Fox-Wizel Ltd. Periodic Report for 2018

FOX-WIZEL LTD.

PERIODIC REPORT FOR 2018

Index

Chapter A - Description of the Corporation's Business

Chapter B - Board of Directors' Report on the State of the Corporation's Affairs

Chapter C - Financial Statements as of December 31, 2018 and the Corporation's Separate Financial Information

Chapter D - Additional Information on the Corporation

Chapter E - Corporate Governance Questionnaire

Chapter F - Report on the Effectiveness of Internal Control over Financial Reporting and Disclosure

INDEX

CHAPTER A - DESCRIPTION OF THE GROUP'S BUSINESS ...... - 3 - 1. Description of the general development of the Group's business ...... - 3 - 1.1 The Group's activities and description of its business development ...... - 3 - 1.2 The operating segments ...... - 3 - 1.2.1 The operating segment of fashion and home fashion ...... - 3 - 1.2.2 The operating segment of aromatic bath and body care products ...... - 6 - 1.2.3 The Company has other activities that do not constitute a reportable segment as follows...... - 6 - 1.3 Investments in the Company's equity and share transactions ...... - 11 - 1.4 Dividend distribution ...... - 11 - 1.4.1 Distribution of dividends in 2018 and 2017 ...... - 11 - 1.4.2 Dividend distribution policy...... - 11 - 2. Other information...... - 12 - 2.1 Financial information regarding the Group's operating segments ...... - 12 - 2.2 The economic environment and the effect of external factors on the Group's operations ...... - 13 - 2.2.1 General overview ...... - 13 - 2.2.2 The political-security situation ...... - 13 - 2.2.3 Political and economic changes in China and Southeast Asian countries ...... - 13 - 2.2.4 The market's position and changes in the standard of living ...... - 14 - 2.2.5 The competition in the fashion industry ...... - 14 - 2.2.6 Change in customs duty and tax rates in Israel ...... - 15 - 2.2.7 Employment terms ...... - 15 - 2.2.8 Costs of commodities ...... - 15 - 2.2.9 Shutdown of seaports ...... - 16 - 2.2.10 Foreign currency exchange rate fluctuations ...... - 16 - 2.2.11 Changes in interest and the CPI ...... - 16 - 3. Description of the Group's business in its operating segment ...... - 17 - 3.1 The fashion and home fashion operating segment ...... - 17 - 3.1.1 General information - the fashion and home fashion segment ...... - 17 - 3.1.2 Products ...... - 20 - 3.1.3 Segmentation of revenues and product profitability ...... - 21 - 3.1.4 Customers ...... - 24 - 3.1.5 Marketing and distribution ...... - 24 - 3.1.6 Order backlog ...... - 26 - 3.1.7 Competition ...... - 27 - 3.1.8 Seasonality ...... - 27 - 3.1.9 Production capacity ...... - 29 - 3.1.10 Quality control ...... - 29 - 3.1.11 Fixed assets and facilities ...... - 29 - 3.1.12 Intangible assets ...... - 33 - 3.1.13 Suppliers ...... - 34 - 3.1.14 Working capital ...... - 35 -

- 1 - 3.1.15 Limitations and supervision in the operating segment ...... - 37 - 3.1.16 Condensed results of the operating segment ...... - 39 - 3.2 The aromatic bath and body care products operating segment ...... - 40 - 3.2.1 General information - the aromatic bath and body care products segment ...... - 40 - 3.2.2 Products ...... - 42 - 3.2.3 Segmentation of revenues and product profitability ...... - 43 - 3.2.4 Customers ...... - 44 - 3.2.5 Marketing and distribution ...... - 44 - 3.2.6 Order backlog ...... - 49 - 3.2.7 Competition ...... - 49 - 3.2.8 Seasonality ...... - 50 - 3.2.9 Production capacity ...... - 51 - 3.2.10 Quality control ...... - 51 - 3.2.11 Fixed assets and facilities ...... - 51 - 3.2.12 Intangible assets ...... - 54 - 3.2.13 Suppliers ...... - 54 - 3.2.14 Working capital ...... - 55 - 3.2.15 Limitations on and supervision of Laline's activities and products ...... - 57 - 3.2.16 Collaboration agreements ...... - 58 - 3.2.17 Condensed results of the operating segment ...... - 58 - 3.3 Additional information regarding the entire Group's activities ...... - 59 - 3.3.1 Human capital ...... - 59 - 3.3.2 Financing ...... - 62 - 3.3.3 Insurance ...... - 63 - 3.3.4 Taxation ...... - 63 - 3.3.5 Material agreements ...... - 63 - 3.3.6 Litigation ...... - 64 - 3.3.7 Business strategy and targets...... - 65 - 3.3.8 Expected developments in the coming year ...... - 67 - 3.3.9 Discussion of risk factors ...... - 68 - Chapter B - Board of Directors' Report on the State of the Corporation's Affairs ...... - 72 - Chapter C - Financial Statements as of December 31, 2018 ...... - 72 - The Corporation's Separate Financial Information ...... - 72 - Chapter D - Additional Information on the Corporation ...... - 72 - Chapter E - Corporate Governance Questionnaire ...... - 72 - Chapter F - Report on the Effectiveness of Internal Control over Financial Reporting and Disclosure ...... - 72 -

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CHAPTER A - DESCRIPTION OF THE GROUP'S BUSINESS

1. Description of the general development of the Group's business

1.1 The Group's activities and description of its business development

The Company was founded on June 1, 1995 under the name of Wizel Textile Marketing Ltd. as a private company. On February 10, 2002, the Company changed its name to its current name Fox-Wizel Ltd. ("the Company"). Effective from April 2002, the Company's securities have been traded on the Tel- Aviv Stock Exchange ("the TASE"). The Company, by itself and through its investees (collectively: "the Group") is engaged in the design, acquisition, marketing and distribution of clothes, fashion accessories, underclothing, sports footwear, casualwear and accessories, home fashion and children's and babywear. The Group also sells aromatic bath and body care products.

1.2 The operating segments

The Group is active in two main business areas which constitute its operating segments:

1. Fashion and home fashion under the following brand names: FOX and American Eagle Outfitters - in Israel and abroad - and FOX Home, Aerie, The Children's Place, Mango, Urban Outfitters, Anthropologie and Free People in Israel. See additional information in paragraphs 1.2.1 and 3.1 below.

2. Aromatic bath and body care products through the Laline brand name in Israel and abroad. See additional information in paragraphs 1.2.2 and 3.2 below.

Each of these operating segments represents an accounting operating segment. See details of the adoption of the provisions of IFRS 8 regarding operating segments and the criteria for their adoption according to management's approach in Note 30 to the financial statements.

See details of the Company's other activities which do not aggregate to a reportable operating segment in paragraph 1.2.3 below.

1.2.1 The operating 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 in Israel").

 Sales to the international market - sales to franchises and wholesalers abroad ("foreign franchise sales" or "sales to the international market").

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Local sales

The FOX and FOX Home brand name

The Group's major activities in the Israeli fashion industry are performed under the FOX brand name. The Company also sells housewares and home textile accessories in the FOX Home retail chain. The FOX brand name is one of Israel's leading fashion brand names. It 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/season collection and the fall/winter collection. The products marketed by the Company are custom manufactured for it by subcontractors in various Southeast Asian countries. The Company's design department designs products for the sub brand names: women, men, kids, baby and also designs housewares and home textile products. Most of the Company's products are sold in combined stores that offer two or more of the Company's sub brand names.

The American Eagle and Aerie brand names

The American Eagle ("AE") store chain operates through FWS Retail Ltd. ("FWS") under an exclusive franchise granted to the Company on February 2, 2012 for the sale of the American Eagle Outfitters clothing brand and of the Aerie lingerie brand. The AE stores also sell Aerie lingerie in a store-in-store format.

These brands are well-known and leading clothing and apparel brands in the United States which offer fashionable casualwear at affordable prices. The strength of the AE fashion brand name is evidenced, among others, by the high frequency of issuing new collections in the course of the year, showing and selling between ten and a dozen collections in one year.

In 2016, FWS began collaborating with American Eagle Outfitters US in designing and making signature children's collections that are sold exclusively in select stores nationwide under the store-in-store format. In 2017, FWS began selling the children's collection to one of American Eagle Outfitters US' franchisees in Asia.

See information about the franchise agreement in Note 20b(8) to the financial statements. See details of a term sheet signed on March 10, 2019, which updates the terms of the option granted to Retail Royalty Company and to American Eagle Management Co. (collectively: "AEO"), revises the provisions of the agreements signed between the parties regarding the decision making process in FWS and extends the Children's brand franchise period in Note 32d to the financial statements.

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The Children's Place brand name

The children's and babies' apparel brand, The Children's Place ("Children's" or "TCP") is one of the leading children's and babies' apparel brands in the U.S. which offers a wide and diversified collection of clothing items designed for boys and girls, from casual to trendy.

The Children's began operating on March 7, 2014 under an exclusive franchise granted to the Company. It sells clothing items, accessories and footwear for children and babies from New Born to size 14 at high quality and affordable prices.

See information about the franchise agreement in Note 20b(9) to the financial statements.

The Mango brand name

The MNG/Mango brand name ("Mango") is a leading multinational European brand which offers trendy apparel, footwear and accessories for women, men and kids at premium quality and competitive prices.

The Mango store chain began operating on January 5, 2015 under an exclusive franchise granted to the Company. The Company aims to maximize the inherent potential of the Mango brand and enhance the customers' shopping experience similarly to the brand's global market position.

See information about the franchise agreement in Note 20b(10) to the financial statements.

The Urban Outfitters, Anthropologie and Free People brands

On September 6, 2017, the Company signed three exclusive franchise agreements for setting up and operating a retail chain of the Urban brands - Urban Outfitters, Anthropologie and Free People ("Urban") in Israel. Urban is a global trending fashion brand with new weekly collections, offering fashionwear to both men and women, undergarments, accessories and home décor items. The chain is operated by UFA Retail Ltd. ("UFA") which is 80% held by the Company. The chain began operating in Q1 2018, see more information in Notes 10b(10) and 20b(13) to the financial statements.

Sales to the international market

The Company operates in the international market and aspires to expand to the maximum possible the deployment of its FOX 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.

See additional information in paragraph 3.1.5 below.

In 2017, FWS began selling the children's collection to one of American Eagle Outfitters US' franchisees in Asia.

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The Charles & Keith brand name

The Charles & Keith store chain ("C&K") began operating on February 17, 2015 under an exclusive franchise granted to the Company. The Company decided to discontinue the C&K chain activity, among others due to the chain's immaterial contribution to the Company's operating results. By late February 2018, the Company had closed the entire C&K chain stores. The store closing costs are immaterial to the Company's financial position or operating results.

1.2.2 The operating segment of aromatic bath and body care products

Laline Candles and Soaps Ltd. ("Laline") offers retail sales of soaps, candles, oils, bath products, body care products, baby care products, accessories and gifts. Laline markets its products mainly through the directly-operated retail chain in Israel as well as to wholesalers and to the international market through franchises and directly-operated stores overseas.

See a detailed description of Laline's business in paragraph 3.2 below.

1.2.3 The Company has other activities that do not constitute a reportable segment as follows

a. 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"), a private company controlled by Ilan and Ronit Halfon. 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 retail sales by directly-operated stores in Israel under the Sacks brand name.

As of December 31, 2018, Sacks operates 19 stores in leading shopping malls in Israel and has some 152 employees. In 2018, Sacks generated sales totaling approximately NIS 53,646 thousand (100%) compared to NIS 54,541 thousand (100%) last year.

To date, Sacks has entered into wholesale agreements for marketing its products in the Netherlands, Germany, France, Austria, Switzerland, England, Australia, Greece, Canada, Japan, Denmark, Spain and Argentina. See more information in Note 10b(5) to the financial statements.

b. Billy Haus Ltd. - on August 25, 2006, the Company acquired 50% of the share capital of Billy Haus Ltd. ("Billy Haus"), which is held by the Company and Effi Haus Ltd. in equal parts. Billy Haus imports international youth surfing sportswear and extreme sports apparel. Its main brands include Billabong, Element and Quiksilver. Billy Haus markets its products through a retail chain. On December 4, 2018, Billy Haus signed an agreement with Ug Manufacturing Co. Pty Ltd. according to which Billy Haus was granted an exclusive franchise in effect until June 30, 2026 for opening and operating the Boardriders retail chain in Israel for selling the Roxy, Quiksilver and DC Shoe brands.

As of December 31, 2018, the retail chain operates 38 stores in major shopping malls in Israel. Billy Haus has some 392 employees. In 2018, Billy Haus generated sales totaling approximately NIS 92,871 thousand (100%) compared to approximately NIS 88,273 thousand (100%) last year. See more information in Note 10b(3) to the financial statements.

- 6 - c. Yanga Ltd. - on August 28, 2014, the Company purchased 50% of the share capital of Yanga Ltd. ("Yanga"), which is held in equal parts by the Company and Horowitz Yang Holdings Ltd., owned by the couple Mr. Nir Horowitz and Mrs. Meital Yang-Horowitz. Yanga is engaged in the acquisition, production and marketing of vintage/romantic style boutique fashion for women under the Yanga brand to retailers through a store chain. As of December 31, 2018, Yanga operates 31 stores across Israel. Yanga has some 165 employees. In 2018, Yanga generated sales totaling approximately NIS 63,477 thousand (100%) compared to approximately NIS 47,117 thousand (100%) last year. See additional information in Note 10b(6) to the financial statements. d. Retailors Ltd. - on March 1, 2015, the Company acquired 90% of the share capital of Retailors Ltd. ("Retailors"). Retailors operates a retail chain for marketing and selling sports shoes, apparel and accessories under Nike franchise agreements in Israel and in Canada and under a Foot Locker franchise agreement in Israel:

- The Nike brand in Israel - on November 27, 2014, the Company signed an agreement with Nike Israel Limited ("Nike") according to which Nike granted the Company a non-exclusive franchise for setting up a store chain in Israel for selling sportswear and sports apparel by Nike, one of the world's leading sports brands. Between 2015 and 2017, the entire Nike mono brand stores operated by different franchisees were purchased. Retailors simultaneously opened additional Nike stores. As of December 31, 2018, the chain operates 22 stores across Israel with some 376 employees. See more information in Notes 5(a) and 20b(11) to the financial statements.

- The Nike brand in Canada - on April 21, 2017, a subsidiary of the Company, Retailors Ltd. ("Retailors"), signed an agreement with Nike Canada Corp., a subsidiary of Nike Inc., according to which the latter granted Retailors a seven- year franchise for setting up a store chain in Canada (excluding British Columbia) for the sale of Nike footwear, clothing and sports apparel. Retailors' activity in Canada is performed through its wholly-owned subsidiary, Retailors Sports Inc. ("Retailors Sports"), which began opening stores in Canada in November 2017. As of December 31, 2018, the chain operates six Nike stores with 218 employees. See more information in Note 20b(14) to the financial statements.

- The Foot Locker brand - on October 26, 2016, Retailors signed an agreement with Foot Locker Europe BV ("FL") according to which FL granted Retailors a franchise to set up and operate chain stores in Israel for selling footwear and sports apparel of top international lifestyle brands under the "Foot Locker" brand. The franchise period is ten years from the date of signing. The Foot Locker chain began operating in March 2017. As of December 31, 2018, the chain operates 40 stores nationwide with some 510 employees. See more information in Note 20b(12) to the financial statements.

In 2018, Retailors generated revenues totaling approximately NIS 403,098 thousand (100%) compared to approximately NIS 178,672 thousand last year. See more information in Note 10b(7) to the financial statements

The Company consolidates the financial statements of Retailors in its financial statements from March 1, 2015.

- 7 - e. The Terminal X retail website - the Company holds 56.25% of the shares of Terminal X Online Ltd. ("Terminal X"), 25% is held by Smile Networks, L.P., a limited partnership controlled by Reshet Media Ltd., and about 18.75% is held by Horowitz Yang Holdings Ltd.

Through Terminal X, the Company operates a retail website by the same name which was launched on November 20, 2017. The multi-brand fashion and lifestyle retail website serves as a platform for selling the third party local and international brands by the Company and its investees as well as a private brand under the Terminal X tradename. As of December 31, 2018, the chain has 59 employees. In 2018, the revenues generated by Terminal X approximated NIS 30,962 thousand (100%).

See details of a transaction for adding Smile Networks (controlled by Reshet Media) as partner in Terminal X in Note 10b(11) to the financial statements. f. Shesek Supply Services for Mother Baby & Child Ltd. ("Shesek") and Shilav Direct Marketing to Mother's Home Ltd. ("Shilav") (collectively, "the Shilav companies") - on April 24, 2018, the Company entered into an agreement with private companies controlled by Mr. Ronen Elad ("the seller") according to which, on the date of closing of the transaction, which occurred on July 2, 2018, the Company acquired from the seller 50% of the share capital of each of the Shilav companies.

Shilav operates a retail chain for selling baby and children's products and an online retail website launched in 2013. As of December 31, 2018, the chain has 73 stores nationwide (of which six franchised branches) with some 580 employees. The chain also operates a customer loyalty program. Shilav's products target new parents, representing the majority of sales (including furniture, baby carriages, car seats etc.) as well as a variety of toys, room decorating textiles and clothing and apparel for newborns, infants, and toddlers. Shilav's products also include international brands that are exclusively imported by Shilav as well as store brands. The Shilav companies' HQ is located in Airport City, near the Company's HQ.

In H1 2018, Shilav's total sales amounted to approximately NIS 144,148 thousand (100%).

The Company consolidates the financial statements of the Shilav companies in its financial statements commencing from July 2, 2018. See details of the Shilav acquisition transaction in Note 5b to the financial statements.

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As of December 31, 2018, the number of stores operated by the Group is 677 as follows

31.12.2018 31.12.2017 No. of fashion and home fashion stores in Israel 3301 3142 No. of aromatic bath and body care stores in Israel 111 106 No. of aromatic bath and body care stores overseas 7 - No. of stores that are not part of a reportable segment in Israel 2233 1204 No. of stores that are not part of a reportable segment in Canada 6 2 Total stores 677 542

1 Including 109 FOX stores, 43 FOX Home stores and 32 combined FOX and FOX Home stores, 46 AE stores, 49 Children's stores, 4 Urban Outfitters stores and 47 Mango stores. 2 Including 110 FOX stores, 42 FOX Home stores and 28 combined FOX and FOX Home stores, 43 AE stores, 43 Children's stores, 1 Charles & Keith store and 47 Mango stores. 3 Including 19 Sacks stores, 38 Billabong stores, 31 Yanga stores, 22 Nike stores, 40 Foot Locker stores and 73 Shilav stores. 4 Including 19 Sacks stores, 38 Billabong stores, 24 Yanga stores, 22 Nike stores and 17 Foot Locker stores.

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A diagram of the Group's structure and the Company's holdings as of December 31, 2018

Fox-Wizel Ltd.

("the Company")

50% 56.25% 80% 90% 100% 50% 50% 100% 50% 50%

The Shilav Terminal UFA Retailors Fox- Yanga Billy- FWS Laline A.H. companies X Online Retail Ltd. (6) Wizel Ltd. Haus Retail Candles Fashion (9) Ltd. (8) Ltd. China (5) Ltd. Ltd. and Manu- Soaps facture and (7) Ltd. (4) (3) Ltd. (2) Marketing 3020 Ltd. (1)

Retailors Sports Inc.

(1) 50% of the share capital is held by the Company, 40% by Ilan and Ronit Halfon and 10% by Amos Halfon. (2) 50% of the share capital is held by the Company, 25% by Revital Levi Holdings Ltd. and 25% by Meirav Cohen Holdings Ltd. (3) The Company and FWS signed an option agreement with American Eagle Management Co. and Retail Royalty Company (collectively: "AEO") according to which American Eagle was granted an option to be allocated shares that will reflect 50% of FWS' issued and outstanding share capital, see details of a term sheet signed for updating the terms of the option and revising the provisions of the agreements signed between the parties regarding the decision making process in FWS in Note 32d to the financial statements. (4) 50% of the share capital is held by the Company and 50% by Effi Haus Ltd. (5) 50% of the share capital is held by the Company and the other 50% is held by Nir Horowitz and Meital Yang-Horowitz. (6) 90% of the share capital is held by the Company and 10% by Shnaidman Holdings Ltd. (7) 80% of the share capital is held by the Company, 10% by Horowitz Yang Holdings Ltd. and 10% by Sea & Shells Ltd. (8) 56.25% of the shares are held by the Company, 25% is held by Smile Networks, L.P., a limited partnership controlled by Reshet Media Ltd., and 18.75% is held by Horowitz Yang Holdings Ltd. (9) Shesek Supply Services for Mother Baby & Child Ltd. ("Shesek") and Shilav Direct Marketing to Mother's Home Ltd. ("Shilav") (collectively, "the Shilav companies") in which 50% are held by the Company and 50% by a company controlled by Mr. Ronen Elad.

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1.3 Investments in the Company's equity and share transactions

During 2016-2018 and through the date of publication of this periodic report, no investments were made in the Company's equity and/or no material (off-market) share transactions were performed by interested parties in the Company, excluding the exercise of non-marketable share options in the context of the Company's 2011 ESOP by Mr. Elad Vered and Mrs. Michal Rivkind, the son-in-law and daughter of Mr. Avraham Fox (a director and controlling shareholder in the Company) into 32,182 and 8,046 Company shares in consideration of approximately NIS 92.7 thousand and approximately NIS 23.2 thousand, respectively. See details of the allocation of (non-marketable) RSUs to Mr. Harel Wizel, a controlling shareholder in the Company and the Company's CEO, in Regulation 21 to Chapter D to the periodic report and in Note 19 to the financial statements.

1.4 Dividend distribution

1.4.1 Distribution of dividends in 2018 and 2017

Following is a description of dividends distributed in the past two years:

2017

Amount % of dividend distributed Manner of Made in respect distributed out (NIS distribution Allowed/ of retained of income in the Date of payment thousands) (cash/other) court approved earnings for relevant period April 24, 2017 32,672 Cash Allowed Jan-Dec 2016 50%

2018

Amount % of dividend distributed Manner of Made in respect distributed out (NIS distribution Allowed/ of retained of income in the Date of payment thousands) (cash/other) court approved earnings for relevant period April 23, 2018 38,101 Cash Allowed Jan-Dec 2017 50% September 20, 2018 * 30,000 Cash Allowed Jan-Jun 2018 51%

* It should be noted that the Board's decision to distribute the above dividend was made following the Board's approval that the above distribution meets the profit test and solvency test stipulated in Section 302 to the Israeli Companies Law, 1999 and in view of the improvement in the Company's operating results as reflected in its financial statements as of June 30, 2018. It was decided to approve the distribution without amending the Company's dividend distribution policy according to which dividends are distributed once a year shortly after the publication of the Company's annual financial statements.

The above distributions did not require obtaining court approval.

 On March 18, 2019, the Company declared the distribution of a dividend in the amount of approximately NIS 46.4 million, representing approximately NIS 3.43 per share in respect of the second half of 2018. The dividend will be distributed on April 22, 2019. Following said dividend distribution, the balance of distributable earnings, as per Section 302 to the Israeli Companies Law, 1991, amounts to approximately NIS 497.1 million (the overall dividend ratio for 2018 is 50% of net income in this year).

See details of the Company's undertaking towards banks to meet certain financial covenants in Note 16c to the financial statements.

1.4.2 Dividend distribution policy

In the Board's meeting of March 27, 2016, it was decided that effective from 2016, the Company will distribute dividends once a year, after the issuance of the annual financial statements as of December 31 of each year. The dividend will be at a rate of at least 50% of the distributable earnings retained in the reporting year. The Board will be entitled to amend the dividend and actual distribution policies based on the Company's needs.

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2. Other information

2.1 Financial information regarding the Group's operating segments

For details of the adoption of the provisions of IFRS 8 regarding operating segments and the criteria for their adoption according to management's approach, see Note 30 to the financial statements.

Below are the Group's operating results in 2016-2018 according to operating segments (NIS in thousands):

2018 Total before Fashion and home Aromatic adjustments fashion bath and Other - (100%) of Israel Abroad body care unallocated operations Adjustments Total Sales to externals 1,723,403 27,553 184,408 369,883 2,305,247 )685,826( 1,619,421 Intercompany sales 904 - - - 904 )904( - Total sales 1,724,307 27,553 184,408 369,883 2,306,151 )686,730( 1,619,421 % of total revenues 74.8% 1.2% 8.0% 16.0% 100.0% Gross profit 1,015,244 10,509 125,732 210,984 1,362,469 )434,711( 927,758 Variable operating costs 368,242 - 37,622 Fixed operating costs 554,546 2,793 68,329 Operating income 92,456 7,716 19,781 21,732 141,685 )25,418( 116,267 Operating income margin 5.4% 28.0% 10.7% 5.9% 7.2%

2017 Total before Fashion and home Aromatic adjustments fashion bath and Other - (100%) of Israel Abroad body care unallocated operations Adjustments Total Sales to externals 1,723,403 27,553 184,408 369,883 2,305,247 )685,826( 1,619,421 Intercompany sales 904 - - - 904 )904( - Total sales 1,724,307 27,553 184,408 369,883 2,306,151 )686,730( 1,619,421 % of total revenues 74.8% 1.2% 8.0% 16.0% 100.0% Gross profit 1,015,244 10,509 125,732 210,984 1,362,469 )434,711( 927,758 Variable operating costs 368,242 - 37,622 Fixed operating costs 554,546 2,793 68,329 Operating income 92,456 7,716 19,781 21,732 141,685 )25,418( 116,267 Operating income margin 5.4% 28.0% 10.7% 5.9% 7.2%

2016 Total before Fashion and home Aromatic adjustments fashion bath and Other - (100%) of Israel Abroad body care unallocated operations Adjustments Total Sales 1,634,109 24,528 163,237 288,370 2,110,244 )646,633( 1,463,611 % of total revenues 77.4% 1.2% 7.7% 13.7% 100.0% Gross profit 957,098 9,890 105,481 169,034 1,241,503 )408,575( 832,928 Variable operating costs 349,362 - 28,404 Fixed operating costs 537,201 3,259 68,955 Operating income 70,535 6,631 8,122 24,497 109,785 )14,249( 95,536 Operating income margin 4.3% 27.0% 5.0% 8.5% 6.5%

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Developments in financial data

As for explanations for the Company's operating results, assets and changes in revenues, gross profit and operating income in 2017 and 2018 according to operating segments, see the Board of Directors' Report in Chapter B below.

2.2 The economic environment and the effect of external factors on the Group's operations

Following is a description of the factors in the Group's macroeconomic environment which are liable to affect its operations:

2.2.1 General overview

According to data published by the Bank of Israel and other macroeconomic expert sources, 2018 was characterized by a growth rate of about 3.6% as opposed to about 3.1% and 3.8% in 2017 and 2016, respectively. Local macroeconomic sources predict continued growth rates in the Israeli market in 2019 of about 3.5%.

2.2.2 The political-security situation

The majority of the Group's points of sale are located in shopping malls and commercial centers. The security situation in Israel is liable to affect the activity of shoppers in points of sale during times of battle or ongoing terrorist attacks. The political-security situation in Israel is liable to adversely affect global public opinion and Israel's position in the world and therefore impair the success of the Group's brands in the international market.

2.2.3 Political and economic changes in China and Southeast Asian countries

Most of the Group's products are manufactured by suppliers and subcontractors in China. The Group is exposed to any limitations and/or changes in legislation and/or in political processes in China and/or in Israel and/or other countries which might affect the possibility of manufacturing the products in China, shipping the products out of China and/or the manufacturing costs in China. Moreover, significant fluctuations in the Chinese Yuan exchange rate might affect production costs and consequently the prices of products imported from China.

To the best of the Group's knowledge, as a result of the accelerated development in China, many changes took place there in recent years such as an increase in taxes imposed on textile exporters as well as regulatory changes, including in labor laws. The Group is unable to assess the degree of effect of the above mentioned factors and of any other factors arising from China's accelerated growth on the purchase prices of products made in China. In addition, the Group occasionally enters into small scope contracts with supplies from other countries in order to examine alternative sources of production and minimize its exposure to the Chinese market.

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The Company also purchases from Bangladesh subcontractors. Bangladesh has no diplomatic relations with Israel and the Group is aware that restrictions have been imposed on Bangladesh companies that prevent them from directly trading with Israel. As a result, there is a risk that this activity will either be discontinued or interrupted due to political decisions made in this country. Production in Bangladesh is exposed, among others, to processes of intensified control on employment in the country, particularly in the textile industry. Currently, it is difficult to assess whether the above processes will have an effect on the production capacity in Bangladesh.

The Company estimates that there are immediate alternatives for the Bangladesh subcontractors in other countries of the Far East. In order to purchase products from countries which have no diplomatic relations with Israel such as Bangladesh, on March 22, 2010, the Company founded Fox Wizel (BVI) Ltd., registered in the British Virgin Islands.

2.2.4 The market's position and changes in the standard of living

The scope of the Group's consumer products sector is derived, among others, from the size of the population and its standard of living. The population growth rate, the purchasing power and private consumption growth rate, the level of available income and the standard of living all have a potential impact on the scope of the Group's operations and business results. In order to mitigate this impact, the Group focuses on expanding its operations in international markets.

2.2.5 The competition in the fashion industry

The Group's principal areas of activity involve the design, acquisition, distribution and marketing of clothes, footwear, trendy accessories, housewares and home textiles which it performs by operating retail chains by itself and through wholesales in Israel and abroad through franchises and sales to others. The retail and particularly the fashion industries are specifically characterized by fierce competition. In recent years there have been several trends which enhanced competition in the industry: the introduction of international brands into Israel, the increase in online purchases in the international and local markets, the open sky policy which led to increased purchases abroad at the expense of the local market, the growth in the number of commercial centers and shopping malls and the competition for attractive retail spaces in those centers and malls. In order to minimize the effect of changes in the fashion industry on its profits, the Group continuously adapts the majority of its products to the changing fashion trends, retains attractive prices and competitiveness, invests in advertising and designing the unique identity of its brands, increases the variety of chains and brands owned by it and recently launched an exclusive multi-brand retail website. See more information on the competition in the fashion and home fashion segment in paragraph 3.1.7 below. In the Group's aromatic bath and body care products segment, there is competition between several branded retail chains (some of which department stores and others retail chains) as well as local private stores. See details on competition regarding Laline in paragraph 3.2.7 below.

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2.2.6 Change in customs duty and tax rates in Israel

Most of the Company's products are manufactured in the Far East. Therefore, changes in customs duty on imported goods from these countries might affect the Company's expenses and profits. Changes in customs duty in foreign countries in which the Group sells its products may also have an effect on the Group's revenues (although the Group's franchisees bear the customs related costs) since an increase in customs duty rates will make it difficult for the Group to compete with local manufacturers or with manufacturers from foreign countries.

Changes in customs duty rates on textiles and footwear imported to Israel might affect the Company's results. In early 2017, the customs duty rate on the majority of textiles, fabrics and footwear was 12%. On May 17, 2017, the customs duty rate on footwear was updated to zero. On January 21, 2018, the Customs Tariff and Exemptions and Purchase Tax on Goods Order (Temporary Provision No. 9), 2018 became effective. This order cancels the customs duty on the majority of textiles and clothing, sports goods, cosmetics and fragrances through December 31, 2019.

In 2017 and 2018, the Israeli corporate tax rate was 24% and 23%, respectively. See more details in Note 28 to the financial statements.

2.2.7 Employment terms

 Minimum wage

Most of the Group's employees receive minimum wage or slightly higher wages and therefore any significant increase in minimum wage will have an adverse effect on the Company's expenses and profits. In December 2017, the minimum wage was increased from NIS 5,000 to NIS 5,300 a month. By the end of March 2018, the minimum wage was calculated based on 186 labor hours a month or 43 labor hours a week at an hourly tariff of NIS 28.49. Effective from April 2018, the work week in Israel was shortened to 182 labor hours a month at an hourly tariff of NIS 29.12.

 Pension

From January 2017, the mandatory rate of an employer's contribution to employee provident funds was raised to 6.5%, increasing the rate of an employer's total contributions to employee benefits to 12.5%. See more details in paragraph 3.3.1(h) below.

2.2.8 Costs of commodities

The rise in the prices of commodities, mainly cotton, might lead to erosion of the Group's profits from products and, consequently, impair its financial results and business operations. In 2018, the prices of cotton rose by about 1.0% compared with 2017.

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2.2.9 Shutdown of seaports

Since most of the Group's products and commodities are manufactured abroad and shipped and conveyed to Israel and to foreign franchisees by sea, any disruptions in seaport activity in Israel, China and/or target ports will adversely affect the marketing of the Group's products and its profits.

2.2.10 Foreign currency exchange rate fluctuations

The Group is affected by fluctuations in foreign currency exchange rates, mainly the U.S. dollar and the Euro, arising from purchases in foreign currency from foreign suppliers and subcontractors and from purchases from local suppliers whose cost of products is sensitive to changes in exchange rate fluctuations.

On the other hand, most of the Group's sales are made to local customers in NIS and/or in unlinked NIS credit. As a rule, the Company enters into hedges to protect itself against possible changes in foreign currency rates.

In addition, exchange rate changes in foreign currencies in relation to the NIS are liable to change the purchase prices of the Group's products, the selling prices to consumers and consequently, impair the Group's profits.

The Company also holds securities portfolios, some of which consisting of dollar debentures. Any sharp decline in the dollar exchange rate is likely to affect the quoted prices of these securities.

2.2.11 Changes in interest and the CPI

The Company is exposed to changes in the Prime interest rate arising from financial liabilities assumed by it for financing its operations and from the linkage of the rental fees payable to lessors. In order to hedge some of those liabilities, the Company invests some of its cash balances in linked debentures and in debentures bearing both fixed and variable interest.

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3. Description of the Group's business in its operating segment

3.1 The fashion and home fashion operating segment

3.1.1 General information - the fashion and home fashion segment

a. Developments in the operating segment markets

The Company's main activity is in the fashion and home fashion segment.

As a dynamic and leading company in the fashion and home fashion industry, the Company has invested considerable resources in the physical aspect of the stores, in creating a positive shopping experience for customers and in designing versatile collections. In addition, the Company invests resources in expanding and enhancing its customer loyalty club by offering unique benefits to its members.

The Company has nationally deployed stores in shopping malls and commercial centers under the FOX, FOX Home, American Eagle, Aerie, The Children's Place, Mango and Urban brand names.

Due to its size, the Company is able to reduce acquisition costs both in terms of order volumes and number of items ordered from each model thereby allowing its customers to benefit from attractive and competitive prices.

As of December 31, 2018, the Group has 330 stores across the country in this operating segment.

The fashion industry in Israel in recent years has experienced several trends as follows:

 Increased competition from the penetration of international chains into the Israeli market.  Increase in the number of online purchases mainly of international brands from overseas.  Enhanced competition resulting from the open sky policy which led to increased foreign purchases at the expense of the local market.  Investments in building brand identity as a means of distinction from other brands, mainly through advertising and managing a consolidated customer loyalty club.  M&A of fashion brands by leading corporations at the expense of smaller brands.  Enhancement of the customers' shopping experience by investing in the physical aspect of the points of sale.  Expansion of existing fashion brands into new areas such as by offering fashion accessories under the same brand name.  Opening outlet stores and outlet commercial centers which offer several outlet stores in the same center.  Increase in the number of retail spaces and shopping centers and expansion and renovation of existing malls.

- 17 - b. Special restrictions, legislation, regulations and constraints applicable to the operating segment

See information in paragraph 3.1.15 below. c. Changes in the scope of operations in the segment and the profits therefrom

According to RIS data, there was an average decrease of about 1.7% in same store sales in the fashion and footwear industries in 2018. d. Market developments in the operating segment or changes in the nature of the customers therein

See paragraphs 2.2.5 and 3.1.1 above. e. Critical success factors in the operating segment and changes therein

The Company believes that there are several critical success factors underlying the operating segment as follows:

 Operating the Terminal-X online retail website which allows purchasing a variety of the Group's products, including the Terminal-X exclusive brand products and other international brands.

 Expanding the variety of the Company's activities and segments such as home fashion, footwear and fashion accessories and adding trendier clothing brands.

 Introducing renowned international brands into the Group's product offerings and expanding the Company's customer base.

 Designing, purchasing and regularly updating versatile and trendy collections by investing resources in design and procurement departments, constantly following local and global developments in the fashion and home fashion industries and catering to diverse customer preferences.

 Sustaining a firm, reliable and flexible procurement system and infrastructure abroad that benefits from the Company's economies of scale both in order volumes and in the number of items ordered from every design made by the Company to assist in reducing procurement costs and allow offering competitive prices to customers.

 Maintaining advanced logistics and supporting IT systems - the Company has two advanced logistic centers in Israel which allow optimized adaptation of inventories to store needs. The Company's IT systems enable real time connection of each of the Company's stores with its control and logistic centers and its HQ.

 Maintaining effective quality control system from the manufacturing stage throughout the supply chain.

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 Expanding and improving the operation of the Group's customer loyalty club as a tool for strengthening the Company's relations with its customers and expanding the club's credit card operations. See additional information in paragraph 3.1.5 below.

 Expanding the Group's sales to institutional customers through marketing gift cards and unique gift packages.

 Achieving national deployment of the Company's stores in prime strategic locations inside major shopping malls and centers in Israel in order to allow prospective customers maximum exposure to the Company's products.

 Improving the shopping experience in the Company's stores by refreshing the stores' appearance and by consolidating stores, changing store location, closing stores in less profitable locations and adjusting store size.

 Continuing to focus on providing quality service and tailored solutions to the Company's customers.

 Sustaining a stable financial capital structure.

 Benefiting from the diverse media platforms for enhancing the public's exposure and awareness to the Company's brands while creating added value for the brands by associating them with the Company's attractive image and distinguishing them from the competition (social media and social networks). f. Changes in the system of suppliers and commodities in the operating segment

The Company's management believes that in the last few years, the majority of manufacturing activity in the industry in general and specifically in the Company has been conducted by Far East subcontractors, mainly from China, India and Bangladesh. The Company has no dependency on a specific supplier and/or subcontractor since all the Company's products can be manufactured at the desired quantities by a large number of other suppliers and/or subcontractors in China and/or in other countries (mainly in Southeast Asia) without incurring any significant additional production costs. In order to achieve a flexible and efficient acquisition process, the Company also acts through the Chinese subsidiary for locating suppliers, monitoring production and assuring quality. g. The main barriers to entry and to exit in the operating segment and changes therein

The barriers to entry in setting up a single fashion store are low since it does not require any special resources. However, the transition from operating a single store or several locally deployed stores to nationwide deployment requires making large investments in infrastructures and in logistics and also requires financial strength.

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The barriers to exit in the operating segment mainly consist of costs involving shutting down stores and terminating agreements for rental of stores, offices and logistic centers and cancellation of agreements signed with franchisers. See more information on a rental agreement and its implications in Note 20b to the financial statements.

h. Alternatives to the operating segment products and changes therein

The Company's products have many alternative products by local manufacturers and/or importers that are marketed throughout Israel in numerous and diversified points of sale and online domestically and worldwide. The Company acts to retain and enhance its competitive edge over alternative products through market differentiation, design, quality and by attributing added value to its brands by adhering to leading and innovative designs, offering competitive prices, developing a variety of products, offering an enhanced shopping experience, expanding deployment in leading locations, advertising, public relations and managing a members' club.

i. The structure of the competition in the operating segment and changes therein

The local fashion industry is characterized by fierce local and global competition between a large number of international and local branded chains, local retailers and websites. See more information in paragraphs 3.1.1 above and 3.1.7 below.

3.1.2 Products

The Group's products in the fashion and home fashion segment include various types of fashion products such as clothing, footwear, underclothing, housewares and accessories and there is no material difference regarding the Group's risks, logistics, store locations, employees, marketing and decision-making process underlying all the products in this segment.

Following are details of the Company's diverse products in the operating segment:

a. The FOX brand - the Company sells clothing, footwear and fashion accessories for women, men, kids and babies. The Company designs its products through an in-house design department and manufactures them through subcontractors in the Far East. The Company sells these products through a nationwide store chain in Israel as well as to wholesalers in Israel and abroad to the Company's foreign franchisees.

b. The FOX Home brand - the Company sells housewares and home textiles under the FOX Home brand in a nationally deployed store chain and to institutional customers. A large part of the products are designed in the Company's in-house design department or using subcontractors and are manufactured by subcontractors, mainly in the Far East.

c. The American Eagle brand - the Company sells women's, men's and children's clothing, footwear and fashion accessories of the American Eagle brand in a store chain across Israel. The products are designed in American Eagle Outfitters U.S. headquarters and manufactured through subcontractors in the Far East. In 2016, FWS began collaborating with American Eagle Outfitters in the U.S. for designing and manufacturing exclusive and unique children's collections that are sold in the chain's stores in Israel and overseas.

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d. The Aerie brand - the Company sells women's underclothing and leisurewear of the Aerie brand in a nationally deployed store chain in Israel. The products are designed in AE's U.S. headquarters and made through subcontractors in the Far East.

e. The Children's Place brand - the Company sells The Children Place's children's and babies' apparel and fashion accessories in various sizes from New Born to size 14 in a store chain across Israel. The products are designed in Children's U.S. headquarters and made through subcontractors in the Far East.

f. The Mango brand - the Company sells apparel, footwear and accessories for women, men and kids under the Mango brand name in a chain of nationally deployed stores. The brand offers four main annual collections. The designs are made at HQ in Spain and the products are manufactured in the Far East by subcontractors.

g. The Urban brand - the Company sells women's and men's clothing, underclothing and various lifestyle products such as homewares and decorations, tech and media products including vinyl and cassettes, audio, cameras and books. This on-trend fashion brand is a leading global brand with numerous and versatile collections that are updated weekly.

See more information on the above brands in paragraph 1.2.1 above and in Note 20b to the financial statements. See more information on the production capacity in paragraph 3.1.9 below.

3.1.3 Segmentation of revenues and product profitability

The brands sold by the Company in the fashion and home fashion segment share common features and similarities expressed by a long list of parameters which also pertain to long-term gross and operating profit margins, procurement and distribution processes, customer types, seasonality, regulation, risk factors and more.

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Following are details of revenues and the Company's sales in the fashion and home fashion segment:

Fashion and home fashion Net sales (after discounts, operating segment excluding VAT), NIS millions % of segment sales in Israel 2018 2017 2016 2018 2017 2016 Local brands - fashion 702 693 682 39% 40% 42% Franchised brands - fashion 776 749 703 43% 44% 43% Local brands - home fashion 310 282 249 18% 16% 15% Total 1,788 1,724 1,634 100% 100% 100%

The gross profits of the brands in the fashion and home fashion segment in 2018, 2017 and 2016 range between 54.9%-63.4%, 538%-61% and 53.7%-61.7%, respectively (excluding the C&K brand discontinued in 2017).

It should be noted that some of the brands sold by the Company in the fashion and home fashion segment are in the first years of operation by the Company and have yet to reach their full growth potential and operating profit margins that are currently experienced by the Company's other brands in this segment. The Company estimates that in the long run, the operating profit margins of these brands will reach similar rates to those yielded by the Company's other more veteran brands in the segment.

Following is a breakdown of revenues and gross profit in the segment according to customer types:

2018 2017 Fashion and home Revenues Revenues fashion operating (NIS Segmentation Gross profit (NIS Segmentation Gross profit segment thousands) of revenues margin thousands) of revenues margin Directly operated stores5 1,717,477 94.3% 62.5% 1,690,470 96.5% 59.1% Wholesalers and others 70,052 3.8% 39.6% 33,837 1.9% 46.9% Foreign franchisees 34,635 1.9% 37.8% 27,553 1.6% 38.1% Total 1,822,164 100% 61.2% 1,751,860 100% 58.6%

See an analysis of the growth in sales and in gross profit in paragraphs 2.1.1 and 2.1.2 to the Board of Directors' Report in Chapter B below.

5 The revenues from directly operated stores include revenues from 24 stores managed by operators. The sales turnover in stores managed by operators in 2018 accounted for about 7% of total sales in this operating segment.

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Below are details of proceeds data per sq. m. in directly operated same stores and per employee in 2018-2016:

Fashion and home fashion operating segment 2018 2017 2016 Total sales in directly operated stores (NIS thousands)(1) 1,717,477 1,690,470 1,599,597 Total sq. m. in directly operated stores - annual average (2) 122,426 117,150 110,789 Number of directly operated stores at reporting date 330 314 313 Average monthly proceeds per sq. m. (NIS) 1,169 1,203 1,203 Monthly proceeds per employee (NIS thousands) (3) 61.7 59.5 55.7

(1) The data of directly operated store sales include total proceeds in stores less VAT and less any discount and special offer entered into the cash registers (including exercise of club points and coupon discounts).

(2) The data of sq. m. presented in the table above are in net terms and exclude public spaces and storage areas. The calculation of total average sq. m. per annum is proportionate to the number of months of operation for each store.

(3) The average monthly proceeds per employee are calculated as follows: total directly operated store proceeds only divided by the number of the Company's salespeople during a calendar year (including subcontracted employees working in directly operated stores through manpower companies). Since most of the Company's salespeople are part-time employees, the number of employees was calculated using full-time position terms (total hours by sales staff divided by 186 hours until March 31, 2018 and by 182 hours from April 1, 2018, following a legislative amendment enacted).

Following are details of directly operated same stores in 2018-2017:

Fashion and home fashion operating segment 2018 2017 Change % Total sales in directly operated stores (NIS thousands)(1) 1,316,741 1,335,395 - 1.4% Total sq. m. in directly operated stores - annual average (2) 92,764 92,764 - Monthly proceeds per sq. m. in directly operated same - stores (NIS) (3) 1,183 1,200 Number of directly operated stores (3) 264 264 -

(1) As for the calculation of total directly operated store sales, see item (1) in the above table.

(2) As for the calculation of total directly operated store sales, see item (2) in the above table.

(3) The calculation of sales per sq. m. of same stores in 2018 is based on stores that have not changed in terms of sq. m. or of the sub brands sold therein in 2018-2017.

(*) The percentage of change in same stores in 2017 compared to 2016 was (0.6%) (calculated based on unchanged stores in terms of sq. m. or the sub brands sold therein in 2017-2016 consisting of 270 stores).

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3.1.4 Customers

The Group's customers can be classified into three main groups:

 The end consumers at the stores managed and operated by the Company (in Israel)  Wholesale customers in Israel: owners of stores across Israel and institutional customers  The Company's foreign franchisees

The Company is not dependent on a specific customer whose loss would materially affect its operating segment, including any foreign franchisee. See additional information about the Company's customers in paragraph 3.1.14 below.

3.1.5 Marketing and distribution

a. General

Distribution in Israel

The distribution of the Company's products in Israel is done from the Company's state- of-the-art storage and logistic center at FOX House at the Airport City near Ben-Gurion Airport and from the logistic center in Modiin, Israel.

The Company's products are stored at the logistic centers and distributed to the Company's stores in Israel based on a daily distribution plan, according to the Company's sales forecasts, targets and actual sales. Distribution is carried out to the majority of stores on a daily basis and includes models that have been pre-booked before the season begins and re-ordered items based on each store's specific needs. The IT systems allow online supervision and control in order to provide a quick response, inventory management and operation flexibility and inventory shifting between stores and from the logistic centers to stores. These tools enable better utilization of inventories, reduction of items returned from the stores to the logistic centers and optimization of store spaces. From time to time and based on its needs, the Company uses external storage apart from the logistic centers, as above, through subcontractors. Distribution to stores is normally done using the Company's truck fleet.

See details of the offices and logistic centers used by the Company in Notes 20b(2) and 20b(4) to the financial statements, respectively.

Distribution in international markets

The distribution of the Company's products to franchisees in international markets is generally performed directly from the Company's foreign subcontractors' warehouses and facilities. The Company delivers the manufacturing orders to foreign subcontractors, which includes information of the target country for product supply. Once manufactured, the goods are directly shipped from the manufacturer's factories to the customers, whereby most sales are performed under FOB terms.

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Marketing the Company's products in Israel

The Company markets its products to Israeli customers through a chain of stores managed and operated by the Company and through sales to wholesalers and institutional customers who resell the Company's products at the points of sale operated by them.

The Company's stores are mostly located in leading shopping malls and commercial centers in Israel. The stores are all designed under a uniform and unique concept which is occasionally updated and adapted to the Company's marketing objectives. Sales and marketing in the actual stores are performed by the sales teams who have been specifically trained in the sales, service and fashion fields. In addition, the Company provides special offers at the stores (advertised at the points of sale) and holds special sales events. The Company operates several outlet stores for selling surplus inventories that have not been sold during the year.

The Group's marketing activity in Israel consists, among others, of advertising on television, issuing catalogs, advertising in the written and digital press, in billboards and in shopping malls and stores, operating a website and social networks, activities for members of the Dream Card customer loyalty club etc. The marketing activities, their nature and scope vary from time to time and are determined at the Company's management's discretion.

Online marketing

On November 20, 2017, the Company launched the Terminal X multi-brand fashion and lifestyle retail website which serves as a platform for the Company for selling the Group's brands and many other international brands. See details in Note 10b(11) to the financial statements.

Customer loyalty club

On January 1, 2014, the Company launched a new consolidated customer loyalty club, Dream Card. As of the periodic report date, the club encompasses most of the Group's brands (FOX, FOX Home, AE, Aerie, Children's, Laline, Mango, Billabong, Terminal- X, Foot Locker, Urban Outfitters and Free People) and allows club members to receive specific club benefits for each brand, earn credits for each qualifying purchase and exercise earned credits for each club brand.

Moreover, in keeping with an agreement from January 21, 2018 between the Company and Leumi Card, on July 10, 2018, the Company and Leumi Card launched the Dream Card VIP credit card in the context of the Company's customer loyalty club. The credit card offers exclusive benefits, including in collaborations with third parties, and allows customers to earn more store credits alongside other benefits and special offers granted by Leumi Card to its customers. The Company considers this credit card a significant growth engine for expanding its customer loyalty club's operation. The Company believes that this step contributes to leveraging its economies of scale and its retail status and represents a strategic advantage over its competitors. See more information in Note 20b(15) to the financial statements.

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The Company distributes targeted catalogs and leaflets informing the club members of special offers and new products. According to the club's rules, the Company may change the club's rules and/or the benefits offered to the members from time to time, at its exclusive discretion and subject to applicable law. The Company considers the customer loyalty club as a main tool for retaining customer loyalty and invests extensive marketing and sales promotion efforts therein compared to its other marketing efforts.

The following table presents the numbers of club members and identifiable purchase rates in 2018-2016:

Dream Card club % of identifiable As of members (thousands) purchases December 31, 2018 1,575 ~ 65% December 31, 2017 1,450 ~ 70% December 31, 2016 1,300 ~ 71%

b. Pricing of the Company's products in Israel

The Company's products have uniform prices that are determined before each season begins. The pricelist states the final consumer selling price (including VAT) and the product's wholesale price (excluding VAT) ("the Company's pricelist"). The Company's pricelist applies to products sold in directly operated stores in Israel (including stores operated by external operators) and through others in Israel (wholesalers, retail stores, institutional entities etc.).

c. Sales and marketing in the international market

As elaborated below, the Company entered into franchise agreements with foreign companies which granted the franchisees an exclusive, limited and non-transferrable license for distributing and reselling the Company's products in the relevant countries and the right to use the FOX trademark as well as other Company brand names and trademarks. The sales are made to franchisees under FOB terms whereby the franchisees bear all the costs relating to transport, insurance, taxes, customs etc. as well as costs relating to construction, operation and advertising of the chain in the relevant territory. In most cases, the franchise is granted for retail sales only.

3.1.6 Order backlog

All the Company's customers, excluding foreign customers, purchase products from time to time based on their specific needs and without ordering in advance. The Company's franchisees order the products they need from the Company four-nine months before each season begins.

The order backlog of the Company's foreign customers as of December 31, 2018 approximates NIS 21,659 thousand.

The order backlog of the Company's foreign customers as of December 31, 2017 approximated NIS 18,939 thousand and was fully realized in 2018.

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3.1.7 Competition

The Company operates in an extremely competitive market which is host to numerous entities, including manufacturers, importers, international fashion chains, local fashion chains, international and local websites and private stores. Moreover, in the last two years, with the introduction of the open sky policy and the growth in the number of Israelis traveling abroad, there was an increase in foreign purchases at the expense of the local market.

Competition in the women's fashion sector ranges according to quality, trendiness, branding and pricing. In the basic wear field, the Company's competitors include Delta, Hoodies, S.Wear, Tamnoon and others.

In the fashion industry, the Company's competitors include H&M, Twentyfourseven, Pull & Bear, Zara, Castro, Renuar, Golf, Top Shop and numerous other local chains and stores.

Competition in the children's clothing and fashion industry is numerous and diverse such as Zara, H&M, Castro, Honigman, Delta, S.Wear, H&O, Golf Kids, Keds, Hoodies and numerous other domestic chains and stores.

There is also considerable competition in the housewares segment from brands such as Golf & Co., Hamashbir, Naaman Porcelain, Vardinon, Kitan, Zara Home, IKEA and non-food stands in the food chains.

As for the Company's methods of dealing with competition in the Israeli fashion industry, see paragraphs 3.1.1 and 3.3.7 above.

3.1.8 Seasonality

The Group's activities as a group engaged in the clothing and apparel industry are affected by seasonality - summer (March-August) and winter (September-February). The Company designs, manufactures and orders most of the products sold by it twice a year, about four-nine months before each season, and coordinates the advertising and marketing efforts at the beginning of each season (mostly in the first month of each season).

The winter seasons, and mostly the fourth quarter of each year, are characterized by higher sales than the other quarters. Main sales are made in the first three months of each season. Moreover, seasonal volatility is reflected in sales in each season. The winter sales are usually positively affected by cold weathers and the beginning of the rain season in October-December and negatively affected by warm and rainless winters.

Furthermore, there is generally an increase in sales volumes shortly before the holiday seasons, which affects sales volatility between quarters. The first and second quarters of each year are mainly alternately affected by the timing of Passover.

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Data of sales in the fashion and home fashion segment in 2018 and 2017 according to quarters (NIS in thousands)

2018 2017 NIS % NIS % thousands of sales thousands of sales Q1 421,460 23.2% 383,968 21.9% Q2 417,557 22.9% 434,096 24.8% Q3 445,001 24.4% 421,751 24.1% Q4 538,146 29.5% 512,045 29.2% Total 1,822,164 100% 1,751,860 100%

Data of gross profits in the fashion and home fashion segment in 2018 and 2017 according to quarters (NIS in thousands)

2018 2017 % of gross % of gross NIS profit from NIS profit from thousands sales thousands sales Q1 243,110 57.7% 196,572 51.2% Q2 274,945 65.8% 273,650 63.0% Q3 272,161 61.2% 249,324 59.1% Q4 324,285 60.3% 306,207 59.8% Total 1,114,501 61.2% 1,025,753 58.6%

Data of operating income in the fashion and home fashion segment in 2018 and 2017 according to quarters (NIS in thousands)

2018 2017 % of % of operating operating NIS income from NIS income from thousands sales thousands sales Q1 14,973 3.6% (11,966) (3.1%) Q2 32,242 7.7% 40,583 9.3% Q3 27,319 6.1% 12,339 2.9% Q4 58,204 10.8% 59,216 11.6% Total 132,738 7.3% 100,172 5.7%

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3.1.9 Production capacity

The vast majority of the Group's products in the operating segment are manufactured several months before each (summer/winter) season begins by a large number of subcontractors and, therefore, there is no material limitation imposed on the Company's production capacity.

The Group is not dependent on any specific suppliers and/or subcontractors since all its products can be manufactured in the desired quantities by a large number of other suppliers and/or subcontractors in China and/or in other countries without significant additional production costs.

3.1.10 Quality control

The Group exercises several quality control levels for its products both for controlling production processes in subcontractors' factories and for controlling the quality of products received in Israel. Quality control is performed by the Group's QC department managed by the Chief Quality Officer ("QCO"). The first phase of quality control commences with the receipt of an initial model from the subcontractors which is based on the product file prepared by the Company's designers with the desired model's specs. The preliminary examination inspects the quality of raw materials, dyes, sewing and compliance with washing instructions by the Company's QC staff. After obtaining approval for commencement of work and receipt of goods, the majority of goods received from all subcontractors are inspected. The Company's QCO is responsible for submitting a quality control report on a monthly basis (categorized according to women, men etc.) which reviews findings of any deficiencies in the goods received. Moreover, the QCO inspects the production and ongoing work processes at the subcontractors' factories in China. The Company operates a customer service department that is in charge of detecting flaws in products and classifying them according to the various suppliers as well as preparing a customer service report which specifies the models returned due to flaws in production.

3.1.11 Fixed assets and facilities

a. General

The Company does not own any real estate properties and its activities (offices, warehouses and stores) are performed on leased real estate. In order to secure rental agreements, the Company provided the building lessors promissory notes and/or bank guarantees. As of December 31, 2018, the bank guarantees total NIS 27,703 thousand.

b. Offices and logistic warehouse

See details of the offices and logistic centers used by the Company in Notes 20b(2) and 20b(4) to the financial statements, respectively.

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c. Retail stores

The following table presents the number of stores opened and closed in 2016-2018 as of December 31, 2018:

Fashion and home fashion segment Additional information Total stores at December 31, 2015 308 Stores opened in 2016 - Average new store set up cost - approximately NIS 5,900 per sq. m.6 - Total cost invested in setting up new 18 stores - approximately NIS 32 million. Stores closed/consolidated in 2016 )13( Total stores at December 31, 2016 313 Stores opened in 2017 - Average new store set up cost - approximately NIS 5,600 per sq. m.6 - Total cost invested in setting up new 24 stores - approximately NIS 44 million. Stores closed/consolidated in 2017 )23( Total stores at December 31, 2017 314 Stores opened in 2018 - Average new store set up cost - approximately NIS 4,600 per sq. m.6 - Total cost invested in setting up new 27 stores - approximately NIS 49 million. Stores closed/consolidated in 2018 (11) Total stores at December 31, 2018 330

Average new store set up cost excludes the participation of third parties in set up costs and therefore, the Company's actual cost is likely to be considerably lower. In 2017 and 2018, the shopping malls in which the Company's stores are located participated in 30%- 40% of all new store set up costs. The participation ratios are determined in negotiations between the Company and the lessor, mostly since the lessor is interested in improving its position in the shopping mall market by introducing one of the Group's brands into the shopping mall, or due to a store relocation requirement.

6 Total calculated area does not include communal spaces which are included for payment of rent.

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Following are details of the number of stores opened and closed in 2017-2018 according to brand as of December 31, 2018:

The FOX American Children's FOX Home Eagle Place Mango Urban Total Total stores at December 31, 2017 138 42 43 43 47 0 314 Stored opened in 2018 6 2 4 8 3 4 27 Stores closed/ consolidated in 2018 (3) (1) (1) (2) (3) 0 (11) Total stores at December 31, 2018 141 437 468 49 47 4 330 Average new store area (in sq. m.) 334 297 394 168 411 940 No. of new store contracts signed by the Company in 2019 (at December 31, 2018) 29 1 - 2 - 2

Details of rent contracts for the stores in Israel:

Rent period Total rented area Total number (without extension option) (in sq. m.) * of stores ** Up to one year 26,817 75 One-three years 31,860 74 Three-five years 48,487 104 Over five years 29,918 64

* Including communal spaces and excluding warehouses, updated as of December 31, 2018. ** Excluding 13 stores operated by operators10 based on direct agreements signed between the operators and the lessors whereby the Company is not a party to the store rental agreement.

7 In addition to FOX Home stores, there are 32 combined FOX and FOX Home store-in-stores under the FOX brand. 8 Including two standalone Aerie stores. 9 One combined FOX and FOX Home store-in-stores under the FOX brand. 10 The operators are licensed by the Company to operate a store of one of the Group's brands. The store contents, inventories and sales are exclusively owned by the Company. The operator is charged for the store operation expenses and fees such as rent, management fees and wages and also provides collateral to the lessor in return for reimbursement of operating fees.

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As of December 31, 2018, the Company rents 33011 active stores across Israel for the fashion and home fashion segment, most of which in shopping malls and commercial centers. The rental terms for each store are determined in negotiations between the Company and the lessors. The rental period for the majority of rental agreements is ten years. The initial rental period in most rental agreements is five years. In addition, in most rental agreements, the Company has an option for extension of the rental period by additional periods of 5-15 years.

The rental fees for most stores are partly calculated at a fixed amount and partly as the higher of a fixed percentage of proceeds or a fixed amount and are mostly linked to the Israeli CPI. In addition to rental fees, the Company generally also pays additional fees for the leasehold's management and maintenance.

As of December 31, 2018, with the lessors' consent, the Company granted certain operators the right to use 2412 of its stores in return for the rental fees charged to the Company and provided that they comply with the other provisions in the rental agreements with the lessors.

Total rental fees and management fees in respect of the stores recorded by the Company in its books for 2018 amounted to approximately NIS 265,700 thousand and for 2017 approximately NIS 257,310 thousand. As for the Company's engagements in rental contracts, see Note 20b to the financial statements.

d. Investments in fixed assets, set up and equipment expenses

The Company owns equipment and fixed assets (mainly leasehold improvements). The adjusted depreciated cost of the Company's fixed assets as of December 31, 2018 totals approximately NIS 284,644 thousand.

Details of investments in fixed assets and the related set up and depreciation expenses as of December 31, 2018:

December 31, 2018 (NIS thousands) Accumulated Depreciated Cost depreciation cost Furniture and equipment in stores and offices 57,882 43,486 14,396 Motor vehicles 1,663 442 1,221 Installations and leasehold improvements 617,942 348,915 269,027 Total fixed assets 677,487 392,843 284,644

11 Includes 13 stores operated by operators based on direct agreements signed between the lessor and the store operators. The Company is not a party to the store rental agreement. 12 Including 5 combined FOX and FOX Home store-in-stores.

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Details of investments in fixed assets and the related set up and depreciation expenses as of December 31, 2017:

December 31, 2017 (NIS thousands) Accumulated Depreciated Cost depreciation cost Furniture and equipment in stores and offices 52,210 40,172 12,038 Motor vehicles 1,668 614 1,054 Installations and leasehold improvements 601,724 296,336 305,388 Total fixed assets 655,602 337,163 318,480

3.1.12 Intangible assets

Trademarks

The Company's policy is to achieve proprietary protection over its various trademarks and brand names and therefore it takes steps for renewing and registering its trade marks in its name in Israel and worldwide. The Company's signature brands in Israel are closely identified with the Company and represent its main trademarks. They are imprinted on the Company's products and ad campaigns as a means of recognizing and differentiating the Company's products and attributing value to the Company and its products. The Company owns 18 registered trademarks in Israel under different classifications, including FOX, FOX Home, Dream Card and Dream Kids.

As of December 31, 2018, the Company's expenses relating to trademarks, their registration and protection are immaterial. The Company's management believes that the Company has adequate protection of its trademarks in Israel and that it is able to defend them against third party claims with high likelihood. As of December 31, 2018, the Company has trademarks registered in Israel, China, Singapore, Poland, Mongolia, the Ukraine, Serbia, Bulgaria, the Philippines, Germany, Greece, Vietnam, India, Cyprus, Myanmar and Spain. Applications have been filed for registering the Company's trademarks in other countries as well. The registration process is lengthy and might last between one and three years in each country and in certain cases even longer. Even after the process of registering a trademark abroad is completed, a third party might appeal in a petition to have it reversed. Due to all the reasons detailed above, the Company's management believes that the Company's protection over its trademarks registered abroad and over the applications filed for registering trademarks abroad at this stage is not as strong as the protection it has over its Israeli trademarks since the FOX and F&X brands have not yet accumulated the reputation that they have in Israel overseas.

In addition, as a rule, the Group uses the trademarks which are registered in Israel on behalf of the international brand names based on franchise agreements.

See additional information of the Company's intangible assets in Note 12 to the financial statements.

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3.1.13 Suppliers

a. General

As of December 31, 2018, the Company had engagements for purchasing merchandise in an amount of approximately NIS 287.9 million.

b. Suppliers and subcontractors

The Company has a few dozen main suppliers and subcontractors which manufacture the models ordered by the Company in the Far East. The Company does not have a long- term agreement with any of the suppliers and subcontractors and the orders are made every season based on negotiations between the parties. The Company pays the foreign suppliers and subcontractors for manufacturing the products, sometimes through advance payments or credit letters and sometimes at different credit terms without collateral, all based on the negotiations between the parties and in keeping with economic considerations.

The Company does not have a right to return the products purchased by it from foreign suppliers.

The following table specifies the percentage of purchases of finished goods abroad out of total purchases of finished goods made by the Company according to suppliers and subcontractors:

2018 2017 % of % of purchases purchases out of total out of total Scope of finished Scope of finished purchases goods purchases goods Country (NIS'000) purchased Country (NIS'000) purchased Supplier A China 40,214 5.3% China 29,868 4.6% Supplier B Bangladesh 31,024 4.1% China 27,851 4.3% Supplier C China 29,969 3.9% China 26,586 4.1%

In addition to the above table of suppliers, the Company entered into franchise agreements with the international brands of AE, Children's, Mango and Urban ("the franchisees"). Therefore, the franchisees may be considered as material suppliers for the Company. Nevertheless, the franchisees have numerous suppliers in many countries around the world and are not dependent on any specific supplier. See details in paragraph 3.1.2 above and in Note 20b to the financial statements.

See information of the Company's exposure due to the loss of a brand franchiser in paragraph 9 below.

Apart from the aforementioned, as of December 31, 2018, the Company is not dependent on any specific supplier and/or subcontractor since all the products can be manufactured for the Company in the quantities needed by a large number of other suppliers and/or subcontractors in China and/or in other countries without incurring additional production costs.

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3.1.14 Working capital

a. Policy of holding inventories of finished products

The Company holds inventories of finished products for the supply of the Company's products mostly for an average period of about 4-6 months based on seasonal sales forecasts that are prepared about one year in advance. The scope of inventories held by the Company is relatively large at the beginning of the season and is minimized at the end of the season.

In 2018 and 2017, inventory days were about 189 and 174, respectively.

b. Inventory data (NIS in thousands)

31.12.2018 31.12.2017 Finished goods 365,290 300,848

As of December 31, 2018, the products in the fashion and home fashion operating segment consist of inventories purchased by December 31, 2016 totaling approximately NIS 16,622 thousand. The inventories as of December 31, 2017 include inventories purchased by December 31, 2015 totaling approximately NIS 17,428 thousand ("inventories from previous years"). The Group sells inventories from previous years in the self-operated outlet stores and in special end of season sales in non-outlet stores and from time to time also sells unused merchandise to wholesalers who in turn sell the merchandise in non-local markets.

The Company periodically evaluates the condition and age of inventories and makes provisions for slow moving inventories accordingly. The Company's evaluations include, among others, examining the selling prices of items of inventories from previous years sold in stores against their cost in the Company's books and analyzing the movement in inventories over the years in order to examine the sales rate of inventories from previous years. The Company believes that inventories that are up to two years old will be sold by it at a price that is higher than cost. According to the Company's inventory policy, inventories aged more than two years are written down by 50% and inventories aged more than five years are written down in full. As of December 31, 2015, the value of inventories was written down in respect of a provision for the impairment of inventories in the amount of approximately NIS 10,708 thousand, representing about 50% of the value of inventories which is above two years old and approximately NIS 348 thousand, representing 100% of the value of inventories above five years old. The Company believes that the provision recorded in the books for inventories from previous years is adequate.

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The Company orders the majority of products sold by it between twice and six times a year, depending on the brand and the fashion trends, about 4-9 months before each season. The ordering of products for the next season is based on forecasts according to sales data in previous seasons and estimates and assumptions regarding expected changes in the scope of sales arising from various factors such as opening new stores, changes in customer tastes etc. Items from AE and Children's are ordered about 4-6 times a year based on the turnover in the chief collections and on an ongoing basis for supplements. Mango's women's collection is ordered about six times a year based on the overseas collection and men's and kids' collections are updated about four times a year. Housewares consist of multi-seasonal items that are ordered on an ongoing basis based on a safety inventory model according to sales rate and seasonal items which are ordered twice a year according to the turnover in collections. Not being able to predict future demands for products might expose the Company to high inventory levels. c. Merchandise return policy

In directly-operated stores, the Company allows product returns based on the provisions of the Consumer Protection Act and the Consumer Protection Regulations (Transaction Cancellation), 2010.

The Company's foreign franchisees and wholesale customers in Israel are not granted a right of return at the end of the season. d. Credit

(1) Credit from suppliers

The Group accepts credit from suppliers under current + 60-90 day terms. In the year ended December 31, 2018, the average credit term from suppliers was about 86 days as opposed to about 77 days last year. The weighted credit received by the Group from suppliers in the reporting period did not change materially compared to the reporting periods. The Group's average scope of credit from suppliers in 2018 totaled approximately NIS 162,193 thousand compared to approximately NIS 151,614 thousand in 2017.

(2) Credit to customers

Directly-operated stores in Israel - the Group allows customers using credit cards to use a payment plan free of linkage or interest based on the scope of purchase. The Company periodically enters into engagements with issuers of coupons and magnetic gift cards (non-debit cards) that allow making purchases in a large number of institutions and chains, under arrangements that enable using them in the Group's stores at face value. These issuers pay the Group the consideration for the transactions less a discount at current + 30-45 day terms. As a rule, sales to wholesalers in Israel are not provided on credit. Sales to institutional customers in Israel generally use average credit terms of current + 60-90 days.

Sales to foreign franchisees - sales to foreign franchisees are made at average credit terms of cash or current + up to 90 days from the date of receipt of the goods by the customer or from the date of issuing the invoice.

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In the year ended December 31, 2018, the weighted credit granted by the Group to customers totaled about 30 days compared to about 26 days last year. The Group's average scope of credit to customers in 2018 totaled approximately NIS 146,862 thousand compared to approximately NIS 122,628 thousand in 2017.

(3) Doubtful accounts

The Company's management makes ongoing assessments of credit granted to customers. The financial statements include specific allowances that adequately reflect, according to the Company's management, the loss inherent in debts whose collection is doubtful.

3.1.15 Limitations and supervision in the operating segment

a. The Company's operations are subject to the provisions of general laws, including import, export, customs, consumer protection, intellectual property, labor and business licensing laws. See details of the cancellation by temporary provision of customs duty on some of the fashion and textile products until December 31, 2019 in paragraph 2.2.3 above.

b. In February 2007, the Company received a business license for the Fox House pursuant to the Business Licensing Law, 1968. The license was renewed on September 15, 2013. In February 2016, the Company received a business license for its logistic center in Modiin, Israel. According to the Decree of Business Licensing (Businesses the Require a License), 1995, the Company's activities in most of the stores in the shopping malls and commercial centers do not require a business license.

c. As mentioned above, the Company's activities are subject to various consumer laws, including the Consumer Protection Act, 1981 ("the Consumer Protection Act"), the Law for Supervision of Commodities and Services, 1957 ("the Supervision Law"), the Second Television and Radio Authority Rules (Television Advertising Ethics), 1994 ("the Authority Rules"), and decrees and regulations issued thereunder, regarding non- deception of consumers, mandatory labelling of products and prices, provision of washing instructions, transaction cancellation provisions, provisions regarding purchase coupons, credits, return policies, advertising and more.

d. The Group's customer loyalty clubs are subject to the provisions of the Protection of Privacy Law, 1981 ("the Protection of Privacy Law") and the revised Communications Law (Amendment No. 40), 2008 ("the Spam Law"). According to the Protection of Privacy Law, data included in the database can only be used for the purposes for which the database was founded. The Company is subject to certain reporting duties vis-à-vis the Registrar of Databases and is required to maintain the confidentiality of the information held by it and to secure the data in the database. As for the distribution of advertising pamphlets and mailing materials to customers, the Company acts according to the provisions of the Protection of Privacy Law and the Spam Law.

- 37 - e. The Company is required to comply with various labor laws, including, among others, the Severance Pay Law, 1963, the Annual Vacation Law, 1951, the Annual Labor and Rest Hours, 1951 and more. f. The Company complies with the various laws aimed to secure accessibility for people with disabilities, including the Law for Equal Rights for People with Disabilities, 1998 and the regulations published thereunder, for accessing the Company's services. g. As a public company, the Company is subject to the provisions of the Securities Law, 1968, including the regulations, decrees and rules published thereunder as well as the provisions of the Companies Law, 1999, including the regulations, decrees and rules published thereunder. The Company strictly complies with all the provisions of the Securities Law with the aid of procedures, controls and automated solutions. h. The Company holds the appropriate licenses and abides by the specific laws applicable in the countries in which it operates outside of Israel. i. The Company strictly complies with all the provisions of applicable laws and regulations, among others, by applying automated procedures, controls and solutions.

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3.1.16 Condensed results of the operating segment

Year ended December 31, 2018 2017 2016 General data Number of stores 330 314 313 Net commercial area (sq. m.) 122,426 117,150 110,789 Number of In stores 4,057 4,231 3,462 employees Other 566 566 596 Operating results Revenues Directly operated stores 1,717,477 1,690,470 1,599,597 (NIS'000) Wholesalers and others 70,052 33,837 34,512 Foreign franchisees 34,635 27,553 24,528 Total 1,822,164 1,751,860 1,658,637 Cost of sales (NIS'000) 707,663 726,107 691,649 Gross profit (NIS'000) 1,114,501 1,025,753 966,988 Rent expenses and management fees (NIS'000) 265,700 257,310 246,574 Capital investments in new stores13 (NIS'000) 49,000 44,000 32,000 Advertising expenses (NIS'000) 36,413 34,552 32,851 Depreciation expenses14 (NIS'000) 59,154 57,391 51,496 Operating income (NIS'000) 132,738 100,172 77,166 Working capital (NIS'000) 584,286 510,371 475,748 Data of sales turnovers and proceeds Revenues per sq. m. (NIS) 1,169 1,203 1,203 Change in same store revenues (%) -1.4% 0.6% 5.1% Data of customers' club Number of customers' club members (million) 1.58 1.45 1.30 Identifiable purchase rate (%) ~ 65% ~ 70% ~ 71%

13 The store set up costs exclude third party participation in set up costs and therefore actual costs could be lower. 14 Depreciation expenses also include depreciation of logistic centers as well as stores.

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3.2 The aromatic bath and body care products operating segment

Laline sells body and face care, lifestyle, bath and shower, fragrances and ambiance products, accessories and gifts. Laline's office, administrative, design, finance and marketing activities are located in FOX House at Airport City. The storage and logistics activities are carried out in the Group's logistic center in Modiin.

As of December 31, 2018, Laline operates 111 stores in Israel and has some 670 employees. Laline also opened a chain of directly-operated stores in Canada and another store in Barcelona, Spain.

As stated in paragraph 1.2.3(a) above, the Company holds 50% of the share capital of Laline. Despite this holding rate, the aromatic bath and body care products operating segment, including the data from Laline's financial statements, is presented at full holding rate (100%).

For additional details, see paragraph 2 to Chapter B below.

3.2.1 General information - the aromatic bath and body care products segment

a. Developments in the aromatic bath and body care products operating segment markets

The aromatic bath and body care products segment is subject to extensive competition from competitors such as Sabon, The Body Shop and L'Occitane as well as from pharm chains and department store chains that offer unique departments that sell skin and body care products. There are also local shops that sell beauty and body care products.

In recent years, the aromatic bath and body care products segment has been experiencing several trends as follows:

 Competition in the local market due to the entry of international firms.

 Increase in online sales of local and international brands.

 Investments in branding both at the product level and at the store level.

 Development and innovation trends starting from expanding product lines to introducing new fragrances and ending in upgrading existing product and packaging offerings.

- 40 - b. Special restrictions, legislation, regulations and constraints applicable to the operating segment

See paragraph 3.2.15 below. c. Changes in the scope of operations in the segment and the profits therefrom

The Group does not have objective data regarding the overall scope of activity in this segment and/or its profits. d. Market developments in the operating segment or changes in the nature of the customers therein

Laline is a successful leader in its local market with extensive deployment of stores across Israel. The Company and Laline both believe that Laline has tremendous potential of succeeding in international markets.

Laline is currently acting to expand its deployment in international markets and began by opening several directly operated stores in Toronto, Canada (six stores as of the periodic report date) and a store in Barcelona, Spain. e. Critical success factors in the operating segment and changes therein

Laline believes that there are several critical success factors underlying the operating segment as follows:

 Investing in identity building as a means of distinction from competitors.

 Creating a variety of innovative products with a wide spectrum of scents, sensations and designs.

 Investing resources in advertising in order to retain and enhance power, distinction and dominance in the aromatic bath and body care industry.

 National deployment of Laline's stores in strategic locations inside major shopping malls and commercial centers in Israel and unique and uniform concept design of all the stores to give out a clean and intimate look & feel. The entire stores are made of white-colored wood and the products are categorized by scent and in sets for creating a special customer shopping experience.

 Utilizing Laline's economies of scale both in order volumes and in the number of items ordered from each product type to assist in minimizing acquisition costs and offer competitive prices to customers.

 Maintaining and using advanced, automated state-of-the-art management, control, IT and logistics systems.

 Maintaining an effective quality control system for the products.

 The customers' club is large and dynamic and offers added value to the customer.

 Accessing international markets through directly operated stores and franchisees.

 Domestic and international online sales.

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f. The main barriers to entry and to exit in the operating segment and changes therein

Laline estimates that there are no significant barriers to entry in the industry in which it operates. The barriers to entry in setting up a single store in this segment are relatively low and do not require any special resources. However, the transition from operating a single store or several locally deployed stores to nationwide deployment requires making large investments in infrastructures and in logistics, having financial strength and entering into engagements with vital suppliers.

The barriers to exit in the operating segment mainly consist of costs involving shutting down stores and terminating agreements for rental of stores, offices and logistic centers.

g. Alternatives to the operating segment products and changes therein

Laline's products have many alternative products by local manufacturers and/or importers that are marketed throughout Israel in numerous and diversified points of sale. Laline acts to retain and enhance its competitive edge over alternative products through market differentiation, originality, innovation, quality and market leadership and by attributing added value to its brands by adhering to leading and trendy designs, offering competitive prices, developing a variety of products, advertising, public relations and managing a members' club as part of the Company's consolidated customer loyalty club, the Dream Card (for additional information, see paragraph 3.2.5 c below). .

h. The structure of the competition in the operating segment and changes therein

The aromatic bath and body care industry is characterized by competition several branded chains (including department stores and retail chains) and local shops.

In addition to retail chains that market competing products in Israel such as Sabon, The Body Shop, Yves Rocher and L'Occitane, the nationally deployed pharm chains and department stores also sell competing products as well as a large number of retail stores that do not form part of the national competing chains.

3.2.2 Products

Laline's products are divided into the following seven categories:

 Body care products: hand and body lotions and creams, bath lotions and body oils.  Bath and shower products: liquid and solid soaps, scrubs and shower gels.  Fragrances and ambiance products: candles, diffusers, oil burners.  Tailored product series for teenage girls and men.  Face products: creams, lotions and masks.  Textile products: bathrobes, towels, blankets.  Bath and lifestyle products: bath and shower accessories.

The Company has several suppliers that manufacture most of products ordered by it. Most of the products are developed and designed by Laline itself and manufactured for it by suppliers.

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3.2.3 Segmentation of revenues and product profitability

All of Laline's products in the aromatic bath and body care products segment do not differ materially in terms of risks, development, procurement, marketing and the decision making process.

Following are details of revenues and gross profit according to types of customers:

Aromatic bath 2018 2017 and body care Revenues Gross Revenues Gross operating (NIS Segmentation profit (NIS Segmentation profit segment thousands) of revenues margin thousands) of revenues margin Directly operated stores in Israel and overseas 174,737 84.2% 70.2% 162,538 88.1% 71.5% Wholesalers and others 13,869 6.7% 45.8% 11,999 6.5% 45.2% International operations * 18,872 9.1% 45.2% 9,871 5.4% 41.2% Total 207,478 100% 66.3% 184,408 100% 68.2%

Below are data of proceeds per sq. m. in directly operated stores in Israel and overseas and proceeds per employee in 2016-2018:

Aromatic bath and body care operating segment 2018 2017 2016 Total sales in directly operated stores (NIS thousands) (100%) (1) (*) 174,737 162,538 148,451 Total sq. m. in directly operated stores - annual average (2) 5,201 5,048 4,877 Number of directly operated stores at reporting date 118 106 104 Average monthly proceeds per sq. m. (NIS) 2,800 2,683 2,536 Average monthly proceeds per employee (NIS thousands) (3) 55 50.8 47.8

(*) In 2018, this amount includes revenues totaling approximately NIS 808 thousand from two stores opened in 2018 and managed by operators.

(1) The data of directly operated store sales include total proceeds in stores in Israel less VAT and less any discount and special offer entered into the cash registers (including exercise of club points and coupon discounts).

(2) The data of sq. m. presented in the table above are in net terms and exclude public spaces and storage areas. The calculation of total average sq. m. per annum is proportionate to the number of months of operation for each store.

(3) The average monthly proceeds per employee are calculated as follows: total proceeds of directly operated stores divided by the number of salespeople during a calendar year. Since most of the salespeople are part-time employees, the number of employees was calculated using full-time position terms (total hours by sales staff divided by 186 hours until March 31, 2018 and by 182 hours from April 1, 2018, following a legislative amendment enacted).

The increase in total sales per sq. m. n directly operated stores mainly arises from the increase in same store sales in 2018 as opposed to sales in 2017 and from opening new stores in the course of 2018.

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Following are details of directly operated same stores in 2017-2016:

Aromatic bath and body care operating segment 2018 2017 Change % Total sales in directly operated stores (NIS thousands)(1) 163,563 153,215 6.8% Total sq. m. in directly operated stores - annual average (2) 4,943 4,943 - Monthly proceeds per sq. m. in directly operated same stores (NIS) (3) 2,757 2,583 - Number of directly operated stores (3) 105 105 -

(1) As for the calculation of total directly operated store sales, see item (1) in the above table.

(2) As for the calculation of total directly operated store sales, see item (2) in the above table.

(3) The calculation of sales per sq. m. of same stores in 2018 is based on stores that have not changed in terms of sq. m. or of the sub brands sold therein in 2018-2017.

(*) The percentage of change in same stores in 2017 compared to 2016 was 5.02% (based on unchanged stores in terms of sq. m. or the sub brands sold therein in 2017-2016 consisting of 98 stores).

3.2.4 Customers

Laline's customers can be classified into three main groups:

 The end consumers at the stores managed and operated by Laline and on the Company's website  Wholesalers: business and institutional customers  Foreign franchisees

Laline is not dependent on a specific customer whose loss would materially affect its operating segment, including any foreign franchisee.

3.2.5 Marketing and distribution

a. General

Marketing channels

Laline has four major marketing channels:

1. Direct sales to the end customers in stores that are managed and operated by Laline in Israel ("directly-operated sales" or "directly-operated stores").

2. Sales to business and institutional customers in Israel (workers' committees etc.) ("sales to institutional customers").

3. Sales to Laline's foreign franchisees ("sales to foreign franchisees").

4. Direct sales to end customers in in stores managed and operated by Laline abroad.

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Distribution to directly operated stores

The distribution of products in Israel is done from the Fox Group's state-of-the-art storage and logistic center in Modiin. Laline's products are stored at the logistic center and distributed to Laline's stores in Israel based on predetermined distribution procedures issued by Laline's HQ according to sales forecasts, targets and actual sales. Distribution is mostly carried out on a daily basis and includes products that have been ordered based on each store's specific needs and items that have been re-ordered. The IT systems allow online supervision and control in order to provide a quick response, inventory management and operation flexibility and inventory shifting between stores and from the logistic center to stores. These tools enable better utilization of inventories, reduction of items returned from the stores to the logistic center and optimization of store spaces. The logistic center and its computerized conveyance systems and machinery enable customized gathering of items for each store individually based on each store's specific needs and actual sales.

On July 15, 2012, the Company and Laline signed an agreement for the provision of logistic services according to which he Company will grant Laline logistic services that consist of the following: storage at the Company's logistic center, supply chain management and distribution to stores. The agreement allows Laline to use the Company's logistic systems and infrastructures for the purpose of optimizing Laline's logistic, storage, distribution and supply chain procedures in the Company's IT systems. The consideration for the Company's logistic services was determined as a percentage of Laline's total operations and will be reviewed and updated annually if needed.

Sales to institutional customers are made through the Group's logistic center in Modiin as described above.

The distribution of products to Laline's directly operated stores abroad is performed through a specific warehouse rented by Laline in each country of operation based on sales forecasts and targets and actual sales, in coordination with Laline's Israeli HQ's policies. Products are normally distributed to the stores several times a week, including preordered and reordered items based on specific store needs. Laline's IT systems provide supervision and control and allow quick response, flexible stock management and operation and inventory shifting between stores and from the warehouse to the stores.

Distribution to foreign franchisees

The distribution of Laline's products to foreign franchisees is mostly performed directly from Laline's logistic center in Modiin. Laline delivers the manufacturing orders to the suppliers and sells the products to the foreign franchisees from the logistic center in Israel at ex-factory terms. Laline's international department issues sale invoices to the franchisees based on the pricelist.

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Marketing Laline's products in Israel

Laline markets its products to Israeli customers through a chain of stores managed and operated by Laline and through sales to institutional buyers who make bulk purchases.

Laline's stores are mostly located in leading shopping malls and commercial centers in Israel. The stores are all designed under a uniform and unique concept which is occasionally updated and adapted to Laline's marketing objectives. Sales and marketing in the actual stores are performed by the sales teams who have been specifically trained in the sale and service fields. In addition, Laline provides special offers at the stores (advertised at the points of sale) and holds special sales events (Valentine's, holidays etc.).

Laline's marketing activity in Israel consists, among others, of advertising on television, advertising in the written press, in magazines, in billboards and in shopping malls and stores, operating a website, collaborating with various commercial companies, internet campaigns, partnering with retailers in offering coupons, operating the Dream Card customer loyalty club, promoting and maintaining the various brand pages on social media etc. The marketing activities, their nature and scope vary from time to time and are determined at Laline's management's discretion.

From time to time, Laline looks into opening new stores once new commercial centers are erected in attractive locations or when an opportunity arises for opening a store in a city where Laline does not have an active store. Laline's management also periodically examines the profitability of its existing branches in order to make decisions regarding branch reduction.

Laline's products are marketed to customers through directly operated stores abroad using a retail chain managed and operated by Laline.

Laline's stores in Canada are located in leading shopping malls and centers and designed with a unique and uniform concept that is occasionally updated and adapted to Laline's marketing targets. In-store sales and marketing are performed by the sales teams who are trained in sales and servicing. Laline also promotes special sales in stores (advertising in POSs, special offers for Valentine's, holidays etc.). b. Pricing of Laline's products

Laline's products have uniform prices that are determined by Laline for all products once a year. The pricelist states the final consumer selling price (including VAT) ("Laline's pricelist"). Laline's pricelist applies to products sold in directly operated stores in Israel and serves as a base price before discount for institutional buyers, directly operated stores overseas and Laline's foreign franchisees.

- 46 - c. Marketing and direct sales in the stores managed and operated by Laline in Israel

Sales are made directly by Laline to the end consumer through store managers and employees. As of December 31, 2018, Laline manages and operates 111 stores in all parts of the country, mainly in commercial centers.

The rental periods in the rental agreements for Laline's stores do not share a common feature. The agreement period varies but most of the agreements include an option for a unilateral extension by Laline (the lessee). Simultaneously with the rental agreements, management agreements are signed with the commercial centers' management companies.

Given the large number of stores operated by Laline, it does not deem any of the agreements to be material.

Customer loyalty club

On January 1, 2014, Laline joined the Company's consolidated customer loyalty club, Dream Card, which encompasses several of the Group's brands. For details of the club, see paragraph 3.1.5(a) above.

Laline holds a database which contains customer data and is managed pursuant to the provisions of the Protection of Privacy Law, as specified in paragraph 3.2.15 below. d. Sales and marketing through institutional buyers in Israel

Laline sells its products to several institutional entities around Israel. The engagement is generally signed with large workers' committees, members' clubs and credit card companies. These engagements are usually signed in advance and in bulk quantities right before holidays and special events chosen by the buyer. e. Sales and marketing abroad

Laline entered into franchise agreements with foreign companies which grant the franchisees an exclusive, limited and non-transferrable license for distributing and reselling Laline's products in the relevant countries and the right to use the Laline brand name as well as other brand names and trademarks owned by Laline. The franchisees bear all the costs relating to transport, insurance, taxes, customs etc. as well as costs relating to construction, operation and advertising of the chain in the relevant territory. In most cases, the franchise is granted for retail sales only.

- 47 -

As of December 31, 2018, Laline has entered into agreements with the following foreign franchisees:

California, USA

On March 25, 2010, Laline signed an agreement with a US franchisee which is a company controlled by Zemach Holdings LLC for setting up a chain of stores in north California, USA ("the US franchisee"). According to an addendum to the agreement from late 2012, the territory was reduced to North California bay area only. The US franchisee will locate and prepare the leasehold properties in which the stores will be opened at its expense and operate the chain using a professional brand manager and a local team. The US franchisee will bear all the set up and operation costs.

As of December 31, 2018, the US franchisee has three stores in San Francisco, USA.

Japan and Hawaii

On September 4, 2010, Laline signed an agreement with a franchisee in Japan ("the Japanese franchisee") for setting up a store chain in Japan. The Japanese franchisee will locate and prepare the leasehold properties in which the stores will be opened at its expense and operate the chain using a professional brand manager and a local team. The Japanese franchisee will bear all the set up and operation costs. On December 10, 2010, the trademark was registered in Japan.

As of December 31, 2018, the Japanese franchisee has opened 31 stores, of which 28 in various cities in Japan and three in Hawaii, USA.

In March 2016, the Company and the Japanese franchisee signed an extension of the agreement for a period of ten years until January 1, 2026 with an option for a target- contingent extension for another ten years until January 1, 2036. In May 2016, the Japanese corporation, TSI Holdings Co., acquired 70% of the interests in the Japanese franchisee. The Japanese franchisee, owned by the new partner, intends to expand Laline's operations in Japan in 2019.

Directly operated stores abroad

As of December 31, 2018, Laline, through wholly controlled subsidiaries, operates six stores in Canada and one store in Barcelona, Spain. Laline entered into an agreement for opening another store in Canada, expected for 2019.

In December 2017, Laline closed the Times Square store in Manhattan, NYC in return for a removal fee of US$ 1.6 million.

Laline occasionally examines the prospects of opening new stores in Canada with the opening of new shopping centers in prime locations or of opening stores in cities in which it has no market presence. Laline's management periodically analyzes existing store profits to make decisions regarding closing stores that are not profitable.

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3.2.6 Order backlog

The institutional customers may purchase Laline's products by making advance bulk orders or on an ongoing basis based on their specific needs. Laline's foreign franchisees order the products they need from Laline based on actual sales volumes, as encouraged by Laline and with the franchisee's approval.

Details of order backlog from Laline's foreign franchisees (NIS in thousands)

Expected revenue Order backlog as of recognition period December 31, 2018 Q1 2019 4,680

3.2.7 Competition

The competition in the aromatic bath and body care industry is great and versatile. There are many entities, including manufacturers, importers, department stores, pharm chains, special retail chains and private stores that compete with Laline's activities in this segment.

Laline's largest competitors in its segment include the pharm networks such as Super Pharm and Be, department stores such as Hamashbir, and niche retail chains such as Sabon, The Body Shop and L'Occitane.

Laline's management does not have data regarding the scope of the Israeli aromatic bath and body care market but compared to the special retail chains, pharm chains and national department stores, it is estimated that Laline is one of the leading players in this market in Israel. Although the pharm chains and department stores market aromatic and body care products, there are material differences in the method of marketing, display and sale compared to Laline. While these chains sell the products separately in several departments around the store's area (which is usually hundreds and sometimes thousands of sq. m. in space), Laline's stores are uniformly decorated to provide a clean and intimate look & feel. Laline's stores are all designed in white wood and the products are displayed in groups according to categories. Each store has a toiletry station for the customers' personal experimentation with the various products. The stores' sales teams have been trained to provide each customer professional personalized consulting on relevant products. The ambiance in Laline's stores, along with the scents of candles and soaps, is very relaxing and calm.

See a discussion of the positive factors that promote Laline's competitive edge in paragraph 3.2.1(e) above.

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3.2.8 Seasonality

Laline's revenues are affected by seasonality, mainly depending on the timing of the holiday seasons.

Data of sales in the aromatic bath and body care products segment in 2018 and 2017 according to quarters based on Laline's financial statements:

2018 2017 NIS % NIS % thousands of sales thousands of sales Q1 48,497 23.4% 41,860 22.7% Q2 47,879 23.1% 47,605 25.8% Q3 59,176 28.5% 50,867 27.6% Q4 51,926 25% 44,076 23.9% Total 207,478 100% 184,408 100%

Data of gross profits in the segment in 2018 and 2017 according to quarters:

2018 2017 % of gross % of gross NIS profit from NIS profit from thousands sales thousands sales Q1 31,825 65.6% 28,116 67.2% Q2 32,486 67.8% 32,351 68.0% Q3 38,569 65.2% 34,971 68.7% Q4 34,739 66.9% 30,294 68.7% Total 137,619 66.3% 125,732 68.2%

Data of operating income in the segment in 2018 and 2017 according to quarters:

2018 2017 % of % of operating operating NIS income from NIS income from thousands sales thousands sales Q1 6,146 12.7% 1,206 2.9% Q2 8,157 17.0% 6,674 14.0% Q3 10,513 17.8% 7,287 14.3% Q4 4,158 8.0% 4,614 10.5% Total 28,974 14.0% 19,781 10.7%

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3.2.9 Production capacity

The vast majority of Laline's products are manufactured on an ongoing basis throughout the year by several suppliers in Israel and therefore there is no material limitation imposed on Laline's production capacity.

Laline is constantly acting to recruit new suppliers on the one hand and monitor the manufacturing and quality control of the products manufactured by existing suppliers on the other.

3.2.10 Quality control

Laline exercises several quality control levels for its products both for controlling production processes in suppliers' factories and for controlling the quality of products manufactured by them. Quality control in Israeli factories is performed from time to time through inspections by the supplier's internal QA functions and via an active product development and quality control administration and regulation practiced from time to time. There is a quality control function in China which is managed by the Group's representatives in China through control agents who inspect the product after it is manufactured, inspect the quality of the merchandise and deliver a detailed report to Laline's HQ for approval. The first phase of quality control commences with the receipt of a prototype from the suppliers which is based on the product file prepared by Laline's product development department at Laline's HQ with the desired product specs. The preliminary examination inspects the quality of raw materials, product packaging and product quality compared to purpose (in body care products - texture, scent, feel and tests of outcome) by Laline's product development department. Laline is part of the Group's customer service division that is in charge of providing an adequate response for each application made by consumers regarding purchases of faulty products. In addition, faulty goods that are recalled from the branches are fed into the system and the data are used when needed based on specific cutoffs such as product type or flaw.

3.2.11 Fixed assets and facilities

a. General

Laline does not own any real estate properties and its activities (offices, warehouses and stores) are performed on leased real estate. In order to secure rental agreements, Laline provided the lessors of the stores in which it operates bank guarantees in a total of NIS 2,600 thousand as of December 31, 2018 and in a total of NIS 2,075 thousand and US$ 1,460 thousand as of December 31, 2017. The dollar guarantee had been provided to the lessor of the NYC store and was returned to Laline on January 18, 2018.

b. Offices and logistic warehouse

From November 2008, Laline subleases a building at Airport City from the Company. The sublease agreement was signed with the approval of the lessor under the same commercial terms as those in the Company's rent agreement pro rata to Laline's share of the leasehold (see details in Notes 20b(2) and 20b(4) to the financial statements, respectively).

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In November 2008, in addition to the rent agreement, Laline signed an agreement for the use of equipment and infrastructures, use of investments made by the Company in the leasehold and use of other services in the building including maintenance of joint utility systems such as electricity and air conditioning, cleaning of joint spaces, joint security services, fire detection systems etc. c. Retail stores

The following table presents the number of Laline stores opened and closed in 2016- 2018 as of December 31, 2018:

Stores Additional information Total stores at December 31, 2015 103 Stores opened in 2016 - Average new store set up cost - approximately NIS 7,500 per sq. m. - Total cost invested in setting up new 4 stores - approximately NIS 1.35 million. Stores closed in 2016 )3( Total stores at December 31, 2016 104 Stores opened in 2017 - Average new store set up cost - approximately NIS 7,500 per sq. m. - Total cost invested in setting up new 5 stores - approximately NIS 1.69 million. Stores closed in 2017 )3( Total stores at December 31, 2017 106 Stores opened in 2018 - Average new store set up cost - approximately NIS 7,500 per sq. m. - Total cost invested in setting up new 7 stores - approximately NIS 1.81 million. Stores closed in 2018 (2) Total stores at December 31, 2018 111

Details of rent contracts underlying Laline's stores in Israel:

Rent period Total rented area Total number (without extension option) (in sq. m.) of stores Up to one year 1,319 29 One-three years 1,772 36 Three-five years 1702 37 Over five years 4356 9

As of December 31, 2018, Laline rents 111 stores across Israel, most of which in shopping malls and commercial centers. The rental terms for each store are determined in negotiations between Laline and the lessors. The rental period lasts from one year to ten years. The initial rental period in most rental agreements is between three and five years. In addition, in most rental agreements, Laline has an option for extension of the rental period by additional periods of 1-15 years. The rental fees for most stores are calculated as the higher of a fixed percentage of proceeds or a fixed amount and are mostly linked to the Israeli CPI.

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In addition to rental fees, Laline generally also pays additional fees for the leasehold's management and maintenance.

Total rental fees and management fees in respect of the stores in Israel paid by Laline in 2018 amounted to approximately NIS 21,996 thousand and approximately NIS 21,670 thousand in 2017.

(*) Excluding two stores managed by operators whose underlying rental agreements were signed directly between the relevant shopping mall and the operators without including Laline. d. Investments in fixed assets, set up and equipment expenses

Laline owns equipment and fixed assets (mainly leasehold improvements). The total adjusted depreciated cost of Laline's fixed assets as of December 31, 2018 totals approximately NIS 30,675 thousand.

Details of investments in fixed assets and the related set up and depreciation expenses as of December 31, 2018:

December 31, 2018 (NIS thousands) Accumulated Depreciated Cost depreciation cost Furniture and equipment in stores and offices 50,632 35,581 15,051 Motor vehicles 377 239 138 Installations and leasehold improvements 28,624 13,138 15,486 Total fixed assets 79,633 48,958 30,675

Details of investments in fixed assets and the related set up and depreciation expenses as of December 31, 2017:

December 31, 2017 (NIS thousands) Accumulated Depreciated Cost depreciation cost Furniture and equipment in stores and offices 46,356 29,251 17,105 Motor vehicles 377 112 265 Installations and leasehold improvements 19,931 11,081 8,850 Total fixed assets 66,664 40,444 26,220

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3.2.12 Intangible assets

Trademarks

Laline's policy is to achieve proprietary protection over its various trademarks and brand names and it is therefore acting to have them registered in its name in Israel and worldwide. Laline's signature brands in Israel are closely identified with it and represent its main trademarks. They are imprinted on Laline's products and ad campaigns as a means of recognizing and differentiating Laline's products and attributing value to Laline and its products.

As of December 31, 2018, Laline owns three trademarks registered in Israel. Laline also owns 29 trademarks registered in the EU, the United States, Asia and in other countries. Applications have been filed in other countries for registering the Company's trademarks in those countries. The Israeli trademarks are valid for a period of ten years. Laline occasionally extends the validity of its registered trademarks as necessary.

3.2.13 Suppliers

a. General

As of December 31, 2018, Laline has outstanding engagements for purchasing merchandise in an amount of approximately NIS 26.5 million compared with NIS 19.0 million in 2017.

b. Suppliers

Laline has several main suppliers in Israel which manufacture the products ordered by it. Laline pays the suppliers and subcontractors for manufacturing the products at different credit terms without collateral, all based on the negotiations between the parties and in keeping with economic considerations.

Laline engages with several suppliers simultaneously on a regular basis, which contributes to diversification of acquisitions, another reduction in the dependency on a specific supplier and potential reduction in acquisition costs.

Laline has no dependency on a single material supplier since it possess all knowhow related to product development and production planning, however, due to size considerations (purchase costs and production volume), Laline produces about 38% of production at one manufacturer. Yet, as mentioned, production of any of the products can be transferred from one manufacturer to another. This process could last about nine months including the license.

Laline is constantly acting to recruit new suppliers on the one hand and monitor the manufacturing and quality control of the products manufactured by existing suppliers on the other.

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The following table specifies the percentage of purchases of finished goods out of total purchases of finished goods made by Laline according to main suppliers and subcontractors:

2018 2017 % of % of purchases purchases out of total out of total Scope of finished Scope of finished purchases goods purchases goods Country (NIS'000) purchased Country (NIS'000) purchased Supplier A Israel 30,179 ~ 38.0% Israel 21,561 ~ 39.0% Supplier B Israel 6,787 ~ 8.6% Israel 5,425 ~ 10.0% Supplier C Israel 5,857 ~ 7.4% Israel 4,879 ~ 9.0%

3.2.14 Working capital

a. Policy of holding inventories of finished products

Laline holds inventories of finished products for the supply of its products for an average period of about three-four months based on the following considerations: (1) past experience; (2) future sales forecasts in relation to existing inventories, opening new stores, changes in customer preferences etc.; and (3) product supply time (usually three- four months from date of order). The inability to foresee future demands for products might expose Laline to high inventory levels. Laline's products have a long shelf life which allows holding inventories in the long term.

In 2018 and 2017, inventory days were 100 and 88, respectively.

b. Inventory data (NIS in thousands)

31.12.2018 31.12.2017 Finished goods 24,086 14,386

Laline periodically evaluates the condition and age of inventories and makes sure that inventory items are sold beforehand so as to avoid a situation of surplus inventories that cannot be sold.

c. Merchandise return policy

Agreements between Laline and foreign franchisees do not confer a right of return, except special cases which will be approved by Laline.

Laline allows customers of chain store to return products subject to the provisions of the Consumer Protection Act and Consumer Protection Regulations (Cancellation of a Transaction), 2010.

- 55 - d. Credit

(1) Credit from suppliers

Laline accepts credit from suppliers under current + 30-90 day terms. In the year ended December 31, 2018, the average credit term from suppliers was about 46 days as opposed to 43 days last year.

Laline's average scope of credit from suppliers in 2018 totaled approximately NIS 10,745 thousand compared to approximately NIS 6,705 thousand in 20176.

(2) Credit to customers

Directly-operated stores in Israel - Laline allows customers using credit cards to use a payment plan free of linkage or interest based on the scope of purchase. Laline periodically enters into engagements with issuers of coupons and magnetic gift cards (non-debit cards) that allow making purchases in a large number of institutions and chains. These issuers pay Laline the consideration for the transactions less a discount at current + 30-45 day terms.

Sales to wholesalers and sales to others in Israel are generally performed at average credit terms of current + up to 60 days.

Sales to foreign franchisees - sales to foreign franchisees are made at credit terms of 90-120 days from the date of receipt of the goods by the customer or from the date of issuing the invoice. As of December 31, 2018, Laline has full guarantees in respect of open debts.

In the year ended December 31, 2018, the weighted credit granted by Laline to customers totaled about 27 days compared to about 29 days last year.

(3) Doubtful accounts

Laline's management makes ongoing assessments of credit granted to customers. The financial statements include specific allowances that adequately reflect, according to Laline's management, the loss inherent in debts whose collection is doubtful.

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3.2.15 Limitations on and supervision of Laline's activities and products

a. Laline's operations are governed by the provisions of general laws, including import, export, customs, consumer protection, intellectual property, labor and business licensing laws.

b. Pursuant to the Business Licensing Law, 1968 ("the Business Licensing Law"), an individual cannot operate a business that requires a license unless they hold a license pursuant to the Business Licensing Law and the terms prescribed thereunder. In February 2013, Laline received an exemption pursuant to the Business Licensing Law. According to the Decree of Business Licensing (Businesses the Require a License), 1995, Laline's activities in the stores in the shopping malls and commercial centers do not require a business license. In addition, Laline imports and markets cosmetics under a cosmetics license as required by the Supervision of Products and Services Decree (Cosmetics), 1973.

c. Laline's activities are subject to consumer laws, including the Consumer Protection Act and decrees issued thereunder, regarding non-deception of consumers, mandatory labelling of components and mandatory price presentation, provisions regarding transaction cancellations as well as provisions regarding purchase coupons, credits, return policies, advertising and more.

d. Laline's operations are governed by the provisions of the Israeli Protection of Privacy Law, 1981 ("the Protection of Privacy Law") and the revised Communications Law (Amendment No. 40), 2008 ("the Spam Law"). In keeping with the Privacy Protection Law, customer databases can only be used for the purposes for which the databases were founded. Laline is subject to certain reporting duties vis-à-vis the Registrar of Databases and is required to maintain the confidentiality of the information held by it and to secure the data in the database. As for the distribution of advertising pamphlets and mailing materials to customers, the Company acts according to the provisions of the Protection of Privacy Law and the Spam Law. Laline is also required to comply with various labor laws, including, among others, the Severance Pay Law, 1963, the Annual Vacation Law, 1951, the Annual Labor and Rest Hours, 1951 and more.

e. Laline complies with the various laws aimed to secure accessibility for people with disabilities, including the Law for Equal Rights for People with Disabilities, 1998 and the regulations published thereunder, for accessing the Laline's services.

f. Laline's activities are subject to specific legal provisions such as the Law for Supervision of Commodities and Services (Cosmetics), 1973 for obtaining a general and specific license to sell cosmetics and the Decree for Labelling Merchandise (Cosmetics Packaging), 1960 regarding the mandatory sale of cosmetics only in a container that is packaged with its entire contents by the manufacturer or importer and without manipulating the product's packaging, the Pharmacists Ordinance, 1981 and the Pharmacists Regulations (Cosmetics), 2013.

- 57 -

g. As for the Laline's overseas activities, it complies with the specific laws and regulations applicable in each country and holds the appropriate licenses.

h. Laline strictly complies with all the provisions of applicable laws and regulations, among others, by applying automated procedures, controls and solutions.

3.2.16 Collaboration agreements

In the context of the expansion of Laline's activities into foreign markets, Laline entered into franchise agreements as detailed in paragraph 3.2.5(e) above.

3.2.17 Condensed results of the operating segment

Year ended December 31, 2018 2017 2016 General data Number of directly operated stores 118 106 104 Net commercial area (sq. m.) 5,201 5,048 4,877 Number of In stores and in HQ employees 670 650 653 Operating results Revenues Directly operated stores 174,737 162,538 148,451 (NIS'000) Wholesalers and others 13,869 11,999 3,102 Foreign franchisees 18,872 9,871 11,684 Total 207,478 184,408 163,237 Cost of sales (NIS'000) 69,859 58,676 57,756 Gross profit (NIS'000) 137,619 125,732 105,481 Capital investments in new stores15 (NIS'000) 1,810 1,690 1,350 Advertising expenses (NIS'000) 4,640 5,295 4,586 Depreciation expenses (NIS'000) 10,013 7,019 7,123 Operating income (NIS'000) 29,728 19,782 8,122 Working capital (NIS'000) 33,824 48,994 28,144 Data of sales turnovers and proceeds Revenues per sq. m. (NIS) 2,800 2,683 2,536 Change in same store revenues (%) 6.8% 5.0% 13.1% Data of customers' club Number of customers' club members (million) 1.58 1.45 1.30 Identifiable purchase rate (%) ~ 63% ~ 68% ~ 69%

15 The store set up costs exclude third party participation in set up costs and therefore actual costs could be lower.

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3.3 Additional information regarding the entire Group's activities

3.3.1 Human capital

a. A diagram of the Group's organizational structure

The Group's organizational structure, as relevant for the Group's needs, is as follows (*): The Board

Fox Group CEO Senior Deputy EVP Group CEO Purchasing & Logistics

The Billabong EVP Fox Israel American Mango Yanga FOX Urban Human CEO Eagle CEO CEO CEO Home Outfitters Children's CEOs Resources CEO Anthropologie Place CEO Free People CEO

EVP EVP Fox Development Israel Sales

Sacks Nike Foot Shilav Terminal-X Laline EVP EVP Real EVP EVP EVP EVP CEO CEO Locker CEO CEO CEO Finance & Estate Marketing & Business Legal Operations CEO IT Systems Advertising Development Counsel &Logistics

(*) The brands FOX, FOX Home, AE, Children's, Mango and Urban have similar organizational structure comprising EVP of Sales and EVP of Commerce.

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b. Employee headcount

As of December 31, 2018 and 2017, the Group had 7,749 and 6,670 employees, respectively, according to the following departments:

December 31, Segment 2018 2017 Management (including marketing, advertising and business development) 55 51 Finance 31 27 Brand, design and procurement Fashion and management 52 49 home fashion Sales HQ 179 168 Store sales teams16 4057 4,231 Operations and logistics 249 271 Total employees in the fashion and home fashion segment 4,623 4,797 Aromatic bath Store sales teams and HQ16 and body care products 674 650 Other Store sales teams and HQ16 2,452 1,223 Entire Group Total Group employees 7,749 6,670

From time to time, the Group also hires temporary employees through manpower companies.

c. Material dependency on employees

Mr. Harel Wizel, the controlling shareholder in the Company, a director and the Company's CEO, is a key officer in the Group owing to his business and managerial skills. In view of Mr. Wizel's understanding and experience in marketing and sales, his contribution to the development and innovation of new products and to the Group's advertising and PR efforts is considerable. Should Mr. Wizel cease to serve in the Company, this might have a potentially detrimental effect on the Group's revenues and profits.

d. The Group's investments in employee training and coaching

The Group organizes periodic training courses to all of the Group's employees. Employee training is performed in accordance with the Company's training program and annual work plan. In addition, there are employees in the Group who are required to pass the qualification tests such as cashiers, shift supervisors, LOD leaders and etc. In addition, all store managers are required to take basic management courses and several ad hoc trainings according to the position's requirements.

16 This group of people includes a large number of part-time employees.

- 60 - e. Remuneration plans for senior officers in the Company

1. In August 2011, the Company adopted an option plan to senior officers according to which about 643,640 non-marketable share options with a value of approximately NIS 10,995 thousand that are unlisted and that may be exercised into 643,640 Ordinary shares of NIS 0.01 par value each were allocated, at no consideration, to the Company's officers. As of the date of this report, all share options have been exercised.

2. On June 28, 2017, in a private placement, the Company's CEO, Mr. Harel Wizel, was allocated non-marketable RSUs which are exercisable into about 1.0% of the Company's equity and voting rights. See more information in Regulation 21 to Chapter D to this periodic report and in Note 19 to the financial statements.

3. On June 22, 2017, the Company approved a revised remuneration plan for 2017- 2019 in the context of which certain adjustments were made to the employment terms of controlling shareholders and their relatives employed by the Company and an update to the employment terms of certain officers in the Company. See more information in Note 19 to the financial statements and in an immediate report of June 22, 2017 (TASE reference: 2017-01-0525213). f. Loans to employees

The Company provides loans to employees at its discretion and based on their salaries, in conformity with its procedures. As of the reporting date, loans provided by the Company to employees are in immaterial amounts. g. Employment agreements

In this context, the Company's employees can be classified into four main categories: stores, logistics, HQ and senior management:

Store employees - the vast majority of the Company's employees are employed at the Company's stores, consisting of store managers, shift supervisors and sales staff. The employment agreements signed with the sales teams and shift supervisors include a base salary with the addition of overtime. The employment agreements signed with store managers include a global gross monthly salary and require the managers to maintain the Company's confidentiality for the duration of the employment period and thereafter and to commit to non-competition for the duration of the employment period and for a certain period thereafter.

Operations and logistics employees - these employees sign personal contracts, some of which based on work hours whereas the contracts relating to employees are based on a global gross salary. Some of the logistics employees are subcontracted from manpower companies, which allows the Company to respond to monthly changing workloads.

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HQ employees - the majority of HQ employees sign salary agreements based on global gross monthly salaries. These employees are entitled to certain benefits from the Company such as vehicles, cellular phones and participation in executive insurance policies. These employees are also committed to maintain the Company's confidentiality for the duration of the employment period and thereafter and non- competition for the duration of the employment period and for a certain period thereafter.

Senior officers and key management personnel - the senior officers (including controlling shareholders) and other executives in the Company are employed according to personal labor contracts. See details of the remuneration plan for senior officers in the Company and the employment terms of controlling shareholders and their relatives employed in the Company in Regulations 21 and 22 to Chapter D to the periodic report and in Note 19 to the financial statements.

h. Collective agreements and expansion orders

Collective agreements - the Company and its employees are subject to general collective agreements and expansion orders that apply to all employees in the private sector in Israel, including a pension insurance expansion order issued on December 30, 2007 which requires the Company to make contributions to pension and severance pay funds in respect of its entire employees. The Company provides for the minimum amount of contributions prescribed in this order for almost all its employees (except for several HQ employees for whom the provision is made based on personal contracts). The rate of the employer's contributions is 6.5% for the pension component and 6% for the severance component).

The Company's accrued severance pay is fully covered by executive insurance policies, severance pay funds and the amounts recorded in the financial statements.

Manpower companies - Israeli law requires the Company to directly hire subcontracted employees at the end of nine months of labor. The seniority of the subcontracted employees hired by the Company is retained. In the first nine months, the employees are employed by the manpower company and the latter pays their wages and related social benefits.

3.3.2 Financing

The Company finances its operations using its own resources and through bank loans. See more information in Notes 16 and 26 to the financial statements.

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3.3.3 Insurance

The Group insures its assets and liabilities under insurance policies prepared by leading insurance companies. The Group's insurance policies include:

 Fire damage and consequential loss (including coverage for fire damage, burglary, earthquake and natural disasters).  Goods in transit.  Funds and employee loyalty.  Terrorism related damage.  Third party liability.  Employers' liability.  Product liability.  Cyber risks.  Contracted work.  Marine and/or air cargo import.  Directors' and officers' liability.  Company store and warehouse inventory insurance.

The Company estimates that based on the risks to which the Group is exposed and as customary in the insurance industry for its type of business, the Group is adequately insured and is not subject to underinsurance.

3.3.4 Taxation

See Note 28 to the financial statements.

3.3.5 Material agreements

a. Agreements for the lease of FOX House, the Modiin logistic center and Shilav's logistic center

The following table presents information of the lease agreements of offices and warehouses in 2017-2018:

Year ended December 31, 2018 Year ended December 31, 2017 (NIS thousands) (NIS thousands) Total rental and Total rental and management fees management (including fees (including leasehold leasehold Total area depreciation and Total area depreciation Office building and (sq. m. leasehold (sq. m. and leasehold warehouse thousands) improvements) thousands) improvements) FOX House, Airport City 14,525 13,450 14,525 13,535 Modiin logistic center 13,150 6,677 13,150 6,440 Shilav companies' logistic center, Airport City 9,308 3,23817 - -

See details of the agreement for the lease of the FOX House in the Airport City campus, the agreement for the lease of the Modiin logistic center and the agreement for the lease of the Shilav companies' logistic center in Airport City in Notes 20b(2), 20b(4) and 20b(3) to the financial statements, respectively.

17 Rental fees for six months.

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b. Franchise agreements signed by the Group regarding international brands

According to the Group's standard franchise agreements, the franchise period is extensive and includes an option for extension, among others subject to complying with a business plan and reaching understandings on a business plan for the extended period. The franchise agreements determine the commercial terms underlying the purchase of products directly from the franchisor and the transfer of ownership of the products to the Company upon completion of the purchase of the products. In addition, the franchise agreements provide for payment terms, store design, store deployment, compliance with operating standards etc. In general, the Company has no right of return of products to the franchisor, subject to certain exceptions.

See details of the Group's franchise agreements regrading international brands in paragraphs 1.2.1 and 1.2.3 above in Note 20b to the financial statements.

c. Agreement for allocation of shares in Terminal X Online Ltd.

See details of the agreement in Note 10b(11) to the financial statements.

d. Engagement in agreement with Leumi Card for establishing and operating a credit card for members of the Company's joint customers' club

See details in Note 20b(15) to the financial statements.

e. Agreement for the acquisition of the Shilav companies

See details in Note 5b to the financial statements.

f. Agreement for amending the terms of the option granted to American Eagle (AEO)

See details of a term sheet for amending the terms of the option granted to AEO and for revising the provisions of the agreements between the parties regarding the decision making process in FWS in Note 32d to the financial statements.

3.3.6 Litigation

See details of material legal proceedings and class actions in Note 20a to the financial statements. In addition, the Group holds several litigation proceedings in the ordinary course of business. The Company's exposure in respect of these proceedings is immaterial to the Group's business.

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3.3.7 Business strategy and targets

The Group's strategy relies on its evidenced strengths: its market position as Israel's leading fashion retail chain, its nationwide widespread store deployment in leading shopping malls and shopping centers, the shopping experience it offers its customers, its well-established customer loyalty club, its efficient and independent logistic system, its financial stability, its ability to identify and utilize opportunities in the retail market, its acquisitions and/or development of additional brands in Israel and abroad, mainly in the Group's core segments (fashion, footwear and lifestyle), and extensive retail management knowhow.

The Group's main targets focus on maintaining the Group's financial stability and strength and enhancing and improving its operations and profits, among others by improving the competitiveness of the Company and its investees and by constantly examining prospective business opportunities, acquisitions and/or development of additional activities and brands in Israel and abroad (mainly in the Group's core operating segments - fashion, footwear and lifestyle).

The Group's management intends to continue taking measures for positioning itself in Israel as a top retail group with a diversity of leading brands. In order to minimize the effects of changes and trends on the Group's operating segments, the Group takes the following steps, among others:

- The Group continuously adapts and customizes the majority of its products to the changing fashion trends, retains attractive and competitive prices and invests in advertising and building the unique identity of its brands.

- The Group performs periodic examination of appropriate opportunities for enhancing the variety of chains and brands owned by it.

- The Group acts to strengthen its customers' loyalty using the Group's customer loyalty program and its exclusive credit card.

- The Group acts to enhance its competitive edge, including by operating an exclusive multi-brand retail website.

- The Group also performs structured processes of analyzing and drawing conclusions in order to constantly improve the design, purchasing and procurement activities, adopt advanced marketing strategies, improve terms of rental agreements and optimize logistic and distribution processes.

The Group's management aims to continue operating to reinforce its positioning in international markets by opening directly operated stores or franchises for selling brands which management considers to have the potential of succeeding in these markets.

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The Group's management is also taking steps to reinforce Laline's position in international markets and in 2018 opened six Laline stores in leading commercial centers in Toronto, Canada. Laline's continued expansion into the international markets of Europe, North America and the Far East will be examined from time to time and determined based on the relevant business plans, the expansion potential and the operating results of the existing stores in the international markets.

The Group's management is currently collaborating with the global Nike Group based on a franchise agreement to develop a retail chain of Nike stores in leading commercial centers in Canada through Retailors, currently focusing on Toronto for 2018-2019. The continued expansion into additional locations will be decided based on the relevant business plans, the expansion potential and the operating results of the existing stores in the international markets.

The Group's management is also acting to enhance its position in the growing online retail market through its website, Terminal-X, which sells a large variety of the Group's brands and numerous other international brands, including the Group's private Terminal-X brand, online. The Company aims to become Israel's fashion and lifestyle retail website of choice for local consumers.

The Company's management has identified the business expansion potential of launching its own credit card, Dream Card VIP, for its customer club members, in collaboration with Leumi Card. This activity allows the Company to further enhance its customer relations and expand its income sources.

In keeping with the Group's strategy of increasing the variety of its chains and brands, the Company acquired the Shilav brand name, a leading brand in the local baby clothing and toy market. The Company plans to harvest its extensive accumulated retail knowhow and experience for benefiting from the synergies between the companies.

The Company's management headquarters provides support for the investees' managements as part of the mindset that investees are likely to benefit from the Company's/Group's skilled and experienced personnel and means.

The targets discussed above consist of forward-looking information as defined in the Israel Securities Law and as such they are largely based on the Company's expectations and estimates regarding future economic, social and other developments and their mutual effects. The Company has no certainty that it will be able to realize these vision and goals since they are inherently based on factors that are not under the Company's control.

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3.3.8 Expected developments in the coming year

. The Company intends to take steps to expand the scope of the sales and profits of its local brands, focusing on new brands.

. The Group aims to continue developing the footwear and sports apparel segment by increasing the number of Foot Locker stores in Israel.

. As for the Company's plans for expanding its operations in Canada by opening Nike stores, see paragraph 1.2.3 above.

. The Company plans to continue expanding Laline's operations overseas as described in paragraph 3.2.5(e) above.

. The Company plans to continue developing and expanding the multi-brand Terminal X website.

. The Company intends to continue enhancing the operation of its customer loyalty club and expand its credit card customer base. See details in Note 20b(15) to the financial statements.

. The Group plans to continue examining potential mergers and/or acquisitions and/or import of additional products/brands, if and when the right retail opportunities are identified.

. The Company will focus on enhancing the Shilav brand domestically and benefiting from the potential synergies between the Group and Shilav.

. The Group plans to continue expanding its activities in additional international markets by obtaining franchises or by partnering with local companies with the needed financial resources, knowhow and experience in the local retail market in those countries, if and when appropriate opportunities are found.

The expected developments in the coming year consist of forward-looking information as defined in the Israel Securities Law. These expectations are largely based on expectations and estimates regarding future economic, social and other developments and their mutual effects and on the information held by the Company As of the reporting date. The Company has no certainty that these expectations will be realized. The Company's operating results may materially differ from the estimated or implied results.

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3.3.9 Discussion of risk factors

The Company's activities are subject to the following risk factors:

Macro risks

a. General overview

See paragraph 2.2 above.

b. The political-security situation

See paragraph 2.2 above.

c. Political and economic changes in foreign markets

See paragraph 2.2 above.

d. Foreign currency exchange rate fluctuations

See paragraph 2.2 above.

e. Changes in interest and CPI

See paragraph 2.2 above.

f. Disruptions in seaports

See paragraph 2.2 above.

g. The market's position and changes in the standard of living

See paragraph 2.2 above.

Segment risks

a. Manufacturing restrictions and economic-political changes in countries of Far East and Southeast Asia

See paragraph 2.2 above.

b. The fashion industry and the competition therein

See paragraph 2.2 above.

c. Employment terms

See paragraph 2.2 above.

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See paragraph 2.2 above. e. Exposure to climate and weather changes

The Company plans its activities based on the different seasons (mainly winter and summer collections). Accordingly, uncharacteristic climate changes in the seasons might reduce the Company's sales and increase surplus inventories in those seasons. f. Credit risks

The Group's revenues derive from a larger number of customers in Israel and abroad. The majority of sales are made in cash or credit. A large part of customer debts derive from sales to foreign franchisees. g. Exposure to high inventory levels

Miscalculation of future demands might expose the Company the high inventory levels. The inability to foresee demands for products might leave the Group with surplus inventories. h. Rental fees

The Group operates in leasehold properties in shopping malls and commercial centers. Structural changes in the nature of operations of such markets or of the Group in respect of these markets are liable to affect the amounts paid by the Group as rental fees and therefore have a material impact on its operating results. i. Cyber risks

The Group manages its operations both through physical locations (stores, HW offices and logistic centers) and online. The Group's operations rely on internal interfacing IT and communication systems that connect all the Group's sites. The Group also has databases that contain sensitive customer data and other confidential information. The cyber risks facing the Group include potential damage to inter-site communications, system shutdown or disruption, database damage or theft (which will expose the Company to potential lawsuits) and leakage of the Group's sensitive business information. In 2018, the Group purchased cyber risk protection insurance and concurrently applies controls and defenses to minimize cyber related risks, including license management, password protection and antivirus and backup systems.

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Group specific risks a. Dependency on key personnel

Mr. Harel Wizel, the Company's CEO, is a key individual in the Group. In the event that he ceases to serve in the Company, this will adversely affect the Group's revenues and profits, see paragraph 3.3.1 above. b. Exposure to the stability of the grantors of franchises/cancellation of franchise agreement

The Company is exposed to the economic and market stability of the grantors of franchises (AE, Children's, Mango, Nike and Urban). A significant deterioration in their economic or market conditions could have a considerable effect on the Company in the short term. It should be noted that such risk has never materialized and, judging by past circumstances of similar global retail groups, brand franchisees that experience financial difficulties are normally replaced by new franchisees. Although the Company's operations have yet to expose it to such occurrence, also given that franchisors have a very limited and predetermined right of cancelling franchise agreements in the event of material breach of the agreement, default or change in control in the Company, the Company's ability to purchase new franchises mitigates its exposure to loss of franchisors of specific brands.

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The following table summarizes the potential risks and the degree of their potential effect on the Group's profits. The Group's estimates are based on reasonable expectations and exclude any irregular events in terms of scope, size and duration:

Degree of effect on the Group Risk Large Medium Small Macro risks 1. Political-security situation + 2. Foreign currency exchange rate fluctuations + 3. Changes in interest and CPI + 4. Market recession + 5. Seaport disruptions + Segment risks 6. Manufacturing restrictions and economic- + political changes in China and East Asia 7. The fashion industry and competition therein + 8. Raising the minimum wage + 9. Increase in customs duty rates + 10. Climate changes + 11. Increase in prices of raw materials + 12. Exposure to high inventory levels + 13. Cyber risks + Company specific risks 14. Dependency on key personnel + 15. Credit risks + 16. Political and economic changes in foreign + markets 17. Exposure to the stability of franchisors +

Harel Wizel Avraham Zeldman CEO and Director Chairman of the Board

Date: March 18, 2019

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Chapter B - Board of Directors' Report on the State of the Corporation's Affairs

Chapter C - Financial Statements as of December 31, 2018 The Corporation's Separate Financial Information

Chapter D - Additional Information on the Corporation

Chapter E - Corporate Governance Questionnaire

Chapter F - Report on the Effectiveness of Internal Control over Financial Reporting and Disclosure

F:\W2000\w2000\12553\OTR\18\FOX-WIZEL-BARNEA-2018.docx

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