Grupo Sanborns S.A.B. de C.V. José Cebeira | Sr. Analyst Retailing Historical News [email protected] Ext. 1394 Jerónimo Cobián | Jr. Analyst Last updated on july 24, 2019 [email protected] Actinver: (55) 1103 6600 GSANBOR (HOLD, PT P$19.50) 2Q19 Results - Negative Report due to limited growth and higher SG&A

The company’s top-line posted a mild 2% growth YoY, while margins continue to be impacted by higher energy costs, wages and expenses of non-comparable stores. It’s important to mention restated 2018 figures are fully comparable, considering the application of IFRS-16. Consolidated sales, grew only 2% YoY, while the sales floor increased 3% YoY. Among its formats, Sears, Sanborns, iShop/Mixup and Others reported +1%, +1%, +8% and -1%, respectively. At the EBITDA level, the company reported a 6% YoY decline, and margin suffered a 100 bps contraction to end at 13.2%; negative results came on the back of higher electricity costs, wages and expenses of non-comparable stores. Finally, at the bottom- line the company recorded a 1% YoY decline, partially offset by lower financial expenses (P$-90 vs. P$-198). Tax rate was modestly higher, 34% vs. 33% from last year’s same period.

April 26, 2019

GSANBOR (HOLD, PT P$19.50) 1Q19 Report: Negative Results

The company’s performance remains below the industry as its total sales increased below 1%. Also, the company’s margins continues to be negatively impacted by higher energy costs, wages and uncollectible credits. Sales at the consolidated level grew only 1% YoY, and the sales floor increased 2% YoY. Among its formats, Sears stood out with a 2% increase, while “Others” was up a 5%, and iShop/Mixup and Sanborns declined 1% in both cases. At the EBITDA level the company reported a 7% declined (ex- IFRS-16); under the new accounting normative, the EBITDA also decreased YoY, 5%. At the comprehensive financial income the company reported a positive result of P$101m vs. P$10m a year ago, as interest rates kept rising and GSANBOR continues to have excess cash. Finally at

Disclaimer: https://goo.gl/6b8m3o www.actinverresearch.com the bottom-line the company recorded a 27% decline, which followed the mild operating trend, but was negatively impacted by a higher tax rate, 29% vs. 24% from last year’s same period.

April 12, 2019

Retail 1Q19 Previews: Expecting Mixed Results We expect a mixed 1Q19 earnings season for the Retail and Other Consumption Industry.

Positive Reports: Among the reports that we believe could be outstanding or above consensus' expectations in this season are CHEDRAUI, LACOMER, LIVERPOOL, and ELEKTRA. Neutral Reports: Due to the slow performance of the economy during the quarter, we forecast that ALSEA, WALMEX, GSANBORNS, and LAB will post neutral results. Negative Reports: We forecast that SORIANA will be the only weak report of the sector in the 1Q19 earnings season. Full report here

February 25, 2019

GSANBOR (HOLD, PT P$19.50) Negative 4Q18 Report, yet we see some positives going forward due to the increase of sales floor.

The company was able to report mid-single digit growth at the top-line in Total Sales, as on top of the meager SSS numbers, sales floor was up by 2.4% by year-end. There were a total 14 new/remodeled stores throughout the year, as the company continues to work through its renovation strategy. Besides that, a key driver for the quarter was “El Buen Fin” with strong sales for some categories such as technology and electronics due to these drivers the company was able to reach a 4.2% TS in the 4Q18. The company reported a 2.8% decline in EBITDA, which resulted in a 100bps contraction at the margin. At the comprehensive financial income the company reported a positive result of P$50 m vs. P$10 m a year ago, as interest rates kept rising and GSanbor continues to have excess cash. As other players in the industry, GSanbor continues to be cautious on its Credit Portfolio. While the number of credit cards were up 5.4% at 4.16 million, the outstanding balance was up only 0.2%

2 Disclaimer: https://goo.gl/6b8m3o www.actinverresearch.com at P$12.9bn. Strict requisites for new customers and intense follow-on collections meant NPLs were mostly unchanged at 4.4%, compared to 4.3% a year ago. Finally at the bottom line the company recorded a 12% decline, which followed the mild operating trend but was negatively impacted by a higher tax rate, 26.4% vs. 17.9% the past year. Nonetheless, the absolute number in this line was actually above our expectations, yet, we prefer to focus on operating performance when grading the quality of GSanbor’s results.

February 6, 2019

GSANBOR (HOLD, PT P$19.5) Acquires a minority stake in Miniso BF

Grupo Sanborns announces a non-binding agreement with Miniso BF Holding for a minority capital investment. In the case of reaching a definitive agreement, the formalization and execution will be subject to the proper authorizations. Miniso is a business model focus in different necessities such as: Household items, Daily life products, Health & Beauty, Fashion Accessories, digital Products and Food & beverages products. The company has presence in 79 countries with over 2,600 stores. MINISO has set a goal of opening 10,000 stores in 100 economies, including 7,000 stores overseas, and generating 100 billion yuan ($14.52 billion) in annual revenue by 2022. Nowadays, the firm counts with almost 100 stores in Mexico and have a strong acceptance in Mexico. We see as positive news for Grupo Sanborns. Although the amount paid and the percentage acquired is not public yet.

January 25th, 2019

Department Stores Industry Update / 4Q Previews

After some comments of the new administration, the Mexican market has been hit by the exit of international and domestic players as their sentiment toward the new administration is not the best. We expect at least three active years in consumption due to government spending on social programs and infrastructure projects. The new administration increased the national minimum wage in the country to expand the citizens purchasing power.

3 Disclaimer: https://goo.gl/6b8m3o www.actinverresearch.com 4Q18 Previews: Department Stores & Others Discretionary Consumer

Sales EBITDA Net Income Department stores 4Q17A 4Q18E % Chg 4Q17A 4Q18E % Chg 4Q17A 4Q18E % Chg Elektra 27,087 28,291 4% 4,284 4,802 12% 902 3,561 295% Gsanborns 16,008 16,446 3% 2,288 2,306 1% 1,660 1,343 -19% Liverpool 44,546 48,617 9% 8,383 8,589 2% 5,636 5,124 -9% Total 60,555 65,063 7% 10,671 10,895 2% 7,296 6,467 -11% Source: Actinver

Sales EBITDA Net Income Others 4Q17A 4Q18E % Chg 4Q17A 4Q18E % Chg 4Q17A 4Q18E % Chg Alsea 11,616 12,114 4.3% 2,358 1,774 -24.8% 652 328 -49.6% Lab 2,885 3,050 5.7% 613 649 5.8% 339 397 17.2% Total 14,501 15,164 4.6% 2,971 2,423 -18.4% 990 725 -26.8% Full report here

October 25, 2018

GSANBOR (HOLD, TP 2019e P$22.0) A Weak 3Q18 Earnings Report: main formats underperform, iShop saves the day

The company reported a weaker-than-expected 3Q18, showing a combination of soft same-store performance in spite of an easy comparison base. With a moderate increase in revenues (7.7%), a retreat in EBITDA (-3.4%) and a marginal Net Profit advance (1.4%). GSanbor recorded a relatively modest rise in revenues (+7.1%) as a strong recovery in its iShop stores could not outweigh stalled performance at its two main formats, Sears (4.0%) and Sanborns (0.0%). Our HOLD recommendation stands unchanged with a price target that has been set at P$22.0 for 2019. Full report here

July 27, 2018

GSANBOR (HOLD, PT P$22.0) 2Q18 Report: Still a struggling proposition

Even weaker than expected, GSanbor’s 2Q18 lackluster results show a combination of soft same-store performance and a stalled floor base that is not able to cope with rising expenses, thus producing only marginal increase in revenues (3%), but a significant retreat in EBITDA (-7%) and Net Profit (-12%). We are incorporating a slower sales- floor expansion going forward and a gradual recovery in same-store performance into our earnings model, which drives a revision to a P$22.0 target price. Our HOLD recommendation stands unchanged.

4 Disclaimer: https://goo.gl/6b8m3o www.actinverresearch.com May 09, 2018

RETAIL Fifth edition of “Hotsale” will take place between May 28th and June 1st

The National Association of Online Sales (AMVO) has confirmed the online version of “El Buen Fin” will take place the upcoming week comprising between May 28th to June 1st. A total 330 companies have confirmed their participation, up from 264 from last year’s event, in which a total P$4.9bn sales were recorded—these were up 60% from 2016. Among participants we can highlight Elektra, Telcel, Aeromexico, Netshoes, Alameda, Price, Travel, Linio, Mercado Libre, eBay, Adidas, Petco, Wibe, and Nike. Most of the bigger retailers have usually participated, so we also expect to see most, if not all, of the listed companies taking part in this event.

February 28, 2018

GSANBOR (HOLD, PT P$24.0) 4Q17 Results: Not the desired results...still

GSanbor continues to struggle to deliver positive results even if it has been involved in a multi-year transformation and expansion of its sales-floor platform. This is closer now to be completed, but we have yet to see clear signs of a recovery in same-store performance, while the usual sales- based indicators keep pointing to a persistent market share decline and profitability has followed suit all along 2017. Even if the stock is now trading at very attractive ratios, we do not expect the market to react favorably until positive delivery seems actually closer. Full report here

November 17, 2017

RETAIL Media reports 10% expectations for sales growth throughout El Buen Fin

During this long weekend in Mexico there will be the seventh edition of El Buen Fin, Mexico’s version of Black Friday. Media reports call for a 10% increase in total sales (estimate attributed to a number of sources, including ANTAD), that would therefore reach over P$100bn over the weekend. It is important to note that our own expectation is

5 Disclaimer: https://goo.gl/6b8m3o www.actinverresearch.com around 4% - 5% on a same-store basis, so total sales reaching an 8% to 9% range would suffice our anticipation, and be marginally below the top-line figure reported by the media.

October 27, 2017

GSANBOR (HOLD, PT P$24.0) 3Q17 Results: Shaken and Stirred

GSanbor released a weaker-than-expected 3Q17 report that was affected by soft same-store sales, idled stores following September’s earthquakes, and increased expenses and credit reserves that turned in a negative operating leverage. This was in spite of a mild improvement at the gross margin. We have trimmed our expectations for sales expansion and margins in the next years, resulting in a revised price target of P$24.0 (from a previous P$25.5) that leads us to sustain our HOLD recommendation. The valuation metrics are comparatively cheap, but the performance is not there to back a revaluation, in our view. We believe the market —and ourselves— will adopt a wait-and-see approach before turning optimistic on GSanbor, even considering the cheap valuation. While sales were mostly flat as expected, EBITDA falling 11% was 8% below our estimates, at the time a 57% dive in both Operating and Net profit is the result of extraordinary gains recorded last year (P$1,141m on the purchase of a 14% stake in Sear Mexico); comparable numbers would still show a decline of 16% on both Operating and Net Income.

October 26, 2017

GSANBOR (HOLD, PT P$25.5) 3Q17 Results Scheduled for Today AMC

Our estimates for GSanbor anticipate one of the weakest showings among retailers in this quarter, given modest advances in SSS for both of its main store formats, Sears and Sanbors, in addition to facing margin pressure as lower-end consumers exhibit a cautious stance on durable goods lately. We should also note that on 3Q16 the company recorded accounting gains of P$1,143m on its purchase of a 14% stake in Sears Mexico, so last year’s Operating and Net Profit numbers were artificially high. Our

6 Disclaimer: https://goo.gl/6b8m3o www.actinverresearch.com estimates include sales growing a mere 2%, but EBITDA retreating 4%, at the time Net Profit could be off by 56% given the lack of the aforementioned extraordinary income.

July 28, 2018

GSANBOR (HOLD, TP P$24.0) 2Q17 Report: Still waiting for harvest time…

Gsanbor 2Q17 earnings release confirmed our projection that called for a modest revenues expansion as organic- driven sales show a really modest performance (+3.4% SSS), while the kick-in effect of recent remodeling and floor expansion made for a similar contribution allowing a consolidated sales advance of 7.0%. EBITDA was slightly off our expectations but still rose 2.7% YoY as operating expenses have continued to outpace revenue performance; management cites electricity costs as one of the key factors here. Margin was off by 53bp at 12.7%. Net profit did comply to expectations rising 16% YoY as, in spite of the weak operating performance, the effective tax rate normalization (32.0% vs 35.5%) proved correct and overcame the poor top-line showing.

July 27, 2017

GSANBOR (HOLD, PT P$24.0) 2Q17 report due today

We look for GSanborn to file a positive, yet modest report in this upcoming 2Q17 earnings season. Our estimates include Sales and EBITDA rising 7%, while Net Profit could surprise (+18%e) following a normalized tax rate. Our estimates assume a solid recovery in Sears’ SSS, yet still- ailing performance at Sanborns stores. iShop should perform outstandingly well, yet with a limited contribution to total sales, the overall performance is dictated by the counterbalancing of Sears an Sanborns. Store expansion is negligible this quarter, but the carryover from the previous 12 months means sales floor at the close of 2Q17 should mark a 5.4% YoY rise. This, plus the effect of a lower number of stores under remodeling, and the step up in pace from renovated units will make for a sizable chunk of the projected 7.5% sales expansion. We expect a modest dilution in margins (-10bp to 13.2% in EBITDA), largely as Sanborns Stores struggle to achieve operating

7 Disclaimer: https://goo.gl/6b8m3o www.actinverresearch.com leverage and Sears counterbalances with its renewed push in fashion categories. The unusual hike in Net profit, up 18% to P$801m (EPS P$0.35), would be driven by a normalization in the effective tax rate (31.0%e vs 35.5% a year ago). We are not projecting significant FX gains or losses within the company’s financial costs.

April 28, 2017

GSANBOR (HOLD, PT P$24.0) 1Q17, The expansion program shows its hand.

GSANBOR released positive 1Q17 figures that confirmed our operational estimates, but that managed to surprise at the Net Profit on the back of lower tax reserves. With minor changes to our estimates, the HOLD recommendation and P$24.0 target remain unchanged following the quarterly update to our earnings model. As expected, sales increased 8.7% as a recovery in SSS performance (+4.9%) has been possible as recently-opened stores mature and there is a smaller proportion of stores now undergoing remodelings. Even if EBITDA margin was somewhat off YoY (-10bp to 11.8%), this allowed for EBITDA to rise 8.2% just as we anticipated. As one of the issues on which we are not fully convinced in Gsanbor’s business model, performance by format is once again uneven in this quarter, and we see no reason to expect otherwise going forward. While the core Sears segment is responding well to the new store openings, a refreshed fashion-oriented clothing assortment, and refurbished locations (sales grew 10% and EBITDA 12%), Sanborns continues to struggle with what we consider a troubled format (sales were flat and EBITDA fell 15%). IShop, on the other side, recorded stellar performance and is slowly catching up Sanborns to potentially become the group’s second most-relevant platform within a few years.

February 27, 2017

GSANBORS (HOLD, PT P$24.0) Uneven improvements in 4Q16 limit our enthusiasm

Even if GSanbors released a positive report that was in line to our expectations, the nature of the recovery, specifically the different trends seen among the several store formats, lead us to remain on the skeptical side in spite that the

8 Disclaimer: https://goo.gl/6b8m3o www.actinverresearch.com unchanged target price at P$24.0 offers an attractive potential return. Thus, we continue to rate GSanbor a HOLD. On the quarter’s numbers, the company achieved 9% higher sales on top of a 5.2% SSS expansion and a 6.4% hike in sales floor, which accelerated during the final quarter of the year —as is seasonally usual— with the addition of 10 stores, out of the year’s 17 total. The annual 4.0% rise in SSS shows the impact of partial closures that affected mostly at the start of the year.

9 Disclaimer: https://goo.gl/6b8m3o www.actinverresearch.com