FOX-WIZEL LTD. BOARD OF DIRECTORS' REPORT AS OF SEPTEMBER 30, 2014

Transcription

1 FOX-WIZEL LTD. BOARD OF DIRECTORS' REPORT AS OF SEPTEMBER 30, 2014 Hermon St. Airport-City P.O.B. 76; Ben-Gurion Airport Tel.: Fax:

2 FOX-WIZEL LTD. We are hereby pleased to present the report of the Board of Directors of Fox-Wizel Ltd. ("the Company") and its local and foreign subsidiaries (collectively, "the Group") for the nine and three months ended September 30, 2014 ("the reporting period"), in conformity with the Israeli Securities Regulations (Periodic and Immediate Reports), The attached financial statements have been prepared in conformity with International Financial Reporting Standards ("IFRS"). See additional information in Note 2 to the financial statements. The Company did not include separate financial information in the financial statements as of September 30, 2014 after it had tested the additional information that would be provided to the investor in the separate financial statements and founded that compared to the information included in the consolidated financial statements of the Company it is not significant. A. THE BOARD OF DIRECTORS' EXPLANATIONS FOR THE STATE OF THE COMPANY'S AFFAIRS 1. A brief description of the Company and its business environment General The Group is engaged in the design, acquisition, marketing and distribution of clothes, fashion accessories, underclothing, footwear and home products. The Company also sells aromatic bath and body care products. The Company operates in two main business activities which represent operating segments: 1. Fashion and home fashion under the brands FOX - in Israel and abroad and American Eagle Outfitters and Aerie in Israel and, starting March 2014, The Children's Place brand in Israel. 2. Aromatic bath and body care products through the Laline brand. See more information below

3 1.1 The segment of fashion and home fashion This operating segment is marketed through several marketing channels as follows: Local sales - through the Israeli retail chain - a chain of stores operated by the Company itself and/or through subcontracted operators ("directly operated sales" and/or "directly operated stores") and wholesales to institutional stores and entities in Israel ("wholesales and others in Israel"). Foreign sales - sales to franchises and wholesalers abroad ("foreign franchise sales"). Local sales The FOX brand The Group's major activity in the Israeli fashion industry is performed under the FOX brand. The Company also sells housewares and home textile products in the FOX Home retail chain. The FOX and Fox Home brands are one of Israel's leading fashion and home fashion brands. The brand has maintained its top position by following current trends, practicing innovation and developing a variety of models while maintaining product quality, using structured marketing and positioning strategies and operating an advanced logistic system. In the fashion industry, the Company designs most of the clothing items sold by it using experienced designers who are employed at the Company and produce two main collections every year: the spring/summer season collection and the fall/winter collection. The products marketed by the Company are custom manufactured for it by subcontractors in various Far East countries. The Company's design department designs products for the sub-brands: women, men, kids, baby and also designs housewares and home textile products. Most of the Company's products are sold in one-stop stores that offer two or more of the Company's sub-brands. The American Eagle and Aerie brands On June 30, 2010, the Company signed an agreement with Aeo Management Co. for the acquisition of a franchise of the clothing brand American Eagle Outfitters and of the underwear brand Aerie (collectively - "AE"), two leading clothing brands in the United States which offer fashionable casualwear at affordable prices. The strength of the AE fashion brand is evidenced, among others, in the high frequency of issuing new collections in the course of the year, selling between ten and a dozen collections in one year. According to the agreement, the Company set up and operates a retail chain for selling the above brands in Israel whose deployment rate is based on the business plan and local market needs. The AE retail chain commenced operations on February 2, The stores also sell Aerie underwear products based on the store-within-a-store business model. In December 2013, the Company started to deploy separate chain store of the Aerie brand

4 The franchise is in effect for a period of ten years beginning on January 1, 2012 with an option for extension by another ten years. The franchise provider has an option for repurchasing 51% or 100% of the brand activity in Israel at the end of the first ten years of operation and on several predetermined dates for a price based on a predetermined valuation mechanism. The Children's Place brand On June 29, 2013, an agreement to grant a franchise was signed between the Company and The Children's Place International LLC ("TCP"), according to which TCP granted the Company an exclusive franchise to set up chain stores in Israel that will sell clothing of the children's clothing brand "The Children's Place". The franchise is in effect for ten years which end on December 31, 2023 with an option for extension by another ten years. According to the agreement, the Company set up and operates chain stores for selling the brand in Israel. The deployment rate is based on the business plan and the local market needs. The TCP retail chain commenced operations on March 7, As of September 30, 2014, the Company's directly operated retail chain includes 222 stores as described below FOX stores (*) AE stores (**) TCP stores (*) FOX Home - starting from the second nine months of 2010, the Company operates the FOX Home retail chain that is wholly-owned by it for selling housewares and home textile products. As of September 30, 2014, the chain has 36 stores (and 8 mixed stores that sell clothing items along with housewares and textile products). (**) AE - as of September 30, 2014, the chain operates 34 stores in leading shopping malls across Israel, of which 5 are separate stores of the Aerie brand. Foreign sales The Company operates abroad under the name of FOX/F&X and plans to expand the deployment of its fashion retail chain to other international markets in collaboration with exclusive franchisees in each country which possess financial, logistic and marketing infrastructures and specialize in the domestic retail industry. The foreign stores are established by the franchisees that bear the entire costs of construction, including the logistics and advertising costs. As of September 30, 2014, 243 stores/points of sale operate under the F&X and FOX brands in 11 countries around the globe: Bolivia, Singapore, Thailand, Panama, the Philippines, Cyprus, Kazakhstan, Serbia, Russia, Costa Rica and Mongolia. The Company also generates wholesales through resellers in 7 countries: Russia, Kazakhstan, Panama, India, Greece, Belgium and Germany (online sales)

5 1.2 The segment of aromatic bath and body care products On January 19, 2007, the Company signed a share allocation agreement whereby it purchased 50% of the share capital of Laline Candles and Soaps Ltd. ("Laline") and Laline International Ltd. ("Laline International"). Laline sells soaps, candles, oils, bath products, body care products, baby care products, accessories and gifts. Laline markets its products mainly through the self-operated retail chain in Israel. In addition, Laline markets its products to wholesalers and overseas through franchisees. As of the reporting date, the Israeli retail chain consists of 90 stores in leading shopping malls in Israel. There are also 16 franchise stores operating under the name of Laline in 3 countries around the world: California, Japan and the Caribbean's. The compromise settlement of a class action claim which was filed against Laline in February 2010 regarding sale of product with a wrong label was validated by a court decree in September See immediate report of October 1, 2014, TASE reference: The request to file a class action claim against Laline regarding sale of body lotion which contains a caption that in the opinion of the plaintiff constitutes breach, among others, of the Consumers Protection Regulations, 1991 and Consumers Protection Act, 1981 was dismissed after the parties reached a compromise agreement (in a negligible amount) Laline retail chain in Israel See more information on the Group's operating segments in paragraph 1.3 below. 1.3 Other activities that do not constitute a reportable segment A.H. Fashion Manufacture and Marketing 3020 Ltd. - on July 3, 2007, the Company signed a share allocation agreement with A.H. Fashion Manufacture and Marketing 3020 Ltd. ("Sacks"). According to the agreement, the Company acquired 50% of Sacks' issued and outstanding share capital. Sacks manufactures and markets women's fashion products to local and foreign wholesalers and through directly-operated stores in Israel under the Sacks brand. As of the reporting date, Sacks operates 16 stores in leading shopping malls in Israel and markets its products to wholesalers in the Netherlands, Germany, Switzerland, Spain, Belgium, the UK, Denmark, Canada, South Africa and Russia. In addition, Sacks operates a franchise store in Russia. Billy Haus Ltd. - on August 25, 2006, the Company acquired 50% of the share capital of Billy Haus Ltd. ("Billy Haus"), which imports international youth surfing sportswear. Its main brands include VZ, Billabong and Element. As of the reporting date, Billy Haus markets its products through a retail chain of 36 stores in leading shopping malls in Israel. The stores sell extreme sports and surfing apparel and accessories. These products are also sold to wholesalers

6 Marcha Ballerina Ltd. ("Marcha") - on December 5, 2012, Marcha was cofounded by Billy Haus, which holds 66.7% of Marcha's authorized share capital, and Contact Business Contacts Ltd., a private company wholly owned and controlled by Mr. Ari Melamud, which holds 33.3% of Marcha's authorized share capital. As of the reporting date, Marcha operates 10 points of sale in leading shopping malls across Israel and 8 points of sale abroad. Yanga - on August 28, 2014, the Company the Company acquired 50% of the issued and outstanding share capital of Yanga Ltd. ("Yanga"). Yanga is engaged in the acquisition, production and marketing of boutique fashion for women in a vintage/romantic style under the brand "Yanga" to retail clients in Israel. As of the reporting date, Yanga operates 7 stores in leading shopping malls across Israel. See also significant events during the reporting period in paragraph Events after the reporting period On November 18, 2014, the Company's Board approved signing a memorandum of understandings between the Company and American Eagle Management Co. ("AEM") and Retail Royalty Company ("RRC") (severally and collectively - "AE") which provides an outline for an agreement according to which AE will pay the Company or a wholly-owned subsidiary of the Company an amount equivalent to 50% of the cost of the investment in the American Eagle and Aerie brand name operation in Israel in the Company's books ("the brand names" and "the operation", respectively) as well as amount that is equivalent to 50% of the value of the operation's inventory. Simultaneously, an option will be granted to AE to purchase 50% of the operation in consideration of $ 1 (one U.S. dollar) as well as adjusting the investments in capital and working capital as of the date of exercise of the option. In addition, to the extent that the joint activity is to the satisfaction of both parties, the possibility of using the joint activity as a basis for expanding the operation into other territories will be examined. The Company will undertake towards AE that Mr. Harel Wizel will continue to manage the joint activity for a period of at least two years from the date of beginning the joint activity. The parties will enter negotiations. If for whatever reason a final agreement is not reached within 90 days from commencing negotiations, the current agreement will remain intact and unchanged. In the negotiations, the parties will also discuss adjusting the trade terms based on the current franchise agreement signed between the Company and AE ("the current agreement") to the new engagement. A final agreement is subject to the approval of the qualified entities of both parties and to other legally required approvals, if any. At this stage, the Company is unable to assess the chances of signing a final and binding agreement between the parties. See more details in an immediate report of November 18, 2014 TASE reference: On October 26, 2014, the Company simultaneously signed two agreements for the operation of chain stores of the brand name MANGO in Israel and in the territories controlled by the Palestinian Authority as follows: A franchise agreement between the Company and the Spanish company PUNTO FA, S.L. ("PUNTO"), owner of leading fashion brands including: "MNG"/"MANGO" ("the brands"), according to which PUNTO granted the - 6 -

7 Company an exclusive franchise to set up chain stores in Israel and in the territories controlled by the Palestinian Authority that will sell apparel, footwear and accessories of the brands ("the franchise agreement"). The franchise term is 10 years from the operation of the first store by the Company ("the first franchise term"). At the end of the first franchise term, the agreement provides for an extension of the term for another ten years under the same commercial terms, subject to required adjustments and subject to the Company's material compliance with its obligations under the agreement and the parties' consent to a common vision. The Company shall pay PUNTO a franchise fee in an amount of approximately NIS 3 million which shall be paid upon commencement of operations. The Company expects that the franchise term will begin in January 2015, provided that by then all of the suspending conditions in the operation purchase agreement will be fulfilled, including the approval of the Anti-trust Commissioner. An agreement between the Company and Elbit Fashion Ltd. ("Elbit Fashion"), the present franchisee of the brands in Israel, for the purchase of the brands' operations in Israel, the inventories and the customer loyalty program ("the operation purchase agreement") was signed. According to this agreement, Elbit Fashion will sell and assign to the Company all business activity, stores, investments in the leased properties, furniture and equipment, inventories and customer loyalty program and all rights relating thereto, free of any third party right, except as explicitly stated in the agreement and net of current liabilities related to the business activity, in consideration of approximately NIS 35 million, subject to adjustments at the closing date and as specified in the agreement ("the consideration"). The closing date has been scheduled at the later of January 5, 2015 and the date of the complete transfer of the business activity to the Company in accordance with the provisions of the operation purchase agreement, provided that by such date all the suspending conditions included in the agreement have been fulfilled, including the approval of the Anti-trust Commissioner ("the closing date"). As of the date of the approval of the agreement, Elbit Fashion operates 28 stores that sell apparel, footwear and accessories of the brands across Israel. See more details in an immediate report of October 27, 2014, TASE reference: Significant events during the reporting period The security events in Israel affect the Company's operation in all business activities, except the fashion and home fashion operation abroad. As a result of the Operation Protective Edge which took place in July and August this year, there was a decline in the number of visitors to shopping malls and commercial centers in Israel, especially in south Israel where the effect of Operation Protective Edge was significant. This decline had an effect on the Company's operating results for the third quarter of the year On July 20, 2014, the Company signed an agreement with Yanga for the purchase and allocation of shares that will constitute 50% of the issued and outstanding - 7 -

8 share capital of Yanga. The agreement became effective on August 28, 2014 after receiving the approval of the general director of the Anti-trust Authority. According to the agreement, the Company paid Yanga in consideration for the allocated shares a total of NIS 5,500 thousand and in consideration for the shares purchased from Yanga's shareholders a total of NIS 3,500 thousand in cash. For additional details, see the immediate report of July 21, 2014, TASE reference: On August 12, 2014, the Company reported that it is holding negotiations with Nike for possible business collaboration in Israel. The Company announced that it is unable to assess the chances that these negotiations will mature into an agreement between the parties. For additional details, see the immediate report of August 12, 2014, TASE reference: On August 6, 2014, the Company received a demand from the Israel Securities Authority for payment of a financial sanction in an aggregate of approximately NIS 133 thousand due to violation of provisions of the Israel Securities Law, 1968 and the Israel Companies Law, 1999, in view of the ISA's decision to reduce the amount of the financial sanction at a rate of 85%. See more details in an immediate report of August 7, 2014, TASE reference: On June 25, 2014, the Company's general meeting approved the payment of the variable component of the 2013 grant to Mr. Elad Vered, a relative of the controlling shareholder in the Company, according to the Company's remuneration policy. Also, the meeting approved the appointment of Mr. Alon Cohen to a second term as external director in the Company's Board for an additional period of three years from October 18, For additional details, see the immediate report of June 25, 2014, TASE reference: and the convening notice for the meeting of May 18, 2014, TASE reference: On May 15, 2014, an agreement to grant a franchise was signed between the Company and Charles&Keith International Pte Ltd. ("C&K"), according to which C&K granted the Company an exclusive franchise to set up chain stores in Israel that will sell footwear, bags and women's accessories of the C&K brand. The franchise is in effect for a period of eight years which end in May For additional details, see the immediate report of May 15, 2014, TASE reference: On March 9, 2014, the Company declared a dividend of NIS 25.5 million from the Company's retained earnings in the second half of The dividend was paid on April 13, During the first quarter, the Company started to operate the TCP retail chain. As of the reporting date, 21 stores operate in leading shopping malls and commercial centers across Israel On March 15, 2014, Mr. Shay Levin stopped acting as a director in the Company On March 12, 2014, the Company took a long-term loan of NIS 100 million from a large Israeli bank for the purpose of increasing its liquid balances and improving its financial strength to finance working capital needs and future investments. The loan bears interest at the Prime rate and the loan principal is repayable in 20 equal - 8 -

9 quarterly payments from December 1, Interest is payable from June 2014 on a quarterly basis On January 1, 2014, the Company launched a consolidated customers' club under the name of "Dream Card" which encompasses all of the Group's brands (apart from Marcha Ballerina, Yanga and Sacks) so that an existing member of the club can enjoy the club's benefits in each of the brands without additional fee. Former customers' clubs (Fox, Laline, Billabong) will stop recruit new members and will terminate within three years from January 1, The Company believes that this procedure will leverage size advantage and its retail status and will bring to a strategic advantage over its competitors On December 30, 2013, the Company informed on preliminary negotiations between the Company and Apex Fund regarding a contemplated investment of Apex Fund in the Company. On January 26, 2014, the Company informed of its decision not to continue the negotiations with the Fund

10 2. The Group's business results The Company's revenues are affected by seasonality, which is generally expressed by increased sales during Passover, the Holiday season and the fourth quarter of the year as a result of the winter sale. In view of the application of IFRS 11, the results of the companies Laline, Sacks, Billy Haus and Yanga, which were previously recognized under IAS 31 using the proportionate consolidation method (except Yanga which was acquired after the application of IFRS 11) (so that the operating results of the reported companies were presented in detail in the profit or loss items) are now accounted for using the equity method (so that the monetary results of the reported companies are presented as a single component in equity earnings and not divided between the different components of the statement of profit or loss such as in sales, cost of sales and etc.). The Company elected as an accounting policy to present the equity earnings of companies accounted for at equity in operating income because the investment in these companies represents part of the operating activity and strategy of the Company. In furtherance to the application of IFRS 11, the results of the reported companies (Laline, Sacks, Billy Haus and Yanga), which were previously recognized under IAS 31 using the proportionate consolidation method (except Yanga which was acquired after the application of IFRS 11) are now accounted for using the equity method. In order to present the reporting results of the segment based on the businesses of the Company and the information that is reviewed by the chief operating decision maker, the CODM, the data for sales and segment income of companies reported using the equity method (previously recognized using the proportionate consolidation method, except Yanga, as above) at full holding rate (100%) and a corresponding adjustment of sales and segment income was made to present the operating results based on the actual holding rate under the column adjustments

11 2.1 Condensed consolidated statements of profit or loss (NIS in thousands) Periods Quarters Year 1-9/ / / / Revenues from sales 779, , , ,769 1,047,700 Cost of sales 312, , , , ,967 Gross profit 467, , , , ,733 Selling and marketing expenses 419, , , , ,269 General and administrative expenses 13,612 10,326 5,245 3,849 14,893 Other income (3,539) (1,052) (3,539) (227) (1,052) Equity earnings 10,360 13,968 4,495 6,078 15,720 Operating income 48,090 90,893 9,567 30, ,343 Operating income margin 6.2% 12.2% 3.6% 11.9% 12.9% Financial expenses (income), net (13,328) 9,609 (11,795) 4,590 14,654 Income before tax 61,418 81,284 21,362 26, ,689 Tax expense 12,187 17,096 3,265 5,022 26,499 Net income 49,231 64,188 18,097 21,068 94,190 Net income margin 6.3% 8.6% 6.8% 8.2% 9.0% The sales turnover in the first nine months of the year amounted to approximately NIS million compared to approximately NIS million in the corresponding period of last year, an increase of approximately NIS 31.4 million (about 4.2%). The sales turnover in the third quarter amounted to approximately NIS million compared to approximately NIS million in the corresponding quarter of last year, an increase of approximately NIS 8.1 million (about 3.2%). The increase in sales turnover in the first nine months of the year compared to the corresponding period of last year arises from an increase in sales in the fashion and home fashion operating segment in Israel offset by the decrease in sales in the fashion and home fashion abroad. The main increase in net sales, as above, is due to the increase in net retail spaces, particularly the TCP brand that started to operate in the first quarter of the year compared to the corresponding period of last year. The increase in sales was partly offset as a result of the Operation Protective Edge which took place in the third quarter of the year and brought to a decline in the number of visitors to shopping malls and commercial centers in Israel, especially in south Israel. Also, the current winter season which was characterized by lack of rainfalls, compared to the winter season last year, brought to a decline in sales in the first quarter of the year. See also the analysis of operating results by segments in paragraph 2.2 below

12 The increase in sales turnover in the third quarter of the year compared to the corresponding quarter of last year arises from an increase in sales in the fashion and home fashion operating segment in Israel offset by the decrease in sales in the fashion and home fashion abroad. The main increase in net sales, as above, is due to the increase in net retail spaces, particularly the TCP brand that started to operate in the first quarter of the year compared to the corresponding period of last year. The increase in sales was partly offset as a result of the Operation Protective Edge, as above. The gross profit in the first nine months of the year amounted to approximately NIS million, accounting for about 60.0% of sales, compared to a gross profit of approximately NIS million, accounting for about 58.6% of sales in the corresponding period of last year (an increase of about 1.4% of sales turnover, an increase of approximately NIS 29.0 million). The gross profit in the third quarter amounted to approximately NIS million, accounting for about 58.0% of sales, compared to a gross profit of approximately NIS million, accounting for about 58.4% of sales in the corresponding quarter of last year (a decrease of about 0.4% of sales turnover, an increase of approximately NIS 3.6 million). The increase in gross profit in the first nine months of the year compared to the corresponding period of last year mainly arises from the decrease in the average exchange rate of the U.S. dollar in relation to the NIS in the period which was partly offset by the increase in the VAT rate effective from the beginning of June last year, the increase in the customs rate and by the increase in discounts granted to customers in Israel. The decrease in gross profit in the third quarter compared to the corresponding period of last year mainly arises from the increase in discounts granted to customers in Israel which was partly offset by the decrease in the average exchange rate of the U.S. dollar in relation to the NIS in the period. Selling and marketing expenses in the first nine months of the year amounted to approximately NIS million, accounting for about 53.8% of sales, compared to approximately NIS million, accounting for about 47.1% of sales in the corresponding period of last year (an increase of about 6.7% of sales turnover, an increase of approximately NIS 67.4 million). Selling and marketing expenses in the third quarter amounted to approximately NIS million, accounting for about 55.5% of sales, compared to approximately NIS million, accounting for about 47.4% of sales in the corresponding quarter of last year (an increase of about 8.1% of sales turnover, an increase of approximately NIS 25.2 million). The increase in selling and marketing expenses in the first nine months and in the third quarter of the year compared to the corresponding periods of last year mainly arises from the increase in sales turnover which led to an increase in variable expenses, mainly salary and related expenses and royalties, an increase in fixed expenses mainly due to the increase in net retail spaces, particularly the chain stores of the TCP brand that started to operate in the first quarter of the year, and from the increase in advertising expenses relating to launching the TCP brand and the consolidated customers' club

13 General and administrative expenses in the first nine months of the year amounted to approximately NIS 13.6 million, accounting for about 1.7% of sales, compared to approximately NIS 10.3 million, accounting for about 1.4% of sales in the corresponding period of last year (an increase of about 0.3% of sales turnover, an increase of approximately NIS 3.3 million). General and administrative expenses in the third quarter of the year amounted to approximately NIS 5.2 million, accounting for about 2.0% of sales, compared to approximately NIS 3.8 million, accounting for about 1.5% of sales in the corresponding quarter of last year (an increase of about 0.5% of sales turnover, an increase of approximately NIS 1.4 million). The increase in general and administrative expenses in the first nine months and in the third quarter of the year compared to the corresponding periods of last year mainly arises from increase in donations and income from reverse of allowance for doubtful account which was recorded in the corresponding quarter of last year. Other income in the first nine months of the year amounted to approximately NIS 3.5 million, accounting for about 0.4% of sales, compared to approximately NIS 1.1 million, accounting for about 0.1% of sales in the corresponding period of last year (an increase of about 0.3% of sales turnover, an increase of approximately NIS 2.4 million). Other income in the third quarter of the year amounted to approximately NIS 3.5 million, accounting for about 1.3% of sales, compared to approximately NIS 0.2 million, accounting for about 0.1% of sales in the corresponding quarter of last year (an increase of about 1.2% of sales turnover, an increase of approximately NIS 3.3 million). The increase in other income in the first nine months and in the third quarter of the year compared to the corresponding periods of last year arises from recognition of revenue for compensation that the Company expects to receive with reasonable assurance and that management estimates at approximately NIS 3.5 million under the Property Tax Regulations and Restitution Fund (Compensations Payments) (Direct and Indirect War Damages) (Temporary Order), 2014 as a result of the Operation Protective Edge ("the compensation claim"). The compensation claim request was filed pursuant to the turnover formula. In the reported period, the Company received an advance of NIS 500 thousand on account of the compensation claim. Equity earnings in the first nine months of the year amounted to approximately NIS 10.4 million, accounting for about 1.3% of sales, compared to approximately NIS 14.0 million, accounting for about 1.9% of sales, in the corresponding period of last year (a decrease of about 0.6% of sales turnover, a decrease of approximately NIS 3.6 million). Equity earnings in the third quarter of the year amounted to approximately NIS 4.5 million, accounting for about 1.7% of sales, compared to approximately NIS 6.1 million, accounting for about 2.4% of sales, in the corresponding quarter of last year (a decrease of about 0.7% of sales turnover, a decrease of approximately NIS 1.6 million)

14 The decrease in equity earnings in the first nine months of the year compared to the corresponding period of last year mainly derives from decrease in sales by subsidiaries following Operation Protective Edge which took place in the third quarter of the year and which brought to a decline in the number of visitors to shopping malls and commercial centers in Israel, especially in south Israel. Also, the current winter season which was characterized by lack of rainfalls, compared to the winter season last year, brought to a decline in sales in the first quarter of the year. The decrease in equity earnings in the third quarter of the year compared to the corresponding period of last year derives from decrease in sales following Operation Protective Edge, as above. Operating income in the first nine months of the year amounted to approximately NIS 48.1 million, accounting for about 6.2% of sales, compared to operating income of approximately NIS 90.9 million, accounting for about 12.2% of sales in the corresponding period of last year (a decrease of about 6.0% of sales turnover, a decrease of approximately NIS 42.8 million). Operating income in the third quarter of the year amounted to approximately NIS 9.6 million, accounting for about 3.6% of sales, compared to operating income of approximately NIS 30.7 million, accounting for about 11.9% of sales in the corresponding quarter of last year (a decrease of about 8.3% of sales turnover, a decrease of approximately NIS 21.1 million). The decrease in operating income in the first nine months of the year compared to the corresponding period of last year derives from the increase in fixed expenses due to the increase in net retail spaces and the simultaneous effect of the dry winter season and Operation Protective Edge on sales, as above. The decrease in operating income in the third quarter compared to the corresponding period of last year derives from the increase in fixed expenses due to the increase in net retail spaces and the simultaneous effect of Operation Protective Edge on sales, as above. Financial income, net in the first nine months of 2014 amounted to approximately NIS 13.3 million, accounting for about 1.7% of sales, compared to financial expenses, net of approximately NIS 9.6 million, accounting for about 1.3% of sales in the corresponding period of last year. Financial income, net in the third quarter amounted to approximately NIS 11.8 million, accounting for about 4.5% of sales, compared to financial expenses, net of approximately NIS 4.6 million, accounting for about 1.8% of sales in the corresponding quarter of last year

15 The transition to financial income, net in the first nine months of the year compared to financial expenses, net in the corresponding period of last year mainly arises from revaluation of foreign currency balances and hedges that do not qualify for hedge accounting under IAS 39. In the first nine months of the year, financial income of NIS 11.5 million were recorded in respect of the revaluation, as above, compared to a loss of approximately NIS 9.8 million in the corresponding period of last year and NIS 3.2 million were recorded in respect of increase in securities. The transition to financial income, net in the third quarter of the year compared to financial expenses, net in the corresponding period of last year mainly arises from revaluation of foreign currency balances and hedges that do not qualify for hedge accounting under IAS 39. In the current quarter, financial income of NIS 9.9 million were recorded in respect of the revaluation, as above, compared to a loss of approximately NIS 4.8 million in the corresponding period of last year and NIS 2.0 million were recorded in respect of increase in securities. Tax paid after adjustment of equity earnings presented in net income after taxes in the first nine months of the year accounted for about 23.9% of income before taxes compared to 25.4% of income before taxes in the corresponding period of last year. Tax paid after adjustment of equity earnings presented in net income after taxes in the third quarter of the year accounted for about 19.5% of income before taxes compared to 25.1% of income before taxes in the corresponding quarter of last year. The Group's net income in the first nine months of the year amounted to approximately NIS 49.2 million, representing about 6.3% of sales, compared to net income of approximately NIS 64.2 million, representing about 8.6% of sales in the corresponding period of last year. The Group's net income in the third quarter of the year amounted to approximately NIS 18.1 million, representing about 6.8% of sales, compared to net income of approximately NIS 21.1 million, representing about 8.2% of sales in the corresponding quarter of last year. The table below details fixed and variable costs in each of the Company's operating segments in the reporting periods in 2014 and 2013: Fashion and home fashion Aromatic bath and body care 1-9/2014 (*) 1-9/ /2014 (*) 1-9/2013 Sales 779, , , ,610 Gross profit 467, ,216 68,515 72,193 Fixed costs 253, ,036 35,488 34,330 Variable costs 176, ,255 18,220 18,587 Operating income before adjustments 37,730 76,925 14,807 19,276 *) Comparative figures have been reclassified to adjust to the current period's presentation

16 Fashion and home fashion Aromatic bath and body care 7-9/2014 (*) 7-9/ /2014 (*) 7-9/2013 Sales 264, ,769 37,996 38,505 Gross profit 153, ,073 24,810 26,418 Fixed costs 82,272 71,065 12,326 11,885 Variable costs 66,403 54,406 6,687 6,777 Operating income before adjustments 5,072 24,602 5,797 7,756 *) Comparative figures have been reclassified to adjust to the current period's presentation. 2.2 The Group's operating business results in the nine and three months periods ended September 30, 2014 and 2013 by operating segments (NIS in thousands) In furtherance to the application of IFRS 11, the results of the reporting companies (Laline, Sacks, Billy Haus and Yanga), which were previously recognized under IAS 31 using the proportionate consolidation method (except Yanga which was acquired after the application of IFRS 11) are now accounted for using the equity method. In order to present the reporting results of the segment based on the businesses of the Company and the information that is reviewed by the chief operating decision maker, the CODM, the data for sales and segment income of companies reported using the equity method (previously recognized using the proportionate consolidation method, except Yanga, as above) at full holding rate (100%) and a corresponding adjustment of sales and segment income was made to present the segment's results based on the actual holding rate under the column adjustments. 1-9/2014 Aromatic Fashion and home bath and Total fashion body care Other - before Israel Abroad (Laline) unallocated adjustments Adjustments Total Sales 738,717 40, , , ,994 (219,664) 779,330 Gross profit 452,461 14,780 68,515 75, ,959 (143,718) 467,241 Operating income 28,631 9,200 14,807 14,977 67,615 (19,525) 48,090 Income margin 3.9% 22.7% 14.3% 13.0% 6.8% - 6.2% 1-9/2013 Aromatic Fashion and home bath and Total fashion body care Other - before Israel Abroad (Laline) unallocated adjustments Adjustments Total Sales 684,781 63, , , ,629 (221,761) 747,868 Gross profit 416,843 21,373 72,193 74, ,459 (146,243) 438,216 Operating income 60,444 16,498 19,276 18, ,216 (24,323) 90,893 Income margin 8.8% 26.2% 18.3% 16.4% 11.9% %

17 7-9/2014 Aromatic Fashion and home bath and Total fashion body care Other - before Israel Abroad (Laline) unallocated adjustments Adjustments Total Sales 252,116 12,769 37,996 45, ,244 (83,359) 264,885 Gross profit 149,451 4,296 24,809 29, ,847 (54,100) 153,747 Operating income 2,484 2,659 5,797 6,844 17,784 (8,217) 9,567 Income margin 1.0% 20.8% 15.3% 15.4% 5.1% - 3.6% 7-9/2013 Aromatic Fashion and home bath and Total fashion body care Other - before Israel Abroad (Laline) unallocated adjustments Adjustments Total Sales 236,783 19,987 38,505 43, ,847 (82,078) 256,769 Gross profit 143,275 6,799 26,418 27, ,917 (53,844) 150,073 Operating income 19,231 5,372 7,756 8,494 40,853 (10,173) 30,680 Income margin 8.1% 26.9% 20.1% 19.5% 12.1% % The fashion and home fashion segment Presented below is an analysis of the operating results based on the marketing channels: The fashion and home fashion segment in Israel The sales turnover in this marketing channel in the first nine months of the year amounted to approximately NIS million compared to approximately NIS million in the corresponding period of last year, an increase of approximately NIS 53.9 million (an increase of about 7.9%). The sales turnover in this marketing channel in the third quarter amounted to approximately NIS million compared to approximately NIS million in the corresponding quarter of last year, an increase of approximately NIS 15.3 million (an increase of about 6.5%)

18 The increase in sales turnover in the first nine months of the year compared to the corresponding period of last year arises from the increase in net retail spaces particularly the TCP brand that started to operate at the end of the first quarter of the year compared to the corresponding period of last year. The increase in sales was partly offset as a result of the Operation Protective Edge which took place in the third quarter of the year and brought to a decline in the number of visitors to shopping malls and commercial centers in Israel, especially in south Israel. Also, the current winter season which was characterized by lack of rainfalls, compared to the winter season last year, brought to a decline in sales in the first quarter of the year. The increase in sales turnover in the third quarter of the year compared to the corresponding period of last year arises from the increase in net retail spaces particularly the TCP brand that started to operate at the end of the first quarter of the year compared to the corresponding period of last year. The increase in sales was partly offset as a result of the Operation Protective Edge, as above. Gross profit in this marketing channel in the first nine months of the year amounted to approximately NIS million, accounting for about 61.2% of the segment's sales, compared to gross profit of approximately NIS million, accounting for about 60.9% of the segment's sales in the corresponding period of last year (an increase of about 0.3% of the segment's sales turnover). Gross profit in this marketing channel in the third quarter amounted to approximately NIS million, accounting for about 59.3% of the segment's sales, compared to gross profit of approximately NIS million, accounting for about 60.5% of the segment's sales in the corresponding quarter of last year (an increase of about 1.2% of the segment's sales turnover). The increase in the gross profit margin in the first nine months of the year compared to the corresponding period of last year mainly arises from the decrease in the average exchange rate of the U.S. dollar in relation to the NIS in the period which was partly offset by the increase in the VAT rate effective from the beginning of June last year, the increase in the customs rate and by the increase in discounts granted to customers in Israel

19 The decrease in the gross profit margin in the third quarter of the year compared to the corresponding period of last year mainly arises from the increase in discounts granted to customers in Israel which was partly offset by the decrease in the average exchange rate of the U.S. dollar in relation to the NIS in the period. Operating income in this marketing channel in the first nine months of the year amounted to approximately NIS 28.6 million, accounting for about 3.9% of the segment's sales, compared to operating income of approximately NIS 60.4 million, accounting for about 8.8% of the segment's sales in the corresponding period of last year (a decrease of about 4.9% of the segment's sales turnover). Operating income in this marketing channel in the third quarter amounted to approximately NIS 2.5 million, accounting for about 1.0% of the segment's sales, compared to operating income of approximately NIS 19.2 million, accounting for about 8.1% of the segment's sales in the corresponding quarter of last year (a decrease of about 7.1% of the segment's sales turnover). The decrease in operating income margin in the first nine months of the year compared to the corresponding period of last year derives from the increase in fixed expenses due to the increase in net retail spaces and the simultaneous effect of the dry winter season and Operation Protective Edge on sales, as above The decrease in operating income margin in the third quarter compared to the corresponding period of last year derives from the increase in fixed expenses due to the increase in net retail spaces and the simultaneous effect of Operation Protective Edge on sales, as above The fashion segment abroad Sales in the first nine months of the year amounted to approximately NIS 40.6 million compared to approximately NIS 63.1 million in the corresponding period of last year, a decrease of approximately NIS 22.5 million (a decrease of about 35.7%). Sales in the third quarter amounted to approximately NIS 12.8 million compared to approximately NIS 20.0 million in the corresponding quarter of last year, a decrease of approximately NIS 7.2 million (a decrease of about 36.0%). The main decrease in sales in the reporting periods compared to the corresponding periods of last year derives from net decrease in sales to the Company's existing customers and decrease in the average exchange rate of the U.S. dollar in relation to the NIS in the period

20 Gross profit in this marketing channel in the first nine months of the year amounted to approximately NIS 14.8 million, accounting for about 36.5% of the segment's sales, compared to gross profit of approximately NIS 21.4 million, accounting for about 33.9% of the segment's sales in the corresponding period of last year (an increase of about 2.6% of the segment's sales turnover). Gross profit in this marketing channel in the third quarter amounted to approximately NIS 4.3 million, accounting for about 33.6% of the segment's sales, compared to gross profit of approximately NIS 6.8 million, accounting for about 34.0% of the segment's sales in the corresponding quarter of last year (a decrease of about 0.4% of the segment's sales turnover). The increase in the gross profit margin in the first nine months of the year mainly arises from a decrease in discounts granted to customers. Operating income in this marketing channel in the first nine months of the year amounted to approximately NIS 9.2 million, accounting for about 22.7% of the segment's sales, compared to operating income of approximately NIS 16.5 million, accounting for about 26.2% of the segment's sales in the corresponding period of last year (a decrease of about 3.5% of the segment's sales turnover). Operating income in this marketing channel in the third quarter amounted to approximately NIS 2.7 million, accounting for about 20.8% of the segment's sales, compared to operating income of approximately NIS 5.4 million, accounting for about 26.9% of the segment's sales in the corresponding quarter of last year (a decrease of about 6.1% of the segment's sales turnover) The aromatic bath and body care segment The operating results of the aromatic bath and body care segment (Laline Candles and Soaps Ltd.) are presented using the equity method at full holding rate (100%). The sales turnover in this segment in the first nine months of the year amounted to approximately NIS million compared to approximately NIS million in the corresponding period of last year, a decrease of approximately NIS 2.1 million (a decrease of about 2.0%). The sales turnover in this segment in the third quarter amounted to approximately NIS 38.0 million compared to approximately NIS 38.5 million in the corresponding quarter of last year, a decrease of approximately NIS 0.5 million (a decrease of about 1.3%)

21 The main decrease in sales turnover in the first nine months and the third quarter of the year compared to the corresponding periods of last year derives from the fall in foreign operation due to the closure of the activity in Singapore in the second quarter of the year and, also, from Operation Protective Edge which took place in the third quarter of the year and brought to a decline in the number of visitors to shopping malls and commercial centers in Israel, especially in south Israel. Gross profit in the segment in the first nine months of the year amounted to approximately NIS 68.5 million, accounting for about 66.2% of the segment's sales, compared to gross profit of approximately NIS 72.2 million, accounting for about 68.4% of the segment's sales in the corresponding period of last year (a decrease of about 2.2% of the segment's sales turnover, a decrease of approximately NIS 3.7 million). Gross profit in the segment in the third quarter of the year amounted to approximately NIS 24.8 million, accounting for about 65.3% of the segment's sales, compared to gross profit of approximately NIS 26.4 million, accounting for about 68.6% of the segment's sales in the corresponding quarter of last year (a decrease of about 3.3% of the segment's sales turnover, a decrease of approximately NIS 1.6 million). The main decrease in the gross profit margin in the first nine months and third quarter of the year compared to the corresponding periods of last year mainly derives from the increase in discounts granted to customers in Israel. Operating income in the segment in the first nine months of the year amounted to approximately NIS 14.8 million, accounting for about 14.3% of the segment's sales, compared to operating income of approximately NIS 19.3 million, accounting for about 18.3% of the segment's sales in the corresponding period of last year (a decrease of about 4.0% of the segment's sales turnover, a decrease of approximately NIS 4.5 million). Operating income in the segment in the third quarter of the year amounted to approximately NIS 5.8 million, accounting for about 15.3% of the segment's sales, compared to operating income of approximately NIS 7.8 million, accounting for about 20.1% of the segment's sales in the corresponding quarter of last year (a decrease of about 4.8% of the segment's sales turnover, a decrease of approximately NIS 2.0 million). The main decrease in the operating income margin in the first nine months and third quarter of the year compared to the corresponding periods of last year derives from the decrease in gross profit margin, as above, and from the increase in operating expenses of stores due to the increase in retail spaces