LETTER TO SHAREHOLDERS

 

ECONOMIC OUTLOOK

In 2013, global markets continued to be characterized by high volatility, particularly in share prices, which mostly reflected generous valuations, thanks to low interest rates. However, it is important to consider that due to the uncertainly in the evolution of demand, an important part of company profits were oriented toward dividends and share buy-backs, rather than reinvestment, which is what contributes to the generation of growth and employment.

Uncertainty in the global economy in 2013 continued to be marked by the rhythm of development of the principal countries and geographic regions. The United States grew moderately, Europe appears to have overcome its recession risk, but still with limited advances and high unemployment, and China faced difficulty estimating the size of its deceleration.

Mexico, following the world economic crisis of 2008-2009, showed during the following three years average GDP growth of 4.3%, which is mainly explained by the lower base of comparison following the sharp fall of Gross Domestic Product in 2009 of 4.7% and the reactivation of global dynamism. In Mexico, the growth rate of the past 10 years is 2.6%, well below that of Latin America’s 3.9%.

In 2013, the Mexican economy demonstrated weak growth of 1.1% of GDP, due to negative external impacts, as well as internal adjustments due to the 2012 fiscal deficit, accompanied by inflationary pressure. The government budget, oriented toward rebalancing fiscal accounts, influenced economic activity, through conservative public spending and increased tax collection. Furthermore, the exchange rate experienced a year of intense volatility, with a minimum of 11.98 per dollar, and a maximum of 13.49.

The internal economic fundamentals continue to be solid, despite the low economic dynamism observed in 2013, as low interest rates throughout the world and credit availability incentivized investment. The country has a well-capitalized financial system and a new regulatory framework that will allow more-accelerated growth rates, maintaining a healthy level of leverage, while in the external sector, a moderate recovery of the United States, Europe and Japan is expected, which will strengthen our economy. Given the bases for strong domestic investment and the activation of the domestic economy, we could have higher levels of development.

GRUPO SANBORNS

The low dynamism of the Mexican economy mentioned above impacted the consumption environment, which began the year with a positive tendency. However, it began to revert as of the second quarter of the year due to several factors: conservative public spending and investment, the crisis of housing developers, lower levels of remittances and weak performance in the manufacturing industry.

 

Under this scenario, in February 2013 a primary global public offering of Grupo Sanborns, S.A.B. de C.V. was made in the Mexican Stock Exchange (Bolsa Mexicana de Valores). The percentage of equity placed at $28 pesos per share was 17%, and the subscribed capital was 60% in the local market and 40% in foreign markets. Part of the objectives of the placement was to strengthen the presence of Sears and Sanborns department and specialty stores, remodel and open establishments with a new image and restructure retail space. The process implies a rejuvenation of the fashionware catalog, introducing new brands, a new layout and the establishment of a solid foundation to continue the expansion phase.

 

Despite continued weak private consumption, Grupo Sanborns achieved 3% sales growth from all formats, mainly Sears. Part of these results were due to the promotion of the Sears credit card, as well as publicity efforts, loyalty programs and the identification of clients with our fashion and appliance brands, where we stand out in service quality. At the end of December 2013 we reached 3 million cardholders, a 7% year-on-year increase of own-branded cards through the relaunch of our credit program, where the training of our sales force played a very important role in the reactivation and signing of clients.

 

WE WILL CONTINUE WORKING ON DISTRIBUTION AND PURCHASING SYNERGIES THAT WILL ALLOW US US TO PROVIDE BETTER OFFERINGS FOR OUR CONSUMERS AND GENERATE PROFITABLE AND SUSTAINED GROWTH FOR OUR SHAREHOLDERS.

Net cash flow from operations was $2.844 billion pesos. Total assets were $38.763 billion pesos, while total equity closed the year at $28.011 billion pesos. The net debt to equity ratio was a negative 0.28 times. The net debt to EBITDA ratio was also negative, at 1.40 times.

 

In the months of June and December of 2013, Grupo Sanborns paid an ordinary cash dividend of $0.76 pesos in two payments, which corresponded to $1.789 billion pesos.

 

The resources channeled to investment in fixed assets was $1.675 billion pesos, which corresponded to the opening of 15 new stores: 4 Sears, 4 Sanborns, 5 iShop and 2 Dax, with which we finished the year at 423 units, more than one million square meters of retail space and two shopping centers. In terms of remodeling, extensive makeovers were begun in 12 Sears and Sanborns stores that will be complete after the first half of the current year.

 

The current financial structure of the company is appropriate. The generation of cash flow due to the resources obtained in the primary issue will allow us to carry out the expansion strategy. We will accelerate the opening and remodeling of stores in our three principal formats and continue to consolidate the performance of new product categories.

 

We will continue working on distribution and purchasing synergies that allow us to provide better offerings for our consumers, expand our market position and generate profitable and sustained growth for our shareholders.

 

Among the sustainability activities of Grupo Sanborns in 2013, we continued to replace fluorescent lamps and install solar panels, refrigeration units and air conditioning controls. Programs were implemented to reduce and use recycled paper and we increased training of maintenance and sales staff. We continued with food donations to civil and religious institutions and the hiring of persons with disabilities.

 

As for the program to restore real estate, in 2013 we carried out the conservation of historic buildings in the former aluminum factory designed in 1962 by Félix Candela in Veracruz. This implied the reuse of 3 warehouses to convert them into a shopping mall including a Sears and a Sanborns store, in addition to hosting a hospital, hotel, schools, universities and housing areas with amenities that contribute to an alternative and innovative space for society in Veracruz.

 

The achievements obtained in 2013 are the result of commitment and effort from all of our collaborators, the support of our clients and suppliers and the confidence of all of you, our shareholders. On behalf of the Board of Directors and our management team I would like to thank you and reiterate the commitment of Grupo Sanborns to maintain a successful course to continue to contribute to the development of our country.

 

Sincerely,

 

Lic. Carlos Slim Domit

Chairman of Grupo Sanborns S.A.B. de C.V.