Economic Outlook for 2018
Benefitting from the reform of the internal revenue laws, which reduced corporate taxes from 35.0% to 21.0%, impelling the generation of corporate profits, the United States economy grew by 2.9% during 2018, a rate that produced an increase of 7.0% in nonresidential investment in that country. Meanwhile, domestic demand continued to show a positive trend during the year, with the consumption of durable goods increasing by 5.7%. Based on these factors, the United States Federal Reserve continued with its monetary policies, and the interest rate, which was more than 1.50% at the end of 2017, was adjusted to 2.50% by the end of 2018. Nevertheless, since the beginning of 2019, the Fed has shown signs of caution concerning economic growth, and at the beginning of the latter year it has predicted that the economy will grow at a slower pace in 2019, with a moderate and stable expansion.

As for the Mexican economy, Gross Domestic Product grew by 2.0% during the year, which was mostly attributable to the services sector of the economy. In this respect, the commercial activity as well as the mass media and the financial sector itself saw an expansion greater than other sectors of the economy. The economic growth of the country was partially affected by the performance of the manufacturing sector in 2018, due mainly to the lower production of oil, which was around 1.7 million barrels of oil per day.

As for the fluctuation in the value of the Mexican peso against the United States dollar, this variation was due to the volatility that characterized the year, causing a maximum exchange rate of $20.60 pesos per dollar during that period. Thus, the exchange rate went from $19.66 in 2017 to $19.65 pesos per dollar at the end of 2018.

The negotiations over the United States-Mexico-Canada Agreement (known as USMCA) were concluded during the year, thereby reducing the uncertainty that had been present since the last presidential election in the United States in respect to the modernization of the commercial relationships between these three countries. It is expected that this new agreement will be approved by the legislative bodies of each of the participating nations, to thereby strengthen Mexico’s position in the North American market as an exporting nation, an attractive destination for investment and a capital for industrial development in the country.

In respect to the annual evolution of other indicators of the Mexican economy, the rate of inflation decreased in Mexico in 2018, ending at 4.83%, which compares favorably with the rate of 6.77% of the previous year. This favorable result was principally due to a smaller increase in the price of gasoline during the year. As for the country’s trade balance, there was a deficit of $13.704 billion USD, increasing by $2.736 billion USD in respect to 2017. Specifically, the deficit in the petroleum trade balance grew by $4.881 billion USD during the year, to the amount of $23.190 billion USD. Nevertheless, the surplus in the non-petroleum trade balance grew by 26.7% to end up at $9.485 billion USD at the end of the year, to thereby reflect an increase of 9.1% in Mexico’s manufacturing exports.

Recently, various austerity, transparency and public finances policies and measures have been established by the new Mexican Government to combat corruption, insecurity and poverty in the country. The said problems represent the principal obstacles that hinder the generation of jobs and internal economic growth.

The Mexican Government has proposed as an objective a growth of the Mexican economy of 4.0% annually, which implies that greater investments must be carried out. In this respect, the Ministry of the Treasury and Public Credit has considered raising public investment from 2.6% of the Gross Domestic Product in 2018 to at least 5.0% of the said economic indicator, and it calculates that the participation of the private sector must be greater than 20% in order to drive the development of Mexico.

Grupo Sanborns
Sales increased 4% during the year, thanks to the greater dynamism observed in all the store formats. Specifically, the recently remodeled stores, corresponding to Sears Perisur and Centro Histórico, contributed in a positive manner, as well as the new combined-format Sears-Sanborns stores in Cuernavaca Averanda and Parque Las Antenas. Greater sales were also observed throughout the year in Promotora Musical, as well as in the Other Formats segment.

We continued to develop our proprietary brands in Sears, and we maintained the efficiency of combined-format spaces, as well as the evaluation of the profitability of the stores. This led to the closure of one Sears store during the period. Market volatility in 2018 caused an increase in interest rates, and for this reason, we decided to reinforce our credit strategy in order to improve the credit portfolio with balanced sales with no-interest promotions, while endeavoring to counter the increase in unrecoverable accounts.

In Sears we continued to work on the construction of our proprietary brands and in the strengthening of our distribution and logistics. In this respect, our Distribution Center – damaged from the earthquakes in Mexico City in September of 2017 – restored its flow of merchandise during the year and received support from a new distribution center located in the Mexican state of Guanajuato, established for the purpose of serving the markets in the center and northeast of the country.

In Sanborns, the sales of recorded music and videos continued their downward trend, while the inventory in books was affected by the mergers among some publishing companies. Therefore, our strategy during the year was to maintain profitability by means of an efficient distribution of spaces to favor categories of greater added value and sales. We also decided to close eight units that for various reasons were not meeting the criterion of profitability. We also began to open integrated Sanborns-Sears stores, seeking to complement the supply of merchandise and to offer restaurant service, under a combined format.

0.0 %
grew same store sales (SSS) in Sanborns, versus -1.9% in 2017.

In Promotora Musical, eight iShop stores were opened during the year, and another four stores were remodeled, creating in them a new image. AppleCare memberships and customer loyalty programs, such as the “buyback” program were implemented, promoting the exchange of equipment. These measures produced very good end-of-the-year results in the volume of sales. In “MixUp” we continued with the strategy of improving the mixture of products, with the introduction of more technology and entertainment accessories.

Our e-commerce sales strategy has undergone a continuous evolution in the Sanborns and Sears sites and digital apps, complemented by the development of the ClaroShop.com marketplace, which has increased the online sale of products and services.

Lastly, the Company continues to be financially sound, with a robust capital structure, a healthy debt position and the liquidity that will allow the Company to continue its strategies.

In terms of sustainability, the Carlos Slim Foundation is developing 96 programs and projects in thirteen different areas, including education, jobs, health, sports, culture and the environment, reaching more than 45 million beneficiaries in Mexico and other Latin American countries. Of particular relevance for the Foundation, beginning in September of 2017, is the “Mexico Unido” initiative, to address the damage caused by the earthquakes. During the emergency phase, the companies in the Group and their volunteers responded immediately to the basic needs of the thousands of people who were affected, by providing food, field tents, blankets, sleeping mats, water purifiers and telecom services.

During the phase involving the reconstruction and building of new homes and markets, we issued a call in which the Foundation would contribute five pesos to match every peso received. We received a response from 217 thousand donors who placed their trust in us and donated $412.4 million pesos, to which was added $2.0618 billion pesos contributed by the Foundation. This money has been used for the rebuilding of homes, for health and educational infrastructure and for the reconstruction of the nation’s cultural patrimony. As we have established from the beginning, the actions taken and the application of these resources have been published, month by month, in the Foundation’s web page.

Sincerely yours,

 

Carlos Slim Domit
Chairman of the Board of Directors of Grupo Sanborns, S.A.B. de C.V.