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CFA Society BrazilTeam E

HIGHLIGHTSWe are initiating coverage on Magazine Luiza (Magalu) with a BUY recommendation and a YE18 targetprice of BRL 96.00/share and an expected upside of 36% from its current price. Our recommendation isdriven by the following five key aspects:

Sweet spots available. According to our proprietary analysis, Magalu can increase its margins through organicexpansion. Available data points out to an expansion potential of ~70%, reaching another ~400 cities that meet itstarget requirements. The company will then enjoy margin gains due to its greater scale, reduced logistic costs(~+200bps in EBITDA margin) and increased bargaining power to leverage on its suppliers.

Industry’s frontrunner. Way ahead of its competitors, Magalu managed to identify the most suitable businessmodel for Brazilian consumers and the retailing industry: one that integrates online and offline platforms. Throughthe execution of strategies focused on complementing online and offline operations, Magalu enjoyed the synergiesas shorter delivery deadlines, lower freight expenses and higher inventory turnover were achieved, resulting inhigher EBITDA margin (280bps above Via Varejo’s) and improved working capital needs.

Cash generation takes off. The operating leverage estimated for Magalu, when compared with that of its hardlinepeers, is the one that shows greater potential to margin expansion. The company not only has the highest operatingleverage degree, but also one of the highest EBITDA margin. This higher operating leverage, bundled with itsexpansion opportunities and higher efficiency arising from its omnichannel strategy, guarantees our strong futurecash generation expectancies. Company's high operating leverage boosts its profits, thus enabling a fast multiples'dilution.

A brighter industry outlook. Magalu’s unique business model allows the company to leverage its top line (15%CAGR2017-2022 for its net revenues) on consumer trends and a more favorable economic environment. With therecent cost of credit decrease and jobs creation, the renewals of goods, postponed over the last years, are finallybeing made. Magalu seized the opportunity and net revenue was 24% higher during 1H17 than in the same periodlast year. Moreover, Magalu’s digital culture has been translating on profits taken from consumers going online,as its eCommerce revenues on 1H17 were 56% above the same period last year. Henceforward, we expect Magaluto enjoy the sweets of economic recovery and increasingly eCommerce penetration to deliver strong top linegrowth.

On the road for more upside. Our BRL 96.00 YE18 target price was based on a Discounted Cash Flow (DCF)valuation model. We performed a multiples-based sanity-check to confirm our target. We also simulated a sum-of-parts valuation divided by selling channel to better understand what is priced in and check on our assumptionsimpact.

Risks to our positive view. The main risks to our buy recommendation are (i) the macroeconomic environmentmight be more challenging than expected, (ii) the government might push for tax hikes as a measure to addressfiscal deficits, (iii) Amazon’s arrival might represent a fiercer competitive environment, (iv) the maintenance ofirrational prices strategies by retailing players and (v) the non achievement of market place related additionalservices goals.

October 𝟏𝟖𝐭𝐡, 2017

E Team Student ResearchThis report is published for educational purposes only by students competing in the CFA Institute Research Challenge Retail

Sao Paulo Stock Exchange (B3)

Shareholder StructureTrajano Family 36.99%Garcia Family 26.6%Alaska Asset Management 4.22%Others 32.19%

*Adjusted for factoring costs

Reccomendation: BUYTarget Price: BRL 96.00 (+36%)

Ticker: MGLU3Current Price: BRL 70.72

Source: Company’s data, team’s estimates

Forecast Summary (BRL mn) 2014 2015 2016 2017E 2018E 2019E 2020E 2021E 2022EHighlights

Revenues 9.779 8.978 9.509 11.144 12.981 15.089 17.398 19.908 22.400 EBITDA 605 465 715 897 1.053 1.272 1.560 1.842 2.064 EBITDA, adj. 385 189 405 663 852 1.047 1.313 1.578 1.786 Net income 129 (66) 87 291 523 675 881 1.062 1.192

ProfitabilityEBITDA margin % 6,2% 5,2% 7,5% 8,0% 8,1% 8,4% 9,0% 9,3% 9,2%EBITDA, adj. margin % 3,9% 2,1% 4,3% 5,9% 6,6% 6,9% 7,5% 7,9% 8,0%Net margin % 1,3% -0,7% 0,9% 2,6% 4,0% 4,5% 5,1% 5,3% 5,3%ROIC 20,6% 14,1% 23,5% 24,3% 33,1% 41,1% 53,0% 64,3% 70,4%ROE 19,2% -11,4% 13,9% 14,7% 22,0% 25,1% 33,4% 41,1% 44,8%

Valuation MetricsEV/EBITDA 23,8x 31,0x 20,1x 16,1x 13,7x 11,3x 9,2x 7,8x 7,0xP/E 103,3x N.M. 153,4x 45,6x 25,4x 19,7x 15,1x 12,5x 11,1xEPS 0,68 (0,35) 0,46 1,55 2,78 3,59 4,69 5,66 6,35 Dividends per share 0,17 N.M. 0,12 0,39 0,70 1,92 4,98 5,93 5,92

*Team’s estimates**Bloomberg consensus

Trading Multiples Fw18* Fw18**EV/EBITDA 13,7x 13,8xEV/Sales 0,9x 1,2xP/E 25,4x 31,0x

Balance Sheet Data 2018EShareholders' equity 2.377 P/BV 7,7xNet Debt (Cash) (749)

Forecast ReturnsForecast price appreciation 36%Forecast dividend yield 1%Forecast stock return 37%

Trading DataMarket cap. (BRL mn) 13.281 Shares Outstanding (#mn) 188 Free float 32%52-wk range (BRL) 8.39 / 87.30Avg. daily volume ('000) 3.787 Avg. daily volume (BRL mn) 262

Figure 1: MGLU3 vs IBOVESPA (Jan/17=100)

0100200300400500600700800

Jan-02-2017 Feb-02-2017 Mar-02-2017 Apr-02-2017 May-02-2017 Jun-02-2017 Jul-02-2017 Aug-02-2017 Sep-02-2017 Oct-02-2017

Magalu's Share Price Ibovespa

Magazine Luiza (MGLU3)YE18 Rating BUYYE18 Target price 96.00Current price 70.72

Source: Company’s data.

CFAInstituteResearchChallenge 10/18/17

2

Figure 4: Revenue breakdown per products


30%

23%

23%

17%

3% 4%

Electronic Appliances Audio and VideoTechnology FurnitureToys Others

Figure 6: Income breakdown


29

-141

24

129100

76 63

73

129

-66

87

202

2014 2015 2016 1H17 LTM

Retail Income Equity Income Net Income

Figure 5: Magalu’s footprint


Southeast404 stores 4 DCs55% of GDP

Northeast217 stores 2 DCs14% of GDP

South230 stores 2 DCs17% of GDP

Midwest20 stores 9% of GDP

Figure 2: Magalu’s business segments


Virtual Stores eCommerce

Conventional Stores

Omnichannel

Back Office

10 DCs

+1000 carriers

JV 50/50 Cardif JV 50/50 Itaú 100% Magalu

735

136

Figure 3: Revenues breakdown per channel


79% 75% 71% 68%

5% 5% 5% 5%

16% 20% 24% 27%

2014 2015 2016 1H17 LTMConventional Stores Virtual Stores E-commerce

BUSINESS DESCRIPTION

Magalu is the second largest electronics & appliances’ retailer in Brazil. Focused on a single brandstrategy, the company creates value in all its operating channels through a fully integrated omnichannel model:conventional stores, virtual stores and eCommerce supported by complementary services provided byLuizacred (financial services provider), Luizaseg (Magalu’s insurance arm) and Consórcio Luiza (consortiumadministration) (see Figure 2).

Founded in 1957, Magalu was listed in “Novo Mercado” segment of B3 (Sao Paulo Stock Exchange) in 2011(see Appendix 12). The company opened its first department store in 1974 and nowadays operates throughthree selling channels, which are fully integrated in delivery and payment, increasing consumer’s experienceand service level.

• Conventional Stores. Represented 68% of consolidated gross revenues in 1H17, LTM (see Figure 3).This segment encompasses 735 stores, with an average size of 700 m² per store, present in 16 states (whichrepresents ~75% of Brazil’s GDP) (see Figure 5). At the stores it is possible to find a range of services,from postpaid mobile plans sales to Lu Conecta’s (technical) support.

• Virtual Stores. Represented 5% of consolidated gross revenues in 1H17, LTM. Focused on smaller cities,this segment encompasses 136 stores with an average size of 150m² per store. This store concept doesn'thave any physical showcase nor inventory (except for cellphones). Oriented by a specialist attendant,consumers choose their products through Magalu’s website or Mobile Sales. Payments are made at thestore and later the product is delivered at the store (for pick-up) or at the client’s house (last mile delivery-see Appendix 7).

• eCommerce. Represented 27% of consolidated gross revenues in 1H17, LTM. Through its website andtelemarketing, Magalu sells either its own products directly to consumers (1P) or its sellers’ products (3P).Regarding its direct sales, carried out through its website or smartphone app, products can be either pickedup at the nearest store or delivered at consumers' homes. Launched towards the end of 2016, Magalu’smarketplace operation was recently unified and optimized with the acquisition of Integra in April/2017,allowing a faster expansion from 15 to ~400 sellers and from 20K to ~1mn SKUs in 8 months,complementing Magalu's portfolio by including new segments such as automotive accessories, home décorand others.

Magalu has three additional service providers that, besides improving consumer’s experience andsupporting sales, seek to increase consumer loyalty.

• Consórcio Luiza. With net revenues of BRL 59mn, represented less than 1% of net revenues in 1H17,LTM. Consortium operation aims to grant consumers the possibility of purchasing goods and servicesthrough self-financing.

• Luizacred. A 50/50 JV with the biggest private bank in Brazil, Itaú Unibanco, that represented 80% ofequity income in 1H17, LTM (see Figure 6). Founded in 2001, with the objective of providing credit toMagalu’s customers, it lends through CDC (Consumer Direct Credit), payroll loans, individual loans andLuiza Card. In 2009, Magalu and Itaú renewed the partnership contract for 20 additional years (seeAppendix 18 for better understanding).

• Luizaseg. A 50/50 JV with Cardif (BNP Paribas' subsidiary), that represented 20% of equity income in1H17, LTM (see Figure 6). Founded in 2005, Luizaseg provides a wide insurance’s variety, such asextended warranty, home and thief insurances. In 2015, Magalu and Cardif renewed the partnership for 10additional years. Magalu received BRL 330mn from Cardif for the renewal (see Appendix 18 for betterunderstanding).

In addition, there are three key pillars that set Magalu as a high-level service company.

Deeply rooted culture. The company has consumer’s satisfaction as a core value. The goal is to conveyconfidence and credibility to its consumers, making Magalu not only a retailer, but also a culture vector. Thecompany executes this strategy expanding its culture to all selling channels and giving a special treatment to itsconsumers as a way to retain and also attract new customers.

Becoming Digital. Magalu is shifting from a traditional retailer with an online selling channel to a digitalcompany with physical presence. Five pillars back this change: (i) Digital Inclusion, (ii) Omnichannel Strategy,(iii) Physical Stores Digitalization, (iv) Digital Sales Platform and (v) Digital Culture (see Appendix 13 forbetter understanding). Luizalabs development is an example of the company’s transformation: with a start-upmindset, it is focused on creating new disruptive solutions and improving Magalu’s operation and services. Ithas been shown relevant for the store’s digital transformation and for the development of complementaryplatforms. Magalu’s mobile app reached 6mn downloads and already accounts for ~30% of online sales.

The true omnichannel. All Magalu’s selling channels (online and offline) and service providers are integrated(even holding the words Magazine or Luiza on their names), ensuring more efficiency and improvingconsumer’s service level and experience. All physical stores and eCommerce are integrated through a uniqueoperating system, encompassing sales, payment, storage, logistics (transportation and deliveries) and back-office systems.


3

Figure 7: Brazil retail seliing (2001=100)

100

109116

128

137

148155

158151

142 143147

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017E 2018E

Source: IBGE.

Figure 8: Declining inflation leading to real salary gains

Source: IBGE.

0%

2%

4%

6%

8%

10%

12%

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

2015 2016 2017Real Average Salary, Change YoY 12 Months Accumulated CPI

Figure 9: Sales volume has gained momentum after jobs ceased to be destroyed

Source: IBGE, CAGED.

-3

-2

-1

0

1

-30%

-20%

-10%

0%

10%

2013 2014 2015 2016 2017

Home Appliances Accumulated Sales Retraction, %

Figure 10: Appliance penetration (2015)

Source: Euromonitor.

85% 62% 56% 30% 29%

47% 21% 7.6% 2.8% 0.7%

63% 2.5% 2.3% 1.9% 0.4%

155% 30% 26% 15% 13%

81% 81% 55% 51% 46%

INDUSTRY OVERVIEW

The digital transformation trend and change in consumers' behavior, combined with an economicrecovery environment, will result in retail industry performing above market’s average.

Brazilian retail industry is characterized by thin margins, high working capital dependence and sensitivity toeconomic conditions and consumer behavior. Each time more relevant in the country's economy, retailoperations already accounted for 5.2% of the GDP in 2015, being responsible for 19.1% of the working force.Still with plenty of room to grow, online retailing has been gaining space in Brazil, as it posted a 24%revenues CAGR2008-2016, reaching BRL 44,4bn in sales, around 50mn eConsumers and over 100mn orders. In2017, as the economic downturn stays behind, the improvements in economic fundamentals are creating aconducive scenario for retail industry growth in the following years (see Figure 7).

MACROECONOMICSOne of the key drivers in retail is the rising employment rate of the economy, as it translates into higher percapita income and ultimately boosts consumption. From 2004 to 2013, the Brazilian retail industry grew at apace about twice the annual GDP’s, sustained by massive per capita income gains. Over the last two years, asmacroeconomic and political conditions deteriorated, the industry went through a challenging scenario. Butnow the winds have changed: with lower inflation and interest rates under control, the economy shows the firstsigns of recovery and the retail industry seems to have finally hit a trend-changing momentum driven mainlyby Furniture and Household Appliances, which grew 5.9% during 1H17.

No more two digits or high single digit inflation rates. With lower inflation and higher economic growth,the consumer should continue to be granted with real salary gains (see Figure 8), increasing their propensity torise expenditure. Over the last year, the inflation rate has decreased from over 10% YoY to less than 3%,currently. Such reduction was due to the high interest rates in force until last year and the recent favorabletrend on food prices which, in our view, should remain for a couple more months.

Unemployment rate is going down and should boost retail sales. Furniture and Household Appliances salesvolume registered robust growth as, besides the lower inflation and interest rates, 175.387 jobs were createdover the last five months (see Figure 9). And there is still plenty ground to cover, over the upcoming years theeconomy will give back jobs destroyed over the crisis, setting a huge growth opportunity for the retailindustry. A solid expansion, already on the short term, is backed by the steep downward unemployment ratetrend, as it decreased from 13.7% on Mar/17 to 12.6% currently.

Lower interest leading to higher economic growth. The recent inflation meltdown enabled the Central Bankto aggressively cut interest rates (SELIC is already down by 600bps). Some positive results can already beseen: (i) household consumption grew 1.4% over the last quarter, (ii) the cost of credit for individuals has sunkand (iii) family indebtedness has gone down by almost 500bps, since 2015. Over the upcoming months weexpect the Central Bank to set SELIC at 7.00% and keep it at this level for several quarters ahead. Withdecreasing unemployment rates, rising per capita income, increasing consumer confidence and more attractivecredit conditions, we expect the demand for items offered by Magazine Luiza to soar over the forthcomingyears.

DRIVERSThere is still room for growth. Compared to other countries, Brazil’s electronics and appliances penetrationrates are low (see Figure 10), revealing great expansion potential. Although most households have basicelectronics, such as refrigerators (98.9%) and televisions (99%), very few own more sophisticated goods, suchas washing machines (46%) and notebooks (42.4%). As the country's economy recovers, the expectation isthat demand for household appliances will raise due to (i) families' higher purchasing power and (ii) socialladder move-up, that increases demand not only by creating new consumers, but also by creating a substitutiontrend of basic goods for more fancy ones.

Almost too good to be true. The extinguishment of analogical signal should boost the demand for digitaltelevisions, generating significant growth in TV sales in the following 2-3 years. In 2014, Brazil’s Ministry ofCommunications announced the schedule for analogical signal extinguishment. It is believed that around 99%of Brazilian households owns at least one TV, of which approximately 40% (around 16,6 millions) areanalogical. With the end of analogical signal a replacement movement of the base tube televisions should takeplace in the next few years, boosting sales.

Going mobile. One of the most significant global trends affecting electronics and appliances market in Brazilis the tendency of going mobile, which has been responsible not only for great increase in smartphones sales,but also for higher internet penetration. Between 2010 and 2016, smartphones sales nearly doubled, goingfrom a BRL 16,8 billion profit to a 29,6 billion. The advantage of this trend for the industry is thatsmartphones turnover is higher than that of other goods: around 78% of consumers exchange their phones inless than 2 years against an exchange rate of approximately 10 years for other products.

A long way to go. Past year’s popularization of internet access in Brazil not only has been increasingelectronics sales, but also has been generating more demand for online channels. Since 2005, the number ofBrazilian households with internet access increased over 400%. In 2005, only around 13.6% of the country’shouseholds had internet connection, by 2015 the rate had jumped to 57.8%. This impressive increase wasbacked by the popularization of cell phones and other mobile electronics, such as tablets. Data collected byIBGE point to a rise in internet connection via mobile devices, that grew from 5.6% to 17.3% between


86% 82%

24%

56%

84%

66%

45%

7% 7% 2% 16%

7% 4% 2%

Internet Penetration (% population) % eCommerce share of Total Retail Sales

Figure 12: Internet penetration andeCommerce share in retail (%)

Source: Statista

4

22.4%

9.6%

7.1%

3.2% 2.3%

55.4% Others

Figure 14: Brazilian B&M market share (2016)

Source: Euromonitor, companies data, team’s estimates.

Figure 15: Brazilian eCommerce market share (2016)

21.3%

20.1%

11.5% 5.2%

42.0% Others

Source: Companies data, team’s estimates

2013 and 2015. According to ICT Facts and Figures 2016 research, realized by ITU (United Nations’ agencyfor technology of information), around 83.8% of developed countries’ households have internet access (SeeFigure 11). Which proves that, despite the expansion, Brazil still has a long way to go until reaching itspotential.

Swimming against the tide. eCommerce is still a new selling channel with a huge new and unexploredpotential. Despite the instability and uncertainty surrounding Brazilian’s economic environment, eCommercemanaged to keep up with its good results. Over 2016, the worst year of retailing historical series, internetretailing presented a 7.4% growth. And the perspectives for 2017 are good: after a nominal growth of 7.5% in1H17, a 10% growth is expected by the end of the year. Representing only ~3% of retailing sales, against a~7% rate for developed economies (See Figure 12).

TRENDSWinners take most. In the past few years, we have been observing a movement towards industryconsolidation (See Figure 13) that benefits larger players. More attractive prices and financing optionscombined with the security perception, greatly valued in moments of recession, led to increasing preferencefor the big brands among consumers. In the long run, we expect smaller players to lose share and, among thelarge competitors, the ones that understand market trends and succeed in executing new strategies will havegreat chances of gaining share.

The needle in the haystack. Marketplace can be seen as one of the main online strategies for companies.eCommerce’s good results in the past few years boosted companies’ investment in this channel and, amongthe available strategies, the most popular choice made by big retailers was investing in marketplaceoperations, which alone already accounts for 25% of online retailing gross revenues. More than being able toamplify product assortment to consumers, marketplace operations offer higher margins compared to 1Poperation, a result of its lower costs and equally high cash conversion.

The word is: integration. As a significant portion of eCommerce’s demand comes from store-based retailing,integration between online and offline channels through an omnichannel operation is essential to capture andretain consumers. Another significant global trend affecting Brazilian retailers is the shift in consumer focusfrom product to experience. The new consumer, used to the conveniences and differentials of shopping online,forces retailing companies to rethink their selling strategy in a way that narrows the gap between physical andonline stores in the path to purchase. Despite the channel chosen, consumers must be able to enjoy theshopping experience with the same quality.

Despite everything, physical stores are still essential. Brazil still has a great and unexplored potential whenit comes to online shopping. Brazilian eCommerce’s share in retailing is almost half of that of most developedeconomies, such as the United States, Japan and Germany (~3% against ~7%) (See Figure11). This suggestsnot only that Brazilian eCommerce still has a long way to go, but also reinforces the idea that, despite theongoing retail’s digital transformation, physical stores are still the core of consumers’ shopping experiencemainly due to the strong preference among Brazilian consumers for actually seeing a product and discussing itwith a shopper before buying it. That being said, offline and online channels integration is the best call forretailing companies.

COMPETITIVE POSITIONING

In a highly competitive and still somehow fragmented environment (see Figures 14 and 15), Magalu’scompetitive advantages are key for its consolidation as one of the top hardline retailers.

In the past years, we have been observing a reversion in the deficit trend of Brazil's retail model, verified bythe improvement of operating profits, which created better conditions for retail players to perform. TheBrazilian retail market developed into a deficit structure based on: (i) aggressive price policies, (ii) up to 12xinterest free installments and (iii) free shipping for online purchases. This combination resulted in a low profitbusiness model, characterized by thin margins. Moreover, the stretched days of receivables culminated inhigher working capital needs, forcing companies to adjust their cash cycle by factoring or structuring FIDCs(receivables backed investment funds). Recently, this deficit model is going through changes due to theadoption of a more rational stance by retail players and the large investments made in (i) technology andservice provision, (ii) incentives for cash payments or reduced instalments and (iii) paid shipping, but withaggregated services.

Barking dog, seldom bite. In spite of B2W's recent efforts to stop burning cash, the market is still reluctantin altering its perception about the company. Being among the main online retail players, B2W has adoptedaggressive measures to increase marketplace relevance in GMV (29.6% in 2Q17 against 15.9% in 2Q16) asan attempt to improve the results of its still non-profitable operation. As a part of this strategy, the companyintend to discontinue 75% of its direct sales categories in 2017. However, B2W's records of nondeliverables the past follow-ons as examples - posted doubts on its management capability to deliver itspromises, lowering expectations about the company's future. Despite the results of this new strategy, B2Wshould still continue to burn cash, a reflex of its persistently high financial expenses, which represented 13.7%in 2016, excluding the cost of factoring receivables.

Not all that glitters is gold. Despite being the largest retailer in Brazil, Via Varejo seems to have failed inplanning and executing its strategies over the past few years. Cnova creation in 2014, separating onlineoperations from B&M operations, prevented the development of synergies between the channels andcompromised Via Varejo’s results nowadays. Also, problems involving accounting frauds and badmanagement made Via Varejo’s operations non-viable. As a consequence, plenty of work still has to be done

Figure 11: % of population using internet in Brazil


49% 51% 55%

58% 60% 63% 67% 70% 73% 75%

2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E 2021E

49.9%

55.1% 54.7% 56.2% 56.7%

50.1%

44.9% 45.3% 43.8% 43.3%

2012 2013 2014 2015 2016

Major Players Other Players

Figure 13: Retail market share evolution



5

Figure 17: Ominichannel as margins accretive

33.8% 31.8%

4.7% 7.5%

2.0%

2.8%

Via Varejo Gross Margin

Bargaining power

disadvantage

Magalu Gross Margin

Via Varejo EBITDA Margin

Integrated Omnichannel

Magalu EBITDA Margin

Source: Companies data.

Figure 18: Porter analysis

Source: Team’s analysis

00.51

1.52

2.53

3.54

Bargaining power with Suppliers

Bargaining power with Customers

Barriers of entryThreat of substitute products

Competitive rivalry

Magalu B2W Via Varejo

Figure 19: Brazilian eCommerce total GMV (BRL bn)

3641

4449

60

2014 2015 2016 2017E 2018E

Source: E-bit, team’s estimates.

813Shoppable DCs

Pickupoption

10DCs

Figure 20: The omnichannel strategy

Source: Team’s analysis.

in an attempt to recover its losses and make its online operations profitable. Aiming to create an integratedomnichannel, Cnova was reintegrated in 2017. However, complications involving its full integration are stillcompromising the attractiveness of its operating margins when compared to that of other players (see Figure16).

Something is still missing. Mercado Libre is among the main eCommerce players in Brazil (17.6% marketshare in 2016), holding a pure 3P business model that includes complementary sources of revenue, such aspayment and shipping platforms (MercadoPago and MercadoEnvíos) for transactions made on and off itsplatform. Over the past years, Mercado Libre presented consistent growth backed by inorganic expansion andinvestments in technological solutions to best attend sellers and buyers demands. Recently, we have beenobserving an increase in its complementary services’ relevance in revenues (especially that of MercadoPago),which, in addition to recent free freight offers, has been responsible for gross margin contractions. However,Mercado Libre lacks synergies with B&M operations, greatly valued in countries as Brazil, in which asignificant portion of consumers still feel the need to talk to the store attendant and actually see the productbefore buying it. For that matter, despite its online attributes, Mercado Libre’s potential to reach Brazilianconsumers is limited.

The behemoth is coming. Despite its tremendous success in countries such as the United States, Amazonnow faces a huge challenge when trying to expand its operations in Brazil, where it holds a minor marketshare (<1% in 1H17). The kick start in its expansion has been the recently announced transaction movementfrom a marketplace model focused on the sale of books and ebooks to one focused on electronics, expandingits product portfolio. Amazon is expected to face difficulties replicating its aggressive business model (seeAppendix 20) as (i) different from other markets in which Amazon operates, installment payments for onlinepurchases is a common practice in Brazil (57.8% in 2016 according to Ebit), which results in higher workingcapital needs and may compromise the company’s cash cycle, (ii) financial expenses are higher in Brazil thanin developed countries due to higher interest rates and the necessity of factoring receivables and (iii)underdeveloped infrastructure sets a challenge for the company to achieve its promises of above marketservice levels.

INVESTMENT THESIS

We reiterate our BUY recommendation on Magalu with an expected upside of 36% and a target price of BRL96.00 YE18 per share (against BRL 70.72 in 10/18/2017 closing price), which results in a 25.4x P/E and 13.7xEV/EBITDA YE18. The target price is based on a Discounted Cash Flows Analysis (DCF - FCFF) approach,confirmed by our Multiples Analysis. We support our recommendation on four pillars: (i) Brazil’s economicenvironment recovery, (ii) internet penetration, enabling eCommerce to keep up high growth rates, (iii)Magalu’s integrated omnichannel strategy and (iv) Magalu’s potential to grow its footprint, as its addressablemarket still presents plenty of room. The key drivers to our valuation are:

Surfing macro trends. We expect Magalu to present a CAGR2017-2022 of 15%, backed by a more favorableeconomic environment and consumer trends. Drivers as decreasing credit costs and jobs creation have beenbringing back consumption and, as the economy improves, the company will continue to enjoy top linegrowth. In addition, we also see the company capturing more value from eCommerce growth, be it with itssuperior 1P channel or through its promising 3P platform (see Figure 19).

Positioning is key… To leverage on the back of wounded competitors, Magalu’s integration and digitaltransformation will be key factors to boost its growth. Although the macroeconomic environment is expectedto perform well in the coming years, retailers can still feel some wounds from the economic downturn. Severalbig players are still cleaning up the house, thus, those who are better positioned (first) will enjoy an open road.To better capture value from macro trends and consumer behavior changes, Magalu will be present on onlineand offline channels, working as a unique selling channel. Different from other players, Magalu is the onlyone that is “the same company”, in a way that the customer won’t be buying from its website or in a physicalstore, he will be buying from Magalu, and receive (or pick the product), both in the more convenient way,with Magalu’s superior service level stamp (see Figure 20).

…and Magalu has what it takes to be a winner. As we have already stated, retailers must be integrated inorder to be top-performers in this sector, and, in our view, Magalu is the only true integrated omnichannel as:

• All selling channels are integrated... Magalu can mix digital and physical advantages in every sale,being able to attend all consumers’ demands, such as (i) convenience, (ii) product availability, (iii)complementary services and (iv) superior purchase experience (prized as one of the best companies for itsconsumers, “Prêmio Época Reclame Aqui”).

• ...And so are its operations: Magalu’s integrated logistics, DCs and stores footprints enable fasterdeliveries (93% of on-time deliveries according to ebit.com) as they’re made along the way (the sametruck that replenishes the store makes nearby/along the way deliveries), diluting its logistic expenses(EBITDA margins went from 6.2% in 2014 to 8.3% in 1H17, LTM). Also, its stores inventories can besold through internet (through store pick-up option), increasing inventories turnover (76 days in 2014 to71 days in 1H17, LTM).

• Digital transformation: as a key pillar of Magalu’s new era, digital transformation has been showingseveral operating improvements as it: (i) helped integrating its operating systems (all of its 3rd-partylogistic operators uses Magalu’s technology), (ii) increased efficiency inside stores (average purchasing

Figure 16: KPIsIndustry KPIs Magazine Luiza Via Varejo Lojas AmericanaseCommerce

Deliveries on-time* 93,3% 91,0% 92,8%Probability of shopping again* 91,5% 85,6% 87,6%Revenues growth** 20,5% -6,5% 12,1%

B&M***Total area (m²) 509.909 1.068.600 1.132.880#Stores 813 975 1156Average store size (m²) 627 1.096 980Revenues per m² (BRL) 18.002 18.547 8.827

*As of 10/16/2017**CAGR 2014-2016***As of 06/2017, LTMSource: Compaies' data, eBit, team's estimates


6

Figure 24: WACC breakdown

Cost of Equity (Ke)Risk free rate 2,2%Market risk premium 5,6%Re-levered beta 1,310Country risk premium 2,4%Inflation differential 2,0%Cost of equity USD 11,9%Cost of equity BRL 14,2%

Cost of Debt (Kd)CDI 7,4%Company's effective interest rate 18,6%Spread over CDI 8,2%Cost of debt 11,5%

Weighted Average Cost of Capital (WACC)Ke 14,2%Kd 11,5%Capital structure 35,0%Maginal tax rate 34,0%WACC 11,9%

Source: Bloomberg, Ibboston, Ipea Data, Reuters.

• time went down from 45min to less than 5min) and (iii) increased purchasing experience in online channels(91.5% probability of shopping again according to ebit.com).

• Built to suit: Magalu’s in-store selling strategy will still be value accretive for both, company andcustomers. When the customer enters the store, the attendant can track which products best fit the hisneeds, and offer complementary services (as Lu Conecta) and financing options (be it through LuizaCred orConsórcio Luiza), all this thanks to the company’s integrated and digital operation).

We believe that Magalu will show customer retention as a superior service provider, as it is always bringinginnovations and seeking maximum customer service levels, supported by its integrated omnichannel strategy.

Plenty of room waiting for Magalu. Increasing its capillarity will leverage its integrated omnichannelstrategy. Despite the already developed footprint (with 871 stores distributed over 579 cities), Magalu faces anenormous expansion opportunity, which would also would leverage its omnichannel strategy. After mapping allcities in states in which Magalu currently operates and ranking them according to their GDP, we observed thatthere are still 395 cities that meet Magalu’s target profile. Aiming to increase its capillarity, offer faster deliveryoptions (in store pick-up) and reduce shipping costs’, we expect Magalu to aggressively fulfill this gap on theupcoming years. This expansion will be backed mainly by funds raised in the the recent follow-on and shouldallow its execution with no needs to increase indebtedness levels. (see Figure 21)

Cash is king. Magalu is now well capitalized to increase growth speed. With the recent follow-on, thecompany raised BRL 1.14bn. Now Magalu has funds to deleverage its balance sheet (which already has a NetDebt/EBITDA of 0.3x) (see Figure 22) and invest in technology (LuizaLabs and its online platforms), storesremodeling, logistics improvements and new stores opening, with no additional leverage.

Putting the pieces together. With fresh money in hands, Magalu can enjoy several expansion opportunitiesand increase investments in digital services enhancements. As a first mover in creating a true omnichannel, thecompany is prepared to take advantage of the economy’s recovery, aiming to increase its market-share on theback of struggling players. With an increasing capillarity, the company may reach (physically and/or digitally)a great part of the population, becoming an attractive marketplace in terms of extent and services. Magalu’sstrategy will result in better margins, mainly due to logistic efficiency, and better working capital management,with its “shoppable DCs” increasing inventories turnover. A well-positioned player with a cash generativebusiness is an opportunity one cannot miss (for further insights, see Appendix 19).

VALUATION

We are valuing Magalu at BRL 96.00 (YE18) per share, implying a 36% upside. We used a DCF approach, asit captures the company’s high speed expected growth, and also performed a Multiples-based sanity checkanalysis, in order to capture (i) Magalu’s cheapness/expensiveness among its peers and (ii) how a digitalcompany is valued, as Magalu is changing from a B&M retailer with a digital platform to a digital companywith physical presence, when we include companies that we judge similar to where Magalu is planning to land,on our “Multiples based sanity check”.

Discounted Cash Flow. We made a two-stage growth model. First, we projected Magalu’s results year byyear, divided in two periods: (i) transition period (up to 2022), where the company is shifting from a B&Mretailer with digital selling channel to a digital company with physical presence and (ii) maturing period (from2023 to 2027), where the “new” Magalu walks to maturity with a decreasing growth rate. We used the FreeCash Flow to Firm as Magalu is in a transition period and this may result in a drastic change in capitalstructure. This approach leads us to a BRL 96.00 (YE18) target price (see Figure 23).

WACC calculation. The cost of equity was calculated based on nominal CAPM (Capital Asset PricingModel), in USD, then adjusted for Brazil’s specific risk. We used a risk-free rate of 2.2%, based on the U.S.Treasury Bond. Magalu’s estimated unlevered Beta was based on national and international peers’ averageunlevered Beta of 0.97. Then, we re-leveraged at the company’s target D/E ratio of 54%, leading to a 1.31 beta.For premiums we used Ibboston’s estimated market-risk premium of 5.6% and 2.4% for country risk-premium(based on EMBI+), resulting in a 11.9% unadjusted cost of equity. To adjust our cost of equity for BRL wecompounded 2.0% for expected inflation differential, arriving at a 14.2% cost of equity. We estimated themarginal cost of debt based on Magalu’s current financing costs (~18%) and gave it a discount due to lowerexpected levels for future interest rates, resulting in a 11.5% rate. Using a target capital structure of 35%(reflecting the lower leverage that digital players have) and Brazil’s marginal tax rate of 34%, we obtained aWACC of 11.9% (see Figure 24).

Value in perpetuity. As Magalu is an important retailer in Brazil and we see the company’s relevance growingin the next years, we used 6.5% as an adequate growth rate for the company in perpetuity. This rate is a resultof Brazil’s long term expected inflation of 4.0%, which is a proxy for price growth in the retailing sector (asthis sector pricing strategies weighs a lot in Brazil’s inflation calculation), and the expected GDP real growth of2.5%, as retail is a relevant sector in Brazil’s economy.

The valuation checks. To validate our DCF valuation, we analyzed both B&M retailers and Online playerstrading multiples, as Magalu stands “halfway”. In addition, we focused on the EV/EBITDA forward ratio forYE18, due to P/E distortions for Online players (see Appendix 9).

Figure 21: Expansion summary

Source: IBGE, team’s analysis.

Total Cities in Brazil 5565Total Cities in Which Magalu is Present 579Magalu's highest GDP cities* 521Cities above Magalu's cut GDP 974Expansion Gap 395% of total 40,55%

Figure 22: Cash is king

3.6x4.2x

2.4x 2.3x

0.6x0.2x

1.1x 1.2x

0.2x 0.3x

-1.4x -1.7x

2014 2015 2016 LTM 2017E 2018ENet debt / EBITDA, adjusted* Net debt / EBITDA, Pro-forma

*Net debt accounting for factored receivablesSource: Company’s data

Figure 23: DCF breakdown (BRL)

Projected Cash Flows (2019-2017)

Perpetuity EnterpriseValue

Net Cash(Debt)

TargetPrice

34

58 92 4 96

Source: Team’s estimates.


• EV/EBITDA: In our projections, Magalu’s implied fair EV/EBITDA at YE18 is at 13.7x versus B&M retailermedian of 8.1x and Online players median of 27.3x. As we said, Magalu can be placed in an intermediarypoint, as it is shifting from a B&M to an Online retailer, which would correspond to a 17.7x multiple.Performing a sensitivity analysis of (+/-) 2.5 x, the output range vary from 15.2x to 20.2x, thus,positioning our valuation below the bottom (~14x) and leaving space for more upside as the companyaccomplishes its transformation (see Figure 25).

•P/E: Albeit P/E’s distorted values for online players, once they reflect strong earnings growth potential,we can still extract some insights. Our valuation results in a 25.4x P/E for YE18. Comparing this multipleto Lojas Americanas’ 27.0x, we see Magalu as undervalued mainly due to its greater integration amongselling channels, that results in a greater operating leverage, thus more space for margin expansion.Looking at online players’ mean of 83.0x, we see as fair the discount to lower levels, as Brazil presentsseveral challenges in (i) logistics’ infrastructure, making it more difficult to perform high-quality Last-mile deliveries (both in costs and time), and (ii) working capital needs, as purchases are made in longerterms, increasing factoring needs.

Conclusion. We still see further space for upside as (i) our sensitivity analysis shows greater upsides thandownsides (see Figures 26, 27 and 28) and (ii) our multiples analysis confirms that our expected EV/EBITDA isat a fair level.

FINANCIAL ANALYSIS

Top line growth. As every retailer, Magalu suffered during the crisis as consumption dropped drastically.2015 was one of its worst years, as it maintained a rational pricing strategy while other players struggled in anirrational price war, stealing sales at the cost of burning cash. In 2016, Magalu was able to leverage its saleson the back of customer financing and a slight increase in consumption, and almost return to 2014 levels. Aswe expect (i) a recovery of the economy, increasing same store sales and Magalu’s appetite for organicexpansion, (ii) increasing eCommerce penetration and Magalu’s marketplace ramp-up (attracting more traffic,thus, sellers), we projected strong gross revenues growth over the next 5-6 years (averaging 15.1%) and amore stable growth from then on, resulting in a 11.0% CAGR2017-2027 (see Figure 29).

• B&M: In the physical stores division, in the first 6 years, we projected a more aggressive expansionstrategy (4.0% CAGR2017-2022) in an attempt to leverage on the lack of organization and poor financialstructure from Magalu’s peers. From then on, we expect a stable store opening rate of 0.9% per year andno real growth on same store sales, as retail has always been a competitive sector. Stores openingstrategies must also seek to increase logistic efficiency, with new stores built on a “shoppable DC” model(and old ones being remodeled to meet this new concept) (see Figure 30).

• eCommerce (1P and 3P): In our opinion, this division has the brightest future. As broadband access isincreasing rapidly, mainly on the back of a greater smartphone penetration (as they are getting cheaperand accessible to lower-income classes), we do not see eCommerce growth only by retail sector growth,but from B&M customers who find it more convenient or are now “connected”. As Magalu’s 1P isgaining relevance, and it have just started its 3P operations, we forecast rapid GMV growth (35%CAGR2017-2022) on the back of (i) return on traffic investments, (ii) SKUs expansion, as the companyshould attract more sellers due to its strong Brand name, high fulfillment level and attractive take-rate (wesee Magalu charging 10%), and (iii) innovative measures, like support services, broadband free access forMobile App purchases and conveniences like Mobile Estoquista (which is also value accretive for sellers),attracting customers and resulting in a fast market-share growth, as, in the long run, we see Magalu as arelevant player (not necessarily the leader). Said that, we project a long-term market share of 12% inBrazilian eCommerce GMV. This strong GMV growth is forecasted supported by 3P expected expansion,reaching 30% of Magalu’s eCommerce GMV in 2022, and then growing at a slower pace, to reach 50% in2027. As 3P revenues are only commissions charged from sellers (take-rate), total eCommerce revenuesare expected to present a 18% CAGR2017-2027 (see Figure 31).

9.6 8.4 8.6 9.9 11.0 12.1 13.2 14.2 15.21.9 2.1 2.7 3.4 4.5

5.97.6

9.411.3

0.20.3

0.71.3

2.54.8

11.4 10.4 11.3 13.5 15.8 18.722.0

26.231.3

2014 2015 2016 2017E 2018E 2019E 2020E 2021E 2022E

B&M Direct sales GMV Marketplace GMV

7

Figure 29: eCommerce gaining relevance on Magalu’s gross revenues (BRL bn)

1.9 2.1 2.7 3.4 4.5 6.0 7.7 9.7 11.89.6 8.4 8.6 9.911.0

12.113.2

14.215.2

11.5 10.5 11.413.5

16.019.0

22.025.2

28.3

2014 2015 2016 2017E 2018E 2019E 2020E 2021E 2022E

eCommerce B&MSource: Company’s data, team’s estimates

Figure 30: B&M stores

755 785 799 883 933 983 1,023 1,053 1,073

2014 2015 2016 2017E 2018E 2019E 2020E 2021E 2022E

Conventional Virtual


Figure 31: Magalu’s total GMV (BRL bn)


Bull Base BearRevenues* 17,4% 15,0% 10,0%EBITDA* 23,0% 18,1% 6,2%EBITDA margin** 8,3% 8,1% 7,1%EBIT* 24,6% 19,3% 6,1%EBIT margin** 7,4% 7,2% 6,1%ROIC** 34,1% 33,1% 27,7%EPS* 39,1% 32,6% 18,0%FCFF* 38,3% 30,2% 11,2%P/E** 23,6x 25,4x 32,2xEV/EBITDA** 13,0x 13,7x 16,3xTarget price (BRL)** 128 96 52Upside/Downside 81% 36% -26%

Figure 27: Scenario output

*CAGR 2017-2022**YE18Source: Company’s data, team’s estimates.

Figure 28: Monte Carlo simulation


0

20

40

60

80

100

120

140

SELL HOLD BUY

5%

9% 86%

Figure 26: Price sensitivity (BRL)


Terminal Growth6336% 4,5% 5,5% 6,5% 7,5% 8,5%9,9% 53% 76% 113% 180% 347%10,9% 30% 44% 66% 100% 162%11,9% 13% 23% 36% 56% 88%12,9% 0% 7% 16% 29% 47%13,9% -10% -5% 1% 10% 22%

WAC

C

Figure 25: Valuation comparables

Source: Bloomberg, team’s estimates.

-5x 5x 15x 25x 35x 45x

Avg 18E EV/EBITDA

19E EV/EBITDA18E EV/EBITDALTM EV/EBITDA

eCommerce comparables19E EV/EBITDA18E EV/EBITDALTM EV/EBITDA

B&M comparables


8

Figure 34: Luizacred Highlights (BRL mn)

Equity income as of % of Magalu's net revenues

1.3 1.31.2 1.3

0.91.1

1.82.0

1.713.8%

9.1% 8.6%

12.2%

15.4% 16.7% 17.6%

19.4% 21.7%

1.0% 0.8% 0.7% 0.8% 0.7% 0.8% 1.1% 1.2% 1.0%

-10.0%

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2014 2015 2016 2017E 2018E 2019E 2020E 2021E 2022E

Revenues from financial intermediation (BRL bn) Net margin%


3P to protect margins. With 3P relevance growth, gross margins will be protected from 1P competitivepricing requirements. In our projections, as we see Magalu’s eCommerce gaining relevance on company’s topline, bundled with the fact that prices are not expected to increase, as the company always choose rationalpricing strategies, margins would be expected to decrease. Nonetheless, we also see 3P gaining space ineCommerce revenues, and protecting further gross margin deteriorations for future years, and we forecaststabilization at 29%.

True ominichannel: efficient use of resourses... As we mentioned before, most players are trying to movetheir huge structures into an integrated model, one that Magalu always kept in sight. In all expansions made,and new selling channels opened, Magalu had in mind how they would be “a part of the sum”. That, with alittle help of digitalization, guaranteed that its omnichannel came from the inside (since the beginning),ensuring Magalu’s superior operating leverage, that will sustain greater margin expansion as the company gainscale (see Figure 32).

…and agility to adapt in new scenarios. Even in its worst year, the company was able to manage its logisticsand preserve EBITDA margin (5.2% is still a good margin for a retailer). Nonetheless, in our forecasts, weestimated that Magalu’s expenses, as proportion of net revenues, should decrease from 23% to 21%. As generalexpenses may be diluted by its scale growth, back-office personnel will leave place to technology and itsintegrated logistics might post lower Last-mile delivery expenses, other expenses may increase, mainly on theback of (i) increase in selling force, (ii) increase in marketing expenses and (iii) eCommerce promotionexpenses. In the end, the result will be a total SG&A dilution, increasing Magalu’s EBITDA margin above 9%(see Figure 33).

Complementary services complement results. Magalu’s JVs are not only leverages for its sales, but also veryaccretive for its bottom line, as financing customers can increase sales level with profitable and less riskierportfolios due to its strong partnerships’ expertise. LuizaCred and LuizaSeg have always been great sales andresults drivers for Magalu. On one side, they helped supporting sales, as they offered several financing andinsuring options for customers, being essential during the crisis, as the company could offer great financingterms as it had a highly capitalized bank as a partner. On the other side, these companies also helped increasingoperating and net results, as they turned out to be very profitable.

LuizaCred: Besides helping leverage Magalu’s sales, the financing firm also turned to be a profitable business,mainly due to (i) high interest rates in play, (ii) strong credit scoring selection and funding capital, on the backof Itaú’s expertise, and (iii) alternative financing offerings, for riskier clients, supported by Losango andSantander, LuizaCred was able to support Magalu’s sales and also posted strong earnings, with a solid creditcard and loan portfolio. We expect future maintenance of LuizaCred’s profitability, as a higher transactionvolume and financing services revenues are expected to grow, offsetting lower expected credit portfolio yielddue to lower rates in play (see Figure 34).

LuizaSeg: We see Magalu’s insurer more as a sales driver, once it is value accretive to customers. Asinsurances and other related offered products are more “aggregate” services to products sold by Magalu,LuizaSeg’s importance may rely more on customer satisfaction driver than a profitable business with relevantimpact on bottom lines.

Both companies will be key factors for Magalu’s success, they work as (i) sales leverages, (ii) customersatisfaction and client retention tools and (iii) profitable and margin accretive businesses.

Putting capital to work (or not). Due to its efficient working capital management, backed by its integratedoperation, Magalu can decrease its factoring needs and still leverage on its suppliers. Magalu has been workingon its working capital efficiency, showing lower working capital needs year after year (even during the crisis):although inventories stayed longer in its DCs due to sales volume decrease and needs for logistics usesoptimization, it managed to increase its days of payables outstanding, funding its working capital needs on theback of suppliers. As retail is all about working capital, here is where we find a great amount of value, as weexpect even more cash to be unlocked with working capital management improvements (see Figure 35).

• An increase in inventories turnover… : Thanks to Magalu’s omnichannel strategy, we see a wide spacefor inventories turnover increase as (i) “Retira-Loja” allows the company to spawn its stores inventorythrough online sales, (ii) footprint expansion will increase “pick-up at store” capillarity, (iii) future storeremodeling and new model of stores opened to act as a “mini-DC” will allow less pipeline inventory (asthere will be lesser DC to store transportation needs) and (iv) digital transformation will increase sellingefficiency, as the average selling time fell from 45min to less than 5min.

• …will also result in an increase in terms with suppliers: While the company increase its selling speed, italso increases its purchase needs as it gains (i) larger scale, mainly due to expected expansion (physicalpoints and eCommerce penetration) and (ii) inventory replacement needs to maintain customer servicelevels.

• A key combination to unlock cash: As we decrease cash commitments on inventories, also leveraging onsuppliers, we see consistent cash liberation, that would result in (i) a cash-cushion to increase customerfunding, which would leverage sales, (ii) decrease factoring needs, impacting on company’s interestcharges, and (iii) cash availability for short term investments, increasing interest income.

Figure 35: Working Capital improvementsdecreasing factoring needs

1817

1312 1400 1275 1203 1082894

632

285301

-106 -187

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2014 2015 2016 2017E 2018E 2019E 2020E 2021E 2022E

Working capital Working capital, adjusted for factoring Factored receivables


Figure 33: EBITDA margins

6.2%

5.2%

7.5% 8.0% 8.1% 8.4%

9.0% 9.3% 9.2%

3.9%

2.1%

4.3%

5.9% 6.6% 6.9%

7.5% 7.9% 8.0%

2014 2015 2016 2017E 2018E 2019E 2020E 2021E 2022E

EBITDA margin Adjusted EBITDA margin


Figure 32: Operating leverage

0% 2% 4% 6% 8%

10% 12% 14% 16% 18%

1.0x 2.0x 3.0x 4.0x



9

Figure 39: Risk matrix


OP1 MR1 CR1

MR2

CR2

Figure 40: Fiscal deficit predictions (BRL bn) keep getting worse

-139 -129

-65

10102

128105

75

-33

-111-156 -159 -159

-139

-65

2010A 2012A 2014A 2016A 2018E 2020EPrior Trajectory New Trajectory

Source: Brazilian federal government

Figure 38: Increasing pay-out backed byhigher cash generation


1.3% -0.7% 0.9% 2.6% 4.0% 4.5% 5.1% 5.3% 5.3%

-20%

0%

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(0.2)

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2014 2015 2016 2017E 2018E 2019E 2020E 2021E 2022E

Net income (BRL bn) Net margin Payout

Tomorrow is a new day. Higher CapEx is expected in the short term to help Magalu complete itstransformation. Capital expenditures have been low in recent years, as Brazil was passing through its worstrecession and companies (Magalu included) had no great appetite for expansion. The company dedicated itsinvestments on maintenance and technology development, motivated by its digital transformation proposal,which would also bring efficiency results (very welcomed during the crisis), reflecting in a greater EBITDAmargin. From now on, Magalu should have a heavy investment need for: (i) stores remodeling, (ii) new storesopening, (iii) logistics’ improvements, solutions as fulfillment implementation, and (iv) tech CapEx, forLuizaLabs projects, eCommerce improvements, increasing purchase experience and Marketplace systemsCapEx, as we expect a huge sellers, thus SKUs, increase. After the aggressive expansion, CapEx should returnto lower levels in proportion of revenues (see Figure 36).

An investment in integration pays the best interests. When the transformation is done, Magalu will be a newcompany, with higher margins and lesser investment needs (due to its funded working capital and higher cashgeneration supporting CapEx). Magalu already presented attractive returns for its shareholders and, even in2015, the company managed to return 14% over the invested capital. When the new phase comes, as more cashgeneration is expected, the company will be able to support its investment needs and generate stronger returns(see Figure 37).

The waiting might come to an end. Magalu, since its IPO, held its pay-out rates in the minimum requiredlevel (25%). In our forecasts, the company maintains this policy during next two years heavier investmentcycle. Nonetheless, after 2019, tying higher cash generation to a lower leveraged balance, profitability mayincrease significantly and, as cash generation might cover investment needs, we see Magalu posting generousdividends to its investors, rewarding those who believed in it (see Figure 38).

INVESTMENT RISKS

The main threats to our recommendation include macroeconomic, market and operational risks. Eventhough some could be mitigated by the company, each one is assigned with probabilities and potentialimpacts (see Figure 39).

Further macro deterioration (MR1). A slower than expected economic recovery could compromise ourrecommendation as it would weaken top line growth and harm margins. We see three main risks for theeconomic recovery: (i) the delay on the approval of key macroeconomic reforms, (ii) the development of thecorruption investigations and (iii) the results of the 2018 general elections. GDP growth ahead will be heavilyinfluenced by the recent interest rate cuts. The sustainability of these lower rates lays on the back of themaintenance of low inflation and the approval of further reforms, especially the social security one. We see thecorruption scandals as the main factor delaying such reforms, but the recent approval of a higher fiscal deficitand the creation of TLP (a new long-term interest rate) proved the government is still muscular enough toapprove at least a diluted version of the social security reform. The development of the 2018 presidentialelection must also be kept in sight. The uncertainty arises from the possibility that the former BrazilianPresident, Lula, who currently leads the polls, may be convicted for corruption crimes just a few weeks beforethe elections.

The insatiable lion (MR2). The government might be unable to approve economic reforms addressing thefiscal deficit trajectory (see Figure 40). In this case, it may try to boost its revenues by: (i) creating new taxes,(ii) rising the pre-existing taxes rates and (iii) revoking tax benefit programs. Increasing taxes affect thatMagalu’s net revenues directly (ICMS, ISS and PIS e COFINS) would be a highly unpopular measure and,therefore, we believe won’t take place. Besides that, Magazine Luiza takes just little benefit from taxexemptions programs such as “Substituição Tributária” and “Lei do Bem”, thus, wouldn’t be severely affectedby such measures.

Outsiders may be landing strong (CR1). Amazon is still a small player in the Brazilian market with an under1% market share, but things are expected to change sooner than later. The company has so far played itsexpansion playbook in Brazil (for further information see Appendix 20), initially selling only Books andeBooks besides offering its eReader Kindle, directly. The company also holds a marketplace, which has justexpanded to electronic appliances. Such expansion was expected to happen earlier this year, but was postponedfor two main reasons: (i) Amazon had to learn how to adapt its low margin operation to a market in whichpurchase installment is very common and, therefore, requires factoring (which due to high interest ratescompromises profitability) to avoid longer days of receivables (see Figures 41 and 42), (ii) due to issuesregarding the service levels in its book marketplace (mainly logistics and after-sales). The company recentlyintensified its hiring process, as it hired about 500 people over the last months, pointing out to a mainly organicentrance strategy. In our view, Magalu is the player that will be less affected by Amazon’s arrival due to threekey reasons: (i) Magalu’s marketplace integration and additional services are already being developed,offsetting any kind of disadvantage towards any other marketplace players, (ii) Magalu has a strong brandrecognition built over its superior service levels made possible by its fully integrated omnichannel, (iii)Magalu’s well developed footprint sets up an important costs dilution opportunity unavailable to pure onlineretailers as it can use its stores as shoppable distributions centers.

No such thing as a free lunch (CR2). Mercado Libre started, on 2Q17, a free shipping policy in Brazil withthe intention of leveraging its sales volume and increasing traffic on its website. Any transaction priced aboveBRL120 value is eligible to free shipping, besides that, as customers perform more purchases, lower ticketitems will be suitable for free shipping. The company’s Brazilian operation 2Q17 net revenues were about 60%above the realized on 2Q16 on a FX neutral basis, while Magalu recorded a 56% growth. By comparing the

Figure 36: Strong investments on digital transformation...

152 158124

449

328 353383 369

311

1.55% 1.76% 1.30%

4.03%

2.53% 2.34% 2.20% 1.85%

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2014 2015 2016 2017E 2018E 2019E 2020E 2021E 2022E

CapEx Asof%ofnetrevenueSource: Company’s data, team’s estimates

Figure 37: ...will result in robust returns


19%

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14% 15% 22% 25%

33% 41%

45%

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2014 2015 2016 2017E 2018E 2019E 2020E 2021E 2022E

Return on equity Return on invested capital (EBIT)


Figure 42: ...But Not at Low Costs (BRL mn)

351

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280290300310320330340350360

VVAR B2W MGLU

Cost of Factoring As % of Net RevenuesSource: MELI’s data, team’s estimates

10

Figure 43. MELI’s free shipping : sales growthand margins reduction

361

579

216

386

2Q16 2Q17

Net Revenues (mn) Total Costs (mn) Contribution Margin

40,26% 33,29%

Source: Companies data and team’s estimates.

2016 Magalu Via Varejo B2WMaximum Remuneration (R$mn) 3.011.644 undisclosed undisclosedMinimum Remuneration (R$mn) 2.089.106 undisclosed undisclosedTotal Remuneration (R$mn) 11.461.999 29.727.536 24.962.025Number of Members 4 7 8Average Remuneration (R$mn) 2.865.500 4.295.887 3.055.327

Figure 44.Executives’ remuneration

Source: Companies data

same periods mentioned above, Mercado Libre’s Brazilian operation presented skyrocketing costs, translatinginto an increase of ~80%, in a FX neutral basis, of its Brazilian operation direct costs, resulting on a 700bpsdecrease on the company’s contribution margin (see Figure 43). That said, even though we believe free-freightwill continue to be offered to clients in special conditions, such as Magalu’s strategy of providing free-freightfor app purchases, we don’t see competitors offering indiscriminately free-freight as it is a big margin corrosivemeasure.

A bridge too far? (OR1) Magalu’s next crusade is the development and implementation of a fully integrated3P business model with additional services. The company aims to implement a model including storage andshipment (or the pick-up at store option) of its sellers' products. The rationale behind this goal is that the rangeof services offered is one of the mostly valued factors by sellers, therefore, with a further developedmarketplace platform, the company would be able to attract a greater number of sellers, diversifying itsportfolio and allowing a higher take rate charge. In a scenario in which the company fails to deliver itspromises, our upside would be impaired. In any case, we see the concretization of this scenario as highlyunlikely due to three main factors: (i) so far, the management has been able to deliver a perfectly executeddigital transformation and recently hired Simon Olson, former Head of New Business at Google Latin America,with the mission of acquiring tech startups, (ii) LuizaLabs offers the necessary knowhow for the developmentand implementation of marketplace related technology and (iii) the company’s recent follow on raised thenecessary resources for the investments required in this process.

CORPORATE GOVERNANCE

Magazine Luiza is part of “Novo Mercado”, the highest governance level in B3. It has an experiencedmanagement team in B&M and eCommerce, a board with diverse range of experiences that complement eachother, modest executives’ remuneration, and no risks of dilution based on the stock option’s exercise, butcompensation of the owners that held board seats falls short.

Decades of experience and track record brings potential to successful execution. All top level executivesare long time insiders, and we believe they are crucial as culture maintainers, especially during the process ofsolidifying values and the innovative DNA, one of their core competitive advantages. Recently, the companyhired Simon Olson, former Head of New Business at Google Latin America, to lead M&A efforts in acquiringtech companies. Frederico Trajano (Magalu’s CEO), alongside Simon, is heading the digital transformation ofMagalu.

Quality is the best business plan. Only 37.5% of board seats are held by independent counselors, which couldopen room for a biased decision process. We see this risk being offset by the counselors' expertises. They arerenowned authors on Corporate Governance issues and Executive program professors. Furthermore, Magalu’sCEO is not a board member, avoiding any potential conflict of interests (for further information we invite youto read Appendix 21 and 22).

Committee. Magalu has five committees: Fiscal, Compliance, Finance, People and Strategy. The companydoesn’t have a Remuneration Committee, which can bias its compensation decisions, but we see this beingoffset due to two main reasons: (i) the CEO is not a member of any committee and (ii) the averageremuneration of the executive directors (51.6% of the total is variable) is well below that of its competitors (seeFigure 44).

Not all the best practices. Magalu has double misalignment: between different shareholders of the companyand in terms of market benchmark. With the exception of 2015, the company has distributed dividends over thelast years, composing an average payout of 25% plus interests on own equity. In 2015, during the crisis’ peak,the shareholders suffered alongside the company, as it had a negative bottom line and didn’t distribute anycapital. But this was only true for the minority shareholders, since the family controllers, through the board’sremuneration, received a millionaire annual compensation, each, on average, 8 times higher than that of itscomps (see Figure 45).

Figure 45. Board’s Compensation comparison

Source: Companies data

2016 Magalu VVAR B2WNumber of Members 7 9 6Independent Members 2 2 3Compensation per Member 825.603 100.741 120.000

Figure 46: News Flow, Historical Price andProjections (BRL)

-10.00

10.00

30.00

50.00

70.00

90.00

110.00

May-2011 Oct-2011 Mar-2012 Aug-2012 Jan-2013 Jun-2013 Nov-2013 Apr-2014 Sep-2014 Feb-2015 Jul-2015 Dec-2015 May-2016 Oct-2016 Mar-2017 Aug-2017 Jan-2018 Jun-2018

BRL 70.72

05/11Joins BM&F

Bovespa

06/11Acquisition of Lojas do

Bau da Felicidade

08/11Added to S&P Global BMI

05/12Added to Brazil

IBRX Index

06/13Kinea acquired Distribution

Center from Magalu

09/13Equity Buyback of5,000,000 shares



10/15Stock Split

(1:8)

04/16Equity Buyback of

350,000 shares

09/17Stock Split

(8:1)and Follow-On

10/17Amazon announces

marketplace for electronic and

appliances in Brazil

05/17Audio JBS

BRL 128.00

BRL 96.00

BRL 52.00

VVAR B2W MGLU AMZNReceivables, mn 2.964 689 575 11.461Net Revenues, mn 19.819 8.601 9.509 135.987Days of Receivables 55 29 22 31Factoring, mn 2.340* 2.414 1.587 0Adjusted Days of Receivables 98 132 83 31

Figure 41: Company’s do manage to achieve interesting days of receivables...

Source: Companies data and team’s estimates.


11

Appendix 1: Income Statements Consolidated P&L

eCommerce - Assumptions

B&M - Assumptionsn B&M - Buil-ups 2014 2015 2016 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E

#Stores 755 785 799 883 933 983 1.023 1.053 1.073 1.083 1.093 1.103 1.113 1.123 % YoY 4% 2% 11% 6% 5% 4% 3% 2% 1% 1% 1% 1% 1%

Total area (m²) 481.726 498.570 501.319 548.280 569.778 591.088 607.910 620.291 625.656 626.723 627.782 628.832 629.875 630.910 % YoY 3% 1% 9% 4% 4% 3% 2% 1% 0% 0% 0% 0% 0%

Gross revenues 9.562 8.368 8.562 9.867 10.972 12.102 13.174 14.221 15.190 15.939 16.692 17.471 18.285 19.135 % YoY -12% 2% 15% 11% 10% 9% 8% 7% 5% 5% 5% 5% 5%

Revenues per m² (BRL/m²) 19.850 16.784 17.080 17.996 19.257 20.475 21.671 22.927 24.278 25.432 26.589 27.783 29.029 30.330 % YoY -15% 2% 5% 7% 6% 6% 6% 6% 5% 5% 4% 4% 4%

Same store sales 15% -15% 0% 5% 7% 6% 6% 6% 6% 5% 5% 4% 4% 4%bps YoY (30)bps 15bps 5 bps 2 bps (1)bps (0)bps (0)bps 0 bps (1)bps (0)bps (0)bps (0)bps (0)bps

n eCommerce - Buil-ups 2014 2015 2016 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027EeCommerce in BrazilTotal GMV (BRL bn) 36 41 44 49 60 73 90 109 134 155 180 209 242 281

% YoY 15% 8% 10% 23% 23% 22% 22% 22% 16% 16% 16% 16% 16%Average ticket per order 346 388 418 431 449 468 487 507 527 548 570 593 616 641

% YoY 12% 8% 3% 4% 4% 4% 4% 4% 4% 4% 4% 4% 4%Magazine Luiza's eCommerce channelGMV 1.876 2.059 2.724 3.598 4.860 6.568 8.855 11.939 16.096 18.672 21.659 25.125 29.145 33.809

% YoY 10% 32% 32% 35% 35% 35% 35% 35% 16% 16% 16% 16% 16%Market share 5% 5% 6% 7% 8% 9% 10% 11% 12% 12% 12% 12% 12% 12%

bps YoY (0,3)bps 1,1 bps 1,2 bps 0,8 bps 0,8 bps 0,9 bps 1,0 bps 1,1 bps - bps - bps - bps - bps - bps 1P GMV 1.876 2.059 2.724 3.418 4.512 5.896 7.558 9.436 11.267 12.468 13.688 14.884 15.988 16.905

% of total 100% 100% 100% 95% 93% 90% 85% 79% 70% 67% 63% 59% 55% 50%3P GMV - - - 180 348 672 1.297 2.503 4.829 6.204 7.971 10.241 13.157 16.905

as of % of total 0% 0% 0% 5% 7% 10% 15% 21% 30% 33% 37% 41% 45% 50%Take rate 0% 0% 0% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10%Marketplace gross revenues - - - 18 35 67 130 250 483 620 797 1.024 1.316 1.690 eCommerce gross revenues 1.876 2.059 2.724 3.436 4.547 5.963 7.688 9.686 11.750 13.088 14.486 15.908 17.304 18.595

% YoY 10% 32% 26% 32% 31% 29% 26% 21% 11% 11% 10% 9% 7%

n Income statement 2014 2015 2016 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E CAGR 2017-2027

B&M - Gross revenues 9.562 8.368 8.562 9.867 10.972 12.102 13.174 14.221 15.190 15.939 16.692 17.471 18.285 19.135 7,6%% YoY -12% 2% 15% 11% 10% 9% 8% 7% 5% 5% 5% 5% 5%

eCommerce - Gross revenues 1.876 2.059 2.724 3.436 4.547 5.963 7.688 9.686 11.750 13.088 14.486 15.908 17.304 18.595 18,4%% YoY 10% 32% 26% 32% 31% 29% 26% 21% 11% 11% 10% 9% 7%

Others 66 71 86 44 45 48 48 48 48 48 48 48 48 48 1,0%Total gross revenues 11.505 10.498 11.372 13.346 15.565 18.114 20.910 23.956 26.988 29.075 31.226 33.427 35.637 37.779 11,3%

% YoY -9% 8% 17% 17% 16% 15% 15% 13% 8% 7% 7% 7% 6%(-)Deductions (1.725) (1.520) (1.863) (2.202) (2.584) (3.025) (3.513) (4.048) (4.588) (4.943) (5.308) (5.683) (6.058) (6.422) 12,0%

% of Rev. 15% 14% 16% 17% 17% 17% 17% 17% 17% 17% 17% 17% 17% 17%Net revenues 9.779 8.978 9.509 11.144 12.981 15.089 17.398 19.907 22.400 24.132 25.918 27.745 29.579 31.356 11,2%

% YoY -8% 6% 17% 16% 16% 15% 14% 13% 8% 7% 7% 7% 6%COGS (7.087) (6.400) (6.586) (7.745) (9.060) (10.577) (12.247) (14.074) (15.904) (17.134) (18.401) (19.699) (21.001) (22.263) 11,4%

% YoY -10% 3% 18% 17% 17% 16% 15% 13% 8% 7% 7% 7% 6%Gross profit 2.692 2.579 2.923 3.399 3.921 4.512 5.150 5.833 6.496 6.998 7.516 8.046 8.578 9.093 10,6%

Margin % 28% 29% 31% 31% 30% 30% 30% 29% 29% 29% 29% 29% 29% 29%SG&A (2.187) (2.190) (2.271) (2.597) (2.956) (3.358) (3.785) (4.234) (4.659) (5.020) (5.391) (5.771) (6.152) (6.522) 9,9%Equity income 100 76 63 95 88 117 194 243 228 250 329 342 276 300 12,7%

as of % of net revenues 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1%EBITDA 605 465 715 897 1.053 1.272 1.560 1.842 2.064 2.229 2.454 2.617 2.702 2.871 12,6%

Margin % 6% 5% 8% 8% 8% 8% 9% 9% 9% 9% 9% 9% 9% 9%(-)Depreciation (114) (126) (134) (121) (119) (137) (156) (175) (190) (206) (223) (243) (265) (264) 8,5%EBIT 491 339 581 776 934 1.135 1.404 1.667 1.874 2.023 2.231 2.374 2.437 2.607 13,2%

Margin % 5% 4% 6% 7% 7% 8% 8% 8% 8% 8% 9% 9% 8% 8%Net financial results (361) (486) (504) (384) (187) (173) (170) (183) (186) (174) (186) (199) (213) (229) EBT 130 (147) 77 393 747 962 1.234 1.485 1.689 1.849 2.045 2.175 2.224 2.379 20,1%(-)Taxes (2) 82 9 (101) (224) (287) (354) (422) (497) (544) (583) (623) (662) (707) 21,7%

Effective tax rate % 1% 55% -12% 26% 30% 30% 29% 28% 29% 29% 29% 29% 30% 30%Net income 129 (66) 87 291 523 675 881 1.062 1.192 1.305 1.462 1.552 1.562 1.672 19,5%

Margin % 1% -1% 1% 3% 4% 4% 5% 5% 5% 5% 6% 6% 5% 5%% YoY -151% -232% 236% 79% 29% 30% 21% 12% 9% 12% 6% 1% 7%


12

Appendix 3: Cash Flow Statement

Appendix 2: Balance Sheetn Balance sheet 2014 2015 2016 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E

Cash and equivalents 412 617 599 1.558 1.193 1.200 1.200 1.354 1.763 1.918 2.067 2.202 2.311 2.365 Financial assets 451 498 819 597 597 597 597 597 597 597 597 597 597 597 Trade accounts receivables 618 435 581 647 785 943 1.116 1.304 1.491 1.607 1.725 1.847 1.969 2.088 Inventory 1.473 1.353 1.597 1.698 1.875 2.066 2.259 2.451 2.614 2.817 3.025 3.238 3.452 3.660 Other current assets 442 457 324 382 422 468 519 574 628 666 705 745 786 825

Current assets 3.396 3.361 3.920 4.881 4.872 5.274 5.691 6.280 7.094 7.604 8.120 8.630 9.115 9.534 Other long term assets 520 759 814 760 760 760 760 760 760 760 760 760 760 760 Fixed assets 1.336 1.383 1.367 1.726 1.935 2.151 2.378 2.572 2.693 2.799 2.926 3.078 3.256 3.491

Investments 281 297 294 312 312 312 312 312 312 312 312 312 312 312 Property plant and equipment566 579 560 915 1.176 1.444 1.724 1.971 2.144 2.303 2.483 2.687 2.918 3.180 Intangible 489 507 513 500 447 394 342 289 237 184 131 79 26 -

Long term assets 1.855 2.141 2.181 2.487 2.695 2.911 3.138 3.332 3.453 3.559 3.687 3.838 4.016 4.252 Total Assets 5.251 5.502 6.101 7.368 7.567 8.185 8.829 9.612 10.548 11.164 11.806 12.468 13.132 13.786

Suppliers 1.790 1.894 2.365 2.865 3.399 4.025 4.728 5.512 6.318 6.807 7.310 7.826 8.343 8.844 Short term debt 591 568 838 770 371 58 8 8 - - - - - - Revolving credit - - - - - - - - - - - - - - Labor obligations 167 154 188 214 249 289 334 382 430 463 497 532 567 601 Other short term liabilities 283 258 281 312 320 328 338 348 358 365 373 380 388 395

Short term liabilities 2.831 2.875 3.672 4.161 4.339 4.701 5.408 6.250 7.106 7.635 8.180 8.738 9.298 9.841 Long term debt 1.120 1.255 1.011 444 74 16 8 - - - - - - - Other long term liabilities 631 797 796 778 778 778 778 778 778 778 778 778 778 778

Long term liabilities 1.752 2.052 1.807 1.223 852 794 786 778 778 778 778 778 778 778 Total Liabilities 4.583 4.926 5.479 5.384 5.191 5.495 6.194 7.028 7.884 8.413 8.958 9.516 10.076 10.619 Shareholders' equity 668 576 622 1.985 2.377 2.690 2.635 2.584 2.663 2.750 2.848 2.951 3.055 3.167

Paid-in capital 607 607 607 1.751 1.751 1.751 1.751 1.751 1.751 1.751 1.751 1.751 1.751 1.751 Legal reserves 16 16 20 35 61 95 139 192 252 317 390 468 546 629 Retained earnings - (50) - 204 570 849 750 646 666 688 712 738 764 792 Others 45 3 (5) (5) (5) (5) (5) (5) (5) (5) (5) (5) (5) (5)

Liabilities + Shareholders' Equity5.251 5.502 6.101 7.368 7.567 8.185 8.829 9.612 10.548 11.164 11.806 12.468 13.132 13.786

n Cashflow statement 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027ENet income 291 523 675 881 1.062 1.192 1.305 1.462 1.552 1.562 1.672 (+) Depreciation and amortization 121 119 137 156 175 190 206 223 243 265 264 (+/-) Change in working capital 331 222 280 340 407 459 173 179 183 184 178 (+/-) Change in other assets / liabilities 258 - - - - - - - - - -

Cashflow from operating activities 1.001 864 1.091 1.377 1.644 1.841 1.684 1.864 1.978 2.010 2.114

CapEx, net (480) (328) (353) (383) (369) (311) (312) (351) (394) (444) (499) Cashflow from investing activities (480) (328) (353) (383) (369) (311) (312) (351) (394) (444) (499)

Debt withdrawal (repayment) (634) (770) (371) (58) (8) (8) - - - - - Dividends (73) (131) (169) (220) (266) (298) (326) (365) (388) (390) (418) Other changes in shareholders' equity 1.145 - - - - - - - - - -

Cashflow from financing activities 438 (901) (539) (278) (274) (306) (326) (365) (388) (390) (418)

Begining cash position 599 1.558 1.193 1.200 1.200 1.354 1.763 1.918 2.067 2.202 2.311 Change in cash position 959 (365) 199 716 1.002 1.224 1.046 1.148 1.195 1.176 1.197

Cash position before revolving credit other dividends 1.558 1.193 1.393 1.916 2.202 2.578 2.810 3.066 3.262 3.378 3.508 (+/-)Revolving credit withdrawal (repayment) - - - - - - - - - - - (-)Extraordinary divide - - (193) (716) (848) (815) (892) (999) (1.060) (1.067) (1.142) Ending cash position 1.558 1.193 1.200 1.200 1.354 1.763 1.918 2.067 2.202 2.311 2.365


13

Appendix 4: Discounted Cash Flow

Appendix 5: WACC DecompositionBeta calculationPeer companies Currency Tax rate TICKER Bloomberg beta Debt to Equity (mn), capitalization Unlevered Beta

MktCap Debt D/E StructureAmazon USD 35% AMZN US 1,14 464.479 23.619 5,1% 4,8% 1,099Mercado Libre USD 35% MELI US 1,41 10.743 325 3,0% 2,9% 1,378

eCommerce 4,1% 3,9% 1,238

Best Buy USD 35% BBY US 1,05 18.844 1.347 7,1% 6,7% 1,004Lojas Americanas BRL 34% LAME4 0,83 25.322 17.145 67,7% 40,4% 0,572Via Varejo BRL 34% VVAR11 1,091 3.558 6.239 175,3% 63,7% 0,506

Electronics 83,4% 36,9% 0,694

Re-levered BetaMagazine Luiza BRL 34% MGLU3 1,31 54% 35% 0,966

n Free cashflow analysis 2014 2015 2016 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027EEBITDA pro-forma 605 465 715 897 1.053 1.272 1.560 1.842 2.064 2.229 2.454 2.617 2.702 2.871 (+/-) Adjustments (319) (351) (372) (329) (289) (342) (442) (507) (506) (545) (647) (682) (640) (686)

(-)Cost of factoring (220) (275) (310) (234) (201) (225) (247) (264) (278) (295) (318) (340) (364) (387) (-)Equity income (100) (76) (63) (95) (88) (117) (194) (243) (228) (250) (329) (342) (276) (300)

EBITDA adj. 286 114 342 568 764 929 1.118 1.335 1.559 1.684 1.808 1.935 2.062 2.185 (-)Depreciation and amortization (114) (126) (134) (121) (119) (137) (156) (175) (190) (206) (223) (243) (265) (264) (=)EBIT adj. 172 (12) 209 448 645 792 962 1.161 1.369 1.478 1.584 1.692 1.797 1.921

Marginal tax rate 34% 34% 34% 34% 34% 34% 34% 34% 34% 34% 34% 34% 34% 34%NOPAT adj. 113 (8) 138 295 425 523 635 766 903 975 1.046 1.117 1.186 1.268

(+)Equity income 100 76 63 95 88 117 194 243 228 250 329 342 276 300 (+)Depreciation and amortization 114 126 134 121 119 137 156 175 190 206 223 243 265 264 (+/-)Change in working capital - 341 248 331 222 280 340 407 459 173 179 183 184 178 (-)CapEx (152) (158) (124) (449) (328) (353) (383) (369) (311) (312) (351) (394) (444) (499)

Free cashflow to firm 175 376 458 393 527 704 942 1.222 1.469 1.293 1.426 1.490 1.467 1.510 % YoY 115% 22% -14% 34% 34% 34% 30% 20% -12% 10% 4% -2% 3%

Terminal Value 30.028 Terminal Growth Rate 6,5%WACC 11,9%

FCFF MarketYE18 Value

Enterprise value 17.445 14.470 Total debt (18E) 444 1.382 (-)Cash (18E) (1.193) (265)

Net debt (cash) (749) 1.117 Equity value 18.194 13.353

Shares outstanding (#mn) 188,8 188,8 Price per share 96 70,72

Implied upside 36%

Cost of Equity (Ke) Notes:Risk free rate¹ 2,2% 1. Treasury bondMarket risk premium² 5,6% 2. Source: IbbostonRe-levered beta 1,310 3. EMBI+Country risk premium³ 2,4% 4. as of 2018EInflation differential4 2,0%Cost of equity USD 11,9%Cost of equity BRL 14,2%

Cost of Debt (Kd) Notes:CDI¹ 7,4% 1. as of 2018E averageCompany's effective interest rate² 18,6% 2. as of 06/30/2017, LTMSpread over CDI³ 8,2% 3. as of 2017E averageCost of debt¹ 11,5%

Weighted Average Cost of Capital (WACC) Notes:Ke 14,2% 1. Debt / Total Cap.Kd 11,5%Capital structure¹ 35,0%Maginal tax rate 34,0%WACC 11,9%


14

n Margins% 2014 2015 2016 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027EGross margin 27,5% 28,7% 30,7% 30,5% 30,2% 29,9% 29,6% 29,3% 29,0% 29,0% 29,0% 29,0% 29,0% 29,0%EBITDA margin 6,2% 5,2% 7,5% 8,0% 8,1% 8,4% 9,0% 9,3% 9,2% 9,2% 9,5% 9,4% 9,1% 9,2%EBITDA, adj. margin 3,9% 2,1% 4,3% 5,9% 6,6% 6,9% 7,5% 7,9% 8,0% 8,0% 8,2% 8,2% 7,9% 7,9%EBIT margin 5,0% 3,8% 6,1% 7,0% 7,2% 7,5% 8,1% 8,4% 8,4% 8,4% 8,6% 8,6% 8,2% 8,3%Net margin 1,3% -0,7% 0,9% 2,6% 4,0% 4,5% 5,1% 5,3% 5,3% 5,4% 5,6% 5,6% 5,3% 5,3%

n Profitability 2014 2015 2016 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027EROA 2,4% -1,2% 1,4% 4,0% 6,9% 8,2% 10,0% 11,1% 11,3% 11,7% 12,4% 12,4% 11,9% 12,1%ROE 19,2% -11,4% 13,9% 14,7% 22,0% 25,1% 33,4% 41,1% 44,8% 47,5% 51,3% 52,6% 51,1% 52,8%ROIC (D+E) 20,6% 14,1% 23,5% 24,3% 33,1% 41,1% 53,0% 64,3% 70,4% 73,6% 78,3% 80,4% 79,8% 82,3%ROIC (Wk+Fixed assets) 10,4% 2,9% 15,4% 30,0% 41,1% 53,9% 76,3% 117,6% 234,2% 298,2% 381,7% 448,5% 465,1% 417,0%

n Solvency 2014 2015 2016 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027ENet debt (cash) / EBITDA 1,1x 1,2x 0,2x -1,4x -1,7x -1,8x -1,6x -1,5x -1,6x -1,6x -1,5x -1,5x -1,5x -1,5xAdjusted Net debt (cash) / EBITDA 3,6x 4,2x 2,4x 0,6x 0,2x -0,1x -0,1x -0,2x -0,4x -0,3x -0,3x -0,3x -0,3x -0,2xCurrent ratio 1,2x 1,2x 1,1x 1,2x 1,1x 1,1x 1,1x 1,0x 1,0x 1,0x 1,0x 1,0x 1,0x 1,0xInterest coverage ratio 1,1x 0,5x 0,9x 1,8x 3,3x 4,5x 5,6x 6,3x 6,7x 6,9x 7,0x 7,0x 6,7x 6,7xCash coverage ratio 1,3x 0,8x 1,2x 2,0x 3,7x 5,0x 6,2x 6,9x 7,4x 7,5x 7,7x 7,7x 7,4x 7,4xD / E 2,56x 3,17x 2,97x 0,61x 0,19x 0,03x 0,01x 0,00x 0,00x 0,00x 0,00x 0,00x 0,00x 0,00x

n Market Ratios 2014 2015 2016 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027EEV / EBITDA 23,8x 31,0x 20,1x 16,1x 13,7x 11,3x 9,2x 7,8x 7,0x 6,5x 5,9x 5,5x 5,3x 5,0xEV / Sales 1,5x 1,6x 1,5x 1,3x 1,1x 1,0x 0,8x 0,7x 0,6x 0,6x 0,6x 0,5x 0,5x 0,5xP / E 103,3x N.M. 153,4x 45,6x 25,4x 19,7x 15,1x 12,5x 11,1x 10,2x 9,1x 8,6x 8,5x 7,9xP / BV 19,9x 23,1x 21,4x 6,7x 5,6x 4,9x 5,0x 5,1x 5,0x 4,8x 4,7x 4,5x 4,3x 4,2xDividend yield 0,2% N.M. 0,2% 0,5% 1,0% 2,7% 7,0% 8,4% 8,4% 9,2% 10,3% 10,9% 11,0% 11,7%EPS (BRL) 0,68 N.M. 0,46 1,55 2,78 3,59 4,69 5,66 6,35 6,95 7,78 8,26 8,32 8,90 FCFF yield 1,2% 2,6% 3,2% 2,7% 3,7% 4,9% 6,5% 8,5% 10,2% 9,0% 9,9% 10,3% 10,2% 10,5%

n DuPont Analysis 2014 2015 2016 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027EROE 19% -11% 14% 15% 22% 25% 33% 41% 45% 47% 51% 53% 51% 53%Financial leverage 7,9x 9,6x 9,8x 3,7x 3,2x 3,0x 3,4x 3,7x 4,0x 4,1x 4,1x 4,2x 4,3x 4,4xROA 2% -1% 1% 4% 7% 8% 10% 11% 11% 12% 12% 12% 12% 12%Assets turnover 1,9x 1,6x 1,6x 1,5x 1,7x 1,8x 2,0x 2,1x 2,1x 2,2x 2,2x 2,2x 2,3x 2,3xNet margin 1% -1% 1% 3% 4% 4% 5% 5% 5% 5% 6% 6% 5% 5%

Appendix 6: Key Financial Indicators

Term MeaningOmnichannel Multi sale channel, for e.g.: eCommerce, app and B&M storesLast Mile Delivery The deliver is made at the client's placeB&M Offline retail stores

FGTSLength-of-Service Guarantee Fund. At the beginning of each month companies deposit an amount corresponding to 8% of each employee salary. Employees can only withdraw their FGTS in special occasions.

1P Online eCommerce own products' sales3P Third party products sales

Mobile Pin PadCheckout and payment platform, preventing the consumer from having to go to the cashier for card payments

Mobile Delivery Integrates the more than 1000 carriers by a same operating system so clients are able to track in real-time their purchases until final destination.

Mobile Inventories Responsible for all inventory controlMobile Sales Sellers can consult offers, technical specifications and also process sales through a mobile gadget"Pick-up at store" The act of buying online and picking the product up at a physical store.Electronics and Appliances e.g.: smartphones, computer, refrigerator, televisions, dishwasher.

Appendix 7: Glossary


15

Appendix 8: Macroeconomic Assumptions

Appendix 9: Multiple Analysis

n Macroeconomic assumption 2014 2015 2016 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027EBrazil

IPCA (YoY%) 6,4% 10,7% 6,3% 3,0% 4,0% 4,3% 4,0% 4,0% 4,0% 4,0% 4,0% 4,0% 4,0% 4,0%GDP (YoY%) 0,5% -3,8% -3,6% 0,7% 2,5% 2,5% 2,5% 2,5% 2,5% 2,5% 2,5% 2,5% 2,5% 2,5%Selic (year end) 11,8% 14,3% 13,8% 7,0% 7,0% 8,0% 8,0% 8,0% 8,0% 8,0% 8,0% 8,0% 8,0% 8,0%

Average 13,0% 14,0% 10,3% 7,0% 7,5% 8,0% 8,0% 8,0% 8,0% 8,0% 8,0% 8,0% 8,0%Selic over CDI spread 0,1% 0,1% 0,1% 0,1% 0,1% 0,1% 0,1% 0,1% 0,1% 0,1% 0,1% 0,1% 0,1% 0,1%CDI (year end) 11,6% 14,1% 13,6% 6,9% 6,9% 7,9% 7,9% 7,9% 7,9% 7,9% 7,9% 7,9% 7,9% 7,9%

Average 12,9% 13,9% 10,2% 6,9% 7,4% 7,9% 7,9% 7,9% 7,9% 7,9% 7,9% 7,9% 7,9%

USACPI (YoY%) 1,6% 0,1% 1,3% 2,0% 2,0% 2,2% 2,0% 2,0% 2,0% 2,0% 2,0% 2,0% 2,0% 2,0%GDP (YoY%) 2,4% 2,6% 1,6% 2,4% 2,1% 2,0% 1,8% 1,8% 1,8% 1,8% 1,8% 1,8% 1,8% 1,8%FED target interest rate (year end) 0,0% 0,4% 0,6% 1,4% 2,1% 2,7% 2,9% 2,8% 2,8% 2,8% 2,8% 2,8% 2,8% 2,8%

Brazil x USACDS (5yr) 202 bps EMBI+ 241 bps

P / E EV / EBITDA EV / SALESCompany Ticker Market Cap Currency LTM 2018E 2019E LTM 2018E 2019E LTM 2018E 2019E

EV/EBITDAMagazine MGLU3 13.280,6 BRL 63,4x 31,0x 26,0x 18,0x 13,8x 12,6x 1,4x 1,2x 1,1xMagazine 13.280,6 BRL 63,4x 25,4x 19,7x 18,0x 13,7x 11,3x 1,4x 0,9x 0,8x

B&MEV/EBITDA

Best Buy BBY 17.011,6 USD 14,7x 13,9x 13,2x 6,0x 5,7x 5,7x 0,4x 0,4x 0,4xLojas Americanas LAME3 29.074,7 BRL 199,7x 27,0x 19,6x 13,8x 10,6x 9,3x 2,1x 1,9x 1,7xVia Varejo VVAR3 9.908,2 BRL 270,5x 8,8x 7,0x 11,2x 8,1x 6,8x 0,6x 0,5x 0,4x

Mean 161,6x 16,6x 13,3x 10,4x 8,1x 7,3x 1,0x 0,9x 0,8xMedian 199,7x 13,9x 13,2x 11,2x 8,1x 6,8x 0,6x 0,5x 0,4x

eCommerce

Amazon AMZN 461.698,1 USD 243,4x 110,0x 62,6x 35,9x 18,9x 14,3x 3,1x 2,2x 1,8xMercadolibre MELI 11.404,1 USD 69,0x 56,0x 42,0x 45,3x 35,6x 26,3x 10,4x 6,2x 4,6x

Mean 156,2x 83,0x 52,3x 40,6x 27,3x 20,3x 6,7x 4,2x 3,2xMedian 156,2x 83,0x 52,3x 40,6x 27,3x 20,3x 6,7x 4,2x 3,2x

Average 177,9x 48,5x 32,8x 25,9x 17,7x 13,6x 3,6x 2,3x 1,8x

Sensitivity analysis (+/- 2,5x)

EV/EBITDA102,5 15,2x 16,4x 17,7x 18,9x 20,2x

Price 88,6 95,5 102,5 109,5 116,4

EV/EBITDA102,5 15,2x 16,4x 17,7x 18,9x 20,2x

Upside 25,2% 35,1% 44,9% 54,8% 64,7%

Figure 47: Valuation comparables

Source: Bloomberg, team’s estimates.

-5x 5x 15x 25x 35x 45x

Avg 18E EV/EBITDA

19E EV/EBITDA18E EV/EBITDALTM EV/EBITDA

eCommerce comparables19E EV/EBITDA18E EV/EBITDALTM EV/EBITDA

B&M comparables


16

Appendix 10: Sum-of-parts Simulation

n Profit and loss statement 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E

Total eCommerce GMV 3.598 4.860 6.568 8.855 11.939 16.096 18.672 21.659 25.125 29.145 33.809 YoY % 35% 35% 35% 35% 35% 16% 16% 16% 16% 16%

1P GMV 3.418 4.512 5.896 7.558 9.436 11.267 12.468 13.688 14.884 15.988 16.905 YoY % 32% 31% 28% 25% 19% 11% 10% 9% 7% 6%

Gross revenues 3.418 4.512 5.896 7.558 9.436 11.267 12.468 13.688 14.884 15.988 16.905 YoY % 32% 31% 28% 25% 19% 11% 10% 9% 7% 6%

(-)Deductions (581) (767) (1.002) (1.285) (1.604) (1.915) (2.119) (2.327) (2.530) (2.718) (2.874) Net revenues 2.837 3.745 4.893 6.273 7.832 9.352 10.348 11.361 12.354 13.270 14.031

YoY % 32% 31% 28% 25% 19% 11% 10% 9% 7% 6%(-)COGS (2.071) (2.734) (3.572) (4.579) (5.717) (6.827) (7.554) (8.294) (9.018) (9.687) (10.242) Gross profit 766 1.011 1.321 1.694 2.115 2.525 2.794 3.068 3.336 3.583 3.788 EBITDA 170 225 294 376 470 561 621 682 741 796 842

YoY % 32% 31% 28% 25% 19% 11% 10% 9% 7% 6%(-)Depreciation and amortization (57) (75) (98) (125) (157) (187) (207) (227) (247) (265) (281) EBIT 113 150 196 251 313 374 414 454 494 531 561

YoY % 32% 31% 28% 25% 19% 11% 10% 9% 7% 6%

P&L assumptions1P GMV share 95% 93% 90% 85% 79% 70% 67% 63% 59% 55% 50%Deductions 17% 17% 17% 17% 17% 17% 17% 17% 17% 17% 17%Gross margin 27% 27% 27% 27% 27% 27% 27% 27% 27% 27% 27%EBITDA margin 6% 6% 6% 6% 6% 6% 6% 6% 6% 6% 6%EBIT margin 4% 4% 4% 4% 4% 4% 4% 4% 4% 4% 4%

n Projected cash flows 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E

NOPAT 75 99 129 166 207 247 273 300 326 350 370 (+)Depreciation and amortization 57 75 98 125 157 187 207 227 247 265 281 (+/-)Change in working capital (85) (112) (147) (188) (235) (281) (310) (341) (371) (398) (421) (-)CapEx (28) (37) (49) (63) (78) (94) (103) (114) (124) (133) (140) Free cash flow 18 24 31 40 50 60 66 73 79 85 90

YoY % 32% 31% 28% 25% 19% 11% 10% 9% 7% 6%

Discount period 1,0 2,0 3,0 4,0 5,0 6,0 7,0 8,0 9,0 Present value of cash flows 27,2 30,4 33,0 34,2 32,9 31,4 29,7 27,8 25,5

DCF assumptionsMarginal tax rate 34% 34% 34% 34% 34% 34% 34% 34% 34% 34% 34%Change in working capital as of % of net revenues 3,0% 3,0% 3,0% 3,0% 3,0% 3,0% 3,0% 3,0% 3,0% 3,0% 3,0%CapEx as of % of net revenues 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0%

Discounted cash flow analysisTerminal growth rate (nominal) 6,5%Discount rate 15,0%

% of Total ValuePresent value of cash flows 272,1 19%Value in perpetuity 1.125,1 81%

Total value of 1P 1.397,2 Per share, actual 7,4

1P


17


Total eCommerce GMV 3.598 4.860 6.568 8.855 11.939 16.096 18.672 21.659 25.125 29.145 33.809 YoY % 35% 35% 35% 35% 35% 16% 16% 16% 16% 16%

Marketplace GMV 180 348 672 1.297 2.503 4.829 6.204 7.971 10.241 13.157 16.905 YoY % 93% 93% 93% 93% 93% 28% 28% 28% 28% 28%

Gross revenues 18 35 67 130 250 483 620 797 1.024 1.316 1.690 YoY % 93% 93% 93% 93% 93% 28% 28% 28% 28% 28%

(-)Deductions (3) (6) (12) (23) (45) (87) (112) (143) (184) (237) (304) Net revenues 15 29 55 106 205 396 509 654 840 1.079 1.386

YoY % 93% 93% 93% 93% 93% 28% 28% 28% 28% 28%(-)COGS (5) (10) (19) (37) (72) (139) (178) (229) (294) (378) (485) Gross profit 10 19 36 69 133 257 331 425 546 701 901 EBITDA 8 15 29 55 104 197 248 312 393 495 624


YoY % 89% 89% 89% 89% 89% 26% 26% 26% 26% 26%

P&L assumptionsMarketplace GMV share 5% 7% 10% 15% 21% 30% 33% 37% 41% 45% 50%Take rate 10% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10%Deductions 18% 18% 18% 18% 18% 18% 18% 18% 18% 18% 18%Gross margin 65% 65% 65% 65% 65% 65% 65% 65% 65% 65% 65%EBITDA margin 55% 54% 53% 52% 51% 50% 49% 48% 47% 46% 45%EBIT margin 53% 52% 51% 50% 49% 48% 47% 46% 45% 44% 43%

n Projected cashflows 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E

NOPAT 5 10 19 35 66 125 157 198 249 313 393 (+)Depreciation and amortization 0 1 1 2 4 8 10 13 17 22 28 (+/-)Change in working capital (0) (0) (1) (1) (2) (4) (5) (7) (8) (11) (14) (-)CapEx (0) (0) (1) (1) (2) (4) (5) (7) (8) (11) (14) Free cashflow 5 10 19 35 66 125 157 198 249 313 393

YoY % 89% 89% 89% 89% 89% 26% 26% 26% 26% 26%

Discount period 1,0 2,0 3,0 4,0 5,0 6,0 7,0 8,0 9,0 Present value of cashflows 16,1 26,4 43,4 71,3 78,1 85,4 93,4 102,2 111,8

DCF assumptionsMarginal tax rate 34% 34% 34% 34% 34% 34% 34% 34% 34% 34% 34%Change in working capital as of % of net revenues 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0%CapEx as of % of net revenues 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0%

Discounted cash flow analysisTerminal growth rate (nominal) 6,5%Discount rate 15,0%

% of Total ValuePresent value of cash flows 628,2 11%Value in perpetuity 4.929,0 89%

Total value of Marketplace 5.557,3 Per share, actual 29,4

Marketplace


18


Magalu's average store size (m²) 621 611 601 594 589 583 579 574 570 566 562 YoY % -2% -2% -1% -1% -1% -1% -1% -1% -1% -1%

Magalu's average revenues per m² 17.996 19.257 20.475 21.671 22.927 24.278 25.432 26.589 27.783 29.029 30.330 YoY % 7% 6% 6% 6% 6% 5% 5% 4% 4% 4%

Gross revenues 9 11 12 13 14 14 15 15 16 16 17 YoY % 18% 10% 5% 5% 5% 4% 4% 4% 4% 4%

(-)Deductions (2) (2) (2) (2) (2) (2) (3) (3) (3) (3) (3) Net revenues 8 9 10 11 11 12 12 13 13 14 14

YoY % 18% 10% 5% 5% 5% 4% 4% 4% 4% 4%(-)COGS (5) (6) (7) (7) (8) (8) (8) (9) (9) (9) (10) Gross profit 3 3 3 3 4 4 4 4 4 4 5 EBITDA 1 1 1 1 1 1 1 1 1 1 1


YoY % 18% 10% 5% 5% 5% 4% 4% 4% 4% 4%

P&L assumptionsSSS 5% 7% 6% 6% 6% 6% 5% 5% 4% 4% 4%Maturation 85% 95% 100% 100% 100% 100% 100% 100% 100% 100% 100%Deductions 17% 17% 17% 17% 17% 17% 17% 17% 17% 17% 17%Gross margin 32% 32% 32% 32% 32% 32% 32% 32% 32% 32% 32%EBITDA margin 7% 7% 7% 7% 7% 7% 7% 7% 7% 7% 7%EBIT margin 5% 5% 5% 5% 5% 5% 5% 5% 5% 5% 5%

n Projected cashflows 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E

NOPAT 0,3 0,3 0,3 0,4 0,4 0,4 0,4 0,4 0,4 0,4 0,5 (+)Depreciation and amortization 0,1 0,1 0,2 0,2 0,2 0,2 0,2 0,2 0,2 0,2 0,2 (+/-)Change in working capital (0,2) (0,1) (0,1) (0,1) - 0,1 0,1 0,1 0,1 0,1 0,1 (-)CapEx (0,3) (0,2) (0,2) (0,2) (0,2) (0,2) (0,2) (0,2) (0,2) (0,2) (0,2) Free cashflow (0,1) 0,1 0,2 0,2 0,3 0,4 0,5 0,5 0,5 0,6 0,6

YoY % -178% 148% 34% 28% 24% 20% 11% 4% 4% 4%

Discount period 1,0 2,0 3,0 4,0 5,0 6,0 7,0 8,0 9,0 Present value of cashflows 0,2 0,2 0,2 0,2 0,2 0,2 0,2 0,2 0,2

DCF assumptionsMarginal tax rate 34% 34% 34% 34% 34% 34% 34% 34% 34% 34% 34%Change in working capital as of % of net revenues 2,0% 1,5% 1,0% 0,5% 0,0% -0,5% -1,0% -1,0% -1,0% -1,0% -1,0%CapEx as of % of net revenues 4,0% 2,5% 2,0% 2,0% 2,0% 2,0% 2,0% 1,8% 1,8% 1,8% 1,8%

Discounted cashflow analysisTerminal growth rate (nominal) 6,5%Discount rate 14,0%

% of Total ValuePresent value of cashflows 1,8 19%Value in perpetuity 8,1 81%

Total value of an average store 10,0 Per share, actual 0,1

Average Store

Sum-of parts simulator

B&M 1P MarketplacePer share, actual 0,05 Per share, actual 7,40 Per share, actual 29,43 Average number of stores in projected period 1.072 Average number of stores in projected period 1 Average number of stores in projected period 1 Total value of B&M operations, per share 56,7 Total value of 1P operations, per share 7,4 Total value of B&M operations, per share 29,4

% of TP 57% % of TP 7% % of TP 29%

Sum of parts vs Target PriceSum of parts 93,5 (-) Net Debt (Cash), per share (6) Implied share price 99,8

We performed a simple simulation for a Sum-of-parts Valuation to estimate what is priced in our target price and measure the weight of each business. All ourassumptions were based on the basic assumptions of our consolidated valuation, in a way we don't lose to much accuracy, as the company don't open thesegment specific numbers.


19

Simulation Summary Mean Std. Dev. Max-Min DistributionMacroeconomics

IPCA 2021E 4,0% 1,0% - NormalGDP 2021E 2,5% 0,5% - NormalSelic 2019E 8,0% 1,0% - Normal

Top Line GrowthSSS (real growth) 1,5% - 3.5% - 0.0% TriangularOnline Market share (2022E) 12,0% - 15.0% - 7.5% Triangular3P share on total GMV (2022E) 30,0% - 50.0% - 15.0% Triangular

OperatingEBITDA margin% 9,0% - 13.0% - 5.0% TriangularCash cycle (20) days - 0 - (30) TriangularFactoring % 75,0% - 85.0% - 70.0% Triangular

0

20

40

60

80

100

120

140SELL HOLD BUY

5%

9% 86%

Appendix 11: Monte Carlo SimulationWe performed a Monte Carlo Simulation for a better understanding of the impact that the volatility of our basic assumptions would cause on our target price. The summary of our simulation is presented below:

After performing 2000 iterations, we see Magalu's implied fair value 86% in the BUY territory and only 5% in the SELL territory. The analysis was conducted using a 95% confidence level.


20

Appendix 12: Magalu’s Timeline

0.6 0.7 0.9 1.4 1.9 2.2 2.63.4

4.1

5.7

7.68.5

9.7

11.510.5

11.4

6.5

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 1H17

111 127 174 253 351 346 391 444 455 604 728 743 744 756 786 800 872

Foundation Growth Consolitation DigitalTransformation1957 1991 2009 2016

IPOFrederico Trajanoassumes asCEO;

launch ofmarketplace


Appendix 11: Magalu’s Awards


2013 201620152014

• Most Valuable Brands, Exame Magazine

• Best place to work, Você S/A

• Leaders of Brazil 2014 Award, LIDE

• Great place to work, GPTW

• Professional of the year in Technology, E-commerceBrasil

• Most admired Brazilian businesswoman , Carta Capital

• E-bit Best E-commerce Stores Award, E-bit

• E-awards Brazil 2016 E-commerce APP, E-awards

Foundation: Founded in 1957 by the couple Luiza Trajano and Pelegrino Donato, in Franca, Sao Paulo’s countryside, Magalu opened its first departmentstore in 1974. Always a pioneer, the company created the concept of Virtual Stores (1992) and was an early bloomer in Brazilian eCommerce (2000).Pioneer in funding its consumers, in 2001 the company structured a JV (50/50) in partnership with Itau Unibanco, Luizacred. In 2005 the companystructured another JV with Cardif, Luizaseg, its insurance arm.

Growth: With an ambitious expansion plan, the company landed at the city of Sao Paulo in 2008 by opening 46 stores in a single day. Magalu enteredBrazil’s Northeastern market by acquiring Lojas Maia’s (2010), a retail chain composed of 136 stores. In 2011, Magalu was listed at “Novo Mercado”segment of B3 (Sao Paulo’s Stock Exchange), and bought “Lojas Baú da Felicidade” a couple of months later.

Digital Transformation: In 2014, the company founded Luiza Labs, its own creative and technological branch. Labs leads the back stages processes ofMagalu’s digital transformation providing digital solutions and software development. Aiming to improve the quality of its marketplace platform thecompany bought Integra in early 2017. This company executes seller’s integration into Magalu’s platform besides providing additional services such asinventories management and tracking.


21

Figure 48: Lú, the digital saleswoman

Appendix 13: Pillars of InnovationPillars of Innovation. The transformation of a B&M company into an integrated digital platform with physical presencedeveloped by Magalu's management is defined by 5 pillars. (i) Digital Inclusion, (ii) Omnichannel Strategy, (iii) Physical StoresDigitalization, (iv) Digital Sales Platform and (v) Digital Culture.

Digital Inclusion. Consists on making Internet and technology access available to those who have limited access. Within theprojects implemented by Magazine Luiza, it is worth mentioning the agreement with the largest telephone companies in Brazilso that app navigation does not consume client's data package. In addition, through its youtube channel and “Blog da Lú”,consumers have access to self-explanatory contents of marketed products as well as help to choose the best product inaccordance to their needs.

Omnichannel Strategy. The integration of all Magazine Luiza’s selling channels, both online and offline, results in significantcost reduction, such as in Last Mile delivery. The existence of the existence “Malha Luiza”, composed by over 1000 outsourcedcarriers that are integrated through Mobile Delivery, allows stores supply trucks to also make Last Mile deliveries, withoutsignificant cost increases. “Retira Loja” transforms the stores into small Distribution Centers, showing the true meaning of afully integrated omnichannel. Magazine Luiza continues to develop its omnichannel for the full integration of its Market Place(fulfilment). All company's decisions are made thinking in its integration, making the omnichannel emerge from inside.

Physical Stores Digitalization. Currently all Magazine Luiza’s stores have Wi-Fi connection. Also, the implementation ofMobile Sales, Delivery and Pinpad has generated significant gains in efficiency throughout the company's operations. ThroughMobile Sales, sellers can consult offers, technical specifications and also process sales . Mobile Inventory does all inventorycontrol, as well as facilitates store restocking planning and “Retira Loja”. Mobile Pinpad is a checkout and payment platform,preventing the consumer from having to go to the cashier for card payments. Together, they reduce the average purchase timefrom 45 min to 2 min. After the purchase, as Mobile Delivery integrates the more than 1000 carriers by a same operatingsystem, the client is able to track in real-time their purchases until the final destination.

Digital Sales Platform. After using Época Cosméticos – cosmetics' company - as a test for its Market Place platform usage,the complement of the site magazineluiza.com.br with Market Place sales still has a long way of development ahead. In just 8months, the number of sellers went from 15 to ~400 and the number of SKUs went from 20k to ~1m. Market Place expansionincreases the portfolio of products that are merchandised by the company, such as clothing, pharmacy and food. The goal is tomake 3P operations recognized for quality and safety by both consumers and sellers. With the acquisition of “IntegraCommerce”, the company started to offer sellers functionalities such as sales management, pricing, inventory and freightmanagement, including product tracking.

Digital Culture. The creation of Luizalabs in 2014, with 250 developers, enabled the development of new complementaryservices and improvement of platforms and processes, all seeking to improve shopping experience. The improvement of theLuiza app made it reach 6mn downloads in 1H17. Besides that, the creation of “Magazine Você” in 2011 allowed the creation ofvirtual showrooms personalized by any individual in order to promote the products available on the site. The creators arecommissioned according to sales in their virtual storefront.

You reap what you sow. The transformation to a digital platform not only makes Magalu more efficient due to a fullyintegrated system, but also enhances the consumer buying experience. We believe Magalu is well positioned to execute itsdigital transformation plan given that most projects have been implanted aptly. Mobile Sales, Inventory, Delivery as well asMagazine Voce and marketplace expansion have been operating effectively.


22

Magalu’s actions speaks louder than words (and we see this trademark since its foundation):

Virtual stores: Magazine Luiza introduced the virtual stores’ concept in 1992. These stores have 150squared meters on average besides holding no inventories, except for smartphones. The attendantassists the customer finding what he is looking for through a desktop and the purchase is carried outon E-commerce (see Figure 49).

Marketing campaigns: By creating special sales dates, such as “Liquidação Fantástica” and “Sóamanhã” (Fantastic sale and tomorrow only), Magalu managed to make the beginning of the year amore attractive period for retailers. Changed the concept of the following months after end of theyear, making big sales and promotions, turning the beginning of the year a more attractive time forthe retail business.

Consumer additional services: Through Luizacred and Luizaseg, Magalu was among the first retailersto grant their customers with credit, insurance and extended warranties services.

Golden Client: Magalu aims to retain their top customers by granting these with exclusiveopportunities. Once a year, Magalu invites these clients to a closer-doors event in its stores. On thisoccasion, selected consumers are received with a special breakfast and have special offers at theirdisposal.

Cash flow generative and margin conservative: Magalu was one of the few E-commerce playerswhich did not adopt irrational price strategies, prioritizing margins stability. Currently, as consumptionpicks up, and peers are still wounded from previous years, Magalu is the better positioned player tosurf this wave.

Integrated Omnichannel: With substantial use of technology, Magalu was the first player tosuccessfully integrate all selling platforms. A fully integrated omnichannel translates intoopportunities of diluting costs and leveraging its operating results.(see Figure 51)

Appendix 14: Magalu’s PioneeringFigure 49: Virtual store concept

813Shoppable DCs

Pickupoption

10DCs

Figure 51: The omnichannel strategy


Figure 50: Golden client card


23

Appendix 15: What’s Motivating Marketplaces?Marketplace is a mean by which eCommerce players can expand their products portfolio without great inventory or footprint investments. As companiesopen their platforms to sellers they can capitalize on third party sales as these pay a fee for the service (take rate). If they are run well, marketplace inaddition to 1P is able to expand traffic and a broader range of product that increase consumers’ propensity to make additional purchases.

The seller’s cost to be in multiple marketplaces is negligible, so we believe that in the long run the loyalty of the seller to the marketplace will rely on 5pillars:

Consumer traffic: The greater the marketplace volume in terms of website accesses the greater the sellers’ perception of added value. As sellers aim toleverage their sales when exposing their products on marketplace platforms, they will choose the platform with greater traffic.

Credibility and level of service: The brand equity of the marketplace platform is a proxy of differentiation in terms of service quality and it will enhancethe consumer propensity to base its decisions on service level rather than on prices, creating a positive correlation between the seller's perception of valueand the marketplace brand equity.

IT solutions: Further developed marketplace platforms in terms of technology can generate more market insights and enhance sellers experience.

Fullfilment: One of the aspects which sellers value the most is the range of additional services offered by marketplace owners. These services factoringreceivables and products management such as shipping and storage.

Integration with Offline channel: By integrating the marketplace's inventory with physical stores one, marketplace will be able to offer further picking-up options for customers. As it translates into higher purchase ratios, sellers are benefited.

0

1

2

3

4

5ConsumerTraffic

Fullfilment

CredibilityandLevelofServiceITsolutions

IntegrationwithOfflineChannel

MGLU B2W ViaVarejo Meli

Figure 52: Porter analysis

Source: Team’s analysis


24

Appendix 16: Expansion Analysis

Location Conventional Virtual Total Average GDP(mn)Brazil 734 137 871 3,725.00Midwest 19 1 20 2,947.00Goiás 4 0 4 2,811.88MatoGrossodoSul 15 1 16 2,999.22

Northeast 217 0 217 2,676.00Alagoas 16 0 16 2,056.20Bahia 65 0 65 2,588.07Ceará 35 0 35 3,588.14Maranhão 1 0 1 817.39Paraíba 26 0 26 1,390.57Pernambuco 42 0 42 2,457.54Piauí 6 0 6 3,086.62Sergipe 10 0 10 1,879.91RioGrandedoNorte 16 0 16 3,254.55

South 192 38 230 2,675.00Paraná 65 38 103 2,230.09RioGrandedoSul 64 0 64 3,773.40SantaCatarina 63 0 63 2,331.34

Southeast 306 98 404 3,865.00MinasGerais 82 21 103 2,973.93SãoPaulo 224 77 301 5,905.70

Over the upcoming years Magalu intends to open several stores as a mean of expanding its sellingrange and diluting logistics costs as the stores would work as shoppable distributions centers. In orderto understand if there is still space for the company to expand its footprint we analyzed thecharacteristics of the cities in which the company currently holds a physical store.

After collecting the data of all cities in Brazil (according to IBGE 2010) and those in which Magalu iscurrently present (according to the company website) we organized them by GDP and excluded the10% lowest ones, with the premise that these stores deliver lower results.

After that, we defined a city as a possible target if it meets the following criteria: (i) the city doesn’thold any Magalu’s stores currently, (ii) the city must be in a state in which the company already holdsan operation so it can truly work a cost diluent and (iii) the city’s GDP must be above the previousexplained cut, of BRL 300mn.

At the end of our analysis we located 395 which meet our criteria, thus, the company faces anexpansion potential of about 40% of its cities footprint.

68

0

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00

0

0

20

33

79

1564

40

0

0

18

16

2

14 628

37

Figure 54: Number of unexplored target citiesby state

Source: IBGE, team’s analysis

42% 55% 49% 44%

51% 42% 50% 52%

7% 3% 1% 3%

Midwest Northeast South Southeast<500 500-5000 >5000

Figure 55: Unexplored target cities GDP profile

Source: IBGE, team’s analysis

64

0

0

0

0

00

0

0

103

63

301

16103

4

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65

1

6

35 162642

1610

Figure 53: Magalu’s current stores footprint

Source: Company’s data


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Net Revenue (-)Variable Costs and Expenses

Contribution Margin

EBIT

Operating Leverage Degree

0% 2% 4% 6% 8%

10% 12% 14% 16% 18%

1.0x 2.0x 3.0x 4.0xSource: Companies data, team’s estimates

Appendix 17: Operating Leverage

Thebiggesttheoperatingleveragedegree,themorespaceforfixedcostsandexpensesdilution,thus,marginexpansion.AsMagalu gainsscale,itcanaimmarginlevelsnearLAME’s.Inanoptimisticscenario,weseespaceforabove12%EBITDAmargins.

Figure 56: Operating leverage formula

Figure 57: Operating leverage


26

LUIZACREDLuizacred is Magalu’s financing arm. With a portfolio of approximately BRL 5bn is one of the largestfinancing companies in Brazil. Founded in 2001, the 50/50 JV with Itaú Unibanco (country's largest privatebank) has been supplementing Magazine Luiza's retail service by offering financing options to itsconsumers. Interests charged range at around 104% of CDI (Brazil's interbank lending rate). WhileMagazine Luiza is responsible for Luizacred operations and customers relationship, Itaú is responsible forcredit approval and funding, therefore, credit approval is not dependent on people who are involved in theselling process. If there is no credit approval by Itaú, the consumer still has the possibility of findingoptions offered by Losango (another individual credit institution, with lower credit score requirement) or bySantander bank.In 2009, for the renewal of an exclusive contract signed with Itaú for another twenty years, the companyreceived an advance of BRL 250mn in cash. In 2010, with the acquisition of Lojas Maia, Luizacredreceived more BRL 80mn from Itaú.The credit is granted through personal loans, payroll loans, CDC (credit for the purchase of a specific good)and Luiza Card (Magalu's private label card) (see Figure 59) . This card can be used both inside and outsideMagazine Luiza’s selling channels, and, in fact, 78% of LC transactions are made outside Magalu'sstores.This have been granting Magalu with the possibility of capitalizing on loyalty consumers purchasesof items which the company can’t offer them.Luiza Cred, with 3.3mn cards issued and a credit portfolio of ~ BRL 5bn, also serve as a loyalty tool, sinceit provides exclusive offers to recurring cardholders, as well as allowing the creation of consumer’s BigData (contributing for Magalu's understanding of its customers behavior). Consumers have the possibilityof purchasing in up to 24 installments with interests or up to 12 without interest. In addition, consumerswith no default history have the possibility to become Golden Clients, receiving exclusive offers plus betterfinancing options.The greater attractiveness of Luiza Card, due to its lower interest rate and the lower risk, resulted in a sharegain when compared to the CDC, being currently responsible for 80% of financing provided by Luizacred.

LUIZASEGLuizaseg is Magazine Luiza's insurance arm. Founded in 2005, the insurer is a 50/50 JV with Cardif(Subsidiary of BNP Paribas Group) making Magalu the only retailer to have its own insurance company.Luizaseg product portfolio consists mainly of: extended warranty (which has a low loss ratio) residentialinsurance, theft insurance, life insurance and medical and dental insurance, among others.The contract with Cardif was renewed for another 10 years in 2015. Due to the renovation Magalu receivedan advance of BRL 330mn in cash.

It is in giving that we receive. We see “Luizacred” and “Luizaseg” as key factors to Magazine Luiza’sbusiness execution strategy. The availability of credit along insurance offerings raises the level ofconsumer experience, as well as contributing significantly to the company's net margin. The equity incomeaccounted for 72% of Magalu's net income in 2016 and 31% in 1H17.

Appendix 18: Luizacred and Luizaseg

36% 38% 40% 42% 42%

16% 17% 19% 20% 21% 29% 30% 30% 29% 30% 19% 15% 11% 9% 7%

2013 2014 2015 2016 1H2017

Third Party Cards Luiza Card Cash/Down Payment CDC

Figure 58: Magalu’s revenues breakdown bypayment options

58% 69% 79% 81%

37% 28% 17% 15%

4% 4% 4% 4%

2014 2015 2016 1S17 LTM

Luiza Card CDC Personal Loans

Figure 59: % of Luizacred portfolio



n Build-up 2014 2015 2016 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027ETotal card base (thousands) 3.440 3.574 3.251 3.266 3.332 3.415 3.500 3.588 3.678 3.770 3.864 3.960 4.059 4.161

% YoY 4% -9% 0% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2%Total credit borrowed from Luizacred 10.549 10.888 11.949 13.801 9.067 11.050 17.681 19.314 15.034 16.722 23.061 23.951 18.406 20.164

% YoY 3% 10% 16% -34% 22% 60% 9% -22% 11% 38% 4% -23% 10%Total portfolio 4.643 4.441 4.527 4.985 3.491 4.429 7.345 8.411 6.906 7.671 10.530 10.936 8.447 9.245

% YoY -4% 2% 10% -30% 27% 66% 15% -18% 11% 37% 4% -23% 9%

n Income statement 2014 2015 2016 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027ERevenues from financial intermediation 1.312 1.349 1.180 1.251 926 1.135 1.780 2.017 1.689 1.864 2.500 2.597 2.057 2.240

% YoY 3% -13% 6% -26% 23% 57% 13% -16% 10% 34% 4% -21% 9%Market financing operations (227) (269) (234) (238) (176) (216) (338) (383) (321) (354) (475) (493) (391) (426)

% YoY 19% -13% 1% -26% 23% 57% 13% -16% 10% 34% 4% -21% 9%Bad debt provision (543) (630) (499) (499) (330) (395) (618) (668) (518) (575) (790) (820) (634) (693)

% YoY 16% -21% 0% -34% 20% 57% 8% -22% 11% 37% 4% -23% 9%Gross result from financial intermediation 542 449 446 515 420 525 824 966 850 935 1.235 1.283 1.033 1.121

Margin% 41% 33% 38% 41% 45% 46% 46% 48% 50% 50% 49% 49% 50% 50%Services revenues 326 371 383 463 356 454 741 873 760 839 1.125 1.169 926 1.008

% YoY 14% 3% 21% -23% 28% 63% 18% -13% 10% 34% 4% -21% 9%SG&A (594) (658) (625) (669) (495) (606) (950) (1.076) (900) (994) (1.333) (1.384) (1.096) (1.194)

% YoY 11% -5% 7% -26% 23% 57% 13% -16% 10% 34% 4% -21% 9%Other revenues (expenses) 24 (2) (16) (31) (23) (28) (44) (50) (42) (47) (63) (65) (51) (56)

% YoY -108% 700% 97% -26% 23% 57% 13% -16% 10% 34% 4% -21% 9%EBT 297 161 188 277 259 344 570 712 668 733 965 1.003 810 879

Margin% 23% 12% 16% 22% 28% 30% 32% 35% 40% 39% 39% 39% 39% 39%Taxes (117) (37) (87) (125) (116) (155) (256) (321) (300) (330) (434) (451) (365) (396)

Effective tax rate % 39% 23% 46% 45% 45% 45% 45% 45% 45% 45% 45% 45% 45% 45%Net income 181 123 102 153 142 189 313 392 367 403 531 552 446 484

Margin% 14% 9% 9% 12% 15% 17% 18% 19% 22% 22% 21% 21% 22% 22%

Figure 60: Luizacred projections


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Appendix 19: How The Machine Works

Integrated System

Omnichannel

DC’s + Stores

Stores Selling Inventory Through eCommerce

Storage and Logistic Bases

Increase Capillarity

Increase Footprint

(i) Decrease Average Freight Cost(ii) Decrease Storage and Time

Higher Inventory Turnover

Frederico Trajano

Fullfilment

Increase Repurchase Needs (Scale)

Gain Leverage on Negotiation with

Suppliers

Capitalize Its Services

Guarantee Service Level

Dilute Freight

Digitalization

+ SALLERS > CONSUMER SERVICE LEVEL

3P 1P


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Winner player in developed countries Amazon is a case of great success in its home country, the United States, where it is the leading eCommerceplayer, with ~33% of market share. In Europe, especially in Germany and UK, the company replicated its business model with triumphant execution andleads both markets. It is important to note that both of these markets share similarities with the United Stated in terms of internet penetration (more than~80% of the population) and well developed logistics’ infrastructure.

Where there is a will not always there is a way. In China, a developing country, where there were peculiarities in logistics and a completely differentcompetitive scenario(Ali Baba and JD concentrate more than 80% of the total GMV), the company has failed in its expansion, reaching less than 1% ofmarket share. When expanding to India, in order to avoid making the same mistake again, the company made large investments (over US$5bn) to adopt itsplaybook expansion model (B2C>marketplace>Fulfillment>Amazon Prime). Thus, the company overcame the challenges in regulatory requirements,payment structure and low eCommerce popularity to become the 2nd largest player, with 28% of market share.

Has the giant learned the lesson? The behemoth landed in Mexico in 2013, and played its usual expansion strategy. The company faces a big competitivechallenge with Mercado Libre, the market leader with over 10% of market share and 10x more visitors than Amazon. The competition is hurtingprofitability, taking its bottom line to negative fields, and Amazon is still losing by far, with less than 2% of market share.

In Brazil, the company played its usual expansion strategy as well: i) On 2012 the Seattle-based eCommerce entered the Brazilian digital books market, ii)two years later the company started its physical books operation, iii) earlier this year it started its 3P operation, also focused on books, (iv) in October thecompany started selling electronic through its marketplaces. Brazil share similarities with India in terms of poor infrastructure, complex regulatoryrequirements and eCommerce’s market size. Amazon’s operation has already faced some issues in maintaining its usual service levels, including complainsin after-sales and logistics troubles, operating with increased lead-time in Brazil. The operations of MELI in Brazil is the closest to Amazon’s in terms ofmarketplace, and we believe that the real competition will be between then. We believe Brazilian eCommerce is not a winner takes all market. Thus,Magalu, which enjoys the synergies between B&M and online operation, should persist as a leading company on the long term.

Appendix 20: Amazon’s Playbook Strategy

Infrastructure RegulationBanking

CHALLENGES


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Appendix 21: Corporate GovernanceKey Management People

Magazine Luiza Board of Administration Members

Name Title Biography

Frederico Trajano Inácio Rodrigues Chief Executive OfficerMr. Trajano is Chief Executive Officer of Magazine Luiza and its subsidiaries. Frederico have almost two decades of Magalu, having solid experience with the digital transformation and previous experience in Equity research and Asset

Management covering Retail and Consumer Goods.

Roberto Bellissimo Rodrigues Chief Financial Officer

Mr. Rodrigues is Chief Financial Officer of Magazine Luiza and its subsidiaries. Roberto received a BA in Business Administration, from Fundação Getulio Vargas (EAESP – Escola de Administração de Empresas de São Paulo).

Roberto is in Magalu since 2001, with previous experience in Financial Markets at Bradesco BBI. He is currently at the board of Luiza Cred S.A.

Simon Olson Executive Director, Investor Relations and M&ASimon Olson worked for almost nine years in a venture capital in Partnership with Draper Fisher Jurvetson, one of the leading venture capitals in Silicon Valley. Simon also worked in Google as the Head of New Business Development in

Brazil.

Fabrício Bittar Garcia Executive Director, Comercial and OperationsMr. Garcia graduated in Bachelor of Administration from University of Franca (Uni-FACEF) and postgraduated in

business administration from University of São Paulo. Initiated his early career in Magazine Luiza in the comercial area and have decades of experience in the company.

Maria Isabel Bonfim de Oliveira Executive Director, Administrative and Control Ms. Oliveira initiated her early career in Magalu in 1982, assuming in 1992 the manager of controling position and since 2001 is Director of the company.

Name Title Background Tenure Independent?

Luiza Helena Trajano Inácio Rodrigues Chairman of the Board of Administration, Member of People and Organizational Culture Committee

Luiza is nephew of the founders of Magazine Luiza. Mra Trajano started her earlycareer at the company, having experience in all of the company sectors. She wasCEO of Magalu from 2009 to 2015, being responsible for a substantive growth forthe entire company.

12 years Yes

Marcelo José Ferreira e Silva

Vice Chairman of the Board of Admnistration, Member of the Compliance, Auditory and Risks,

Finance, People and Organizational Culture, Strategy and Digital Transformation Committees

Marcelo was ExecutiveDirectorof the company from 2009 to 2015. Heis the actualVice Chairman of the Board of Magalu. 2 years Yes

Carlos Renato Donzelli Member of the Board, Member of the Compliance, Auditory and Risks and Finance Committee

Mr Donzelli is trained as Accounting Technician and Graduated in Administrationfrom Facef (Faculdade de Ciência Econômicas, Contábeis e Administrativas deFranca). He was financial director of Magazine for almost ten years.

8 years Yes

José Antônio Palamoni Member of the Board, Member of the Compliance, Auditory and Risks Committee

Mr. Palamoni is trained as Accounting and MathematicianTechnician. He is theexecutive director of the Holding Grupo Luiza since 1991. 12 years Yes

Betânia Tanure de Barros Member of the BoardMs. Barros wrote several articles andbooks about Management in Brazil. Betânia isalso Member of the Board of Administration of Grupo RBS (RBS Participações S.A.) and Medial Saúde S.A.

1 year No

Inês Corrêa de Souza Member of the Board, Member of Finance Committee Ms. Souza is founder and partner of Latitude Gestão e Finanças and she waspreviously employed as President by Banco UBS S.A 8 years No

José Paschoal Rossetti Member of the BoardMr. Rossetti is currently teacher of executive programs of leadership at FundaçãoDom Cabral and reestructuring projects of Corporate Governance in severalenterprises.

1 year No


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Appendix 22: Board Committee Position

Fiscal Committee TitleInocêncio Teixeira Baptista Pinheiro CEO, MemberFabrício Gomes MemberThiago Costa Jacinto MemberMauro Marangoni MemberRobinson Leonardo Nogueira MemberEduardo Christovam Galdi Mestieri Member

Finance Committee TitleCarlos Renato Donzelli MemberInês Corrêa de Souza MemberMarcelo José Ferreira e Silva Member

Strategy and Digital Transformation TitleLuiza Helena Trajano Inácio Rodrigues MemberSílvio Romero de Lemos Meira MemberMarcelo José Ferreira e Silva Member

Audition, Compliance and Risk Committee TitleCarlos Renato Donzelli MemberJosé Antônio Palamoni MemberMarcelo José Ferreira e Silva MemberPaulo Antônio Baraldi Member

People and Organizational Committee TitleEmília Telma Nery Rodrigues Geron MemberLuiza Helena Trajano Inácio Rodrigues MemberMarcelo José Ferreira e Silva Member

Non-Statutory DirectorsName Title

Patricia Pugas Executive Director of People

Eduardo Galanternick Executive Director of E-commerceDecio Sonohara Executive Director of StructureLuiz Fernando Rego Executive Director of CommercialAndré Fatala Executive Director of Technology

Magazine Luiza has five committees: (i) Strategy Committee, (ii) Finance Committee, (iii) People’s Committee and (iv) Compliance, Auditing and RiskManagement Committee and (v) Fiscal Committee. All the committees aim to stand for the company’s principles, worked according to the best CorporateGovernance practices, make decisions on behalf of Magalu’s interests above interests of particular shareholders and follow and supervise company’sethical standards. The committees’ specific functions are described below:

Strategy Committee. Supports the Board of Administration in matters related to the company’s strategy, the strategic guidelines proposed by the CEOand the implementation of the company’s Strategic Plan.

People’s Committee. Is responsible for defining the company's values and verify if ethical principles are followed rigorously. Helps to solve ethicaldilemmas always regarding the company’s interests.

Finance Committee. Designated to advise the Board of Administration in the following aspects: (i) financial planning; (ii) debt to Equity ratio; (iii)investments; (iv) financial risks to the company; (v) monitoring its subsidiaries’ financial activities (Luizacred and Luizaseg).

Compliance, Auditing and Risks Committee. Aims to supervise the work of the independent auditors, the quality of the financial statements and reports,the accuracy of the accounting principles and the effectiveness of the internal controlling structures.

Fiscal Committee. Responsible for supervising the directors’ actions, evaluating the proposals to be sent to the Assemblies for discussion and approval,examining the company’s financial statements and denouncing to the Board eventual frauds and errors that it may found.

Disclosures:Ownership and material conflicts of interestThe author(s), or a member of their household, of this report does not hold a financial interest in the securities of this company.The author(s), or a member of their household, of this report does not know of the existence of any conflicts of interest that might bias the content or publication of this report.Receipt of compensationCompensation of the author(s) of this report is not based on investment banking revenue.Position as an officer or a directorThe author(s), or a member of their household, does not serve as an officer, director, or advisory board member of the subject company.Market makingThe author(s) does not act as a market maker in the subject company’s securities.DisclaimerThe information set forth herein has been obtained or derived from sources generally available to the public and believed by the author(s) to be reliable, but the author(s) does not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to be used as the basis of any investment decisions by any person or entity. This information does not constitute investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security. This report should not be considered to be a recommendation by any individual affiliated with CFA Society Brazil, CFA Institute, or the CFA Institute Research Challenge with regard to this company’s stock.

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