Guararapes

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Risk Factors

Before making investment decisions, potential investors should carefully consider all the information available on this website, specially the risks described below. Guararapes-Riachuelo’s business, financial situation and operating results may be materially and adversely affected by any of these risks and, consequently, have a negative impact on the securities issued by the Company.

The risks described below are those known by Guararapes-Riachuelo and which the Company believes may materially affect the Company. Additional risks unknown to Guararapes-Riachuelo or risks deemed immaterial may also affect its business.

1. Risks Related to Shares

The market value of the Company’s common shares may be negatively affected by the market volatility. The market value of common shares issued by the Company may be subject to significant fluctuations. The factors which may affect the market value of the Company’s common shares include:

Present or future variations in same store sales or results of operations;

Changes in analysts’ financial estimates;

Present or future change in the Brazilian economy or the retail market; and

Announcements made by the Company or its competitors of relevant acquisitions, strategic partnerships, alienations or other strategic initiatives.

2. Risks Related to the Company

The Company needs to identify and promptly and successfully respond to changes in fashion trends and consumer preferences.

The Company’s sales and operating result depend on its ability to manage inventories and predict, identify and promptly respond to changes in fashion trends and consumer preferences. The development and orders of the Company’s products should be submitted in advance of the applicable sales period and, at the same time, the Company needs to swiftly react to market trends, offering attractive and desirable goods at competitive prices. The delay between development and/or purchase order and the availability of specific products at the stores may hamper a quick response to new trends. If the Company is not able to predict, identify or respond to emerging style trends or consumer preferences or in case it makes inaccurate analyses of the market for its goods or any new product line, there might be a substantial volume of unsold inventories. In response to these situations, the Company may be compelled to lower prices or have promotional sales to clear inventories, which would negatively affect operating results.

The Company may need additional funds in the future, which will not necessarily be available; therefore, it may be necessary to issue bonds and shares. Additional funds raised through the issuance of shares may dilute the shareholders’ stake in the Company’s capital stock.

The Company may not be able to maintain the same pace of growth.

The Company’s turnover has increased over time. Additionally, the Company’s net revenue per square meter grew in the second half of 2005 over the same period of the previous year. Factors which may influence this growth include: (i) capacity to promptly respond to new fashion and consumption trends; (ii) ability to attract and maintain customers; (iii) economic growth of the areas where the Company has stores; (iv) changes in credit policies; (v) competition from the informal market, specially from China; and (iv) climate variations.

In addition, the Company also grows through the increase in the number of stores and sales space resulting from the renovation of existing stores.

The Company’s expansion plan includes the opening of a number of stores substantially higher than that recorded in the Company’s recent history. Future operating results depend, among other factors, on the Company’s capacity to open new stores and increase existing stores’ sales, managing stores in a more profitable way.

The Company’s capacity to continue opening new stores and increasing its sales area depends on the capacity to find space available for possible expansions near existing stores; negotiate lease or purchase agreements for new store facilities which are reasonable in terms of market; design store construction and renovation projects; attract, hire and train qualified personnel; and manage the expansion project.

Investments in store openings and expansions may reduce the Company’s profitability margins until these investments reach the maturity stage.

Therefore, the Company may not be able to maintain the same growth rates for net revenue and profitability per square meter in the future, which may negatively affect the Company’s operating results.

Customer financing is a significant risk for the Company.

Riachuelo private label card represents a significant share of the Company’s sales. Customers who use Riachuelo private label card in their purchases have a payment plan of up to 5 monthly payments without interest in which the first installment is due 30 days after the purchase. The Company’s results may be negatively affected in case the Company is not successful in its credit policy or in the event of situations which affect the payment capacity of customers who use Riachuelo private label card to make purchases, leading to an increase in our customers’ delinquency levels.

The Company allocates substantial funds to marketing and advertising. The Company’s business depends on intense customer presence in the stores and effective marketing to generate such presence. The Company’s sales and profitability depend largely on its capacity to identify its target audience, decide on the advertising message and appropriate media to reach this audience and promote the knowledge of and attraction to the Company’s brands, among others.

In case marketing and advertising activities are not successfully conceived, planned and executed, the Company’s financial situation and operating result may be negatively affected.

The Company received ICMS and income tax benefits on the commercialization of certain products.

The Company has income tax benefits on the sale of products manufactured at its industrial plants located in Natal and Fortaleza, conditioned to the capital reserve per equivalent amount. The benefits granted by the extinct SUDENE are still in effect and consist in the exemption or 75% reduction of income tax on the results posted by each plant for periods finishing from 2008 to 2012.

The Company was also granted with tax benefits related to ICMS (Value-added tax). The Company has tax benefits from Ceará Industrial Development Fund (FDI) up to August 2013, corresponding to 75% of the ICMS due, adjusted by the long term interest rate, and amortization with 99% discount, after a 1-month grace period.

In addition, the Company has benefits within the scope of the Program for Supporting Industrial Development of Rio Grande do Norte – PROADI granted until April 2009, in the form of financing equivalent to 75% of ICMS. Financing is subject to interest at the rate of 3% per year and monetary restatement based on the referential rate variation. Amortization of the monthly payment will occur with 99% discount of the current value, after a 2-month grace period.

The ending of such tax benefits or the Company’s failure to renew them may negatively affect its results.

The Company’s operating results reflect the effect of seasonality of sales. The share value may be affected by these variations.

The Company’s operating results present a significant variation from quarter to quarter and we believe that these variations will continue to occur in the future. These variations are caused by the seasonality of some products’ sales and the sensitivity of apparel manufacturing and retail markets to macroeconomic conditions. The Company’s revenues and profitability reach their highest levels during Christmas and other special dates. However, during carnival there is a considerable decrease in sales. In addition, since a large share of the products offered by the Company may be considered unessential, the sector tends to have negative results during periods of economic stagnation. Any long-lasting reduction in consumer goods purchase may adversely affect the Company’s business and operating results.

Climate variations may have a negative impact on the Company’s operating result.

The Company’s business is susceptible to climate conditions. Log-lasting periods of higher temperatures in the winter or lower temperatures in the summer may render part of the inventories incompatible with such unexpected conditions. Thus, periods of altered climate may compel the Company to sell its inventory excess at lower prices, reducing its margins, which may adversely affect it business.

3. Risks Related To Our Controlling Shareholder

The interests of the Company’s controlling shareholder may be in conflict with the interests of investors.

The powers of the Company’s controlling shareholder include, but are not limited to, electing the majority of the members of the Company’s Board of Directors, establishing the result of any deliberation demanding shareholders’ approval, including corporate restructuring, alienation and payment of any future dividends provided that the minimum dividend payment required by the Brazilian Corporate Law is respected. Therefore, the Company’s controlling shareholder may decide on acquisitions, alienations, financing or similar operations and deliberate on dividend distribution policies which may be in conflict with the interest of investors.

4. Risks Related To the Industry

A reduction in credit sales may adversely affect the Company’s results.

Credit sales are an important component in the results of retail companies in Brazil. A significant share of the Company’s turnover comes from retail activities. In the past, the Brazilian government implemented measures to restrict domestic demand by imposing credit restrictions to banks, credit card companies and the retail sector and increasing the interest rate. The Company’s results may be adversely affected if the demand for consumer credit falls, or if the Brazilian government’s policies reduce consumer credit.

A rise in delinquency rates may adversely affect the Company’s results.

Adverse changes in Brazilian economic conditions may lead to an increase in bad debt provisions and losses.

In case the economic conditions in Brazil worsen due to an economic slowdown; Real depreciation; inflation; or increase in interest rates, among others, customer bad debt rates may rise. If the Brazilian economic conditions worsen and the sector’s customer bad debt rates rise, its results may be adversely affected.

The apparel manufacturing and retail sector is characterized by fierce and growing competition. Although the Company is one of the largest apparel manufacturing companies in terms of turnover and controls of one of the largest retail chains in the country, Lojas Riachuelo has several different competitors at local and national levels. Some of Lojas Riachuelo’s competitors have a larger number of stores, stronger presence in the market, greater brand recognition and more financial, distribution and marketing resources, among others.

New participants in the Brazilian apparel manufacturing and retail sector, including great retailers based abroad, informal market and imported products, especially from China, may give rise to sudden changes in the competitive scenario. The competition is characterized by several factors, including variety of goods, advertising, price, quality, service, location, reputation and credit availability.

The Company also faces the competition from smaller manufacturing and retail companies which profit from the ineffectiveness of the Brazilian tax collection system, import control and labor laws. If the Company does not effectively stand up to the competition, its operating result and financial situation may be adversely affected.

The apparel manufacturing and retail sector is sensitive to reductions in the consumer purchase power and unfavorable economic cycles.

This sector has been historically susceptible to general economic slowdown periods which have led to a decrease in consumer spending. The success of the sector’s operations depends on factors related to consumer spending and/or affecting consumer income, including the general economic scenario, interest rates, inflation, availability of consumer credit, taxes, consumer confidence in future economic conditions, employment and wage levels.

An economic reverse may considerably reduce consumer spending and available income, which would negatively affect sales, operating results and financial performance of the sector as a whole. Any negative effect on the Company’s financial performance would probably lead to a decrease in the price of its common shares.

5. Risks Related To Macroeconomic Factors

The Brazilian government plays an important role in the Brazilian economy. This influence and the political-economic conditions in Brazil may adversely affect the Company’s business and market value.

The Brazilian government frequently intervenes in the Brazilian economy and occasionally makes significant changes in its policies and regulations. The Brazilian government’s actions towards controlling inflation and implementing other policies frequently include, among other measures, interest rate increases, changes in fiscal policies, price control, currency devaluations, cash flow control and limits for imports.

The Company’s business, financial situation and operating result may be adversely affected by changes in policies or regulations involving or affecting factors such as:

interest rates;

inflation;

economic growth;

national, capital and financial market liquidity;

fiscal policy (including reforms currently being discussed by the National Congress);

amendment of regulations on consumer credit; and

political, social and/or economic measures adopted by Brazil or by others which affect the country.

The purchase of goods offered by the Company depends on its customers’ purchase power and its financial performance is sensitive to changes in the Brazilian economic scenario which may affect the consumer purchase power.

Consumer habits are affected by the aforementioned factors as well as employment and wage levels and consumers’ confidence and outlook for the Brazilian economy. Uncertainties related to the Brazilian government policies and eventual changes affecting these or other factors in the future may contribute to economic uncertainty in Brazil and may reduce consumer purchase power, which may lead to lower net sales, inventory excess, price reduction and additional costs related to high inventory levels.

Economic uncertainty in Brazil may lead to an increase in the volatility of securities issued by Brazilian companies and reduce consumer purchase power. These and other future economic, political and governmental changes in Brazil may adversely affect the Company, its business and operating results, as well as its common shares’ market value.

In the past, Brazil recorded sky-high inflation rates. Inflation, the government’s actions to control it and public speculation on eventual future measures had significant negative effects on the Brazilian economy, contributing to the economic uncertainty in Brazil and increasing the volatility of the Brazilian security market.

In the last years, annual inflation rates, measured by the General Market Price Index, fell from 20.1% in 1999 to 12.4% in 2004. The government measures to control inflation include a strict monetary policy with high interest rates, which restricts credit availability and reduces economic growth. As a result, interest rates vary significantly; for example, interest rates in effect in Brazil in the end of 2001, 2002, 2003 and 2004 were 19.05%, 23.03%, 16.91% and 17.50%, respectively, as established by the Monetary Policy Committee.

The increase in oil prices as well as the future actions of the Brazilian government, including interest rate reduction, interventions in the exchange rate and security market to adjust or fix the value of Real may trigger an increase in inflation, which may adversely affect retail consumption levels.

In this scenario, the Company’s suppliers would probably increase the price of their goods to offset future inflation hikes. It is not possible to foresee if the company will be able to transfer any increase in costs of goods to its customers in the future and if the negative impact of this increase in costs will affect its business, operating result and its common shares’ market value.

Last Update: March 26, 2010