,678 Changes in working capital other than financing: Trade accounts receivable (2,296,025) (1,432,781) Inventories (95,241) (425,630) Suppliers (112,865) (32,175) Other, net 440,046 (161,622) (2,064,085) (2,052,208) Resources used in operating activities (894,976) (836,530) Financing Bank loans and long-term debt, net 1,527,570 (124,750) Increase in capital stock 60,904 1,625,678 Minority interest Resources provided by financing activities 1,588,783 1,501,529 Investment Property, leasehold improvements and furniture and equipment, net (911,193) (387,852) (Decrease) increase in cash and temporary investments (217,386) 277,147 Cash and temporary investments at beginning of year 541, ,313 Cash and temporary investments at end of year Ps 324,074 Ps 541,460 The accompanying notes are an integral part of these financial statements. 32

35 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS GRUPO FAMSA, S. A. B. DE C. V. AND SUBSIDIARIES AT DECEMBER 31, 2007 WITH COMPARATIVE FIGURES FOR 2006 Thousands of Mexican Pesos of December 31, 2007 Purchasing Power (except where otherwise indicated) NOTE 1 - ACTIVITIES OF THE COMPANIES The main activities of Grupo FAMSA, S. A. B. de C. V. and its subsidiaries (Grupo FAMSA or the Company), is the purchase and sale of various kinds of household appliances, furniture, clothing and other consumer products, as well as the manufacture of various kinds of furniture and the rendering of banking and credit services, in conformity with the Law of Credit Institutions (LCI). The Company s sales are made on credit and in cash, to both wholesale and retail customers. Currently, Grupo FAMSA carries out its activities through retail branches and wholesale warehouses. The Company s principal subsidiaries and their ownership percentage are: (Unaudited) Ownership % at December 31, Retail sales: Fabricantes Muebleros, S. A. de C. V FAMSA del Centro, S. A. de C. V FAMSA del Pacífico, S. A. de C. V FAMSA Metropolitano, S. A. de C. V Impulsora Promobien, S. A. de C. V FAMSA, Inc., a subsidiary company headquartered in California, U.S.A Corporación de Servicios Ejecutivos FAMSA, S. A. de C. V Corporación de Servicios Ejecutivos, S. A. de C. V Promotora Sultana, S. A. de C. V Suministro Especial de Personal, S. A. de C. V Manufacturing and other: Auto Gran Crédito FAMSA, S. A. de C. V Expormuebles, S. A. de C. V Mayoramsa, S. A. de C. V Verochi, S. A. de C. V Financial sector: Banco Ahorro FAMSA, S. A., Institución de Banca Múltiple (1) (1) Banco Ahorro FAMSA, S. A., Institución de Banca Múltiple (BAF), located in Monterrey, N. L. was incorporated in May 2006 and it began operations in January Its main activity is the rendering of banking and credit services, in conformity with the Law of Credit Institutions. At an Extraordinary General Meeting held on December 14, 2006, the stockholders resolved to change the Company s name from Grupo FAMSA, S. A. de C. V. to Grupo FAMSA, S. A. B. de C. V.; and likewise, to modify its by-laws for purposes of reflecting the new integration, organization and operation of its corporate governance and the new rights of the minority stockholders, as required by the Securities Market Law (SML) published on December 30,

36 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying financial statements were approved for issuance on March 14, 2008 by Humberto Garza Valdéz (Chief Executive Officer) and Abelardo García Lozano (Chief Financial Officer). They have been prepared in accordance with Mexican Financial Reporting Standards (FRS), including the standard requiring comprehensive recognition of the effects of inflation on the financial information. Consequently, all financial statements, including those of prior periods presented for comparative purposes, are stated in constant pesos of December 31, 2007 purchasing power based on factors derived from the National Consumer Price Index (NCPI), published by the Banco de México for domestic companies, and by the NCPI of the country of origin of the companies operating outside Mexico. On January 1, 2007, Grupo FAMSA and its subsidiaries adopted the standards contained in FRS B-3, which basically stipulates a new structure for the statement of income, eliminating the presentation of extraordinary and special items and classifying income and expense as ordinary or non-ordinary, and modifies the general presentation and disclosure criteria for this statement. As a result of applying this new standard, management adopted the criterion of presenting the statement of income based on function, since grouping costs and expenses on this basis allows the various levels of income to be presented. In this connection, for the convenience of the reader, the operating income is presented separately since this caption represents a factor for the analysis of the financial information that Grupo FAMSA and its subsidiaries have regularly presented. In 2007 the adoption of this standard represented no significant change in the presentation and structure of the statement of income compared to that of 2006, and only required reclassification of the employees profit sharing caption to the other expense caption. Following is a summary of the most significant accounting policies followed by Grupo FAMSA and its subsidiaries in the preparation of their financial information: a. Bases for presentation and disclosure The financial statements of all the consolidated companies are conformed to FRS for consolidation purposes, including the financial statements of the foreign subsidiary, FAMSA, Inc., which are originally prepared in conformity with accounting principles generally accepted in the United States of America (U.S.A.), and the financial statements of BAF, which are prepared in conformity with the accounting rules and practices established by the National Banking and Securities Commission (NBSC). The preparation of the financial information in accordance with FRS requires management to make estimates and assumptions that affect the reported amounts at the date of the financial statements. Actual results could differ from those estimates. The most important indexes (National Consumer Price Index - NCPI) used to reflect the effects of inflation on the financial statements were: , and at December 31, 2007, 2006 and 2005, respectively (second half of June 2002 = 100). b. Bases for consolidation The consolidated financial statements comprise those of Grupo FAMSA and all its subsidiaries (see Note 1). Intercompany transactions and balances between Grupo FAMSA and its subsidiaries have been eliminated in consolidation. c. Temporary investments These investments include investments in debt and capital securities, and are classified in the following categories in accordance with management s intention at the date of acquisition: investments to be held to maturity, negotiable financial instruments and financial instruments available for sale. They are initially stated at acquisition cost and are subsequently stated as described below: i. Debt securities to be held to maturity are stated at acquisition cost reduced by amortization of premiums or increased by amortization of discounts, as applicable, based on the unpaid balance while the investments are in effect. Decrease in value is recognized, when appropriate. ii. Negotiable financial instruments and those available for sale are stated at fair value, which is similar to the market value. The fair value is the amount at which financial assets can be exchanged or financial liabilities can be liquidated between interested and willing parties on an arm s-length basis. d. Revenue recognition Revenues arise from the activities described in the first paragraph of Note 1 and may be in cash or on credit. Revenues are recognized at issuance of the sales receipt and/or shipment of the merchandise to the customer. Sales on credit are made on a weekly, bi-weekly and/or monthly installment basis with financing terms under agreements, which occasionally stipulate interest at fixed rates. 34

37 The Company recognizes revenues for financing on sales made on credit at the time the sale is made since the average recovery term is less than a year. Up to 2006, in connection with the sale of warranty policies made by FAMSA, Inc., the Company was required, in accordance with legal requirements in the U.S.A. to maintain 25% of the related sales amount deposited in a trust until the warranty policy expires. At December 31, 2006, the Company had restricted cash for Ps33,732, included in the balance sheet under the caption Cash and temporary investments. e. Allowance for doubtful accounts (Note 3) The Company records as an allowance for doubtful accounts, the equivalent of 3.0% of its net sales made on credit, which the Company considers sufficient to cover any related loss. BAF records the allowance for doubtful accounts in accordance with the rules prescribed by the National Banking and Securities Commission (NBSC), which consist in applying rates in accordance with risks of its portfolio. At December 31, 2007 the allowance for doubtful accounts recorded by BAF amount Ps26,420. f. Inventories and cost of sales (Note 4) Inventories of household appliances, furniture, clothes and other products for sale to third parties are stated at estimated replacement cost, generally at the latest purchase prices. The amounts shown for inventories do not exceed market value. The cost of sales is shown in constant pesos based on the estimated replacement costs prevailing on the dates when the sales were effected. g. Shipment and handling of merchandise The Company records freight expenses under the caption Cost of sales as well as the shipping and handling costs of merchandise when incurred. The amounts received for shipping and handling costs of merchandise paid by the customer are included within Net sales. h. Advance payments for advertising The Company contracts its media advertising, mainly television and press, directly and through its subsidiaries. The related agreements stipulate payments for these services and are charged to income as accrued, which are rendered in the course of one year. At December 31, 2007, there was advertising accrued for Ps113,558 (Ps124,767 in 2006); this amount is included in the balance sheet as Other accounts receivable. i. Goodwill This caption is stated at cost restated by applying factors derived from the NCPI to the historical cost. It is subject to testing for impairment on an annual basis, or earlier, in the event circumstances occur that indicate the existence of a possible impairment. j. Property, leasehold improvements, furniture, equipment and depreciation (Note 5) Property, leasehold improvements, furniture, equipment and the related accumulated depreciation are stated at cost restated by applying factors derived from the NCPI. Depreciation is calculated by the straight-line method based on the estimated useful lives of the assets as determined by the companies. The amortization period for leasehold improvements is determined based on the term of the lease agreement. k. Deferred charges This caption is stated at cost restated by applying factors derived from the NCPI to the historical cost. It comprises principally costs relative to development and implementation of integral computer systems, installation, preoperating and start-up expenses of the foreign subsidiary, all of which are subject to amortization. 35

38 l. Other assets These assets represent principally deposits in guarantee and an intangible asset related to severance compensations. m. Transactions in foreign currency and exchange differences (Note 6) Monetary assets and liabilities in foreign currencies, mainly U.S. dollars (US), are stated in Mexican currency at the rates of exchange in effect at the balance-sheet date. Exchange differences arising from changes in exchange rates between the transaction and settlement dates or the balance-sheet date are charged or credited to comprehensive financing (expense) income. n. Funding BAF s funding liabilities, including the promissory note with interest payable at end of period, are recorded at the funding cost plus the interests accrued, which are calculated based on days elapsed at the closing of each month and are recorded in income as accrued. At December 31, 2007, the BAF s funding liabilities was of Ps270,217 and it is included in the balance sheet as Accounts payable and accrued expenses. o. Estimated liability for labor benefits (Note 8) Seniority premiums to which employees are entitled upon termination of employment after 15 years of service, as well as the obligations existing under the retirement plans and severance compensations, are recognized as a cost of the years in which the services are rendered in accordance with actuarial studies carried out using the projected unit credit method. p. Comprehensive financing income (expense) (Note 10) This item is determined by grouping in the statement of income all interest and other financial income and expense, exchange gains and losses, and the gain or loss on monetary position. The gain or loss on monetary position represents the effect of inflation, as measured by the NCPI, on the Company s monthly net monetary assets or liabilities during the year. q. Impairment of long-lived assets and their disposal Long-lived assets, tangible and intangible (including goodwill), are subject to testing for impairment in the event circumstances occur that indicate the existence of a possible impairment. In 2007 and 2006 no loss due to impairment was recognized since there were no factors indicating impairment of such assets. r. Income tax and employees profit sharing (Note 11) Income tax is recorded by the comprehensive asset and liability method, which requires recognition of deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of all assets and liabilities and their respective tax bases. Deferred employees profit sharing is recorded only based on those temporary differences between the net income for the year and the pretax income applicable thereof, that are reasonably presumed to derive in a future liability or benefit. The employees profit sharing is included in the income statement as Other (expense) income, net. s. Comprehensive income (Note 9) Comprehensive income is represented by the net income plus the gain or loss from holding nonmonetary assets, and items required by specific accounting standards to be reflected in stockholders equity but which do not constitute capital contributions, reductions or distributions. Amounts included herein are restated on the basis of NCPI factors. t. Earnings per share Earnings per share are computed by dividing the net income for the year by the weighted average number of common shares outstanding during the year. There are no effects arising from potentially dilutive shares. 36

39 u. Risk concentration The principal financial instruments maintained by the Company under a credit risk concentration correspond to cash in banks and temporary investments, as well as trade accounts receivable. Cash and temporary investments are maintained in recognized financial institutions. The relative investments are in fixed interest and money market securities. The risk concentration regarding trade accounts receivable is significant since the Company managed a credit portfolio of approximately 1,450,000 accounts (unaudited) at December 31, However, there is an allowance for doubtful accounts based on a percentage of the net credit sales and in accordance with rules prescribed by the NCSF. Additionally, in order to reduce risks, the Company requires that the credits granted be collateralized by the goods sold and a guarantor. NOTE 3 - TRADE ACCOUNTS RECEIVABLE At December 31 this caption comprised the following: Trade accounts receivable Ps 9,906,499 Ps 7,949,580 Less - Allowance for doubtful accounts (1) 112,641 84,005 Net Ps 9,793,858 Ps 7,865,575 (1) In 2007 and 2006, the charge to income was Ps367,742 and Ps286,643, respectively. At December 31, 2007 and 2006 the Company s amounts receivable in respect of its retail customers were pledged as security for a line of credit (see Note 7). NOTE 4 - INVENTORIES Inventories were analyzed as follow: Products (*) Ps 1,950,522 Ps 1,926,798 Clothing, footwear and jewelry 387, ,070 Merchandise in transit, advances to suppliers and other 5,967 7,918 Estimated replacement cost Ps 2,344,380 Ps 2,339,786 (*) Comprises principally electronic products, household appliances and furniture. 37

40 NOTE 5 - PROPERTY, LEASEHOLD IMPROVEMENTS AND FURNITURE AND EQUIPMENT At December 31 this caption comprised the following: Depreciation rate Land Ps 240,307 Ps 240,307 Buildings and construction 151, ,409 3% Leasehold improvements 2,096,210 1,602,953 7% Furniture and equipment 747, ,976 10% Transportation equipment 221, ,545 20% Data-processing equipment 412, ,881 24% Construction in progress 90,736 23,844 3,720,469 2,854,608 Accumulated depreciation (1,459,793) (1,201,135) 2,260,676 1,653,473 Net restated cost Ps 2,500,983 Ps 1,893,780 Depreciation charged to income represented annual average rates of 8.7% in 2007 and 10.2% in In accordance with the lease agreements, the leasehold improvements will become the property of the lessor at the termination of the agreements. 38