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Management’s
discussion and analysis

During 2016, total sales at Grupo Sanborns grew 7.2% to reach Ps. 47,594 million, an increase of Ps. 3,181 million against the previous year. This positive effect was the result of the good performance recorded in all store formats where Sears, Sanborns and Promusa had a contribution of 51.6%, 26.7% and 15.2%, respectively, to annual sales.

During 2016, total sales at Grupo Sanborns grew 7.2% to reach Ps. 47,594 million, an increase of Ps. 3,181 million against the previous year. This positive effect was the result of the good performance recorded in all store formats where Sears, Sanborns and Promusa had a contribution of 51.6%, 26.7% and 15.2%, respectively, to annual sales. Without considering the adjustment in the business plan for telephony products and services, which prevailed in the first nine months of the year, annual sales would have increased 9.7% to reach Ps. 49,278 million.

On a consolidated basis, sales at stores grew 4.0% in the year. Taking into account the effect on telephony sales mentioned above, same-store sales would have increased 6.7%.

With regard to the credit card business, more than 210 thousand proprietary credit cards were issued in the year, which was 6.1% more than in 2015 to reach 3.67 million proprietary cards accepted in all formats of stores. In particular, Sears’s card represented 59% in the mix of total payments via consumer financing. The loan portfolio showed a solid growth of 10.9% to reach Ps. 12,009 million in 2016. Consumer financing income was Ps. 3,183 million, 8.6% more in the year when compared with the Ps. 2,931 million figure recorded in 2015. Furthermore, non-performing credits over 90 days stood at 2.8%, which is below the market’s ratio in the period.

Accumulated operating income increased 34.9% to Ps. 6.620 million in the 2016. Moreover, the operating margin was 13.9%, or 280 basis points more than the margin obtained in the previous year. The above is mainly derived from Other Income of Ps. 1,396 million registered in the period, which came from the accounting profit recorded after the acquisition of 14.0% of the Inmuebles SROM, S.A. de C.V.’s shares. In addition, the operating margin improved as a result of the recognition of Ps. 122 million from the valuation of real estate, and, to a lesser extent, from the higher gross margin in the year.

Without considering the extraordinary effect recorded as Other Income, EBITDA grew 13.4% in the year to reach Ps. 6,474 million. EBITDA margin improved by 70 basis points to 13.6% in 2016.

With respect to financial results, Grupo Sanborns recorded a 60.4% reduction in the comprehensive financing result. This positive effect was mainly due to lower interests as a reflection of use of resources for the expansion plan, which included the opening of 17 new stores in the three main formats, as well as the increase in the loan portfolio.

10.9%

Credit portfolio grew 10.9% to reach Ps. 12,009 million in the year.

As a consequence of better operating results in the year, Grupo Sanborns’ net income increased 44.5% to reach Ps. 4,466 million, which compared favorably with the net income of Ps. 3,090 million in 2015.

The execution of the expansion plan continued. It included the opening of six Sears, seven Sanborns and four iShops stores. We carried out remodeling works at four Sears, one Sanborns and two iShop stores, which totaled Ps. 2,905 million, a 28.8% increase against the previous period, including the construction of two Sears’s stores and expansion works at the distribution center, and construction works for two stores whose opening is scheduled to take place during 2017.

At the end of the year, 442 stores of all formats were operational, which is 6.4% more than Grupo Sanborns’ inventory of stores in 2015. This increase translated into one million 186 thousand square meters of commercial area for the year.

As of December 31, 2016, we had zero debt at Grupo Sanborns with a cash position of Ps. 1,174 million, a figure that compares with Ps. 4,856 million recorded at the close of the previous year. The Ps. 3,142 million decrease is explained by the use of resources under the expansion plan, together with the increase in the credit portfolio and inventories. This reduction is also a result of the payment of dividends, the repurchase of own shares, and the acquisition of 14% of Sears Operadora México and Inmuebles SROM, S.A. de C.V. along 2016.

Sincerely,

Mr. Patrick Slim Domit

Chief Executive Officer
of Grupo Sanborns, S.A.B. de C.V.