C&A Modas SA

BOVESPA:CEAB3

Q2-2025 Earnings Call

[Operator]

[Interpreted] Good evening. Welcome to C&A's Second Quarter 2025 Earnings Conference Call. Joining me today are Mr. Paulo Correa, the company's CEO; and Laurence Beltrão Gomes, CFO and IR Director. This presentation and the earnings release are already available on the company's Investor Relations website.

This conference call is being recorded and simultaneously translated into English. To listen to the English version, click on the Interpretation button. The replay of this conference will also be made available in our RI website. [Operator Instructions]

Before proceeding, let me mention that any forward-looking statements that may be made during this conference regarding the company's business prospects, operating targets and financial targets are based on the beliefs and assumptions of the company's management and on information currently available to C&A. These forward-looking statements are no guarantee of performance. They involve risks, uncertainties and assumptions since they refer to future events and therefore depend on circumstances that may or may not occur. Investors and analysts should understand that general conditions, industry conditions and other operating factors may affect the future results of C&A and may lead to results that differ materially from those expressed in such forward-looking statements.

Now I would like to turn the floor over to Paulo Correa, who will start the presentation.

[Paulo Correa, executive]

[Interpreted] Good morning, everyone, and thank you once again for joining our earnings call for the second quarter of 2025. Let's get started with the quarter highlights. In fact, if I could translate our entire conversation into a single word, it would be consistency.

Our same-store sales in Apparel reached 17% this quarter with a gross merchandise margin expansion of almost 2 percentage points. In 2 years, Apparel net revenue grew by almost 33% with a gross margin expansion of nearly 2 percentage points. This strong operational performance also led to an increase in our pre-IFRS 16 EBITDA margin, which reached 15.3%, more than 2 percentage points above the second quarter of '24.

C&A's preference among our female consumers is increasing, and we are confident of this not only because of our sales performance, but also due to the satisfaction survey results that showed an increase of over 10 percentage points in our NPS for the quarter. As a result of these developments, we had a 113% increase in adjusted net income, reaching BRL 124.7 million. At the same time, we hit a record cash generation this quarter totaling BRL 185 million. This robust cash generation allowed C&A to close the quarter with a leverage reduction to 0.3x in the net debt-to-EBITDA ratio. Another highly notable indicator is our 20.4% ROIC over the last 12 months.

Now moving on to the next slide. You can see our traditional update on the Energia strategy. Starting with the product pillar. We keep on rolling out the initiatives tested throughout 2024 and speeding up their implementation in physical stores. We are investing in the continuous advancement of our key categories. This quarter, we already implemented over 470 Energia initiatives in our stores. We continue to advance in women's and men's, jeans, in our new basics area and in the lingerie, Ace and Beauty categories, which continue to gain relevance in our portfolio.

With the goal of adapting the assortment to each store's consumption profile, we continue to advance our personalization strategy through dynamic assortment, which now has 8 categories in the testing phase. We also took a significant staff with a fashion AI design, our generative tool that assists in product development to expand our assortment with greater agility and productivity. In the past, it could take several months for a product to be developed and made available in stores. Now this entire process is much quicker and more agile.

In Beauty, we achieved growth of over 64% year-over-year with our Valentine's Day event boosting the performance of fragrances and makeup, reinforcing our strategic conviction regarding the growth potential of this category. And as a result of all of these initiatives, we have clearly advanced in expanding our assortment. We now have increasingly relevant and versatile products available for our customers in our stores.

Moving on to the next slide. The last quarter, we developed our Logistics Strategy to sustain C&A's growth curve until 2030, and that was done with the support of expert international consultants. This design was customized to leverage our business model and to increase our commercial and supply chain agility. This strategy was designed so as to bring greater speed and flexibility to our operational model through a more regionalized network, that is, a network that is closer to the stores and major consumption centers, allowing us to have greater capacity to respond to the demands of each store.

The structure will include the presence of urban hubs, which should contribute to greater flexibility and better inventory management in our stores, allowing for a higher frequency of replenishment. Furthermore, granular distribution will also maximize and expand our push and pull operation and viable programs, which will help minimize the risk of stock-outs and will allow for a more balanced distribution of our inventories.

We have also been focusing on a balanced automation of processes, which should contribute to productivity gains and allow us to have greater return on invested capital. This will bring even more agility in the replenishment time of products in our stores and allow us to have greater capacity to adapt and react to our customers' demands.

Now let's talk about the omnichannel journey. I'll get started with our in-store initiatives. We continue to advance with our openings. We opened a new store at Valinhos shopping mall in the state of Sao Paulo, totaling 3 openings this year, all of them exceeding our initial expectations in terms of performance. We also carried out 7 renovations this quarter, 5 in the Southeast, 1 in the South and 1 in the Northeast region, in addition to an expansion at the Nova America mall store in Rio de Janeiro, which also underwent renovation.

The Dispersion Project is now in its fourth wave of implementation, reaching almost 100 stores in our park. Both the renovated stores and those within the scope of Dispersion Project continued to show double-digit growth performance above the company's average.

Now let's talk about our online channel. We had a quarter marked by significant advances in our digital experience with innovations that create a more seamless customer journey. In the quarter, we presented a 30.8% growth in net revenue from the website and app, boosted not only by the higher traffic but also by the 8.4% higher conversion rate. Among the various initiatives, we were pioneers in the use of technology and AI embedded in our website's fashion assistant, which makes it easier for customers to find the products they want.

Now with AI personal shopper, you just need to type something like, oh, I'm looking for winter work outfit, and then personalized suggestions will be given based on this contextualized search. This innovation has already shown results with an increase of up to 4x in conversion among users of this new feature. In addition, we expanded the fashion journey with implementation of a virtual fitting room on the website and on the app, helping customers choose the right size. This solution has contributed to a conversion that is up to 6x higher among users who make use of this feature.

Now moving on to the brand pillar. This quarter, we supported the Everybody in Rio Lady Gaga event, one of the largest events in Brazil, which brought together over 2 million people with huge visibility to our brand both in Rio stores and also for everyone who watched the event online on various different channels. We also launched our special Mother's Day campaign featuring Ingrid Guimarães and Monica Martelli, along with their daughters, strengthening our emotional bond with the audience. In addition, we launched a very innovative collab with top stylists, bringing together creativity and the challenge of designing must-have versatile and affordable items. These initiatives have generated significant visibility for C&A, which translates into improved brand indicators.

Now I'll turn the floor over to Laurence to provide a bit more color to you on our numbers.

[Laurence Gomes, executive]

[Interpreted] Thank you, Paulo. Good morning, everyone. Thank you for joining us. Let me get started giving you for the details about our numbers, starting with net revenue. In the quarter, our Apparel same-store sales reached 17% even on top of a strong baseline of 13%. This performance was only made possible due to our thorough commercial planning, which brought a wider assortment with lighter pieces. Our Test & Learn methodology also contributed to the renewal of our products.

Operational agility was also paramount to achieving this result. We managed to get the right product in the store at the right time, which put us in a good position to make the most of sales in this period. In addition, we continued with the demobilization of our cellphone business, and we shut down another 66 kiosks after Valentine's Day. Now we only have 47 in operations.

The Beauty category continues to have a robust performance growing consistently. In the quarter, net revenue for this category increased by 64% with a highlight on the performance of fragrances on Valentine's Day and also cosmetics and make-up. Our merchandise same-store sales reached 15% in the quarter.

Now on the next slide, you can see details about our gross margin. We continue to grow in sales while, once again, we present gross margin expansion. In Apparel, we grew by 0.8 percentage points year-over-year due to the higher share of winter products in the quarter's mix. And we also had an even more effective performance of our dynamic pricing. As a result, we had a higher level of full price sales and a lower need for markdowns.

In Electronics and Beauty, we achieved an 8 percentage point expansion due to the higher participation of Beauty products in the category mix. As a result, our gross merchandise margin increased by 1.9 percentage points in the quarter, reaching 5.3%.

It's worth mentioning that idea of consistency here. Looking at C&A's evolution from 2022 until today, we have presented sequential margin expansion in all categories. In Apparel, we had an increase of 2.6 percentage points comparing the second quarter of '25 with the second quarter of '22, while our Electronics and Beauty category expanded by 12.4 percentage points. This led to a gross merchandise margin increase of 5.7 percentage points on this comparison basis.

Moving on to the next slide. Here, you can see our pre and post IFRS view of expenses, but I will focus on the pre-IFRS 16 numbers, which better reflects our operational dynamics. Selling expenses in the quarter presented a drop of 0.2 percentage points over net revenue even with marketing investments, more campaigns and increased presence in social media, which is in line with our Energia strategy.

G&A presented an increase of 1.5 percentage points as a percentage of net revenue, mainly due to the increase in the provision for labor charges on long-term incentive plans tied to stock performance, which had an increase of 83% in the period. In addition, we continue to reinforce our structure, strengthen our areas with a greater share of push and pull, which also contributed to this increase. As a result, our operational expenses analyzed as a percentage of net revenue increased by 1.4 percentage points against the second quarter of '24.

Just regarding the effect of the LTIP provision increase, the increase would be 0.3 percentage points on the same comparison basis. It's important to highlight that this dilution was also impacted by the effect of the demobilization and a lower revenue in our cellphone business and also a drop in C&A Pay revenue. In other words, looking only at the relationship between our operational expenses and our growth in Apparel revenue, we're managing to have good expense control even with numerous projects to structure our different business areas.

Now on the next slide, you can see C&A Pay highlights. We remain focused on the recurrence and spending of our active customer base, which allowed us to achieve an increase in C&A Pay's penetration to 27.9% in the quarter. Origination was lower and we closed the second quarter of '25 with a portfolio of up to 360 days of BRL 888 million, 2.9% lower than the second quarter of '24. Greater selectivity in grant in credit, collection, efficiency and other initiatives provided better rollover levels, which resulted in a 3.1 percentage points reduction in the quarter's net losses and a 2.5 percentage point reduction in the NPL for the quarter. This led to a better contribution margin year-over-year, which generated a positive operating result of BRL 0.3 million.

Last but not least, this quarter, we also ended the partnership we had with Bradescard, which resulted in the payment of BRL 650 million with the repurchasing of the right to offer financial products. And also, we sold the portfolio and got BRL 160 million in payment. The end of this partnership concludes one of the strategic pillars of our 2019 IPO. And now C&A is fully regaining independence and autonomy in this business area and will obtain from now on a significant reduction in our financial expenses going forward.

Now let's talk about delinquency. Due to the hard work focused on recurrence of our active base and collection efficiency, the net loss of the 360-day portfolio reached 4.8%, a reduction of 3.1 percentage points compared to the second quarter of 2024. The NPL formation, which is represented by overdue balances over the 360 portfolio, also showed improvement reducing from 7.1% in the second quarter to 5.2% this quarter. As a result, the NPL 90 indicator, which considers the amount of overdue balances between 90 and 360 days, reduced by 2.5 points. Finally, the level of coverage on overdue balances above 90 days ended the quarter at 105.5%, 1.4 percentage points above that of the second quarter of '24.

Moving on to the next slide. Here, you can see our IFRS 16 adjusted EBITDA evolution, which already disregards the impacts of the disposal of the co-branded card portfolio from the partnership I mentioned earlier. So we deducted that number. In the quarter, we reached and BRL 426 million with a 2.1 percentage point expansion in the EBITDA margin for the period. This evolution is a consequence of a higher net revenue with the extension of the company's gross merchandise margin, combined with better levels of net losses in the quarter.

On the next slide, you can see our adjusted net income evolution. In addition to recurring adjustments related to LTIP and the recovery of tax credits, it disregards the effect of the sales of the remaining Bradescard portfolio. As a result of this operational performance, our adjusted net income reached BRL 125 billion, 113% above the same period last year with an expansion in net margin that was almost twice as large year-over-year.

Now on the next slide, we brought you further details about our quarter investments, which totaled BRL 111 million, a 94% increase year-over-year, of which 70.4% were dedicated to the Energia project. Most of these investments were targeted on renovations and remodels. And also in the technology front, we made investments to sustain the advances of our commercial intelligence hub. As Paulo mentioned earlier, we continue to invest in the evolution of our dynamic assortment and in our CRM tools focused on personalization.

As a final financial highlight, on this page, you can see the history of the company's leverage reduction. This quarter, we have the payment of BRL 650 million related to the Bradescard obligation, which resulted in a 32% reduction in the company's total gross debt. And we did that while we achieved a record cash generation, boosted by a good working capital dynamic and inventory turnaround. So we closed the quarter with a robust cash position of BRL 1 billion with a 73% reduction in our net debt. As a consequence, our leverage reached the lowest level since our IPO, reaching 0.3x net debt to EBITDA.

To wrap up before we open for questions, I want to comment on our ESG highlights for the quarter. This quarter, we achieved a top 3 position in Exame's Magazine Best of ESG ranking, which is the main corporate sustainability award in Brazil that uses a strict methodology to assess the social and environmental impacts of organizations. We sponsored the 2025 edition of Rio2C, the largest creativity and innovation meeting in Latin America. And as part of our commitment to diversity, equity and inclusion, we established a partnership with UNHCR and UN Women to hire refugee women so as to promote greater social and economic integration and the generation of decent opportunities for vulnerable populations.

So that concludes my presentation. And now I'd like to turn the floor back to Paolo.

[Paulo Correa, executive]

[Interpreted] Thank you, Laurence. I would like to wrap up our presentation in a different way today because, this quarter, we have completed a bit over a year of implementation of the Energia C&A strategy. This slide show some of the highlights we shared with you during this call but that helps to explain why our results are so consistent. We have executed our strategy with great diligence, and this has been leveraging our operational performance and significantly increasing asset productivity. At the same time, we are gaining market share.

So we are actually talking about the eighth quarter in a row with double-digit growth in Apparel same-store sales, and we have had 16 consecutive quarters with gross merchandise margin expansion. These results are powerful. And combined with discipline and the company's financial management of expenses, investments and working capital, which have contributed to a reduction of our leverage that has now reached 0.3x, this allows us to accelerate our investment plans with our own cash while achieving higher return on invested capital, which is clear if we look at the 20.4% ROIC in the last 12 months. This shows the company's new momentum with healthy growth, robust balance sheet with the capacity to invest and greater return on investment.

And to wrap up, I'd like to share some amazing news with you. A little over a year ago, we started our new store concept project which materializes all the evolutions we saw with the Energia project. We conducted a deep survey with our consumers to understand how we could provide them with a better store experience. And we hired one of the most renowned consulting firms in the industry and we conducted a very careful work to create an increasingly seamless journey in our stores. And the result of this work is our new Energia store, which will be opened on August 22 here in Sao Paulo at 6:00 p.m. at the Center Norte shopping mall. You're all invited to come witness this landmark or milestone in our journey.

This project is the materialization of our Energia strategy. It brings important elements in the presentation of our main product categories with the goal of building an increasingly relevant and seamless experience for our customers. We're very excited about this new chapter in C&A's history, and we hope to see you there to experience this with us.

Thank you.

[Operator]

[Interpreted] [Operator Instructions] Our first question is by Rodrigo Gastim with Itau BBA.

[Rodrigo Gastim, analyst]

[Interpreted] I have two questions. My first question, I mean, in retail, we always wonder about margins in our recent conversations, Paulo, you talked about looking at the winter numbers as a whole. But can you give us more color on what's happening in the second part of the winter? Have you seen any changes compared to the growth you saw in the second quarter? So anything you can tell us about the second part of the winter would be great.

Now about Apparel gross margins for the second quarter, can you break down these numbers for us? We saw an 80 basis point increase. Is that because of the winter seasonality? Or is that an improvement in assortment in stores that decreased the markdowns?

[Paulo Correa, executive]

[Interpreted] Thank you for your question. Well, you know what we think about this. Before anything else, I'd like to start by saying that our performance is in line with our plans. And I have to say this, I've said this before in the second quarter 2024 earnings conference call, and I'll repeat it once again. The winter performance needs to be looked at as a film and not as a static snapshot. If you look at a snapshot, you can have twisted perceptions because you have temperature dynamics and baseline dynamics that need to be taken into account. I always tell the team that we have to look at the second quarter combined with the third quarter so that we can understand what's going on better.

So if we compare 2025 to 2024, winter came earlier, which benefited the second quarter somehow, but it will bring more challenges to the third quarter. But that was all expected. There's no surprise here. So we know what the expected performance is. So this quarter, we still have -- we are in the fifth week of the quarter, and we have some important dates ahead of us like Father's Day this weekend and this temperature transition with higher temperatures in the beginning of the spring and summer seasons. So we're very confident about what we've been doing and very happy with the performance we've been achieving. And you see some fundamentals that are strong indicators of behavioral change.

I don't see any significant changes when it comes to flows or conversion in our stores or delinquency of our customers. So what we've been saying, our revenue has been quite consistent and we expect the same to keep on happening next quarter.

And you also asked about gross margins, right, if this is related to seasonality or assortment. I would say that assortment has a significant impact but it's a progressive one. We're just in the early phases of implementation here. The greatest part of this movement will happen in the second half of the year. This came from the Test & Learn methodology with right products being made available and a lower markdown need because winter came earlier, as I said, and also due to the versatility and the right choice of the collections we launched.

[Rodrigo Gastim, analyst]

[Interpreted] Great, Paulo. That was very clear. Now still about the markdowns, do you have any internal indicators or numbers that you can share with us to show the improvements in markdowns over time?

[Paulo Correa, executive]

[Interpreted] We don't share this number explicitly. But just to give you an idea of the variation in markdowns, if you think about the volume of items as a percentage of the total volumes -- total sales volume, this number dropped 1.5% percentage points year-over-year, just so you understand the impact.

[Operator]

[Interpreted] Our next question is from Pedro Lima with BTG Pactual.

[Pedro Lima, analyst]

[Interpreted] I have a question about the ticket and volume composition in the 17% growth in store productivity. Can you give us further details about this? How much of this growth came from ticket and how much came from volume? And do you see opportunities to pass through prices throughout the second half of the year?

[Paulo Correa, executive]

[Interpreted] Pedro, thank you for your question. Once again, I'd like to highlight the dynamics of this winter season, which is different from the others. Once you have a higher share of winter items, the average prices will naturally increase because we are talking about a mix with more winter items, which leads to a higher average ticket. So if we look at the evolution of the total Apparel average ticket this quarter compared to last year, you see that most of the growth was related to price but, once again, price related to the product mix dynamic.

Our pricing monitoring and pricing management comes from a continuous reading of our pricing in each category and compared to all of our competitors. So what do I mean here? This quarter's growth was mainly boosted by increased prices as compared to volume, like 80-20. And this price increase was mainly boosted by product mix and not unit price in the like-for-like products. And a lower need of markdowns also helped increase the average price this quarter.

[Operator]

[Interpreted] Our next question is from Vinicius Strano with UBS.

[Vinicius Strano, analyst]

[Interpreted] Talking about C&A Pay, we saw increased penetration and we still see a conservative policy when it comes to new accounts. So can you tell us about your customer demands for C&A Pay? Can you tell us about your credit indicators and delinquency?

And I also have a question about your premium and regular store performances. Premium stores were achieving strong performance. Can you update us on that? Has anything changed? And can you also give us a follow-up on product mix? Do you expect C&A to evolve in this fashion pyramid? Do you intend to take up space in the fashion industry and increased prices due to the mix going forward?

[Paulo Correa, executive]

[Interpreted] Thank you. I will start, and then Laurence will answer your question about C&A Pay. So let me get started talking about our premium stores performance. We do have a segmentation that is based on the purchasing power of the audience of each one of the stores. And indeed, we've seen greater advances in stores in which the audience has a higher average purchasing power. This is related to purchasing power as it's also related to how we learned about consumer preferences, which enabled us to experiment and launch new price ranges in new products and new categories.

So yes, we see opportunity to bring more fashion, higher added value and better products, doing that in a higher price range, not losing sight the entry-level products. But this brings us greater effectiveness in premium stores. So these two factors combined explain the better performance of this type of store.

Now talking about product mix, indeed, what's going on was impacted by the winter effect because of the temperatures. If we compare the sales product mix from 2025 versus 2024, we'll see a higher share of winter products, which boosts the average price. However, we still see opportunities to increase our price spectrum. So that means we're going to get a certain category that goes from BRL 60 to BRL 150 in price. And you see that you can explore products with higher added value here that can get up to BRL 199. So this is the beauty of learning from dynamic assortment, to understand that there are opportunities and so that we can devise proposals that are valid and that add value to our customers with a higher price range, not leaving aside the base of the pyramid and the entry-level product offer that we have for all of our store categories.

[Laurence Gomes, executive]

[Interpreted] Thank you for your question, Vinicius. About C&A Pay, we've been talking about this. But once again, I'd like to highlight that we've been focusing on the retail purchasing journey and how C&A Pay is an integral part of that journey. So we've been focusing a lot on the pay experience in stores and both the digital and physical channels. But we want C&A Pay to be not only a credit tool but also a relationship and a communication tool. And I would say that we've been advancing quite well in doing so.

And we continue believing that we can reach a penetration of 30% to 35%, which is what we consider a healthy sales penetration. And we think this is possible not with the current interest levels and all the uncertainties we have, but at some point in time, this might be able to happen. But now we're going to focus on improving the experience and the quality of the product in stores. We want to offer convenience and functionality, no friction. And we want to be able to identify customers that have credit approved, but that for any reason is not making the most of what C&A Pay has to offer.

So this is pretty much our thinking right now. I would say we're doing well. The integration is advancing, but we still have great opportunities ahead of us.

[Operator]

[Interpreted] Our next question is from Pedro Pinto with Bradesco BBI.

[Pedro Pinto, analyst]

[Interpreted] I would like to understand the next wave of the Dispersion Project. Paulo mentioned that you have reached 100 stores with 2 digits above the company's average. So can you tell us about your pipeline of stores and also your time line for this project and how this impact same-store sales?

Now my second question, the company has achieved 0.3x net debt over EBITDA, which allows you to speed up investments with your own cash. So are you thinking about opening new points of sales? Or you want to improve your Dispersion Project in the short term?

[Paulo Correa, executive]

[Interpreted] Thank you for your questions. These are great points. About Dispersion, this is actually a work in progress. We're still working on this. And as we implement a new wave, we end up developing new opportunities and new initiatives, and this makes it possible for us to bring it to a higher number of stores. But I would say that the greatest opportunities have already been explored. Now we want to add another 25 stores in the spring months ahead of us, but not in December, because in December, we need to focus on other opportunities. But the idea is to add another 25 stores this year to get to about 124 stores in total. That's what we want for the second half of 2025.

Now one of the elements becomes very clear in this Dispersion dynamic, which is the renovation. And this is related to your second question because since now our balance sheet is strong enough to accelerate our investment appetite, we, of course, are talking about this, and the idea is to speed up our investments starting now in the second half of '25. We should be getting to around 20 renovations this year. But we're also planning to achieve the number of 30 renovations in 2026. So yes, that's our goal, to speed up our renovations because now we also have a new concept that will gain maturities throughout the rest of 2025 so that it can be accelerated in 2026.

Now about new openings. This cash position gives us the opportunity to move faster. So we're planning to open at least another 5 stores this year, adding up to 8 in total. And the idea is to open from 15 to 20 stores in 2026. So we want to resume our store opening level. We're looking at the opportunities of locations, but we are always very much focused on offering a good experience and having investments with the right level of return. So we're not going to lose discipline when it comes to investments and return on investment.

[Operator]

[Interpreted] Our next question is by Andrew Ruben with Morgan Stanley.

[Andrew Ruben, analyst]

I'm curious if you could talk more about the logistics strategy. Maybe just give us a sense of how long and how much capital to implement this project? And then also a sense of what the network will look like when all is said and done. You mentioned some of, I think, the urban hubs, but what you're considering in terms of larger distribution centers as well. Any of that color, since it's big project, it would be very helpful.

[Paulo Correa, executive]

[Interpreted] Thank you for your question. We're talking about a strategy that we developed so as to have a full integration with our speed model. So rather than centralizing things, our goal is to decentralize. The idea is that in 2026, we can have or hubs and 1 major distribution center. So 1 distribution center in 4 urban hubs. This would be a 3-year long program. So this implementation would be done by -- until 2027. And we're talking about BRL 200 million to BRL 250 million in CapEx to be invested in the next 3 years.

So our mindset is the following. We want to achieve a greater granularity through these different hubs, which will be expanded with time. So the idea is to have a small distribution center for you to distribute more often, right, with higher frequency, but also higher speed in order to meet the specific demands of each store. That's the philosophy behind all of this. If you transport your products to certain hubs at once, this will optimize our logistics costs, right, especially transportation costs. So we've been looking at this. We already opened our first hub in Porto Alegre in recent weeks. That's our first experiment, so to speak.

And this will gain maturity with time, of course. The concept will gain maturity. And as we're able to achieve results, we will roll this out gradually and progressively so as to minimize risk and increase returns as much as possible.

[Operator]

[Interpreted] Our next question is from João Soares with Citibank.

[Joao Pedro Soares, analyst]

[Interpreted] Great news about your investments. It's great to see the company talking about store and distribution expansion. Now how are you going to select the points, the locations? What have you mapped in terms of mall stores or street stores? What is the expected productivity for each point of sales or location?

Now about the C&A Pay credit appetite. Looking at the dynamic, I'd say you're still conservative when it comes to credit appetite, and I would say the installment yield reduced a bit. But you said that the flow is still strong. So why is it that you are not increasing your risk appetite? We see lower penetration compared to other players. So can you explain to us why this is happening?

[Paulo Correa, executive]

[Interpreted] Thank you for your question, João. I'll start with the first part and Laurence Beltrão will answer the second part. Our screening process is supported by different tools that will map the potential of each location and the fit with our strategy and customer base profile. So we're constantly monitoring the potential in each city. And we have around 120 to 150 locations that could have a C&A store with the performance level that we would like to have. Of course, these locations need to be prioritized.

Our expansion team will always visit the locations focused on prioritizing them. But we're talking about a strategy that is basically in shopping malls. So we're much more focused on shopping mall stores than in street stores. And when it comes to shopping malls, the best opportunities are usually in existing shopping malls. In existing shopping malls with a store with 1,500 to 2,000 square meters means that you have to be patient. Of course, we have a target and we're going to go after this target. But before anything else, we have to assess the location potential.

And I talked about our investment diligence. So whenever we look at these different locations, we see new opportunities and we are now building this project of having a C&A in that location, in that city, together with other entrepreneurs. So this is how we approach our new entrepreneurs. And we try to devise new solutions It's a long cycle that can take from 10 to 15 months until you can find a location with good potential to achieve the right sales performance and investment return. But we've been talking with different entrepreneurs throughout the whole country to try and make the most of the opportunities to have a C&A store in an existing shopping mall in specific cities.

And the response of the new shopping malls that we have opened stores in like Chapeco and Valinhos. I mean, the performance they achieved was much higher the performance that we defined in our business case. So that's what we want to continue doing from now on.

[Laurence Gomes, executive]

[Interpreted] Okay. João, about risk appetite in C&A Pay, I would like to remind you that C&A Pay has a risk model and credit granting framework that defines our appetite and credit approval rate. So based on this framework, our appetite is defined. And of course, we also have internal policies that we're still quite conservative when it comes to credit granting. We are at the same levels we were last year when it comes to credit approval rates. So interest rates at 15%, I mean, this is probably one of the main variables that make us keep our conservative position.

In addition to that, our focus right now is not on origination but on recurrence, on spending, on communication, on relationship. We want to work with our active customer base. So that's our focus right now. And above all, what is compulsory to have and follow our risk models and credit granting models. Once again, we believe that with the evolution and improvement in the macroeconomic environment in Brazil with lower interest rates this year, then next year we may have a different scenario with less uncertainty and greater stability. And if that actually happens, we may be able to increase our C&A Pay risk appetite.

[Operator]

[Interpreted] Our next question is by Felipe Rached with Goldman Sachs.

[Felipe Rached, analyst]

[Interpreted] My question is about logistics. I understand the goals of this more granular logistics, but I also think it has some cons, right? Can you talk about that and also about marketing investments? I know that the Energia has brought good results. But can you tell us about the initiatives that you have taken in marketing and branding and how this is going to evolve with Cecilia's arrival now?

[Paulo Correa, executive]

[Interpreted] Felipe, thank you for your questions. So you talked about the balance of the logistics model. Brazil is a huge country with a huge territory, and we have an irregular highway network in the country. And in my view, that's one of the greatest challenges of this model because as we start to build the hubs we want to have in the different locations, our goal is to be able to be closer to the group of stores that will be replenished from that hub and so that we can have greater response agility. In our current model, if we have a certain need in a store that is far away from our distribution center in Sao Paulo, it can take us days to react.

And this means sales being missed or opportunities of offering a better assortment to our customers being missed. So we want to be able to offer the right products in each one of the stores. That's about assortment and consistency in the product. That's the idea behind this. If we're closer to the stores, then we can react faster to these needs. Now if you create predictive models with some level of aggregation, your error level is lower than when you create predictive models store-by-store with the distribution coming from Sao Paulo like we currently do. So that's the rationale behind this. And we do have great expectations to have the right assortment level with a better service in our stores.

About marketing, indeed, a month ago, our new CMO, Cecilia Preto, joined the company. She has a long history working with consumer goods and branding. And this is related to the work that we intend to implement in the coming months to expand our branding initiatives in the company and to build the C&A brand based on our positioning, which is we find ourselves at C&A. That means that we find the products we want, we find the fashion we expect to see, and we find the products at the right price and the right value. So that's the rationale. In the coming months, we will intensify all of these actions, like we said last quarter.

We had the music universe joining the fashion universe with the stylists to bring this universe to our customers. Of course, there are many other factors influencing this, but we cannot forget to say that this new store concept is a milestone in this branding idea because the experience and the look and feel of the store will show what C&A brand positioning is, what C&A Energy is and how we stand out from the other competitors.

[Operator]

[Interpreted] Our next question is by Danni Eiger with XP.

[Danniela Eiger, analyst]

[Interpreted] I have two questions. The first is a bit controversial about tax exemption of cross-border players. Considering all the political topics in the agenda, this may be left aside, but I'd like to understand if you are reacting to this somehow. You talked about expanding your price spectrum. Are you also assessing possibilities to do this also with more popular stores in addition to the more premium stores as a way to overcome this headwind? Or are there any other initiatives that you're going to implement to face this?

And now about profitability going forward. You talked about marketing, but I would also like to hear about gross margins. What do you see here as the main gross margin levers? Apparel was a positive surprise, but we had the winter factor playing in here. Do we have any other structural levers considering that marketing investments will continue for some time? What can we expect in terms of gross margin and EBITDA going forward?

[Paulo Correa, executive]

[Interpreted] Thank you for your questions, Danni. About the cross-border dynamics, of course, everything we see here is speculation. The players have been in contact with the authorities, but anything we could do here would be a step back. And as I said, we have had 8 consecutive quarters of double-digit growth. Some of these quarters happened before that tax change. So we're not going to make any strategic change because of this. This is not in our radar to change our Energia strategy.

Our goal with the Energia strategy is to show the relevance of our products, the strengths of our categories, the seamless user-friendly and intuitive journey. And this is not based on entry-level prices. This is not the path that we want to take regardless of the developments here. So we'll continue with our journey and we expect the economy levels to increase rather than decrease.

Now about gross margins, I see here opportunities to see our models and algorithms mature. Our team is working on the learnings from these dynamic pricing algorithms, and we expect this to bring us opportunities to increase our gross margins. And as we implement the Logistics project, this will give us greater assertiveness, will put us closer to consumers and that will lead to a lower need for markdowns and more full-price sales. This also impacts the company's gross margins. So dynamic assortment, also the choice of the collections that are made available in each one of the stores, this should also bring positive results and positive impacts on gross margin

[Danniela Eiger, analyst]

[Interpreted] Excellent. Congratulations on your results.

[Operator]

[Interpreted] Our next question is from Ruben Couto with Santander.

[Ruben Couto, analyst]

[Interpreted] Just a quick follow-up about the renovations in your new store format with the C&A Energia. I know that you cannot give us any spoilers, but you have this new philosophy of concept stores. This new format now a priority or renovations and new openings from now on? And if this format is successful, how much would this new format account for in your store base?

[Paulo Correa, executive]

[Interpreted] Ruben, thank you for your question. Like you said, we've been working on this concept for some time now, and that's why we're so excited because it's the result of all of the hard work we've done with the Energia project. And as in any new concept, there are learnings and adjustments that are needed. There's no store concept that is brought to life perfect overnight. And if you look at the retailers with a large store network, it's common for them to have different versions of stores in their portfolio. So I mean, when we prioritize consumers with a good customer journey, this will lead to increased square meter sales, which is what's going to make the engine run.

So we want to enhance the model, make it better. And of course, then this new concept would be the official one. All the new stores would have that new model, which would bring an uplift in our square meter sales. And that's the goal of our Energia project, to increase our asset productivity. That's the idea behind Energia. And starting in 2026, we believe that the renovations would already have that concept in mind.

[Operator]

[Interpreted] This concludes our Q&A session. I would like to turn the floor over to Paulo for his final remarks.

[Paulo Correa, executive]

[Interpreted] Thank you all for joining us. Once again, I want to say how proud we are of the accomplishments we had this quarter. And these results come from this consistent transformation, with discipline and execution, customer focus and delivery of results. So this customer focus and customer satisfaction obsession was key here. This was a great quarter, and I want to thank our C&A team for their hard work. This is only possible because of you. So let's continue with our purpose of impacting people so that they can be what they want to be through fashion.

So my heartfelt thanks to you. Thank you so much and see you at C&A.

[Operator]

[Interpreted] If you still have any questions, please get in touch with C&A's Investors Relations team. Thank you all for joining, and have a great afternoon.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]