Sector Overview

Macroeconomic View:

The textile segment is highly correlated to the macroeconomic volatility, since its most relevant cost is based on purchases of an input, the cotton, which has its prices determined by the international market and it is denominated in dollars.

Recently, as consequence to Brazilian Real appreciation in comparison to North American currency, the production cost is remaining stable at low levels; however, any economic instability which may cause foreign exchange volatility should pressure the production costs.

The apparel retail sector is highly correlated with GDP (Gross Domestic Product) changes as well as to the credit market increase. Economic growth allied to the credit expansion, resulted in growth in the retail sector as well in the apparel industry. Price stability over the past few years also contributed to a real income gain for most of the Brazilian population, generating a retail sector recovery and purchase power expansion.

The high informality of the sector generates damages in all retail chains and department stores whose fully comply with the environmental, fiscal and labor legislation. Even fighting massive illegal competition, the largest retail chains have been growing robustly in the past few years due to:

(i) Differentiation
(ii) Segmentation
(iii) Quality
(iv) Technology and control development
(v) Gains of scale

Fiscal Incentives’ Description

The company benefits from fiscal incentives on Income Tax and State Added value Tax (ICMS) over specific products sales. Income Tax benefits incur in the production sales from items manufactured in Natal (RN) and Fortaleza (CE) plants. All resulting incentive must be provisioned as Capital Reserves.

These incentives, granted by former SUDENE, generate tax exemption or a 75% reduction on Income Tax accounted on each plant will expire in 2008 and 2012. respectively. In addition, the Company profits from Added Value Tax exemption.

The company was granted with fiscal incentives by Ceará State’s Industrial Development Fund (FDI) up to 2013, resulting in a 75% of Added Value Tax financing incurred, indexed on TJLP (Brazilian Long-term Development Interest Rate), and 99% discount on its amortization, with a 1 month grace-period.

Additionally, Guararapes benefits from Rio Grande do Norte State Industrial Development Supporting Program (PROADI), granted up to 2009, resulting in a 75% of Added Value Tax financing incurred. Financing is subject to a 3% p.a. interest rate plus monetary variation.Installments amortization will be settled with a 99% discount of the real (current) value, after a 2-month grace period.

Last Update: March 26, 2010