(a) Gross Profit and Gross Margin without Depreciation allocated to cost

Transcription

1 4Q16 Blumenau, February 23 th, Cia. Hering (BM&FBOVESPA: HGTX3), one of the largest retail and apparel designer and manufacturer in Brazil, announces the results of the fourth quarter of 2016 (4Q16). The Company information, unless otherwise indicated, is based on consolidated figures in thousands of Reais, according to International Accounting Standards (IFRS). All comparisons refer to the same period of 2015 (4Q15), except when otherwise indicated. CAPITAL MARKETS Dec. 30 th, 2016 HGTX3: R$ per share Market Cap: R$ 2.4 billion Conference Call February, 24 th, :00 a.m. (BrT) In Portuguese simultaneous translation to English Brazil: (+55) or (+55) EUA: (+1) Toll-Free: (+1) Access code: Hering WEBCAST Conference audio will be broadcast on the internet, with the slide show available at INVESTOR RELATIONS Fabio Hering CEO Frederico de Aguiar Oldani CFO and IRO Bruno Salem Brasil IR Manager Caroline Peretti T. Luccarini IR Analyst Phone.: +55 (11) /4805 PRESS RELATIONS Rosilene Schuldt +55 (47) Lenon Hymalaia +55 (11) / +55 (11) R$ Thousand 4Q16 Consolidated Highlights 4Q Q16 / 4Q / 2015 Gross Revenue 515, , % 1,748,432 1,900, % Domestic Market 504, , % 1,706,324 1,857, % Foreign Market 10,224 12, % 42,108 42, % Net Revenue 432, , % 1,475,137 1,588, % Gross Profit 175, , % 582, , % Gross Margin 40.5% 38.5% 200 bp 39.5% 39.5% 0 bp Cash Gross Profit (a ) 182, , % 610, , % Cash Gross Margin (a) 42.2% 39.8% 240 bp 41.4% 41.1% 30 bp Net Income 50,949 83, % 199, , % Net Margin 11.8% 16.4% -460 bp 13.5% 17.7% -420 bp EBITDA (b) 60,951 94, % 207, , % EBITDA Margin (b) 14.1% 18.6% -450 bp 14.1% 16.5% -240 bp ROIC (c) 14.0% 17.3% -330 bp 14.0% 17.3% -330 bp (a) Gross Profit and Gross Margin without Depreciation allocated to cost 2016: Gross Revenue of R$ 1.7 billion, Payout of 99.8% with additional proposal of R$ 75 mn Total gross revenue of R$ 1.7 billion, 8.0% lower than 2015, impacted by franchise and multibrand performance; 100 refurbished stores in 18 states, under the Hering Store Refurbishment Program; Net income of R$ million, mainly due deterioration in operating income. 29.1% retraction vs also influenced by the dissolution and liquidation of both subsidiary and intercompany debt in 2015; Free cash flow generation of R$ million, R$ 94.7 million higher than 2015, favored by lower working capital need and lower investments. 4Q16: Gross Revenue of R$ million, Net income of R$ 50.9 million Gross Revenue of R$ million, 15.3% lower than 4Q15, impacted by franchise and multibrand performance; R$ 61.0 million EBITDA, margin of 14.1%, due to operational deleveraging, lawsuit gains reversal and additional deposits to Protege Goiás Fund; Net income of R$ 50.9 million and net margin of 11.8% due to operating result deterioration. The decrease of 38.7% vs 4Q15 also due to nonrecurring R$ 53.5 million gain in Income Tax and Social Contribution in (b) Earnings before interest, taxes, depreciation, amortization and participations (c) Last 12 months

2 MESSAGE FROM MANAGEMENT The year of 2016 was marked by important company evolutions in a difficult sales scenario as a result of political and economic crises in the country over the year. The strategy based on the combination of Product and Store Fronts (P&S), started in the previous year, advanced in 2016 and we remain confident that its proper execution, coupled with improvement in consumer sentiment, will drive the company into the next growth cycle. Shopping experience improvement in our stores was at the center of attention this year. After a sequential growth in store network, we prioritize the existing base in 2016, with initiatives to renovate points of sale and to improve the execution of store operation. The refurbishment plan, the largest executed by the company covering 100 Hering Store in 18 states, was successfully completed and was crucial for approximately one third of brand s stores be already in the latest format. We also promoted improvements in shopping experience through visual merchandising (VM) and store assortment enhancement, favoring better inventory management that, despite challenging sales scenario, improved quality, with a reduction in leftovers and lower volume of past collections. We ended the year with 834 stores - six less than of which 18 in other South American countries. Other channels stand out in building bases for future gains. In e-commerce, advances in technology and greater exploration of digital sales platform, with new functionalities implemented such as more accurate recommendations, customized campaigns, responsive layout and product descriptions improvement with photos and videos translated into double-digit growth in visits and sales. These evolutions, meant to improve traffic and conversion, contributed to the good result in the year and leave us optimistic with the perspective of channel s accelerated growth in the future. In multibrand, the conclusion of the segmentation project, in 2016, will allow greater customization to policies and incentives on each customer profile aiming to increase sales from 2017 on. We ended the year with 5 websites and 17,538 active multibrand clients. Another set of work fronts was developed to strengthen Product, seeking better value equation to the consumer (Value for Money) with perceived increase of quality and better pricing. Since the beginning of the year we started revisiting the development of collections process (or Product Lifecycle Management) delivering efficiency gains in the process. We also redesigned scope and attributions of Engineering and Research & Development teams to greater engagement in the collection process, being at the service of brand structures, and we launched Remodelar and Qualidade Total projects, whose attributions are, respectively, to ensure consistency and measures standardization in our products and to enhance aspects related to quality in our products from the selection of materials, through production and training of suppliers, up to the delivery to final consumer. These initiatives will gradually be part of the collections developing process over the next few years. Activities related to our brands also deserve to be on the spotlight. Hering brand, once again among the 25 th Most Valuable Brazilian Brands, according to Interbrand research, promoted relevant improvements in store and product fronts, mentioned above, and also made important investments in leadership development. In children's brands, PUC established new partnerships and its results already presented stabilization signs, while Hering Kids had the highest network expansion and the best sales results of the company in Hering for you brand, after two years of tests and feasibility assessments, stopped operating exclusive stores, and become a product line within Hering brand (its product line can be found in selected Hering Stores, multibrand and webstore). DZARM. brand continues consolidating its new brand positioning and inaugurated its first light franchise: smaller surfaces with lower set up cost involved in the opening. The project will be monitored and could become an important path to growth outside metropolis. At the corporate level, important advances were made in technology, logistics, governance, talent management and succession areas. The extension of SAP system to logistics, invoicing and order fulfillment areas was concluded in the first quarter. We invested in logistics automation with the acquisition of a state-of-the-art sorter, the company's largest investment in the year. The company's governance structures were strengthened with the addition of two new independent board members and with the Strategy Committee creation, whose main functions include supporting the Strategic Plan elaboration and revisiting investment opportunities. Last but not least, we made investments for ours Cia. Hering 4Q16 page 2

3 employees to ensure business continuity in the long run. Talent management was reinforced with Jovens Empreendedores program and with the realization of both competency and mentoring assessments to leadership, in line with our succession plan. Despite the above-mentioned developments, our results, especially sales, were negatively affected by the economic recession and its effects on consumption environment. Net revenue declined 7.2% in 2016, mainly due to weak performance of both multibrand and franchises channels. Gross margin remained stable, with margin gain coming from lower volume of markdowns and better inventories and leftovers management, offset by non-dilution of fixed costs. Earnings before interest, taxes, depreciation and amortization (EBITDA) was R$ million, 21.0% lower than 2015, and net income reached R$ million. Balance sheet at the end of December had low indebtedness and net cash position of R$ million, in line with our conservative financial policy. Our investments in the year totaled R$ 51.3 million and were mainly directed to industry and stores. Despite EBITDA decrease, free cash flow generation was favored by better working capital management and lower investments, accumulating R$ million in 2016, 82.5% higher than Finally, we remain confident in our business strategy and in our ability to resume company's growth from a differentiated business model, strong brands and solid management and leadership base. Management Cia. Hering 4Q16 page 3

4 SALES PERFORMANCE Gross Revenues - R$ thous. 4Q16 4Q Q1 6 / 4 Q / Gross Revenue 515, , % 1,748,432 1,900, % Domestic Market 504, , % 1,706,324 1,857, % Foreign Market 10,223 12, % 42,108 42, % Domestic Market Gross Revenue 504, , % 1,706,324 1,857, % Hering 384, , % 1,270,664 1,415, % Hering Kids 64,438 58, % 218, , % PUC 31,743 35, % 118, , % DZARM. 15,629 17, % 64,603 82, % Other 8,261 8, % 34,161 24, % Domestic Market Share The channel breakdown does not consider Others. 4Q16 4Q Q1 6 / 4 Q / Multibrand 188, , % 722, , % Franchise 196, , % 646, , % Owned Stores 100,619 99, % 265, , % Webstore 11,070 8, % 38,027 31, % Total 496, , % 1,672,163 1,832, % Multibrand 38.0% 37.6% 40 bp 43.2% 44.5% -130 bp Franchise 39.5% 44.0% -450 bp 38.6% 39.7% -110 bp Owned Stores 20.3% 16.9% 340 bp 15.9% 14.1% 180 bp Webstore 2.2% 1.5% 70 bp 2.3% 1.7% 60 bp Total 100.0% 100.0% % 100.0% - Gross sales totaled R$ 1.7 billion in 2016 and R$ million in 4Q16, a decrease of 8.0% and 15.3% compared to the same period last year mainly impacted by the effects of both economic recession and political instability especially on multibrand s performance. In 2016, the company continued to focus its efforts on the Product offer improvement ("Value for Money") with greater consistency in collections from year-end on and better Store experience (P&S). Such initiatives, however, were insufficient to offset negative effects of the economic environment. The multibrand channel decreased by 11.4% in 2016 and 14.4% in 4Q16, impacted by lower sales to existing customers, weak performance from all brands and net closing of approximately 700 points of sale in the year. Sales to franchises declined 11.1% in the year and 24.1% in 4Q16, on lower orders throughout the year, as a consequence of sales drop to final consumers noted in the store network. The most pronounced decrease in 4Q16 is due to higher invoiced volume of High Summer collection in 3Q16, as a result of network preparation for the period of higher sales. Stores operated by the company registered a 2.9% increase in 2016 and +1.3% in 4Q16, mainly influenced by the net addition of 5 stores in the period, good performance in outlets and better store management, mainly related to visual merchandising and supply improvements. Webstores maintained double-digit growth (+20.3% in 2016 and +28.7% in 4Q16), as a result of technological advances in its platforms, digital media investments and launch of online outlet (Espaço Hering), generating increase of both traffic and conversion. Hering brand, widely accepted by all socio-economic classes and age groups and that stands out for its democratic positioning, with good cost-benefit, reported sales decline of, respectively, 10.2% and 19.0% in 2016 and in 4Q16, negatively impacted by the weak performance of multibrand and franchise channels and higher invoiced volume of High Summer collection in 3Q16. Throughout 2016, the brand focused its efforts on P&S fronts: Product, by reviewing the collection development process (or Product Lifecycle Management) generating efficiency gains in the process and in leadership development, and Stores, contemplating important investments in shopping experience, including stores remodeling. In children's brands, the company continued improving their combined strategy by working with two brands of different profiles and styles, however complementary. PUC brand, focused on fashion and colorful clothes to children s public from classes A and B, posted 8.8% sales decrease in 2016 and 11.5% in 4Q16, mainly impacted by the net closing of 9 Cia. Hering 4Q16 page 4

5 stores in the year and sales decrease in the multibrand channel. The brand, which went through adjustments in its value proposition and distribution network, showed signs of stabilization in results by the end of the year. Hering Kids, focused on children of all social classes, offering casual clothing with good cost-benefit ratio, grew by 6.6% in 2016 and 10.3% in 4Q16, company s best result, supported by good product offering, store experience and communication. The brand expanded its stores network, accounting the net opening of 13 stores in the year. DZARM., focused on urban women of classes A and B, who wants to express their power and self-confidence, continued investing to consolidate their new positioning that led to men's line exclusion, which accounted approximately 30% of sales. The brand inaugurated its first light franchise store in 2016, characterized by smaller surfaces with lower set up cost. The project will be monitored and could become an important path for growth. Sales fell 21.6% in the year and 10.4% in 4Q16, as a result of the greater customer s selectivity in the multibrand channel, in line with the brand's new positioning. Despite short-term impact, we believe the new positioning will bear good results in the future. DISTRIBUTION NETWORK Cia. Hering relies on a multichannel model of distribution that allows its products to reach the final consumer through 834 stores, 17,538 multibrand retailers and e 5 webstores. In 2016, gross sales in domestic market were distributed as follows: STORES NETWORK Hering Store refurbishment program, company's priority in 2016, covered 100 stores in 18 states of the country. The project, with a current and modern design, included evolutions in visual merchandising, better lighting and organization, with redesigned sections for jeans and basic, store facade, among other improvements. The plan had incentives from the company comprising R$ 8.4 million as subsidies and financing part of the amount invested. In 4Q16, 15 stores were inaugurated, of which 9 Hering Kids and 6 Hering Store, predominantly operated by franchisees and located in the Southeast region. In addition, 5 operations were closed, of which 4 Hering Store and 1 PUC. In 2016, the company opened 26 stores, of which 13 Hering Kids, 12 Hering Store - one in the international market - and 1 DZARM. During the year were closed 32 units, of which 3 Hering for you stores whose points of sale were converted into Hering Kids. At the end of December the company totaled 834 stores distributed as follows: Cia. Hering 4Q16 page 5

6 Number of Stores 4Q16 3Q16 4Q15 TOTAL Brazil Hering Store Owned Franchised Hering Kids Owned Franchised PUC Owned Franchised DZARM Owned Franchised Hering for you Owned Foreign - Franchised HERING STORES CHAIN PERFORMANCE Hering Store sales, which considers the sales from the stores network (owned and franchises) to final costumers ( sellout ) decreased 8.9% totaling R$ 1.4 billion. In 4Q16, sales revenue totaled R$ million, down 11.6% over 4Q15. Same-store sales fell 8.6% in 2016 and 9.8% in 4Q16. The negative effects of macroeconomic deterioration and consumption environment contributed to consumers flow reduction in stores across the country, resulting in decrease check-outs and, consequently, in units sold. Sales slowdown can also be partially attributed to temporary closure of stores as a result of Hering Store Refurbishment Program execution which covered 100 stores in 18 states, especially in 4Q16 due to reforms concentration in the period. The current and modern design of the project, contemplated advances in consumer's shopping experience, through evolutions in VM, better lighting and organization, with redesigned sections for jeans and basics, among other improvements. The plan included incentives from the company of R$ 8.4 million as subsidy in addition to financing part of the amount invested. By the end of this cycle, approximately 1/3 of the stores network are already in the most up-todate format. The outlet stores (Espaço Hering) showed good performance in the year. The segment grew double-digit and contributed positively to the 3.0% growth in own stores sales in the year and 1.7% in 4Q16. Own stores performance was also positively influenced by the net opening of 4 stores in the year. Average price per item increased 6.6% in the year and 3.3% in 4Q16, and is explained, partially, by better inventory management over the year, resulting in fewer product leftovers, reducing sales of discounted items compared to Cia. Hering 4Q16 page 6

7 Hering Store Chain Performance 4Q16 4Q15 Chg. 4Q16 / 4Q Chg / 2015 Number of Stores % % Franchise % % Owned % % Sales (R$ thousand) ( 1 ) 507, , % 1,436,834 1,577, % Franchise 416, , % 1,198,684 1,346, % Owned 90,603 89, % 238, , % Same Store Sales growth ( 2 ) -9.8% -5.1% -470 bp -8.6% -3.5% -510 bp Sales Area (sq. meter) 90,248 91, % 90,248 91, % Sales (R$ per sq. meter) 5,620 6, % 15,921 17, % Check-Outs 4,070,869 4,849, % 11,846,201 13,828, % Units 8,749,704 10,231, % 24,710,379 28,925, % Units per Check-Out % % Average Sales Price (R$) % % Average Sales Ticket (R$) % % (1) The amounts referred to the sales to final costumers ('sell out') (2) Compared to the same period of the previous year ECONOMIC AND FINANCIAL PERFORMANCE R$ Thousand 4Q16 Part. (%) 4Q15 Part. (%) Chg. Chg Part. (%) 2015 Part. (%) 4Q16 / 4Q / 2015 Gross Revenue 515, % 607, % -15.3% 1,748, % 1,900, % -8.0% Sales Deduction (83,040) -19.2% (100,428) -19.8% -17.3% (273,295) -18.5% (311,212) -19.6% -12.2% Sales Deduction taxes (113,783) -26.3% (123,546) -24.3% -7.9% (362,390) -24.6% (388,305) -24.4% -6.7% AVP (Adjustment to Present Value) (12,703) -2.9% (14,821) -2.9% -14.3% (42,323) -2.9% (39,358) -2.5% 7.5% Sales Deduction Tax Incentives 43, % 37, % 14.5% 131, % 116, % 12.9% Net Revenue 432, % 507, % -14.8% 1,475, % 1,588, % -7.2% Total COGS - Excluding Depreciation and Amortization (249,904) -57.8% (305,351) -60.2% -18.2% (865,031) -58.6% (935,487) -58.9% -7.5% Cost of Goods Sold (260,908) -60.4% (318,711) -62.8% -18.1% (903,324) -61.2% (974,008) -61.3% -7.3% AVP (Adjustment to Present Value) 6, % 6, % -10.4% 24, % 20, % 22.4% Subvention for Expenditure 4, % 6, % -25.0% 13, % 18, % -26.3% Cash Gross Profit 182, % 202, % -9.8% 610, % 653, % -6.6% Depreciation and Amortization (7,183) -1.7% (6,768) -1.3% 6.1% (28,080) -1.9% (25,848) -1.6% 8.6% Gross Profit 175, % 195, % -10.4% 582, % 627, % -7.3% Operating Expenses (128,763) -29.8% (113,212) -22.3% 13.7% (431,104) -29.2% (411,855) -25.9% 4.7% Selling Expenses (99,408) -23.0% (91,957) -18.1% 8.1% (325,344) -22.1% (318,494) -20.0% 2.2% Company (70,185) -16.2% (64,599) -12.7% 8.6% (226,734) -15.4% (225,766) -14.2% 0.4% Fixed (39,812) -9.2% (34,936) -6.9% 14.0% (121,660) -8.2% (119,891) -7.5% 1.5% Variable (30,373) -7.0% (29,663) -5.8% 2.4% (105,074) -7.1% (105,875) -6.7% -0.8% Stores (29,223) -6.8% (27,358) -5.4% 6.8% (98,610) -6.7% (92,728) -5.8% 6.3% Administrative and General Exp. and Mgmt Remun. (14,829) -3.4% (14,247) -2.8% 4.1% (53,685) -3.6% (54,089) -3.4% -0.7% Depreciation and Amortization (7,493) -1.7% (5,444) -1.1% 37.6% (28,567) -1.9% (21,329) -1.3% 33.9% Profit Sharing - N.A 1, % N.A - N.A - N.A N.A Other Operating Income (Expenses), net (7,033) -1.6% (3,405) -0.7% 106.5% (23,508) -1.6% (17,943) -1.1% 31.0% Operating Income Before Financial Results 46, % 82, % -43.7% 150, % 215, % -30.0% Financial Income 7, % 17, % -59.3% 90, % 77, % 16.7% Financial Expenses (10,676) -2.5% (8,899) -1.8% 20.0% (44,289) -3.0% (38,485) -2.4% 15.1% Total Financial Income (Expenses) (3,456) -0.8% 8, % N.A 46, % 39, % 18.2% Operating Income 42, % 90, % -52.9% 197, % 255, % -22.6% Income and Social Contribution Taxes - Current 7, % (107) 0.0% N.A 1, % 1, % 8.3% Income and Social Contribution Taxes - Deferred % (7,777) -1.5% N.A % 24, % -99.8% Net Income for the Period 50, % 83, % -38.7% 199, % 281, % -29.1% Allocated to controlling shareholders 50, % 83, % -38.7% 199, % 281, % -29.1% Allocated to minority shareholders - N.A - N.A N.A - N.A - N.A N.A Earnings per share - R$ Allocated to controlling shareholders % % EBITDA 60, % 94, % -35.4% 207, % 262, % -21.0% Cia. Hering 4Q16 page 7

8 EBITDA AND EBITDA MARGIN Earnings before interest, taxes, depreciation and amortization (EBITDA) fell 21.0% in 2016 and 35.4% in 4Q16, while EBITDA margin decreased, respectively, 240 bp and 450 bp. The main factors associated with these results are: 8.0% gross sales decrease in the year and 15.3% in 4Q16; Gross margin of 39.5% in 2016, stable compared to previous year. In 4Q16, gross margin reached 40.5% (+200 bp), resulting from better inventory management, which enabled lower leftovers of past collections, with a consequent volume reduction of markdown, was partially offset by non-dilution of fixed costs due to revenue retraction; Negative impact in 4Q16 from reversal of lawsuit gains related to the Compulsory Loan to Eletrobrás in the 90's (R$ 7.5 million were booked in 2Q16 in 'Other income and expenses' and R$ 16.7 million in 3Q16, in 'Financial income'), due to an injunction granted by court (further details in the Explanatory Notes number 12). The effect is null in the year; Operating expenses increased 4.7% in the year and 13.7% in 4Q16, result of growth in selling expenses, mainly due to (i) subsidy to franchisees to refurbish Hering Stores, which totaled R$ 8.4 million in the year (R$ 5.6 million in 4Q16); (ii) wage readjustment; (iii) net opening of 5 own stores in 2016 and (iv) increase in provision for doubtful accounts. A 106.5% increase in other operating income (expenses), mainly related to deposits of R$ 22.0 million in the year on Protege Goiás Fund (R$ 12.0 million in 4Q16), partially offset by health and pension plan gains of an actuarial revaluation. In 2016 there was no profit sharing as results were below planned. Reconciliation of EBITDA - R$ thousand 4Q16 4Q15 Chg. 4Q16 / 4Q Chg / 2015 Net Income 50,949 83, % 199, , % (+) Income and Social Contribution Tax (8,130) 7, % (1,817) (25,995) -93.0% (-) Net Financial Income 3,456 (8,829) % (46,678) (39,476) 18.2% (+) Depreciation and Amortization 14,676 12, % 56,647 47, % (=) EBITDA 60,951 94, % 207, , % EBITDA Margin 14.1% 18.6% -450 bp 14.1% 16.5% -240 bp NET INCOME AND NET MARGIN Company's net income decreased 29.1% in 2016 and 38.7% in 4Q16, amounting, respectively, R$ million and R$ 50.9 million. Affects the comparison base, the recognition of R$ 53.5 million gain in Income Tax and Social Contribution, in 2015, from the dissolution and liquidation of the subsidiary Hering Overseas and intercompany debt. The operating result deterioration, mentioned above, was partially offset by: Positive effects in Income Tax and Social Contribution relating to the exclusion of (i) higher investment subsidy led by an increase in local products share in sales mix and (ii) Interest on Capital 35.5% higher than In the year, Operating Income (before taxes on profit) was lower than the total of these exclusions, which explains the gain in Income Tax and Social Contribution; Cia. Hering 4Q16 page 8

9 As mentioned in 'EBITDA' section, quarter s Financial Result was impacted by the reversal of financial income recognition in the amount of R$ 16.7 million, booked on 3Q16, of legal action related to the Compulsory Loan to Eletrobrás. In 2016, net financial income reached R$ 46.7 million, 18.2% higher than 2015, mainly due to higher volume of interest rate from clients and applications, favored by an increase in the company s average cash. CAPEX Capex totaled R$ 51.3 million in the year and R$ 37.0 million in 4Q16. The 21.7% increase in the quarter is attributed mainly to own stores remodeling, opening and acquisition of points of sale that totaled 8 stores. The 47.1% decrease in 2016 is explained by (i) reduction in the amount allocated to industrial plants after investment cycle occurred in 2015, which culminated with the launch of São Luís de Montes Belos (GO) manufacturing plant, as well as investments addressed to the company s largest distribution center (DC), in Goiás and (ii) lower investments in technology, after the conclusion of SAP implementation at the beginning of the year. CASH FLOWS In 2016, Cia. Hering posted positive free cash flow of R$ million, R$ 94.7 million higher than 2015, mainly due to a reduce in working capital needs and lower investments, that more than offset EBITDA decline in the period. In 4Q16, there was a negative cash flow of R$ 2.4 million, R$ 24.4 million lower than 4Q15 mainly due to the deteriotation in operating results. As part of the Store Refurbishment plan, a portion of the amount invested by franchisees was financed by the company, and R$ 14.7 million remained as receivable on December 31, recorded under 'other accounts receivable. Cia. Hering 4Q16 page 9

10 Cash Flow - Consolidated (R$ thousand) 4Q16 4Q15 Chg Chg. EBITDA 60,951 94,349 (33,398) 207, ,876 (55,307) No cash items 24,585 5,673 18,912 21,176 25,693 (4,517) AVP (Adjustment to Present Value) - Clients and Suppliers 5,611 5, ,326 18,219 2,107 Current Income tax and Social Contribution 7,776 (107) 7,883 1,766 1, Working Capital Capex (64,295) (52,792) (11,503) 9,847 (96,812) 106,659 (Increase) decrease in trade accounts receivable (70,136) (99,421) 29,285 29,688 9,931 19,757 (Increase) decrease in inventories 23,463 73,323 (49,860) 4,020 (28,908) 32,928 Increase (decrease) in accounts payable to suppliers 8,500 (12,454) 20,954 21,081 (20,420) 41,501 Increase (decrease) in taxes payable 6,336 6,469 (133) (14,707) (24,745) 10,038 Refurbishment Project - Franchisee Financing (6,053) (734) (5,319) (14,665) (734) (13,931) Others (26,405) (19,975) (6,430) (15,570) (31,936) 16,366 CapEx (37,056) (30,329) (6,727) (51,314) (96,915) 45,601 Free Cash Flow (2,428) 21,989 (24,417) 209, ,692 94,678 Reconciliation from accounting Cash flow to adjusted Cash flow (R$ thousand) 4Q16 4Q15 Chg Chg. DFC - Cash provided by operating activities 26,271 55,952 (29,681) 287, ,654 55,092 Adjustment Financial items allocated to operating cash 8,357 (3,634) 11,991 (27,062) (21,047) (6,015) Unrealized exchange and monetary variation (804) (45) (759) (804) (663) (141) Financial Result 3,456 (8,829) 12,285 (46,678) (39,476) (7,202) AVP (Adjustment to Present Value) - Clients and Suppliers 5,611 5, ,326 18,219 2,107 Interest paid on loans (779) DFC - Cash flows from investing activities (37,056) (30,329) (6,727) (51,314) (96,915) 45,601 Free Cash Flow (2,428) 21,989 (24,417) 209, ,692 94,678 * The adjusted cash flow as presented above is nota Brazilian Generally Accepted Accounting Practice and IFRS financial performance measurement. The information on this table was calculated for the management of the Company and has not been audited by independent auditors. ** Working Capital provisions in this Cash Flow Statement were reported as Non-cash items, which explains the difference between the reported figures in the balance sheet. RETURN ON INVESTED CAPITAL ROIC Cia. Hering s Return on Invested Capital ( ROIC ) was 14.0% in the year-end, a decline of 330 bp compared to The result is mainly explained by the deterioration of the company s operating results, partially offset by lower effective income tax, lower working capital investment and interest on capital 35.5% higher than Return on Invested Capital (ROIC) - R$ thousands 4Q16 4Q15 Chg. 4Q16 / 4Q15 EBITDA 207, , % (-) Depretiation and Amortization (56,647) (47,177) 20.1% (+) Amortization - Right of use properties ¹ 5,164 4, % (+) Financial Results - Adjust to Present Value ² 20,141 17, % (-) IR&CS - Nominal Rate (34%) ³ (67,184) (86,760) -22.6% (+) IR&CS - IOC Tax Benefit ³ 28,588 21, % Operating Income 137, , % Fixed Assets 425, , % Accumulated amortization - Right of use properties 35,658 31, % Working capital 520, , % Average Invested Capital* 981, , % ROIC 14.0% 17.3% -330 bp Notes to the financial statements: (1) Nr. 15; (2) Nr. 33; (3) Nr. 34 (*) Last 4 quarters average Cia. Hering 4Q16 page 10

11 INDEBTEDNESS For another year Cia. Hering ends the fiscal year with net cash, aligned with a conservative financial management policy. At the end of 2016 there was R$ million in cash and cash equivalents and a net cash position of R$ million. The increase in cash is due to the strong cash generation in the year, as mentioned in the respective section. % of % of % of Indebtedness - R$ thousand 4Q16 3Q16 4Q15 total debt total debt total debt Short Term (2,123) 8% - 0% (1,308) 100% Long Term (25,612) 92% - 0% - 0% Total (27,735) 100% - 0% (1,308) 100% (-) Cash and Cash Equivalents 204, , ,093 (=) Net Cash 177, , ,785 SHAREHOLDERS REMUNERATION Dividend s already paid for the fiscal year 2016 totaled R$ million, as detailed below: On May 24, 2016, the Company s Board of Directors approved R$ 42.1 million (R$ per share) paid on June 28, On October 26, 2016, were approved R$ 40.0 million (R$ per share) based on the shareholder s position dated November 4, The payment was made on November 29, On November 30, 2016 were approved R$ 42.0 million in interest on capital (R$ per share) based on the shareholder s position date December 7, The payment was made on December 16, In addition to the amount already paid, Management will submit to the approval of the Annual Shareholders' Meeting to be held in April 2017 the proposal of R$ 75.0 million in additional dividends, which, if approved, will represent a payout ratio for the year of 99.8%, as shown below. Payout Proposal R$ million R$ per share¹ Aprroved in Record date Paid in Already paid Interest on capital /24/ /30/ /28/2016 Dividends /26/ /04/ /29/2016 Interest on capital /30/ /07/ /16/ Proposed Additional dividends ² To be defined ² To be defined ² To be defined ² = Total payout proposed ² Net Income - Attributable to shareholders Payout ratio 99.8% ¹ Value per share net of treasury shares - when applicable. ² To be approved at General Shareholders' Meeting. Cia. Hering 4Q16 page 11

12 BUYBACK PROGRAM There was no share buyback related to the program approved at a meeting held on 07/29/2015, authorizing the acquisition of up to 8 million shares, corresponding to 6.38% of total outstanding shares, which ended on 07/27/2016. On 07/28/2016 the Board of Directors approved the renovation of the program for another 12 months and therefore will be closed on 7/27/2017. Under this program, there was no share repurchases in ACKNOWLEDGEMENTS In 2016, Cia. Hering received important awards that reflected the market s acknowledgement to its performance: 25 th Most Valuable Brazilian Brands (Interbrand) Excellence in Franchising 2016 (ABF) Most Admired Companies in Brazil (Officina Sophia) Most Democratic Brands in Brazil (Consumidor Moderno magazine) Estadão Best Textile Retail Services (Estadão) 100 Best Companies in Corporate Citizenship (Gestão RH magazine) Top of Mind (Instituto Mapa in partnership with Grupo RBS) The most admired HR in Brazil (Gestão RH magazine) Estadão Empresas Mais (Estadão) Transparency Cup 2016 (ANEFAC) EMPLOYEES During 2016, we improved our people management actions, enabling greater focus on our business through a structure based on brand management in order to improve our skills to support our future growth. The Company ended the year with 7,195 employees. OUTLOOK After two years of strong recession, we started 2017 with expectations of gradual improvement of both economy and GDP growth, which, however, has not yet materialized at the beginning of the year. Therefore, we are optimistic about the outlook for the year, despite the challenges that still persist in the short term. Our focus is on implementing Product and Store (P&S) strategy that, along with economic recovery, should contribute to sales growth resumption and consequent results improvement throughout the year. Product evolutions begin to become more evident from the next collections on. All the brands presented important evolutions in the fall and winter collections of 2017, with advances in design and Value for Money that has been translated in orders increase, in franchise and multibrand channels, in the last showrooms. The improvement of collections process should still last for several quarters, highlighting Hering brand. In 2017 we will continue the initiatives related to Store started in Hering Store refurbishment plan will continue to advance to the entire network, although at a lower pace, and combined with VM and supply evolutions, seek to provide Cia. Hering 4Q16 page 12

13 better shopping experience for consumers. In the multibrand channel, the priority is to implement the segmentation plan, which aims to increase channel sales based on a new performance strategy adjusted to specific needs of each segments. In the online channel we continue investing in the plan to increase customer flow and conversion of webstores, channel that we believe to present greater growth potential in the coming years. Lastly, we remain confident in our business strategy focused on value creation over the years, coming from strong and recognized brands, differentiated business model and solid management and leadership foundation. CAPITAL BUDGET - MANAGEMENT S PROPOSAL The Company presents in the table below, the capital budget for the fiscal year of 2017, according to the Normative Instruction 480/09, published by CVM on December 07, Capital budget Investments R$ thousand Stores 22,000 Industry 14,725 Logistics 14,347 IT 16,829 Total 67,901 Company Capital (Cash flow from operation) 67,901 INDEPENDENT AUDITORS Cia. Hering policy with its independent auditors is referred to the provision of services not related to external auditing based on principles that preserve the independence of the auditors. These principles are based on the fact that the auditor should not assess his/her own work, nor carry out managerial functions or even advocate for its customer. During the period ended on December 31, 2016, the Company s independent auditors were not hire for other services beyond the examination of the financial statements of the period. Cia. Hering 4Q16 page 13

14 BALANCE SHEET R$ thousand ASSETS Current assets 1,007, ,638 Cash and cash equivalents 204, ,093 Trade accounts receivable 449, ,861 Inventories 308, ,343 Recoverable taxes 25,358 32,639 Derivative financial liabilities - 4,620 Other accounts receivable 18,926 6,058 Prepaid expenses 1,678 1,024 Noncurrent assets 520, ,854 Long-term receivables 94,367 67,877 Interest-earning bank deposits 4,824 2,994 Other accounts receivable 18,154 10,730 Recoverable taxes 24,631 14,515 Deferred income and social contribution taxes 42,680 39,638 Property, plant and equipment 310, ,285 Intangible assets 115, ,692 TOTAL ASSETS 1,528,691 1,472,492 LIABILITIES AND SHAREHOLDER S EQUITY Current liabilities 275, ,072 Borrowings and financing 2,123 1,308 Trade payables 172, ,953 Payroll and related taxes 44,733 42,214 Taxes in Installments Taxes and social security contributions payable 20,648 20,262 Provisions for contingencies 2,000 1,700 Other provisions 24,865 20,954 Tax incentive obligations 1,501 11,332 Interest on equity and dividends payable Derivative financial liabilities 1,525 - Other accounts payable 4,109 11,839 Noncurrent liabilities 44,132 36,456 Noncurrent liabilities 44,132 36,456 Borrowings and financing 25,612 - Taxes in Installments 3,339 7,488 Provisions for contingencies 10,908 9,471 Other provisions 1,983 1,788 Employee Benefits ,372 Tax incentive obligations 2,029 3,218 Other accounts payable Shareholder's equity 1,209,407 1,173,964 Capital 359, ,368 Capital reserve 26,085 20,569 Treasury shares (4,614) (41,323) Earnings reserve 822, ,779 Valuation adjustments to equity 5,648 11,577 Additional dividends proposed - 39,994 TOTAL LIABILITIES AND SHAREHOLDER S EQUITY 1,528,691 1,472,492 INCOME STATEMENT R$ Thousand 4Q16 4Q Q16 / 4Q / 2015 Revenues 515, , % 1,748,432 1,900, % Domestic Market 504, , % 1,706,324 1,857, % Foreign Market 10,224 12, % 42,108 42, % Sales Deduction (83,040) (100,428) -17.3% (273,295) (311,212) -12.2% Net Revenue 432, , % 1,475,137 1,588, % Cost of Goods Sold (257,087) (312,119) -17.6% (893,111) (961,335) -7.1% Gross Profit 175, , % 582, , % Operating Expenses (128,763) (113,212) 13.7% (431,104) (411,855) 4.7% Selling Expenses (99,408) (91,957) 8.1% (325,344) (318,494) 2.2% Management Remuneration (2,366) (2,185) 8.3% (9,084) (8,578) 5.9% Administrative and General Expenses (12,463) (12,062) 3.3% (44,601) (45,511) -2.0% Depreciation and Amortization (14,676) (12,212) 20.2% (56,647) (47,177) 20.1% (-) Allocated to Cost 7,183 6, % 28,080 25, % Profit Sharing - 1,841 N.A - - N.A Other Operating Income (Expenses), net (7,033) (3,405) 106.5% (23,508) (17,943) 31.0% Operating Income Before Financial Results 46,275 82, % 150, , % Financial income 7,220 17, % 90,967 77, % Financial expenses (10,676) (8,899) 20.0% (44,289) (38,485) 15.1% Total Financial Income (Expenses) (3,456) 8,829 N.A 46,678 39, % Operating Income Before Interest in Subsidiaries 42,819 90, % 197, , % Income and Social Contribution Taxes - Current 7,776 (107) N.A 1,766 1, % Income and Social Contribution Taxes - Deferred 354 (7,777) N.A 51 24, % Net Income for the Period 50,949 83, % 199, , % Controlling shareholders 50,949 83, % 199, , % Basic earnings per share - R$ Controlling shareholders % % EBITDA 60,951 94, % 207, , % Cia. Hering 4Q16 page 14

15 CASH FLOWS R$ Thousand 4Q16 4Q Cash flow from operating activities Net income for the period 50,949 83, , ,170 Adjustments to reconcile net income to net cash generated by operating activities: Deferred taxes (354) 7,777 (51) (24,364) Unrealized exchange and monetary variation Depreciation and amortization 14,676 12,212 56,647 47,177 Provision for doubtful accounts 5,749 2,028 11,922 5,838 Write-off of fixed assets Stock option plan 1,359 1,535 5,516 5,573 Provision for adjustment to realizable value 463 2,430 6,237 7,573 Compulsory loans 24, Provisions for contingencies 1,509 (1,102) 4,579 4,358 Employee Benefits (15,958) 694 (14,374) 1,800 s in assets and liabilities (Increase) decrease in trade accounts receivable (70,136) (99,421) 29,688 9,931 (Increase) decrease in inventories 23,463 73,323 4,020 (28,908) (Increase) in recoverable taxes (10,125) (1,135) (2,835) (29,779) (Increase) in other accounts receivable (8,884) (5,739) (9,468) (4,574) Increase (decrease) in accounts payable to suppliers 8,500 (12,454) 21,081 (20,420) Increase (decrease) in accounts payable and provisions (6,591) (13,835) (11,074) 1,683 Increase in IRPJ e CSLL 1, ,198 14,051 Income tax and social contribution paid (1,466) (84) (5,188) (22,239) Increase (decrease) in taxes payable 6,417 6,469 (14,717) (16,557) Interest paid on loans (94) (45) (94) (873) Cash provided by operating activities 26,271 55, , ,654 Cash flows from investing activities Purchase of property, plant and equipment (11,096) (17,914) (19,350) (63,650) Purchase of intangible (25,960) (12,415) (31,964) (33,265) Cash used in investing activities (37,056) (30,329) (51,314) (96,915) Cash flows from financing activities Interest-earning bank deposits (129) (80) (1,830) (795) Interest on equity and dividends (81,955) (64,146) (164,033) (141,995) Borrowings 27,025 1,308 27,025 1,652 Repayments of loans - - (1,308) (23,556) Acquisition of treasury shares (44,988) Disposal of treasury shares for the stock option plan Cash used in financing activities (55,059) (62,918) (139,770) (209,682) Increase (decrease) in cash and cash equivalents (65,844) (37,295) 96,662 (73,943) Increase (decrease) in cash and cash equivalents (65,844) (37,295) 96,662 (73,943) At beginning of period 270, , , ,036 At end of period 204, , , ,093 Disclaimer: The statements contained in this release relative to the business outlook, operational and financial performance projections and references to the Company s growth potential are mere forecasts based on the management s expectations about its future performance. These forward-looking statements are highly dependent on market performance, on the economic status of Brazil, the industry and on international markets, and may, therefore, change. Cia. Hering 4Q16 page 15