Magazine Luiza SA

BOVESPA:MGLU3

Q3-2025 Earnings Call

[Operator]

Good morning, everyone. Thank you for waiting. Welcome to Magalu's conference call regarding the quarterly earnings. For those who need simultaneous translation, click on the interpretation button via the globe icon at the bottom of your screen and choose your preferred language, English or Portuguese. We want to inform you that this event is being recorded and will be made available on the company's IR website at ri.magazineluiza.com.br. The earnings release and presentation are already available in Portuguese and English. The link to the presentation in English is also available in the chat. [Operator Instructions]

Now I would like to turn the floor to Fred Trajano, CEO of Magalu. Fred, please, you may go ahead.

[Frederico Rodrigues, executive]

Good morning. Thank you very much for attending our earnings conference call for the third quarter of '25. I'm here once again with all of the C-suite at Magalu as well as the heads and CEOs of our main verticals, Magalu Pay, KaBuM!, Netshoes and Epoca. All of them will be available here to answer the analysts' questions at the end of my presentation.

I'd like to begin talking a little bit of putting the third quarter into context based on our strategy cycle. I've been -- I'm celebrating 25 years at the company, 10 years as the CEO. In the last 10 years, we divided our strategic initiatives into two major strategy cycles. The first from 2016 to 2020, it was the company's digitalization strategy cycle. In 2015, we had BRL 10 billion of GMV. It was high numbers at that time, BRL 2 billion online, and I took over the mandate of digitalizing the company because we knew, especially durable goods would migrate significantly to the online. And we had this mandate to digitize the company in this period. We consider that we have concluded this cycle in 2020, that was the last year of the company's digitalization cycle.

At that moment in 2020, we closed 1,300 stores, 50% of the revenue in 2020, but still, we grew 50% and the online started to represent 2/3 of our sales. We consider that at that time, we were able to digitalize the company and conclude the cycle successfully.

The next cycle, that's the one that we're concluding now. That's why I'm giving you all this opening context is the results diversification cycle of making our results more resilient to macroeconomic flows, especially more resilient to changes in interest rates because SELIC in Brazil, the SELIC rate is very volatile. It has high and low cycles, and we needed -- we had digitalized the company, but we had not yet done this results diversification process, which we did by adopting an ecosystem strategy where we acquired companies diversified categories, especially in lines of service, creating Magalog. We evolved the operations of Magalu Pay, our financial company. We'll talk a lot about that today. We launched and evolved Magalu Ads and Magalu Cloud, not to mention the diversification of categories that we mentioned.

With that said, even with the interest rates of 15% this quarter, we presented very positive results, reaching another quarter with high profitability with EBITDA margin of 7.9%, BRL 700 million of EBITDA results. We resumed the income level of BRL 21 million to grow income in a company that still has a large share in cyclic sectors to have BRL 20 million of profit in this scenario is very positive. And reinforcing that, and I'll detail it later, but the initiatives to build this ecosystem and diversify the results has been making our results more resilient.

The company is having financial discipline that's very good. And cash generation, once again, with a good dynamic of working capital, generating BRL 535 million of operating cash in this quarter with the generation in the last 12 months of BRL 2.5 billion. So the company has been communicating to the market that in this context of high interest rates, the focus is on profitability, preserving margins. And this has been our execution with a lot of discipline since then.

In this context, I think the company needs to make some decisions and some trade-offs. It's unavoidable in a context such as what we're experiencing in the macroeconomy. And our trade-off was to slow down our growth. Actually, if we look at our revenue, the net revenue of this quarter grew only 1% year-on-year. But obviously, due to our decision to work only in sectors, categories and sales with positive contribution margins. If we find a scenario with negative contribution margins, we decide in this quarter not to address that sale opportunity. And that generating this impact and the slowdown of our sales, which I think is actually quite resilient considering the scenario we had physical stores still in the positive context with the same-store sales of 5.2% this quarter, even with a quarter where we didn't have that brief off-season summer that we had last year, that was an important part for the white goods sales that quarter, we still grew 5.2%.

We remain very resilient online, flat from -- compared to last year and 3P, considering that we have a lot of share of long-tail merchandises and lower ticket goods, which today are operated at negative contribution markets, free shipping for very low tickets, we chose not to play that game. Our focus is to increase fulfillment that this quarter achieved a share of 28%, growing compared to the 24% of last year.

Our fulfillment is different, and Ricardo Garrido can talk more about it later. But we are letting go a little bit on sales with negative contribution margin to focus on the others. And reminding you that our fulfillment is multichannel with a lower delivery cost with the store pickup on 3P. And with that, I can provide free shipping without losing money. So this is positive. So this is a decision we're making. Temporarily, it will affect the channel's sales. But definitely, when we get over this period of this from third-party shipping to Magalu Entregas and fulfillment by Magalu, we will actually be growing with a lot more sustainability in our results and more competitive resilience.

I'd like to highlight now the reason why we are preserving positive margins in such a harsh scenario in terms of competition. I'd like to highlight here all the investments we made in the strategic cycle and the ecosystem are doing very well. KaBuM! with another quarter of BRL 11 million of income. Netshoes also with a record quarter, growing 12% in sales compared to last year and with a net income of BRL 24 million in the third quarter, an extraordinary quarter. Magalu has been performing very well in its subsidiaries and Epoca Cosmeticos with another very positive year. I'd like to point that these three businesses will be extremely benefited from the new strategy of the company to apply multichannel aspects to all channels of the business, all the business of the company. And I'll explain the new store concept, Galeria Magalu, which will have brick-and-mortar units of all of these business, further boosting this potential of multichannels, which makes Magalu very resilient and will make this business very resilient because in addition to the online operation, KaBuM!, Netshoes and Epoca will have a physical unit with Galeria Magalu. And the idea is to expand that to a lot of the group's other units and further expand these units looking forward. So I think this multichannel aspect will really help these businesses that are already running quite well.

Other businesses where we've been making progress in our ecosystem, I would like to highlight the Magalu Pay, and we have the possibility to ask all your questions. We had another record quarter for Luizacred with BRL 68 million net profit growth compared to last year, NPL also going down, very positive, quite stable. Now NPL over 90 is 8% compared to last year. And we've been proving that our portfolio is of great quality, and we've been able to have quite positive results in Luizacred. But not only Luizacred, we've evolved greatly in consortium. Consortium is already a business of BRL 10 billion of assets under management. We don't talk that much about Consortium Magalu, but it is a great business for the company with net profit of BRL 16 million. So this is a business that goes -- consortium goes well with high interest rates. It tends to be competitive, but a good option.

We're also doing well in the increase of penetration of services, both online and in business. We grew in insurance penetration in our business that helped our financial revenue and the service revenue for the period. Even with a slight decrease in the 3P take rates, this was more than offset by the insurance revenue.

And revenues for the next slide that I'm going to talk about that are Magalog revenues. Magalog has been growing significantly in our business. We created a company, acquired five logistics companies, spin off our logistics department at Magalu and combined all of this business under Magalog's umbrella, which is a logistics operator that provides service to all of the groups and ecosystems companies, but has been providing more and more services to external third-party customers, gaining a lot of market share as a logistics operator.

We've added 12 customers this quarter alone with large customers like Arezzo, IKESAKI, C&A, a lot of companies using Magalog. The service level of Magalog is more than 25%, extremely competitive costs. And with all that, these external clients help us in terms of results, but also help us have the volume in logistics to be able to provide good prices to Magalu's own ecosystem. So it's a win-win, and we've been gaining a lot of awards in the segment and Magalog has had a fantastic year after it was formed as a logistics operator and once we started bringing the results to external customers.

Another slide, please. I'd also like to highlight, I talked about fulfillment already. So I'd like to highlight the ads revenue. Magalu has been growing significantly in this area. We grew 69% this quarter. another revenue that has helped us maintain our total revenue, although the GMV impact that I mentioned. We have a lot of differentiators as everything we do at Magalu. There's always the multichannel aspect. And one of them is the fact that we are enabling 20,000 displays available at the stores for advertisement. So those who advertise on Magalu ads platform in addition to advertising in all digital channels in all formats, we have video formats. We have top-of-funnel format. Sponsored posts. And in our case, we have a differentiator in terms of market compared to market tools, which is the out-of-home, which is advertising at the stores.

The new store is entirely conceived to have LED panels throughout the store to be able to close advertising packages for the major brands in the market. This has been widely well accepted. And we had not only an increase in revenue, but also in the base of advertisers as well. Advertiser base grew 100% in major brands, 113% and 44% for sellers. So we're growing both in major advertisers and in our seller base.

Next slide. I'd like to highlight Magalu Cloud, reaching 1,000 customers in the last quarter, we're winning over the first customers who bring a few million reals per year packages. So we are no longer in the universe of micro and small companies to large companies. And now we're about to sign major contracts with large corporations. And for that, I would like to highlight here for Magalu Cloud this quarter is that we've been able -- we achieved the ISO certification 27001. This is a crucial certification for us to be able to participate in the government's bidding processes, which require local operation because of data or sovereignty nationally and as well as bids for large corporations, most of them require this ISO certificate.

Magalu Cloud has been growing and it is 50% of Magalu's workload is gaining larger customers, and now it's also qualified for new leaps for next year with the certification. There are others that we are about to achieve as well, but we're improving, and this is a landmark that's been celebrated for Magalu Cloud.

So now I'd like to emphasize one of the big launches of this year. We've just launched last week. with a lot of repercursions for our customer base. And outside of our customer base, we launched the first AI commerce experience that is complete -- the first complete experience in the world. Magalu has a huge differentiator. 20 years ago, we created Lu, our digital sales woman that was created based on the founder of the group, Luiza Trajano, the best Director of Board in Brazil. And since we created Lu in 2004, the dream was for her to take over all of the activities with the same magnetism that my end, Luiza always had when she founded the group.

And finally, we are here after decades now, thanks to the highly competent work of our development teams and our partners who participated in this project, we launched the first complete AI platform. We decided to do this exclusively on Lu's WhatsApp. Lu in total has almost 40 million followers in Brazil. She's a global phenomenon awarded in Cannes, and she advertises for other brands in the group. And she is the best most well-known AI character in Brazil and the world, and she has a lot of channels. One of them was already WhatsApp. We had 15 million enabled customers who received Lu's messages, especially for the tracking of goods of post sales regularly. And that's precisely the customers in our base who we launched this experience to and the first world's AI commerce experience in the world because it's complete from product consideration to purchase payments with cards or PIX and all of the post-sales process.

So Lu teaches you throughout the process. We have a very robust architecture. What we launched this experience is not a beta version. It's not a test version. It's not a small AI initiative. It is a multi-agent platform that is very robust with a new architecture that some of our partners saw the architecture like that for the first time. So it's multi-agentic architecture that is complete and has been bringing a lot of positive reviews in the first experiences.

This is already cleared for a lot of analysts who are present here, and we can talk about it later, journalists as well who wrote articles, influencers, but mostly, we're releasing this to our loyal customers. So it's 15 million today, and we intend to grow this base going forward, noting that this is 100% AI commerce experience, 100% automated. This is a huge global level innovation that makes us very proud, especially considering the first reviews we got. There is a video that I would like to show you for those of you that are here with us on the call. And very soon, all of you will be able to see it.

Next slide then. Here, we can see low and some of the features that we have available. She talks to the assistant. She's very nice. She's just as nice as she is in the social network. You have the different modes. You can send audio, pictures, she recognizes everything. And based on a survey, which I believe is this is much greater on the e-commerce searches, which is a standard. The search by keywords usually recommends the product. You can make the purchase, you can talk, ask for more context. And finally, you can get to payment and checkout.

Currently, you can pay via PIX and credit card. And here, we have launched it for 1 million clients. There is the app. So it already knows your credit card in the app. She also knows your delivery address, and this is frictionless. You don't have to leave this environment. I think we have done a very nice development. If you want more technical details, André Fatala is here, and he can talk about the architecture, scalability and economic units from the point of view of business. So all of those can be discussed in the call, but I really wanted to highlight that this is a very relevant launch, and it has been recognized by Meta itself and other partners that were us in this development. And we have news for next week. I'm not going to bring that to you in the call, but we'll talk about it later.

So here are some figures about these first thousands of clients that have participated on this experience. The sales conversion I have 10% higher than. So 3x higher than the app. So conversion is much higher here. The app is engaging in the conversation. NPS of 90. This is very high. It's excellent. We just launched the product and the platform. We are going to have a lot of improvements. Payment mix now is 68% PIX, 32% credit card and channel mix right now is 54% 3P. So this is especially good for 3P, 46%, 1P and long-tail categories, which are the ones that we already need to grow if we look ahead. So Lu's WhatsApp has been great for those categories. Sports, housewares, small appliances, Netshoes sales in Lu's WhatsApp has been one of the main highlights in this beginning. So sports, beauty, all categories with a good performance under this negotiation model, which is great, and we can count on that for future growth.

Now quickly talking about economic units, of course, who starts the conversation here is the client, then the agent sends a message that this has a much lower CC cost, and we believe this is going to have a marginal contribution. This provides a rationale for economic units and also for the long-tail categories that are being sacrificed in the market.

So, I end here my presentation, then I'll come back to talk about galleries. But I'll turn the floor to Roberto Bellissimo, our CFO, for the financial highlights.

[Roberto Rodrigues, executive]

Thank you very much, Fred. Good morning, everyone. Thank you for being with us for this earnings call for the third quarter of 2025. I'm going to go over the main figures. We have already mentioned BRL 15.1 billion in total sales, growth of 5.2% in same-store sales. This is on top of a growth of over 15% in the same quarter of last year. So this is a growth on top of a very strong comparison base.

We have grown our gross revenue in 1.4%, reaching BRL 11.3 billion in total gross revenue. We also highlight here our gross margin. Once again, one of the highest gross margins of the last few years, 31.5%. I highlight here to the merchandise gross margin that has grown 0.2%. Our EBITDA with a margin of 7.9% adjusted net income, once again, since the last -- the end of 2023, when we have recurring net income, and this was another quarter that was positive with BRL 21 million adjusted net income and BRL 85 million of total net income, including here the nonrecurring results, which were positive in this quarter.

Here also, we had tax gains of BRL 133 million and other nonrecurring expenses, which were low in this quarter of BRL 15 million only. Also operational cash flow generation, BRL 535 million, converting EBITDA and cash generation. This has been one of our focus and a total cash position, including receivables and investments of BRL 7.6 billion, a very robust position.

On the next slide, we had the performance of the EBITDA margin in the last quarters, proving the consistency of our EBITDA margin. Even in a scenario of higher interest rates, we were able to maintain EBITDA margin in around 8% in all of these quarters. with the same highlights for the same key levers that we have been reporting in the past quarters, the performance of physical stores, the increase in gross merchandise margin, the profitability increase at Luizacred, also the fulfillment expansion and once again, our operational efficiency and expense control. In this quarter, just like in the prior quarter, we maintained the growth of operating expenses at a very low rate, less than 1% compared to inflation rate, that is around 5%. We have been able to maintain SG&A at a very stable level.

Now on the next slide, we have our working capital performance. We highlight here the change of BRL 100 million in working capital in this quarter. from June to September. In this quarter, also, we should highlight that we are increasing seasonally inventories and with inventories, also the suppliers balance. Of course, in this quarter, we have the seasonality to prepare to the main events that happened at the end of the year, such as Black Friday and Christmas.

At the end of the year, we will go back to reducing inventory levels and improve the turnover for inventories in the last quarter. Also, we should highlight on financial expenses that in this quarter, we were able to sequentially decrease financial expenses, the net financial expenses in the third quarter of 2025 when compared to the prior quarter.

Also, in this period, CDI went up basically 45% compared to last year, and we were able to mitigate part of this effect. And our financial expenses have increased 35% vis-a-vis the same quarter of last year. And this proportional reduction has to do with, first, the increase in PIX. We have been able to increase the PIX instant payment share. We increased the DCC the buy now, pay later. We increased that in physical stores from 8% to 10%, 2 percentage points, also with a better results in the delinquency rates in our DCC, and we were able to sell less in credit cards from third parties, and we reduced expenses for prepayment of receivables and also the balance of prepaid receivables. In the next slide, we explain the dynamics for cash generation in this quarter.

Here, you can see that our total cash went from BRL 8 billion to BRL 7.6 billion, exactly because we settled debentures that were issued by KaBuM! in the amount of BRL 400 million. So today, KaBuM! has no other debt. And so the settling of these debentures explain all the variation of our cash.

Now looking at the cash flow of operation over BRL 500 million, we generated enough cash to pay off investments, which were almost BRL 300 million to pay for leasing and also to pay for interest rates in the period. Also an observation here is that regarding investments in the last quarters, we were investing around BRL 200 million per quarter, which is very similar to our depreciation. In this quarter, we had a major expansion in the capacity and in the amount of servers for Magalu Cloud. This was a onetime off investment in this quarter. And that expansion of Magalu Cloud is one to prepare for Magalu Cloud's growth and also to migrate workloads from Magalu to Magalu Cloud, which has already reached 50% in this quarter.

Now in the next slide, we have cash variation in the last 12 months. And here, we have increased cash in BRL 1 billion from BRL 6.6 billion to BRL 7.6 billion. Also here, we can see the cash generation of BRL 2.5 billion, which was enough to cover all investments and capital funding for Luizacred, again, leasing expenses. So we had a free cash flow of BRL 700 million that was then enough to cover for dividend payments and interest payments as well. And cash variation is really by the net funding of loans -- in the last 12 months, we had BRL 2 billion and paid BRL 1 billion up to September.

And in the next slide, we show that in October, we have paid another BRL 1 billion going back to the debt level that we had -- that we have now in October, BRL 4.8 million, which is exactly the one that we had in September of '24, BRL 4.8 billion as well. To the left, we see our total position of BRL 7.6 billion in total cash.

Here, we had gross debt in September of BRL 5.9 billion. So our net cash then was BRL 1.6 billion. So in terms of capital structure, we maintain a liquidity position that's very robust, a net cash position of BRL 1.6 billion, which has been very much stable in the last quarters. And now our debt schedule the share of 2025, we have settled in October. So today, our debt is all in the long term distributed over the next five years. And our objective here is to keep on bringing down debt and financial expenses.

On the next slide, we have Luizacred. Once again, Luizacred had a quarter that was very robust, a very strong one. Delinquency rates are at historically lower levels of around 8%. The short-term delinquency of 2.6%, and once again, all-time low. Net profit increasing provision and ALL expenses coming down, coverage ratio here increasing a lot, turning from 154% to 156% and 158% of our NPL. That's a very comfortable level.

Finally, talking about our financing branch or financial branch. Now this is a reality. Remember, we had authorization of the Central Bank in February. We started operations in August with a pilot project in one store. And since October, we expanded the pilot to 50 stores that are now in charge of 10% of our revenue of DCC in brick-and-mortar stores. The rollout of this operation has been a success. We should say that a number of benefits and advantages with this launching with this new financial branch happened.

First, the fiscal efficiency. We now provide direct consumer credit in a financial branch that is subject to the supervision and regulation of the Central Bank. The financial branch has a tax bracket that is come from IOF -- in retail, we pay ICMS, 18%. Here, the tax bracket is of 3%, a significant tax difference. So brackets for PIS and COFINS are also different in retail and in financial company. So there is a fiscal efficiency. All taxes are lower here in terms of capital structure.

Today, we have a portfolio of BRL 1.6 billion for retail, which should progress for the next year. We should be accelerating the rollout and have 100% of the DCC production. Starting in January, this should be done by our own financial branch. And therefore, this portfolio for receivables will grow and we will decrease that in retail. Today, we have a structure in which we finance this portfolio of BRL 1.6 billion in retail with long-term debentures. And as we dilute this, we will improve the working capital for retail. So we'll have a more efficient and asset-light retail. And therefore, we can deleverage retail. And within the financial branch structure, we can then finance -- have it be financed with other funding sources.

Naturally, we are going to capitalize the financing branch. It's going to have the peso level as well, but it can also issue letters and other funds or other funding options cheaper than debentures. So with this structure, we have a number of gains, and we've then turned the operation more transparent, more robust with governance and also optimization of the capital structure, which is very good.

And in addition to all of that, we have also been investing in new credit proprietary models. We believe that we have a potential to increase sales in the DCC, both online and offline and also to reduce the delinquency indicators in the future. Simultaneously to the financing branch rollout, we launched a new experience both for clients and sellers who has been faster, more intuitive, and it makes it easier to convert sales in the point of sale. So we are very excited about this initiative because, in fact, this is one that can bring us growth with increased growth in sales and increased profitability.

These were my financial highlights, and I turn the floor back to Fred.

[Frederico Rodrigues, executive]

Well, thank you very much, Roberto. I started our earnings call. I started our earnings call talking about our strategic cycles, but I also said that I have been here at Magalu for 25 years. And if there is something that is constant, and I started here at 2000 to put together the e-commerce of the company. So we are operating e-commerce for 25 years, fighting with different competitors here over these 25 years, everything has changed a lot since I started. But if there is a constant thing is that the company really believes in the multichannel approach. This is the item that turns this story very coherent. And even when we launched 3B, we had that with a very strong multichannel, omnichannel approach. So everything that we do, we try to create a bond back to the store because we do believe in the potential of the physical stores in the physical retail.

Remember, today, 85% of the Brazilian retail is offline. And even if e-commerce grows a lot, I don't see that number of 75%, 80% not being still in physical stores. So we have almost seven decades with experience in the physical retail, but this also needed to be reinvented. We focused a lot in the last decades in building the store as a base of the e-commerce is like a back office and logistics. So the stores are very important as a distribution hub. 50% of 1P of Magalu goes through the store, whether it's ship from store or pick up at the store, collect at the store. And the ship on the store, what they are asking now from WhatsApp the lowest pickup at the store. So this is very strong. This is #1 of requests of clients that are at Lu's WhatsApp. This is a differential, and it's very resilient in all the categories of durables that has to do with this aspect of having the integrated brick-and-mortar stores and the e-commerce and all integrated even with a lot of focus on margin, we keep on gaining share in these categories of larger tickets.

That's what we wanted to do. We bought KaBuM!, we bought Netshoes, and they didn't benefit from this multichannel concept, as I said in the beginning. So we needed to have a physical space that represented this ecosystem in practice. For the end consumer, for many of you, investors to see that Magalu is more than Magalu. It's Netshoes. It's KaBuM!. Magalu is Epoca Cosmeticos. Magalu has basis. Epoca, KaBuM! Estante Virtual and Netshoes together are operations worth more than BRL 1 billion, much larger than a lot of listed companies and all of them doing quite well. But it seems that to the eyes of many, they're still invisible in terms of this connection with the Magalu brand.

With the Gallery Galeria, we will solve all of these issues. We closed the site with an iconic point, maybe the most relevant point in Brazilian physical retail in the main avenue in Brazil, which is Avenida Paulista. I don't know in other countries, but this is one of the most relevant places for Brazilian trade and a point that had a very significant cultural aspects that we will preserve with the opening of a theater, an art gallery and the inclusion of all of Magalu's businesses, but especially businesses that combine digital and physical that will be the stage for digital influencers who will be there at the YouTube theater that we had a global launch last week as well as each of Magalu's sectors, Netshoes, Epoca, influencers will have space to build and create streaming content at the stores.

We intend to have the Black Friday live from the store next week. This is going to be very different. The store will not be open yet, but we will hold the live streaming from the store -- I'm sorry, not next week on the Black Friday week. We're very excited. We'll show you a conceptual video that explores this concept of a meeting point, meeting between digital and physical in the different categories and segments that we operate. I'll show you this video, and then we'll open for the Q&A.

[Presentation]

[Frederico Rodrigues, executive]

With that, I thank you for your attention.

[Operator]

Now we move to the questions-and-answer session. [Operator Instructions] First question, Luiz Guanais, BTG.

[Luiz Guanais, analyst]

I have two questions here. First, if you could, Fred, talk about the investments for next year, looking at the technology platform with the AI side that you talked about as well as the physical store model. How can we see the expansion in physical stores looking at 2026?

And then a second question, looking at marketplace. If you could, Fred, talk a little bit about the evolution of unit economics that you expect for the platform, even in the competition scenario that we see in Brazil that has been becoming more aggressive in recent months.

[Frederico Rodrigues, executive]

Good morning, Guanais. Thank you for your question. I'll answer the first one about investments. And then I'll turn to Garrido to talk a little bit about the dynamics of unit economics on 3P. And I talked a little bit about it, but he'll give you more detail about the investment I think over the last three years, we've been investing basically similar to depreciation. And I think that was the prudent cautious decision in a context where we have SELIC rates at an all-time high with actual real interest rates very high. So we have to be very cautious, and we focused our capital allocation pretty much 100% of CapEx over the last three years in investments in technology.

So to build cloud to expand our development teams. We created the AI department with an exclusive AI dedicated team with Gomes's arrival last year. We invested on this team that now we have -- we're reaping the results. of these investment with the launch of Lu's WhatsApp. So this obviously reflects the investments of the last year, but also the last few years. Even the platform, agentic platform that we're running, our main cloud partner who's Google is there, but part of the agent models are running on Magalu's cloud, open source scalable models that make the scalability of this business very positive.

So we intend, obviously, considering the good signs we're getting from the first experiences with Lu's WhatsApp, we intend to reinforce our investments. I think here, we have a strategic differentiator that's very important. Nobody has that persona. I was at a night collector recently talking about how difficult it is with AI agent because when they speak to the customers, there's a night symbol. There's no persona that is relevant for the consumer.

And we have Lu who's been built over the last 20 years, and she is a cultural phenomenon in Brazil. And customers really do like her, ask her, and we built this very carefully over time. So here, we have a huge opportunity to accelerate investments with a good perspective of returns, especially because the indicators in terms of conversion and NPS are very high, and that makes us very confident to accelerate investments in the platform.

And it's the same thing still we have very positive expectations of our store, Galeria, Magalu. We recovered a lot of it the investments there in advertisement agreements. So we're already working strongly on retail media and ads to capture with the store. It will be a brand place. So we have 150 brands that will be present at the store, including Chanel, Dior, we've been able to attract those brands, Adidas, ASICs, including all of the brands who work with KaBuM!, including Intel, AMD, we have a lot of major brands. In addition to our usual brands, Apple, Samsung, we will have Apple's official post sales point there. It's going to be the second in Brazil after the store opened in Morumbi shopping center in Sao Paulo. That's great. We're very excited with that.

And these brands will have space to invest in advertising there. We -- Célia Goldstein team was able to recover a lot of the return on investment. And we believe validating the view that helped us improve the return on investment of the store with retail media as part of the results to offset part of the CapEx.

To accelerate investment in stores I believe this will happen, especially once interest rates get back to a reasonable level because when we do the math of ROE with interest rates between 15%, 17%, it's very difficult. It has to be an impeccable concept. We need to validate our thesis, but we're very excited. And I believe that we will certainly resume investments in store openings and also Galeria, Magalu is important because it doesn't have to be a new point. We have about 40, 50 points at Magalu, and then we can talk more about this, but there's a profile. We have the stores that we can convert with more than 4,000 square meters of area, and we can convert other points to this concept of a gallery that I think is very positive for the brand, for the business and for the units like Netshoes, KaBuM!, all of the heads of these departments and Epoca as well are very excited. And I'll turn to...

[Ricardo Garrido, executive]

Thank you, Fred. Thank you, Luiz, for your question. I'm Ricardo Garrido, I'm in charge of marketplace here. So talking about the economics at Marketplace and the reaction to this aggressiveness of the market, as Fred said, we operate on the assumption of working always with healthy margins and conditions, including the assets and multichannel aspects to perform well without joining this war of discussing or arguing value.

So I'll rank here three main actions that we've been working on to maintain the economics in a very healthy level, not only now at this quarter, but for the future as well. So first, historically, we've been remanaging take rate of detracting categories to -- into incentive for the sales of promoting categories. So we have a neutral take rate on average. And with that, we're able to perform better. And as a result, we have an increase of the average ticket higher than 20% year-on-year.

Second, we have a lot of operating actions, which have improved significantly our performance, allowing us to continue to offer free shipping and important aspects for the customers. So we have less cancellations, better cash flow with a greater share of sellers in the cash flow with a greater share of PIX payments, significant growth of ads, as Fred already pointed, with a 44% growth of advertising sellers year-on-year. And we have the improvements in the ads platform that receive a lot of compliments from our sellers as well.

And third, we've been working a lot with the channels that convert more. So logistics modalities that deliver faster and offer more free shipping and convert more, exploring our multichannel aspect to do that in a profitable way. And with that, we're also able to spend less in marketing because with the higher conversion, we can spend less in searching for clients.

Within all that, I would like to highlight Fold that continues to grow in share. We're at 28% share. of units sold on 3P delivered by full. That's a 4 percentage points growth compared to the previous year, plus another point compared to the last quarter. And this quarter, we switched on another distribution center in Paraíba in the Northeast with the allocation for heavy products that complements the action of other distribution centers in the Northeast with a light product location. And with that, we continue to grow the footprint. We are present in different regions. And we're able to deliver more and more, faster and faster.

To give you an idea, we got more than 50% of full deliveries in the Northeast shipped from the distribution centers located there, maintaining 80% coverage of free shipping on full because that only happens because we're sharing 10 distribution centers with our stores and 1P. We're sharing the delivery network, and we have almost 1/3 of our deliveries with store pickup free of charge when the clients pick up at the store. So I believe that, that's another pillar.

I would also highlight, in addition to full in the third quarter, we launched Vapt, which is our first ultrafast channel. That's basically a platform in the platform in the marketplace where sellers can contract directly, couriers to deliver within 10 kilometers from their store to deliver on the same day. We announced that at the end of August at Expo Magalu, our sellers event. We have more than 60 sellers in the platform, 23 carriers registered conversion 30% higher even compared to full. And it's -- what's better is that it's a deal between sellers and couriers or carriers that same-day delivery that costs nothing to us. So that's a positive effect on the bottom line. So those are the paths that we're going to follow and continue to work in the 3P economics.

[Luiz Guanais, analyst]

Excellent. Thank you very much for the answers.

[Operator]

Our next question is from Irma Sgarz from Goldman Sachs.

[Irma Sgarz, analyst]

Hello. Good morning. I would like to go back quickly to something that Guanais I said about the major competition that you have, not only with consumers in marketplaces, but also in the fulfillment. I think you talked a little bit about the build-out of the infrastructure, but I would like to understand how you see this potential greater competition among marketplaces that are trying to bring in sellers. How do you think you can differentiate yourselves from other marketplaces, whether in sellers' conditions or in operating areas?

And my other question is related to a logistics network and where inventories lie. Where are you in this learning curve in terms of the complexity of knowing where inventory should be positioned to effectively avoid inventory duplication or maybe some inefficiency rate -- and if you have options, whether in the gross margin or in the inventory levels themselves to explore a better efficiency of positioning inventories and regional levels.

[Frederico Rodrigues, executive]

Thank you for your questions, Irma. Just I would like to clarify about the second part. Are you talking about fulfillment or 1P inventories,

[Irma Sgarz, analyst]

Both.

[Frederico Rodrigues, executive]

Very well. Thank you for your question. I would like to stress what we have been saying. For us, Magalu has a very balanced approach. When you create a channel, we don't need to destroy the other one. When we developed 1P, brick-and-mortar stores are still there. They are still important pillar. And we introduced 3P in the company. We have never done it to destroy 1P. We like having a balanced out perspective, 1P, 3P, physical stores, we believe this balances out the ecosystem. It's very important, and that's what maintains our balance. We have one channel sometimes when the other one has some -- it's going through a hard time. So they have the same operating infrastructure. This allows our business to have a lot of synergy. We believe in this balance. 1P, 3P brick-and-mortar stores and within the online, though 1P and 3P also need to have an important balance. And all the channels have to operate with a positive margin contribution.

We never operated and we have never been a player to grow a lot, but having losses. We have not gone into this fight. There was a movement with 1P back in the past with Americanas and e-commercees that were funded by VCs, and we did not go into that fight at the time we persevered. And today, our 1P is the size that is even at that time, we let go growth and we -- at the moment, that was an irrational 1P there was a irrational war for 1P. And now it's the same on 3P, a lot of subsidies and a lot of bonus.

And so each sale ends up having a negative margin contribution for the platform. We do not believe in this model. We never believed it. It's not part of our rationale and our results here in Brazil, our capital cost is in Brazil. So if we have a negative results, we do not have matrix or a holding company to send us the money. We have to operate on top of our capacity. I like being like this, and this is my entrepreneur's vision. For me, this is positive. And this is what I tell my team. That's how we learn how to be a better executive and to choose to be in a market with a positive margin contribution. our differential, and there are many, but we have one main one, which is the multichannel aspect.

We start the inventory, the merchandise from the sellers in the same DC that we store the 1P merchandise. These are the same DCs we are using idle space in this working capital management that we have to place to bring in 3P inventory. And therefore, 3P will benefit from the same advantages of 1P, and I have already said here, which is store pickup, ship from store. These are all the different possibilities that allow us to provide to the categories that are in the fulfillment to operate with free freight. That's the case. We have a free freight for pickup stores, and we still have profits. So we are operating, we send to the partner with free freight, you have to pay additional costs. But if the product is at fulfillment and you have a store pickup, the delivery cost is much lower because we are using the logistics of a truck that's already going to the store. Therefore, we have this type of productivity. And because we have the multichannels, we can be very competitive, and we believe that we'll keep on growing sales in this context.

[Irma Sgarz, analyst]

I think I still have another question. The inventory allocation.

[Frederico Rodrigues, executive]

Well, Fabricio can talk about that after. But what I can tell you is that we operate inventories for almost 70 years. So we do have -- having the 1P background at this time, it helps a lot, not only because of inventory management, but one of the strong areas of the company is the supply team, the planning team, the items and maybe Fabricio can better explain that. And obviously, we're going to use a lot of this knowledge to share with sellers as well. So everything that we have learned over the decades with the 1P supply, we can apply in 3P. We can detail how our supply team works.

[Fabrício Garcia, executive]

Yes. This is Fabricio. Thank you for your question. As Fred said, we have a lot of experience. We have 18 DCs, 21. with the brands in the ecosystem and 145 stores, all of them with inventory. And by our working capital, you can see that we have a very well done inventory management and supply team that is very robust and an algorithm system that is great. It's supported by AI.

So this experience that we have for over six years, seven years, we can use this experience from 1P to 3P. So we are sure that our inventory management is one of the best that we have in Brazil. It's extremely efficient.

I just would like to stress that at the food today, 80% of deliveries are free freight and very good economic units, thanks to this multichannel structure.

[Irma Sgarz, analyst]

I understood. Thank you very much.

[Operator]

Thank you for your questions. Our next question is from Antonio from Jefferies.

[Antonio Cardoso, analyst]

Good morning, everyone. Two questions here. I first would like to hear from you about the partnership of Casas Bahia and MercadoLibre, if there is an impact in the short and especially in the long term?

And the second and maybe I would like a little bit more color on Magalu Pay perspectives for the fourth quarter for next year, increase DCC. And if we can go over Luizacred, the capacity of growth, when it's going to happen, if you're going to need extra capital or not?

[Frederico Rodrigues, executive]

Good morning, Antonio. Thank you very much for your question. The first one, well, I never talk about the competition that is my habit. So it's very difficult for me to answer the first question. What I can try to say in a broader approach I'm not going to mention the movement of our competitors. But for us, the worst competitors, even in the traditional categories are the ones that are the informal ones, the small sellers, the ones that do not pay taxes. And therefore, they have a different pricing or pricing that is difficult to understand. And these sellers are all over. And they have prices that they make no sense or contraband cell phones that come from Paraguay. So these are the informal competitors, the small ones that they end up doing something that a larger listed company does not do because we have to pay cost, we have to have margin, and we follow all the right practices and rules and so on.

So, for me, in the traditional categories and in the online, the main challenge although we can offset that with our purchasing power and with our size and our multichannel approach. So even then our main headache is the informal small multi-seller.

So now I'll turn to Jorg.

[Jorg Friedemann, executive]

Thank you for your question. Now just stressing some of the observations already made by Fred and Roberto during the presentation, we are at a very good moment for Magalu Pay with a number of levers that have been triggered before I started. And there were some highlights as well to -- some adjustments to trigger other levers. DCC, as already has been mentioned, it is at the highest level of penetration in stores, and the stores, 10.3%. If you add the recent penetration of digital, we are already at the all-time record of penetration at 11.5%.

Now with the financial company and with better perspectives of experiences and adjustments that we have made in credit and incentive, we will, of course, continue increasing this penetration over the next year. This associated to other levers that we have put in motion is increasing is bringing the penetration of our numbers to all-time records. So we have done an analysis of opportunities that we have in stores dispersion and review of pricing policies. And as I said, the increase in DCC, that's going to keep on driving the results.

The consortium, we are focusing on the growth of profitable lines. These are lines that ensure that we are going to have a long-term relationship with clients. Residential and auto already address 95% of all of our IOM with focus in quality. And here, the payments in the consortium over 80%. In addition to all of that, Luizacred still has a strong focus in growing with quality. I would say that the three main focus with Luizacred will continue being resilience, efficiency and engagement.

For resilience, we already talked about this, and we have been improving the delinquency levels. We are at historical figures, 18% and 2.6% in the short-term delinquency for efficiency. We are running at efficiency levels of 33%, and it's coming down and engagement. And despite of the drop of the number of active cards, exactly because we're focusing on quality, we maintain engagement and proof of that is constant revenue. But these will be then the trends for the next quarters. We'll be very much focused in improving our historical vision and going from transactional to more relational to clients.

And on top of that, to develop a long-term strategy that may not only leverage financial services, but really to create a symbiosis with retail levering our competitive advantages, which are our brand, our multichannel approach and our ability to allocate capital focused in return. Thank you very much, everyone.

[Antonio Cardoso, analyst]

Thank you very much, everyone.

[Operator]

Our next question, Pedro from XP.

[Unknown Analyst]

Good morning, Fred and the executive teams. Maybe on a more strategic dynamics in the presentation, you brought the strategic cycles of the company from 2020 to 2025. Maybe if you could detail a little bit more about the company's mindset for the coming five years or for the more distant future.

And then thinking about all of the businesses, both core business, Magalu Pay, Magalu Cloud, ads, what's happening in terms of investments, expectations and overall. So maybe a little bit more on the short term. If you could talk a little bit about the strategy for the Black Friday. maybe I think it's not worth talking too much about the competitors. But with this announcement of Casas Bahia and MercadoLibre, there may be a strategy to try and be more aggressive in this Black Friday. I understand your mindset a little bit and the possible levers to bring stronger bonuses maybe or prioritize profitability in this shorter-term context for the Black Friday and the end of the year, the holiday months.

[Frederico Rodrigues, executive]

Pedro, thank you for the question. I think it's two questions within what you asked. About the Black Friday, I go back to what I mentioned before. I think that the major players play a rational buy the book game. They each take their offers to the Black Friday. And for me, that's part of the game. I don't see this Black Friday being that different from the others because whoever the big player is, they operate within the rationale, paying taxes and with official legitimate products. And the pricing coordinated with the major brands. So I don't see a change in the Black Friday's competitive dynamics. As I said, the competitive dynamics is tighter from those informal sellers who don't pay taxes, and they are the ones who kind of hinder us.

But on Black Friday, they don't have volume. So, for Black Friday, Magalu and a lot of the surveys is the brand that consumers seek the most because it's the moment when they buy high ticket. and they want products with guaranteed provenance. And I have no doubt we'll have another beautiful Black Friday with great space. I have a lot of faith in the live that will stream for Black Friday from our store using the YouTube theater there as well as a stage to stream that once we have that moment when Black Friday begins. We have a lot of actions, Black Push, Now or Never. There's a few campaigns that we've been running for a number of years with credibility, and I believe we'll have a positive Black Friday. We bought the inventory. We have the inventory, have good turnover with the suppliers. We also had a good meeting with the sellers. We have good offers, especially for the full modality. And I think we will be competitive.

And for the future, I haven't announced the new strategic cycle yet. What I've been telling everyone, and I'd like to emphasize and go back to Lu's WhatsApp is that I see very clearly that AI commerce will be the most significant modality, and it will be the prevalent purchasing modality in the future. So there are already some surveys around the world indicating that starting in 2028, a majority of online purchasing journeys will take place mostly or exclusively through AI agents or an AI type bot. And I believe that this investment, I'm looking at the market for 25 years, I think this is a very good bet. And I see that AI is at the center of all retail companies and nonretail companies. I think we cannot ignore the impact for you in the financial industry and for us in retail and for pretty much all industries that have a technology component, even the ones who don't. I think AI must be at the center of the next strategic cycle looking forward. But we still need to develop this a little bit further.

I certainly see that we have a lot of opportunity to give more relevance to multichannels in all operations. Galeria Magalu is a milestone just as Lu's WhatsApp is, but I see this as a concept to be replicated in the future because physical store is what makes Magalu different, having that experience, that contact, being able to operate in these two worlds. Very few companies in the world, maybe none can do that of having a relevant operation in the two worlds and running them in an integrated way. So the multichannel aspect and AI will definitely be pillars of the new cycle. But beyond that, I don't really have a lot to tell you ahead of time.

[Operator]

Next question Ruben Couto from Santander.

[Ruben Couto, analyst]

I think we talked a lot about the 3P and marketplace, but can you talk a little bit about the situation in the market and the core categories for 1P in terms of growth of your market share during this year?

And maybe some color about the difference in the 1P growth between physical and digital areas. What do you expect not only for the fourth quarter, but 2026? If you can give us more details about 1P, that would be interesting.

[Frederico Rodrigues, executive]

Hello, Ruben. Good morning. Thank you for your question. Well, since we've been -- from what we've been seeing, I think we have been very resilient in our traditional categories. there's 67 years building them and the multichannel aspect, especially for 1P plays a role to -- of competitive edge because the customer makes a purchase and can pick up at the store. The product is physically available at the store, so they can also have a ship from store. There's 1,300 stores with 1P inventory where we can deliver to the consumers' home, and that makes a huge difference for us. So this structural benefit of our multichannel presence and how we built the 1P and how it is natively integrated to the physical stores make this a resilient sale.

So we feel that this is a category that feels a lot from the high interest rates because -- we are more conservative to grant credit. We are a lot more conservative when we run sales or clearance. When the interest rate was 2, we had pretty much all categories in 20 payments with no installments. Now it's very rare for us to do that, always negotiated. So we don't have products with negative contribution margin considering the cost of money of making 20 installments with no interest for that transaction.

So, for us, obviously, this moment of high interest rates makes the category -- the industry to move sideways or to grow very little. And we've been able to preserve our share in this context. I believe that the interest rates next year should go down. And all of the interest rates decrease cycle is very positive for our category, both top line and bottom line. So I see that the future dynamics for the industry will be positive. There's a positive perspective, considering it's also the year of a World Cup. And in that context, always historically, you can look at our history. We've been listed for 12 years. World Cup years are always good years and years where the interest rates are going down is a good year. So I don't see how it would be different if all the market projections materialize next year.

[Ruben Couto, analyst]

Great, very clear. Thank you, Fred.

[Operator]

Next question is from Pedro Peroni from UBS.

[Unknown Analyst]

Good morning everyone. Thank you for the presentation. I have two questions on our side. The first one is about the 3P performance. If you can explain which categories have contributed most for this underperformance of marketplace in the quarter and also some of the brick-and-mortar stores, how is the breakdown of the main demands in the physical retail? And how is that broken down by region?

The second question is about having more color on the sales performance on a monthly basis in the quarter. And also if you have information or data to share regarding October already.

[Frederico Rodrigues, executive]

Good morning, Pedro. You have several questions. We have several questions. Let me see if I can recall all of them.

About 3P, I think we already talked a lot. I will stress, I do not consider it to be underperformance. I consider that we have performed very well because we have had a positive margin, positive net income and the marginal contribution of 3P was there. It was positive. And regardless the GMV. So we made a strategic decision already communicated since the beginning of the year. We told the market that we would not go into sales with negative margin contribution. That's what we have done. It's in our plan. And we trust that this is the right strategy in an environment that has 15% of nominal interest rates a year for a company with our characteristics. And any operator that operates in Brazil thinks that this is the right rationale. It doesn't make sense to operate now with negative margins. I don't think this makes any sense.

So now I'll turn the floor to Fabricio.

[Fabrício Garcia, executive]

Thank you. About 1P, we have stores -- physical stores performance, very good in all categories, but I would like to highlight our performance in smartphones. 1P and 3P are growing 2 digits in the category. We gained a lot of share in this category. in the white lines and TVs, the other two categories that we have also here in the company, we grew as well high digits, and we are gaining share in both categories, both in the online as well as in the offline. Our performance in the month were similar months in terms of growth, not better, not worse.

At the end of October, we see that there is a demand retraction because I believe consumers are waiting for November for the Black Friday. We have sales all over the month. So we started November very well, although October was not that of a great performance. So it's a characteristic of the market. About regions, we also have good performance in all of the regions. The only region that has a lower growth considering the base of last year is the South because last year, they had the floods and the performance in the second and fourth quarter was not very high. And we had the problem going there. So the main highlight here, I would say, is the North region, the scenario in categories for different regions.

[Unknown Analyst]

Perfect, very clear.

[Operator]

Next question is from Victor, Banco Itaú.

[Unknown Analyst]

When we look at the revenue growth of the company, especially for the third quarter, it was flat year-on-year. Gross margin and EBITDA also basically flat. And what draws our attention is that considering this top line growth, we usually see a stronger effect of operating deleverage, and this has not happened. It was very good.

And the question is, if growth in revenue continued continues to be shy for a longer period of time, do you think there is a material chance of starting seeing a deleverage -- operating deleverage moment that is a little bit higher?

[Frederico Rodrigues, executive]

Thank you for your question, Victor. Good morning. I think we have been showing a lot of consistency quarter-on-quarter, considering efficient operation, our context, remember that we are changing our mix for instance, in the partner for fulfillment, fulfillment has a more dynamic approach, subsidies and results. We have a strong expenses control, all of them, leasing costs in general, payroll. So this is a very disciplined company in terms of its operating efficiency. And we have been able in this small growth of net revenue to offset that with a lot of efficiency with a better sales mix, better 1P and 3P and physical stores mix. So we are managing the company as a contribution margin.

So whether in the marketplace or in physical stores, we do not manage that with gross profit, but rather with contribution margin paying for marketing prepayment of receivables. So we have a strong discipline and fixed expenses are being developed out of this concept. We have a team controlling it, focusing on optimization of the revenue. And my point of view is that we are seeing a year where we have the perfect storm. We have high interest rates, and we have aggressive competition in some categories of products, especially lower tickets. And high interest rates will affect the higher tickets in the sector.

As I said, obviously, this does not allow us to do the very aggressive promotions and that we can do when we have low interest rates and still provide positive margin contribution. For next year, and going back to what I said in my prior question, I see that we will have in the future more favorable dynamics. When SELIC rate comes down, we can be more aggressive in the categories where we have a high weight of GMV. And also, we will have a World Cup year that's always good for our sector, and it benefits a number of categories because it brings in flow for the online stores and for the physical stores. So this is temporary. This is not structural. This is a tactical decision for the year, which has been communicated for a long time.

But it's not that we are not going to grow more in the future? No, we just want to grow on top of a positive margin contribution. And when the context allows us to do that, and I believe in the next year, we'll have a favorable context. We'll keep on growing the revenue as well. But if we don't grow homework, again, we'll review expenses, we will drop costs. Costs can always be cut. This is a disciplined company, and it has a committed team, and it always delivers very significant things in terms of cost management.

[Unknown Analyst]

Thank you very much, Fred.

[Operator]

Next question, HSBC from Daniela.

[Unknown Analyst]

Good morning, everyone. I'd like to congratulate Fred for this first marathon in this 25 years at the company. And the first question is I would like to understand, Fred, I don't know if it's Fred or Jorg about Magalu Pay. When exactly will it be in full operation? So can you give us any gain or any estimation of the savings in financial costs, expenses. Maybe Roberto can also add about comments on the structure or the dynamics between future fundings. And I mean, I know that considering the payments go through in-house and other services, it will be very positive. But can you tell us or give us an idea of what is the magnitude of this reduction, this potential reduction of financial expenses? That's the first question.

[Jorg Friedemann, executive]

Thank you, Daniela. This is Jorg. About the potential gains, it is true. There are not only tax gains plus financial efficiency that are possible. not to mention the gains we're still going to see related to the improvement in our proprietary credit models. As we mentioned last quarter, we brought a new team for credit with prior experience in institutions such as Capital One and Nubank to completely reformulate our vision of proprietary models with more data leverage, internal data from Magalu Pay and Magalu, and we believe that this will also bring significant benefits.

But to try and quantify it a little bit in the line of your question, I would say that in addition to tax gains that are of about 20% thinking about the DCC at the financial company used to have approximately thinking only about origination throughout the year, funded by instruments that may be achieved through a financial company, such as financial title, CDC and the cost of funding versus the cost of funding we have today, which is the company's equity, we can be speaking about something above BRL 20 billion next year. So there are significant benefits, and we'll start to materialize them, and there will be a lot more.

I think that the topic of this management and the view we want to implement for Magalu Pay transform a transactional view that we've always had into a more relational decision, corroborating what was said on Antonio's question earlier, we'll provide more elements to the market for you to understand better how the strategy reflects on Magalu Pay's day-to-day over the next months and quarters.

[Roberto Rodrigues, executive]

Jorg, if I may add something here. I didn't mention this, but we have a portfolio of BRL 1.6 billion of receivables in retail and the financial company will charge interest rates of 6% to 7% a month. That's the interest rate for installment purchases. And from that, you can estimate, we don't disclose this, but you can estimate the revenue -- potential revenue of interest in this financial company in running rate.

Obviously, this portfolio will be formed throughout next year progressively. But since it's an average duration of 12, 13 months, next year, this portfolio will be formed. And in running rate, we have an interest revenue that will be quite significant with expressive tax efficiency, as Jorg mentioned. So we're very excited with this project of the new financial company.

Please go ahead.

[Unknown Analyst]

I was just going to take from what Roberto was saying. along with José Aparecido, one of the experts in explaining these tax transactions. Basically, I would like to understand whether there would be more gains or more actions that we could expect for next year. I don't know if he has an idea of the time line. Maybe more effects of RAT, FAT. I saw that there was the IR/CS that was deferred that come from KaBuM!. So the idea is whether there are other tax gains that we may expect that we can expect for next year to make the adjustments or maybe try to simulate in our projections.

[Roberto Rodrigues, executive]

Good morning, Dani. Thank you. So we disclosed gains of about BRL 300 million about RAT. That's the risk of labor accidents. That's a thesis that we've discussed since 2010. That was a trial from this year favorable to Magalu, discussing a rate related to the potential risk of labor accidents. Our stores have very, very low risk, and we were discussing that and that was discussed in court and provisioned. And with the recent favorable decision, the prognosis changed. we reversed the provision. We accounted that as other operating revenues because it's nonrecurring and noncash initially. But since we had already deposited everything, we will soon recover this in core deposits.

[Unknown Analyst]

How quickly, Roberto, do you think you can raise everything at once? Or are you going to recover that in installments because it's a significant value.

[Roberto Rodrigues, executive]

It is a significant amount. It is BRL 300 million. Since it is a federal contribution, it's a relatively faster process. So we estimate that to be around 12 months. So we estimate it to be in the short term within 12 months.

In addition, Dani, in all our explanations, the Supreme Court concluded the trials of the topic related to default. We are waiting for the publication of the ruling about the DIFAL aspect referring to 2022. And due to the modulation of the effects, the Supreme Court decided not to allow the retroactive charging of the companies who had lawsuits discussing the application of DIFAL during the fiscal year of 2022, which is not our case. So we still need to wait for the agreement to be published to estimate all of the impacts for Magalu.

But I'd just like to mention as well that we already have BRL 2 million about this topic. Part of this is related to this DIFAL before 2021 and part of it of 2022. We are waiting for the agreement publication to measure the impact. And we expect in the next quarters here, this DIFAL, it's a tax rate about the over on the ICMS. So this is a little bit more dispersed and slower, but we do have the expectation that within one or two years, we may also review of all of the values that have been already core deposits in this topic. So I think these are the main ones related to José Aparecido and the tax aspects.

[Operator]

Our next question is from Andrew from Morgan Stanley. This question is going to be asked in English.

[Andrew Ruben, analyst]

I'm curious about Galeria, Magalu, how we should think about this? Is it more of a one-off concept store? Or could this be an engine for expanded store growth in the future? And then perhaps more broadly, whether it's a broader format like Galeria or more traditional stores, what would Magalu need to see to get back to store growth, again, considering you mentioned that's at the center for omnichannel.

[Frederico Rodrigues, executive]

Andrew, thank you for your question. I would like to thank Dani's remarks because if you take 25 years of retail, you can take 42 kilometers of running, that's easy, the piece of cake.

So about your question, Andrew, I would like to stress the idea here, which is a great expectation that we have and the huge success of audience and the economic success of the store as well. I would say this is a redefinition of department stores. In Brazil, basically, in Brazil, we don't have department stores. The major department stores in Brazil were in the past in the '80s, in the '90s Mappin and Mesbla. And I believe that with the Galeria, we have a possibility to have something updated with this strong approach of having the connection of the stores and social networks. We are going to have YouTube channel, and I see an audience appeal that is huge. And all the challenges that all the stores -- physical stores have this challenge of bringing in audience. I think we are going to be very well positioned in that space.

We are going to have diversified sectors, a very nice concept. We will have experienced coffee restaurant, a gallery. So we believe we have a strong appeal. And in Brazil, Brazilians are -- they don't have that type of concept. If it works, we should replicate the concept, of course, both in units that are already existing. I mentioned some of them. There are 40 to 50 units that have over 40,000 square feet that meters that can be converted to this new concept, but new places as well looking into the future. It will all depend on the success of this format concept. But we are excited.

And remember, we already have for the gallery before, we had good experiences. And Fabricio also mentioned in prior calls, we have in stores for outlet and also an outlet of KaBuM! also here at Tietê unit. And both of them are doing very well. It used to sell BRL 5 million, and we opened a KaBuM!, and Netshoes unit as well each one of them selling BRL 2 million a year -- a month. And Magalu's business doubled in size. Today, we have almost BRL 15 million a month of GMV there.

So, of course, these are outlet stores, different concept. It needs to be validated, but it's very encouraging for the business to work and to be an expansion element for the company, especially for Netshoes, KaBuM!, and Epoca. The introduction of this multichannel concept in their format will help a lot, and it will help the consumers to connect Magalu to all of these assets that are very relevant.

[Operator]

Next question is from Gustavo from Bank of America.

[Unknown Analyst]

Hello. Good morning. Two questions on our side. And I know you won't talk about competition, but how do you think about doing new partnerships to sell your products, whether 3P, 1P or other platforms, especially 1P?

And I also noticed that no one commented about KPIs or updates on your partnership with AliExpress. Can you give us more color on that as well?

[Frederico Rodrigues, executive]

Good morning. Thank you very much for your question, Gustavo. Well, our idea of partnership has to give us reciprocity. So if we bring our 1P to a third-party platform, that third-party platform has to place their catalog in Magalu. It's not a one-way street here. That's what we did with AliExpress in the past. We listed our 1P there, but they also brought their cross-border item to Magalu. They listed those. And this is a partnership that has a mutual benefit. It has a good balance in the business.

So whenever we have this exchange, there is a possibility of discussing partnerships, just listing 1P in a third-party platform. That's something that we rather not do because if you list your 1P in the third-party platform, you lose the client. You have the sale, but you lose the relationship with the client. If it doesn't come from the other side, something that will give you the possibility of gaining new clients, over time, you're going to lose your base -- that base of clients.

So Magalu is well balanced with AliExpress. The clients that they bring us is equivalent to the number of clients that we bring them. Of course, that our GMV because of the ticket is much higher. It's more relevant there. But I would say that we are, in general, in line to what we had expected. is a healthy partnership. And there is a possibility, and we are counting on them in the very short term, which is also of them operating with Magalog. So AliExpress Brazil using Magalog we are in an approval phase and the final contract discussion.

I see this is something that we could grow on, and that would be very positive in our partnership now, probably for the fourth quarter and for the beginning of next year. We are very excited about this possibility. We are happy about the partnership. And that's just the way that we would be open to other partnerships.

[Unknown Analyst]

That's very clear. Thank you very much, Fred.

[Operator]

Next question, JPMorgan, Nicolas.

[Nicolas Larrain, analyst]

A lot of my questions have been answered, but I'd like to hear a little bit about working capital, how you see the opportunities to increase maybe the inventory, how do you see working capital now for the fourth quarter and for 2026? Any answer would be very helpful.

[Roberto Rodrigues, executive]

Good morning, Nicolas. Thank you for your question. Nicolas, thank you for your question. I mentioned that in the third quarter, we usually increase inventory happened last year, it happened this year. This is very positive. We've been able to plan the end of the year very well with all of our suppliers. So we make this move, this advance in inventories. Along with that, we expand the balance of suppliers. We can also get great negotiations in terms of payments as well. So today, we have a very balanced working capital relationship between suppliers and inventories.

So we work a lot, Nicolas, so that all suppliers fund their inventories here at Magalu. They finance it as just as we finance all of our customers and with the new financial company, this will be even more clear. It'd be very good for working capital because all of our sales, when we think about accounts receivables, PIX we receive on retail upfront. If it's on DCC on retail, we'll also get it upfront and credit cards, we may discount every now and then.

So, traditionally, we see accounts receivables as very flexible and light and inventories versus suppliers -- we work a lot with this dynamic based on negotiations and partnerships with our suppliers in the sense that our suppliers finance their own inventory with us, and we've been able to do that in a very healthy manner, and we expect to continue to do so with the same dynamics next year.

And this is also very positive. It's a win-win because as we reduce their inventory, it increases our efficiency, the turnover of our inventories. They also gain from that as well. So that's a very positive dynamic. And we can't look too much at the third quarter turnover because we raised it in the last weeks -- inventory in the last weeks of September.

But when we look at turnover in the fourth quarter, we should see significant evolution. The volume of sales in the fourth quarter is much higher than the third, and the inventories tend to be lower, and we tend to end the year with a working capital position that is very healthy, prepared to enter next year improving. And we have a lot of room, as I said, as I told you, Nicolas, on the last call, we have room to further improve inventory turnover. That depends a little bit also, as Fred mentioned, on the resumption of growth, the interest rate tends to help and all of the initiatives we're implementing are in the sense of increasing sales in a healthy manner. And we realized that by increasing sales, we don't need to increase inventories. So we should see an evolution of inventory turnover that will be very significant in the coming periods.

And just to conclude as well about working capital, Nicolas, this quarter, we did not have a lot of tax monetization that's seasonal in the third quarter. we usually increase inventories, and that brings more tax volume that are paid ahead of time with the tax substitution. But in the fourth quarter, just as last year, we monetized a lot in the fourth quarter, BRL 250 million or BRL 300 million of inventories monetized. And the trend in the fourth quarter is to monetize -- inventory, sorry, taxes, to monetize taxes a lot as well in the fourth quarter and end the year with a balance of taxes to recover smaller with a trend of reduction next year.

So, overall, we're optimistic with all lines of working capital, and I'm confident that they will contribute greatly to our cash generation at this end of the year and the next year as well.

[Nicolas Larrain, analyst]

Thank you, Roberto.

[Operator]

We conclude the Q&A session. At this time, I would like to turn the floor back to Frederico Trajano for his closing remarks. Please, Fred, you may go ahead.

[Frederico Rodrigues, executive]

So I would like to thank all of you again for attending our earnings conference call and make an invitation. If you have not yet used Lu's WhatsApp, please contact our IR department, and we will clear your numbers as we did for our more loyal customers so that you can test this innovation that we launched this week. It is worth it. I recommend it. Thank you. Have a great Friday and a great weekend.

[Operator]

Magalu's conference call is concluded. The Investor Relations team remains available to answer any further questions. Thank you for your participation. Have a great day.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]