The investment in the securities issued by the Company involves exposure to certain risks. Before making any investment decision, potential investors should carefully review all information contained in the Company’s Reference Form, the risks mentioned below and the financial statements and their corresponding notes. Below are the top five risk factors affecting the Company. For a complete list of risks for which the Company may be affected, as well as how these risks are managed, access items 4.1, 4.2, 5.1 and 5.2 of the Reference Form, available in the section “CVM filings“.
We are highly dependent on our distribution and transfer centers and any interruption or failure in our centers’ operations could materially adversely affect us.
We currently have three distribution centers and two transfer centers located in the southern, southeastern and northeastern regions of Brazil. Our operations are highly dependent on our distribution and transfer centers operating normally, since all the goods that we sell are distributed through our distribution centers, with certain of these goods also processed through our transfer centers. If our operations at any of these distribution and transfer centers are totally or partially interrupted by factors that are beyond our control, such as fires, natural disasters, power outages or failure in the systems, among others, such interruptions could materially adversely affect us.
We operate through distinct sales channels (our physical stores, website, mobile site and mobile application) and we believe that the integration of these channels is fundamental for the success of our business. Our failure to successfully integrate our sales channels or improve our innovations could materially adversely affect us.
We carry out our operations under our omni-channel strategy through our physical stores and our digital platform, which consist of our website, mobile site and mobile application. We cannot guarantee that any improvement to our omni-channel strategy will be successful or that we will be able to implement innovations deemed important to our customers, which could be extremely detrimental to our business model and could materially adversely affect us.
We may be unable to successfully implement and maintain the synergy among our sales channels in terms our business operations, logistics infrastructure, communications and marketing, and customer service. Our failure to do so may impair our ability to fully benefit from the advantages that an integrated omni-channel platform offers, which in turn could materially adversely affect us.
Another risk associated with our omni-channel strategy is the possibility of competition between our sales channels. If this were to happen, we may not be successful in our strategy to increase our revenues and the integration of our sales channels may not produce the expected benefits, which could materially adversely affect us.
In addition, we may incur higher-than-expected costs and our omni-channel initiatives may prove to be economically unviable or result in lower-than-expected returns. Furthermore, laws and regulations governing activities inherent to the omni-channel platform (particularly laws and regulations relating to taxation) do not specifically address multichannel retail in Brazil, which leaves us vulnerable to tax assessments and creates an uncertain regulatory environment for our operations. Any of the above factors could materially adversely affect us.
We may not be able to implement our organic growth strategy.
Our organic growth strategy is based on the opening of new stores and/or the transformation of existing traditional concept stores into 5th generation stores, a store model that we developed in 2017 that aims to integrate technology with the benefits provided by our physical stores. Our ability to transform our existing stores and to open new stores depends on numerous factors that are beyond our control, such as the availability of raw and other materials at affordable prices, the availability of technology for the model’s new features and the availability of personnel trained to manage this store model. In addition, it may be difficult for us to identify suitable locations for new stores, or available locations may be accessible at higher prices than we are willing to pay, thus making it impossible to open new stores.
We cannot assure you that our next 5th generation stores will be well received by our customers nor that we will be able to improve our brick-and-mortar store model and successfully respond to our customers’ needs and new trends in consumer behavior. We are unable to predict whether our new store concept will achieve the expected turnover levels or that the construction work resulting from the transformation of our existing stores will not have a material adverse effect on our total sales.
In addition, the renovation of our traditional stores to transform them into our 5th generation concept involves extensive construction work that will require us to obtain or renew, as the case may be, federal, state and municipal registrations, authorizations, licenses and permits, including, without limitation fire department inspection certificates. Our failure or delay in obtaining these registrations, licenses, permits and certificates may materially adversely affect our ability to carry out the transformation of some stores or impact the transformation schedule of our traditional stores.
The inability to manage factors and uncertainties related to the success of our opening of new stores or the renovation of our existing stores to bring them in line with our 5th generation concept, or redesign our physical stores, could materially adversely affect us.
In addition, our growth strategy may require an expansion in the capacity of our distribution and transfer centers, a reorganization of our existing distribution and transfer centers or the construction and development of new distribution and transfer centers. If, for any reason, we are unable to find suitable locations for developing new distribution and transfer centers in new or existing markets, or if we are unable to integrate new distribution or transfer centers or to expand our existing distribution and transfer centers, or services from logistics operators with our inventory control process in an efficient manner, we may be unable to deliver inventory to our stores in a timely fashion, which could materially adversely affect us.
Our inability to maintain sufficient levels of working capital for our business may restrict our growth and could materially adversely affect us.
Because of the seasonal nature of our business, we experience periods when the need for working capital is greater. There can be no assurance that we will be successful in: (1) obtaining funding through the sale of our credit card receivables, (2) renewing our current credit facilities, (3) accessing new financing, (4) issuing securities in the capital markets under favorable conditions, (5) negotiating payment terms with our suppliers under favorable conditions, (6) obtaining payment from our customers under reduced timeframes, or (7) maintaining an efficient inventory.
In the event we are unable to fulfill these objectives, we may become insolvent, be unable to implement our growth strategy or to respond to competitive pressures or finance important initiatives for our business and operations, which could materially adversely affect us.
Changes in legislation may result in adverse effects to our current tax benefits.
The Company currently enjoys certain tax benefits related to ICMS in the retail market affecting sales tax deductions from our revenues and we cannot guarantee that such benefits will continue. The effect of such tax benefits on net income for the fiscal years ended December 31, 2018, 2017 and 2016 was R$ 96.7 million, R$ 93.5 million and R$ 110.6 million, respectively, which is equivalent to 4.2%, 4.7% and 6.0% of the Company’s net revenue.
In addition to the effect on net revenue, the tax incentive generates a negative cost effect due to the write-off in non-recoverable ICMS credit balances at Premier, representing R$ 7.6 million, R$ 17.2 million and R$ 40.8 million for the fiscal years ended December 31, 2018, 2017 and 2016, respectively, which is equivalent to -0.3%, -0.9% and -2.2% of net revenue.
Thus, in the fiscal years ended December 31, 2018, 2017 and 2016, the net effect of the tax incentive on net revenue was 3.9%, 3.9% and 3.8% respectively, or R$ 89.0 million, R$ 76.3 million and R$ 69.8 million. These tax benefits accounted for 60%, 32% and -117% of the Company’s net income, respectively, in the fiscal years ended December 31, 2018, 2017 and 2016. In terms of EBITDA in the fiscal years ended December 31, 2018, 2017 and 2016, these tax benefits accounted for 34%, 46% and 40%, respectively. As for the Adjusted EBITDA in the fiscal years ended December 31, 2018, 2017 and 2016, the tax benefits accounted for 34%, 39% and 40%, respectively.
The Company cannot assure that tax reforms affecting these benefits, or preventing them from being renewed, will take place or that such tax benefits will be effectively maintained until the end of their term and, if maintained, that the conditions currently in force will continue. In addition, the Company cannot guarantee that the constitutionality or legality of these benefits will not be challenged in judicial proceedings.