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BTG Pactual Affiliate Research Banco BTG Pactual S.A.

SectorNote 07 January 2019 Retail and Internet

Zara Index Update: the Brazil cost

Stronger USD makes local markets more competitive. Brazil was an outlier Fabio Monteiro Since the inception of our “ Index” in 2014 ( see our April 2014 report “Foreign Brazil – Banco BTG Pactual S.A. [email protected] Invasion: Why, how and what it means for locals ”), Brazil has been one of the most +55 11 3383 2006 expensive countries to buy apparel. In this edition, we expand the number of countries analyzed (from 29 to 44) for a basket of 12 items. Our simple conclusion is that USD Luiz Guanais appreciation increased the competitiveness of local markets (only the Swiss Franc, Brazil – Banco BTG Pactual S.A. [email protected] Japanese Yen and Thai baht appreciated more than the USD in LTM), with Zara US +55 11 3383 2755 one of the most expensive operations for the sample of products under analysis. To our surprise, the only exception was Brazil.

BRL down 14% LTM vs. USD; Zara Brazil is 18% more expensive than in the US

The BRL was one of the currencies to lose most value against the USD (14% YTD) , mostly reflecting political volatility related to the October elections. However, Zara’s products are now 18% more expensive in Brazil than in the US. That’s a huge change versus our 2016 Zara Index (Brazil was 22% cheaper than in the US), but followed the same trend of our first survey, in 2014, when prices in Brazil were the highest in the world and 21.5% costlier than in t he US. The conclusion of the current study was reached despite Brazil’s tough macro scenario, which took a toll on the amount of money that Brazilians spent abroad - 16% below 2013 levels (excluding inflation). A more hostile environment for foreign players than local companies

Brazil is clearly a tough country for players to do business. Regulatory issues, the complexities of the tax system and logistics bottlenecks made otherwise successful players overseas (e.g. Amazon and Walmart) struggle to gain traction in the country. In the case of Zara, its Brazilian subsidiary has a different M.O. than its global strategy, where distribution is centralized and 57% of factories are concentrated in proximity countries (, , and ). In Brazil, Zara’s FX risk is higher and lead time is longer, as very little is produced locally compared to ten years ago, when Zara produced roughly 40% locally. Only 92 factories are located in Brazil or Argentina, 1.3% of Zara’s factories (7,210). Blue sky for locals…but not for everyone!

We don’t expect the main barriers for foreign retailers to come down much in the coming years (our 2018 Zara Index showed how difficult it is for foreigners to remain competitive in the Brazilian market). But it isn’t a blue sky for all local retailers. Execution discipline and focus on processes and controls remain a key theme. So , companies like Lojas Renner (LREN3) should outperform. Renner has lots of room to grow its market share (currently 6%) in a fragmented apparel retail sector. In the meantime, following the secular growth trend of e-commerce in Brazil, B2W (BTOW3 – Buy) and Magazine Luiza (MGLU3 – Buy) are potential winners in this scenario, combinin g a great focus on service levels, solid traffic and broad assortment at their websites, which offer a barrier for new entrants and foreign players to succeed.

ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 17 Banco BTG Pactual S.A. does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Any U.S. person receiving this report and wishing to effect any transaction in a security discussed in this report should do so with BTG Pactual US Capital, LLC at 212-293-4600, 601 Lexington Avenue. 57th Floor, New York NY 10022.

Brazil Retail and Internet 07 January 2019 page 2

USD appreciation again dictated Zara Index’s main trends; Brazil was an outlier

Our last update of the Zara Index was in February 2016. Since then, the USD depreciated 4.3% versus BRL (while BRL depreciated 14% LTM). Indeed, comparing a basket of 44 currencies (the scope of our analysis in this report), only the Suisse Franc, Japanese Yen and Thai baht appreciated more than the USD in LTM.

Table 1: Currencies’ performance vs. USD (LTM)

Turkey -31% -17% Brazil -14% -11% -10% -10% India -9% -9% -8% UK -8% Norway -7% -7% New Zeland -7% -6% Danmark -6% -6% slovenia -6% Slovakia -6% Portugal -6% -6% -6% -6% -6% Ireland -6% -6% -6% Finland -6% Spain -6% -6% -6% -6% Bulgaria -6% Mainland -6% -6% -4% Malaysia -3% Singapore -3% -2% Vietnam -2% Hong Kong 0% US 0% 1% 2% 4%

Source: Bloomberg and BTG Pactual (01/03/2019)

Our survey this time includes prices of 12 products in 44 countries (vs. 29 previously) with a very similar basket. We also took into account list prices, ignoring any markdowns.

The BRL was one of the currencies to lose most value against the USD in 2018 (14% LTM) – mostly reflecting political volatility, given the elections that took place in October, but Zara’s products are now 18% more expensive in Brazil than in the US.

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After Brazil, Zara’s most expensive operations worldwide are in Japan and in the US, mainly reflecting USD appreciation versus global currencies.

Table 2: “Zara Index” 2018 (raw) – Price gap to Zara US Table 3: “Zara Index” 2018 (PPP-adjusted) – Price gap to Zara US

Slovenia -36% Finland -34% Slovakia -36% Luxembourg -34% Portugal -36% Norway -31% Spain -36% Netherlands -27% Greece -33% Ireland -27% Turkey -33% Danmark -27% Hungary -32% Austria -26% Romania -31% Belgium -26% Bulgaria -30% France -26% Poland -30% Switzerland -24% Austria -29% Germany -24% Netherlands -29% Sweden -23% Luxembourg -29% UK -20% Italy -29% Australia -20% Ireland -29% Spain -18% France -29% Italy -17% Finland -29% New Zeland -17% Estonia -29% Canada -14% Germany -29% Slovenia -11% Belgium -29% Portugal -9% Croatia -28% Greece -7% UK -25% US 0% Mexico -24% Japan 7% India -22% Estonia 8% Czech Republic -21% Slovakia 9% Sweden -19% Hong Kong 14% Mainland China -18% South Korea 25% Canada -17% Croatia 27% Norway -16% Czech Republic 30% New Zeland -15% Hungary 32% Danmark -15% Poland 40% Australia -13% Singapore 48% Malaysia -12% Mainland China 52% Hong Kong -11% Romania 59% Taiwan -8% Mexico 59% Singapore -6% Bulgaria 67% Russia -5% Taiwan 86% Vietnam -5% Brazil 114% Switzerland -4% Turkey 140% Thailand -1% Malaysia 144% South Korea -1% Thailand 144% US 0% Russia 159% Japan 4% Vietnam 171% Brazil 18% India 191%

Source: Company and BTG Pactual Source: BTG Pactual

That’s a huge change vis-à-vis our 2016 Zara Index (Brazil was 22% cheaper than in the US), but followed the same trend of our first survey, back in 2014, when prices in Brazil were the highest in the world and 21.5% costlier than in the US. In 2016, the BRL was also pressured by the deterioration of Brazil’s fiscal situation and political woes.

As in the previous versions of our Zara Index, Portugal and Spain are among the cheapest places to buy Zara products, due to the fact that (owner of Zara) has manufacturing facilities in Spain and outsources production to factories in Portugal, Morocco and Turkey (this time we also included the Turkish operation, whose prices are, on average, 33% cheaper than in the US).

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Table 4: BZ price gap to US Table 5: Spain price gap to US

2014 21% 2014 -34%

2015 -4% 2015 -36%

2016 -23% 2016 -39%

2018 18% 2018 -36%

Source: Company and BTG Pactual Source: Company and BTG Pactual

Inditex has a footprint in 96 countries, with 7.4k stores and eight banners (Zara, Pull&Bear, , , Stradivarius, , Zara Home and Uterque).

Table 6: Net revenues by banner EURmn – Inditex (2017) Table 7: # of stores by banner – Inditex (2017) 97 90 570

830 590 1,480 670 2118 2,227

1,765 1017

1,747 16,620 979 1098 780

Zara Pull&Bear Massimo Dutti Bershka Stradivarius Oysha Zara Home Uterque Zara Pull&Bear Massimo Dutti Bershka Stradivarius Oysha Zara Home Uterque

Source: Company and BTG Pactual Source: Company and BTG Pactual

As of 2017, Inditex operated with ~1.8k suppliers (and 7.2k factories). 57% of factories are in countries near Zara’s headquarters, such as Spain, Portugal, Morocco and Turkey, which explains why these countries have lower average prices than most of Zara’s operations worldwide.

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Table 8: Inditex total suppliers and manufacturers by geographic area

Source: Company and BTG Pactual

In Brazil, Zara started its operations in 1999 and, in almost 20 years, opened 56 stores in the country (vs. an initial plan to open 50 stores in three years), plus 15 Zara Home stores. Logistics challenges coupled with Brazilian tax system complexities made Zara’s life in Brazil much tougher.

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Table 9: Tax system in Brazil

Source: BTG Pactual

Zara’s Brazilian subsidiary has a different M.O. than its global strategy, in which all distribution is centralized and 57% of production is maintained in Portugal, Spain and Morocco axis (which borders Spain).

Almost all clothes manufactured for Zara in the world, including Asia, are shipped to three major distribution centers in Spain. From there, they go by truck or plane to 96 countries in which the company has stores.

Maintaining production in Europe is more expensive than manufacturing everything in China, as competitors do. But one of Zara’s differential is its state-of-the-art inventory management (which also helps its fast fashion model).

In Brazil, Zara’s FX risk is higher and lead time is longer, as very little is produced locally compared to ten years ago, when Zara produced roughly 40% locally. Only 92 factories are located in Brazil or Argentina, 1.3% of Zara’s factories (7,210).

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Table 10: Zara’s timeline

2017 – Reaches 1975 – First store in 1992 – Zara opens 1993 – Opens first 7,475 stores with 8 La Coruña first store in Mexico store in Greece banners (2,118 under Zara banner)

1994 – Opens first 2012 – Opens 1977 – Headquarters 1990 – Opens first stores in Belgium and logistics Center in in Arteixo (Spain) store in France Sweden Tordera

2009 – Zara deepens 1984 – Opens 1989 - Opens first 1999 – Zara starts coverage in China logistics Center with Stradivarius, store in the US operation in Brazil (Arteixo) Bershka and Pull&Bear

1985 – Creation of 2003 – Opens 2006 – Opens 1988 – Opens first Inditex (Holding distribution center in distribution center in company) store in Portugal Zaragoza Léon

Source: Company and BTG Pactual

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Our previous Zara Index editions

Chart 1: “Zara Index” 2014 (raw) – Price gap to Chart 2: “Zara Index” 2015 (raw) – Price gap to Chart 3: “Zara Index” 2016 (raw) – Price gap to Zara US Zara US Zara US

Portugal -29.1% Portugal -41.4% Portugal -39.5% Spain -40.9% Spain -39.5% Spain -29.1% Russia -40.1% Poland -33.4% Greece -17.3% Greece -33.3% Romania -28.8% Mexico -28.3% Netherlands -12.1% -28.8% Romania -24.2% Greece -27.5% Monaco -12.1% Poland -23.5% Netherlands -26.0% Luxembourg -12.1% -23.1% Monaco -26.0% Luxembourg -26.0% Ireland -12.1% Canada -22.6% Italy France -22.2% -26.0% France -12.1% Ireland -26.0% Ireland -22.2% France -26.0% Germany -12.1% Belgium -21.3% Germany -26.0% Belgium -12.1% Germany -21.3% Belgium -26.0% Italy -21.3% Italy -12.1% Austria -26.0% Luxembourg -21.3% Canada -25.9% Canada -11.1% Netherlands -21.3% Taiwan -24.8% Austria -20.9% -6.5% Russia -23.0% Monaco -20.3% Poland -5.4% Brazil -22.5% Mexico -19.4% United Kingdom -15.1% China -3.4% Sweden -13.5% Norway -13.1% Japan 2.6% -10.8% Sweden -11.3% United Kingdom -10.5% Denmark 4.8% Switzerland -10.1% Norway -8.4% Denmark -10.0% Sweden 6.2% Japan -7.1% Hong Kong -6.8% Norway 12.9% Brazil -0.1% Japan -4.7% China 5.4% China -3.5% Switzerland 14.2% South Korea 16.3% South Korea -2.2% Brazil 21.5% Switzerland 17.8% Macau 4.8%

Source: BTG Pactual Source: BTG Pactual Source: BTG Pactual

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Chart 4: “Zara Index” 2014 (PPP-adjusted) – Chart 5: “Zara Index” 2015 (PPP-adjusted) – Chart 6: “Zara Index” 2016 (PPP-adjusted) – Price gap to Zara US Price gap to Zara US Price gap to Zara US

Luxembourg -29.9% Luxembourg -24.3% Switzerland -33.7% Denmark -24.1% Luxembourg -24.6% Switzerland -27.4% Spain -23.1% Monaco -21.1% Denmark -26.6% Switzerland -21.8% United Kingdom -20.2% Norway -19.5% France -25.8% Canada -21.7% Norway -20.9% Ireland -19.2% Spain -25.4% France -19.0% Belgium -19.2% Monaco -25.4% Belgium -18.0% Canada -19.0% Denmark -18.9% Belgium -25.0% Monaco -18.0% Spain -18.4% Sweden -18.0% Netherlands -23.2% Netherlands -18.2% Austria -16.6% France -18.2% Norway -22.4% Ireland -16.1% Austria -18.2% Ireland -22.2% Netherlands -16.1% Sweden -15.7% United Kingdom -15.5% Sweden -21.2% Germany -14.1% Portugal -14.9% Italy -10.7% Germany -19.3% Germany -10.7% Portugal -6.0% Italy -8.3% Canada -19.1% Greece 5.5% Greece -7.7% Italy -18.2% Japan 10.6% Japan 5.8% Hong Kong 27.8% Portugal -17.0% Chile 35.6% South Korea 34.2% United Kingdom -14.1% Mexico 40.6% Poland 43.5% Colombia 41.6% Mexico Greece -11.8% 51.8% South Korea 48.8% Taiwan 52.2% Japan -0.8% Poland 51.8% Macau 52.3% China 42.1% Brazil 60.4% Romania 71.9% Romania 79.0% China 76.9% Brazil 49.4% China 84.2% Brazil 82.9% Poland 54.2% Russia 116.8% Russia 184.3%

Source: BTG Pactual Source: BTG Pactual Source: BTG Pactual

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Brazil is still one of the most expensive countries to buy imported products

As we mentioned in 2016 in our Zara Index report, Brazilians take it for granted that apparel is much cheaper abroad, mainly due to hefty taxation on imported products.

In 2014, when we compiled the prices of a basket of luxury apparel goods, prices in Brazil were, on average, 33% costlier than in the US (including VAT and IOF tax on Brazilian credit cards when shopping abroad).

In our 2016 price survey, a similar basket in Brazil costs only 7% more than if bought in the US.

Now, a basket of luxury products in Brazil costs 4.5% more than in the US. However, in our current survey, some products of international brands sustained cheaper prices in Brazil (as in 2016). Even luxury goods by brands such as Christian Louboutin, Louis Vuitton and Cartier have similar or slightly cheaper prices compared to the US.

By buying locally, Brazilian clients can pay for products in installments and without incurring any FX risk.

Table 11: Luxury product price survey 2014 – Brazil vs. US

Source: BTG Pactual (*6.38% IOF financial transactions tax charge on credit card purchases abroad). Prices as of March 27 th 2014.

Table 12: Luxury product price survey 2015 – Brazil vs. US

Source: BTG Pactual (*6.38% IOF financial transactions tax charge on credit card purchases abroad). Prices as of January 30 th 2015.

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Table 13: Luxury product price survey 2016 – Brazil vs. US

Source: BTG Pactual (*6.38% IOF financial transactions tax charge on credit card purchases abroad). Prices as of December 22 nd 2015.

Table 14: Luxury product price survey 2018 – Brazil vs. US

Source: BTG Pactual (*6.38% IOF financial transactions tax charge on credit card purchases abroad). Prices as of November 29 th 2018.

Looking at cosmetics banners in Brazil (Sephora and L’Occitane), our 2016 survey identified that prices in Brazil were 11% cheaper than in the US, on average.

In 2018, the trend changed in the cosmetics segment (same conclusion from our Zara Index). Products in our sample were, on average, 6% more expensive.

Table 15: Sephora cosmetics survey – Brazil vs. US

Source: BTG Pactual (*6.38% IOF tax charge on credit card purchases abroad)

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Table 16: L’Occitane cosmetics survey – Brazil vs. US

Source: BTG Pactual (*6.38% IOF tax charge on credit card purchases abroad)

In the case of electronics, we took a sample of 20 countries which sell directly (through the Apple Store) iPhones (Xs, 5.8 inches and 64GB) and iPads (64GB). For US, we have adjusted prices to include the sales tax rate (we used an average tax rate of 8%).

The conclusions are the same as those in our 2018 Zara Index. In the case of iPhones, products are, on average, 20% more expensive than in the US for the group of countries analyzed. For iPads, products are, on average, 13% more expensive.

Brazil is the most expensive country, with prices 77% and 101% higher than in the US for iPhones and iPads, respectively.

Table 17: Apple survey (prices vs. US) - iPhone Table 18: Apple survey (prices vs. US) - iPad Iphone Xs (5.8 inch) - Currency Price (local Currency Price (local FX Price vs. iPad Pro (64GB) FX Price vs. 64GB ticker currency) Price (USD) US ticker currency) Price (USD) US China 6.87 CNY CNY curncy 8,699 1,267 17% China 6.87 CNY CNY curncy 5,143 749 6% Hong Kong 7.83 HKD HKD curncy 8,599 1,098 1% Hong Kong 7.83 HKD HKD curncy 4,988 637 -10% Singapore 1.36 SGD SGD curncy 1,649 1,211 11% Singapore 1.36 SGD SGD curncy 968 711 1%

Australia 0.70 AUD AUD curncy 1,629 1,147 6% Australia 0.70 AUD AUD curncy 979 689 -2% Japan 108.01 JPY JPY curncy 112,800 1,044 -4% Japan 108.01 JPY JPY curncy 69,800 646 -8%

Belgium 1.14 EUR EUR curncy 1,159 1,322 22% Belgium 1.14 EUR EUR curncy 739 843 19% Germany 1.14 EUR EUR curncy 1,149 1,311 21% Germany 1.14 EUR EUR curncy 729 832 18% Spain 1.14 EUR EUR curncy 1,159 1,322 22% Spain 1.14 EUR EUR curncy 729 832 18% France 1.14 EUR EUR curncy 1,155 1,318 21% France 1.14 EUR EUR curncy 738 842 19% Italy 1.14 EUR EUR curncy 1,189 1,357 25% Italy 1.14 EUR EUR curncy 739 843 19% Austria 1.14 EUR EUR curncy 1,149 1,311 21% Austria 1.14 EUR EUR curncy 729 832 18% Switzerland 0.99 CHF CHF curncy 1,199 1,216 12% Switzerland 0.99 CHF CHF curncy 719 729 3% Turkey 5.41 TRY TRY curncy 9,899 1,831 68% Turkey 5.41 TRY TRY curncy 4,799 888 26% Sweden 8.99 SEK SEK curncy 12,795 1,423 31% Sweden 8.99 SEK SEK curncy 7,495 834 18% Netherlands 1.14 EUR EUR curncy 1,159 1,322 22% Netherlands 1.14 EUR EUR curncy 738 842 19% UK 1.27 GBP GBP curncy 999 1,266 16% UK 1.27 GBP GBP curncy 619 784 11%

Mexico 20.25 MXV MXV curncy 24,499 1,210 11% Mexico 20.25 MXV MXV curncy 15,499 765 8% Canada 1.34 CAD CAD curncy 1,379 1,026 -6% Canada 1.34 CAD CAD curncy 799 595 -16% US 1.00 USD USD curncy 1,087 1,087 0% US 1.00 USD USD curncy 706 706 0% Brazil 3.80 BRL BRL curncy 7,299 1,921 77% Brazil 3.80 BRL BRL curncy 5,399 1,421 101% Source: Company and BTG Pactual (as of 03/01/2019) Source: Company and BTG Pactual (as of 03/01/2019)

The volatile economic/political outlook took a toll on the amount of money that Brazilians spend abroad, which is also a consequence of the less favorable FX rate. After a peak in 2H17, Brazilians’ expenditures abroad remained flattish y/y in 10M18 in USD terms, but still 16% below the levels of 2013 (without adjusting for inflation effects).

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Chart 7: Brazilian spending abroad in USD (12-month moving average) – Chart 8: Brazilian spending abroad in USD (12-month moving average) – base 100 (2013) y/y growth 1.20 1.40 40% 30% 1.00 1.20 20% 1.00 0.80 10% 0.80 0% 0.60 0.60 -10% 0.40 -20% 0.40 -30% 0.20 0.20 -40% - - -50% Jul-14 Jul-15 Jul-16 Jul-17 Jul-18 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jul-18 Sep-14 Sep-15 Sep-16 Sep-17 Sep-18 Nov-14 Nov-15 Nov-16 Nov-17 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Oct-13 Oct-14 Oct-15 Oct-16 Oct-17 Oct-18 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Apr-18 May-14 May-15 May-16 May-17 May-18 Expenditures w/ international credit cards Brazilian expenditures abroad Expenditures w/ international credit cards Brazilians expenditures abroad

Source: Brazilian Central Bank / BTG Pactual Source: Brazilian Central Bank / BTG Pactual

Local players definitely benefit from Brazilians spending less abroad and from the increasing competitiveness of local retail versus international markets, given the more favorable FX. We also remind investors that the decline in consumption abroad is also a function of the more volatile political outlook in the country, which in turn means a softer recovery for the overall retail sector (including the local market).

According to BTG’s macro team, in a baseline scenario, the 10-year CDS spread ends 2019 at 225bps, and the 10-year US Treasury rate increases to 3.50%. This scenario is compatible with the approval of a moderate social security reform next year in Brazil and additional measures that keep the spending cap rule achievable. In this context, the currency ends 2019 at BRL3.90/USD, the same level of YE18. Higher US Treasury rates would be offset by the decline in country risk.

In the benign alternative scenario, spreads recede to 150bps at YE19 and 10-year US Treasury rates remain stable at the current level of ~3.0% up to YE19. Here, a bold social security reform is approved, and further fiscal consolidation measures advance in Congress as well as pro-productivity reforms. In this context, the currency appreciates to BRL3.40/USD.

In the adverse alternative scenario, Brazil’s 10-year risk spread reaches 400bps and 10-year US Treasury rates rise to 4.00% at YE19. This scenario is compatible with approval of a highly watered-down version of the social security reform proposal, such as a reform focused exclusively on civil servants, and where the incoming administration faces a political gridlock in relation to other necessary fiscal adjustment measures. This scenario would be compatible with the depreciation of the domestic currency to BRL5.00/USD.

It is worth mentioning that the new Brazilian government should lead an agenda in the next months to simplify the Brazilian tax system and eventually reduce import taxes, which could mean a more benign outlook for foreign players to operate in Brazil.

However, Brazil remains a tough environment for foreign players. Assuming the base case scenario for FX rates, as well as the still challenging (and structural) outlook for foreign players to operate in Brazil (high import tax burden, tax system complexities

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and logistics bottlenecks), the advantage of local players should persist in the coming years.

But as in previous years, it isn’t a blue sky for all retailers. Execution discipline and focus on processes and controls remain a key theme. Thus, companies such as Lojas Renner (LREN3) should outperform (also leveraging, in the case of LREN, on its still low market share in Brazilian apparel retail, at ~6%). In the meantime, following the secular growth trend of e-commerce in Brazil, B2W (BTOW3 – Buy) and Magazine Luiza (MGLU3 – Buy) are potential winners in this scenario, combining a great focus on service levels, solid traffic and broad assortment at their websites, which offer a barrier for new entrants and foreign players to succeed.

Table 19: Summary – Zara Index 2018 (prices in USD)

Source: BTG Pactual

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Table 20: Summary – Zara Index 2018 (Prices in USD)

Source: BTG Pactual

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Table 21: Summary – Zara Index 2018 (Prices in USD)

Source: BTG Pactual

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Required Disclosures

This report has been prepared by Banco BTG Pactual S.A. The figures contained in performance charts refer to the past; past performance is not a reliable indicator of future results.

BTG Pactual Definition Coverage *1 IB Services *2 Rating Buy Expected total return 10% above the company’s sector 60% 44% average. Neutral Expected total return between +10% and -10% the 37% 31% company’s sector average. Sell Expected total return 10% below the company’s sector 3% 33% average.

1: Percentage of companies under coverage globally within the 12-month rating category. 2: Percentage of companies within the 12-month rating category for which investment banking (IB) services were provided within the past 12 months. Absolute return requirements Besides the abovementioned relative return requirements, the listed absolute return requirements must be followed: a) a Buy rated stock must have an expected total return above 15% b) a Neutral rated stock can not have an expected total return below -5% c) a stock with expected total return above 50% must be rated Buy

Analyst Certification

Each research analyst primarily responsible for the content of this investment research report, in whole or in part, certifies that: (i) all of the views expressed accurately reflect his or her personal views about those securities or issuers, and such recommendations were elaborated independently, including in relation to Banco BTG Pactual S.A. and/or its affiliates, as the case may be; (ii) no part of his or her compensation was, is, or will be, directly or indirectly, related to any specific recommendations or views contained herein or linked to the price of any of the securities discussed herein. Research analysts contributing to this report who are employed by a non-US Broker dealer are not registered/qualified as research analysts with FINRA and therefore are not subject to the restrictions contained in the FINRA rules on communications with a subject company, public appearances, and trading securities held by a research analyst account. Part of the analyst compensation comes from the profits of Banco BTG Pactual S.A. as a whole and/or its affiliates and, consequently, revenues arisen from transactions held by Banco BTG Pactual S.A. and/or its affiliates. Where applicable, the analyst responsible for this report and certified pursuant to Brazilian regulations will be identified in bold on the first page of this report and will be the first name on the signature list.

Statement of Risk

B2W Companhia Global do Varejo [BRSUBA] - B2W is subject to local macroeconomic conditions, mainly inflation, FX-rate, GDP growth, consumer spending and credit availability. Company specific risks include growth dynamics of the ecommerce sector, competition and deterioration of working capital terms. Lojas Renner S.A. [BRLRE] - Renner is subject to local macroeconomic conditions, mainly GDP and inflation. On top of that, increase in raw material prices and/or deterioration of delinquency ratios could have an adverse impact on the results. Company specific risks include the learning of financial products and their expansion to new regions. Magazine Luiza S.A. [BRMGLU] - We believe the main risks are 1) macro conditions changes, 2) competition, and 3) execution.

Valuation Methodology

B2W Companhia Global do Varejo [BRSUBA] - Our 12-month forward target price is DCF based (cost of equity of 11.0% and g of 6.5%, in nominal USD). Lojas Renner S.A. [BRLRE] - Our 12-month forward target price is DCF based (cost of equity of 9.6% and g of 3.5%, in nominal USD). Magazine Luiza S.A. [BRMGLU] - Our 12-month forward target price is DCF based (cost of equity of 10% and g of 6.5%, in nominal USD).

Company Disclosures

Company Name Reuters 12-mo rating Price Price date B2W Digital 1, 2, 4, 6, 18, 19, 20 BTOW3.SA Buy R$42.00 4-1-2019 Lojas Renner 1, 2, 4, 6, 18, 19, 20, 22 LREN3.SA Buy R$41.35 4-1-2019 Magazine Luiza 18, 19, 20, 21, 22 MGLU3.SA Buy R$178.40 4-1-2019

1. Within the past 12 months, Banco BTG Pactual S.A., its affiliates or subsidiaries has received compensation for investment banking services from this company/entity. 2. Banco BTG Pactual S.A, its affiliates or subsidiaries expect to receive or intend to seek compensation for investment banking services and/or products and services other than investment services from this company/entity within the next three months. 4. This company/entity is, or within the past 12 months has been, a client of Banco BTG Pactual S.A., and investment banking services are being, or have been, provided. 6. Banco BTG Pactual S.A. and/or its affiliates receive compensation for any services rendered or presents any commercial relationships with this company, entity or person, entities or funds which represents the same interest of this company/entity. 18. As of the end of the month immediately preceding the date of publication of this report, neither Banco BTG Pactual S.A. nor its affiliates or subsidiaries beneficially own 1% or more of any class of common equity securities 19. Neither Banco BTG Pactual S.A. nor its affiliates or subsidiaries have managed or co-managed a public offering of securities for the company within the past 12 months. 20. Neither Banco BTG Pactual S.A. nor its affiliates or subsidiaries engaged in market making activities in the subject company's securities at the time this research report was published.

Brazil Retail and Internet 07 January 2019 page 18

21. Banco BTG Pactual S.A. or its affiliates or subsidiaries have not received compensation for investment banking services from the companies in the past 12 months 22. Banco BTG Pactual S.A. or its affiliates or subsidiaries do not expect to receive or intends to seek compensation for investment banking services from the companies within the next 3 months.

B2W Digital

Stock Price (R$) Price Target (R$) 50.0

40.0

30.0

20.0

10.0

0.0 7-Jul-16 7-Jul-17 7-Jul-18 7-Apr-16 7-Oct-16 7-Apr-17 7-Oct-17 7-Apr-18 7-Oct-18 7-Jan-16 7-Jan-17 7-Jan-18 7-Jan-19 Buy Neutral Sell No Rating

Source: BTG Pactual and Economatica. Prices as of 04 January 2019 Lojas Renner

Stock Price (R$) Price Target (R$) 50.0

40.0

30.0

20.0

10.0

0.0 7-Jul-16 7-Jul-17 7-Jul-18 7-Apr-16 7-Oct-16 7-Apr-17 7-Oct-17 7-Apr-18 7-Oct-18 7-Jan-16 7-Jan-17 7-Jan-18 7-Jan-19 Buy Neutral Sell No Rating

Source: BTG Pactual and Economatica. Prices as of 04 January 2019 Magazine Luiza

Stock Price (R$) Price Target (R$) 200.0

160.0

120.0

80.0

40.0

0.0 7-Jul-16 7-Jul-17 7-Jul-18 7-Apr-16 7-Oct-16 7-Apr-17 7-Oct-17 7-Apr-18 7-Oct-18 7-Jan-16 7-Jan-17 7-Jan-18 7-Jan-19 Buy Neutral Sell No Rating

Source: BTG Pactual and Economatica. Prices as of 04 January 2019

Brazil Retail and Internet 07 January 2019 page 19

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