The case study goal for this course is to provide solutions as to how Magazine Luiza can expand the market and become a leader in the online fashion and beauty markets. Specifically, the case study should explore how Magazine Luiza can expand and thrive in the online fashion environment and how can it gain credibility as a fashion leader.

Make sure Qualitative and quantitative analysis are identified.

Preliminary Problem Statement Magazine Luiza, the largest omnichannel retailer in Brazil known for the hard goods category, needs to decide how to move forward to expand the market and become a leader in the online fashion and beauty markets.

1. How can Magazine Luiza plan a compelling value proposition for its emerging fashion business?

2. What is the competitive landscape in Brazil in the fashion and beauty markets?

3. What challenges and opportunities are inherent in launching and positioning a fashion business in an entirely online environment?

4. How does a company with a highly positive reputation albeit in the opposite corner of the retail landscape (hard goods), adroitly leverage that reputation to serve the interests of a new sector (soft goods)?

5. Expand on the problem and what are possible solutions explored in the research?

Preliminary Problem Statement Magazine Luiza, the largest omnichannel retailer in Brazil known for the hard goods category, needs to decide how to move forward to expand the market and become a leader in the online fashion and beauty markets.

Digital Transformation at Brazilian Retailer Magazine Luiza "Online-only retail business models won't work in Brazil." It was with these provocative words that Frederico "Fred" Trajano, the forty-year-old CEO of Magazine Luiza, one of Brazil's largest mass- market retailers, characterized Amazon's imminent entry into the country. Trajano was in the middle of a multiyear digital transformation initiative at Magazine Luiza that involved changing the culture, adopting and then prioritizing ecommerce, creating an online marketplace, and integrating the front-end marketing and back-end operations of the retailer's 858 stores with its online business by the end of 2017. All of this required a significant amount of investment capital that Trajano decided to raise through an FOO (follow-on offering) of common stock. This FOO inspired Trajano to ponder the future of the company. Prior to Trajano becoming CEO, the company was a traditional brick-and-mortar retailer and it was growing at healthy single-digit rates. By late 2017, after Trajano's appointment to the CEO position, more than 30 percent of its sales came from online channels. As Trajano prepared for the FOO, he debated whether he should recast his business as a tech company or maintain its status as a retailer. He ultimately chose to turn it into a tech company. To support this shift, Magazine Luiza's CFO, Roberto Bellissimo, helped to execute an investor plan for the FOO to attract technology-interested investors. These financial investors would largely value the company based on growth rates, which were often achieved by tech companies at the expense of profitability. Magazine Luiza, however, was historically used to the traditional way mass retailers were valued: profitability mattered more than growth. Two questions remained. How would Trajano meet the growth expectations of tech investors? Should Trajano steer Magazine Luiza to grow as fast as possible, foregoing profits, or should he prioritize profitability, and forgo tech-style growth levels?Magazine Luiza: Company Background In 1957, Luiza Trajano Donato and her husband bought a small store in the city of Franca, Sao Paulo. n 1970, the family business began acquiring regional stores, and in the 1980s, it created its first istribution center to support this regional expansion. Luiza Helena Trajano, niece of Luiza Trajano, ecame CEO in 1991, a milestone year for the company. She disseminated "Luiza's way of being" in order guide the company's conduct and focus on valuing employees. She also embarked on an aggressive ace of acquisitions, focused on physical stores and services to support the physical operation, and ocused on targeting Brazil's lower-income middle-class population, which accounted for almost half of he country's total population at the time. 12 For example, she spearheaded LuizaCred, a joint venture with one of Brazil's largest banks in 2001. This increased the availability of credit and financial services roughout the country, facilitating the access of white-line products, furniture, and appliances to a arger, more socioeconomically diverse, segment of the Brazilian population. Although the company launched its ecommerce operation in 2000, Magazine Luiza still favored its hysical stores for growth, acquiring various new chains of stores between 2003 and 2005. This strategy ncreased the company's national footprint, as it owned stores in Brazilian states that collectively omprised 75 percent of the country's Gross Domestic Product (GDP). Following a long period of rong sales growth between 2004 and its initial public offering (IPO) in 2011, Magazine Luiza reported ower-than-expected results in 2015 when the country experienced an economic slowdown. At the eight of one of Brazil's worst recessions ever, the retailer's revenues declined from $3.70 billion to 3.30 billion, earnings before interest, taxes and amortization (EBITDA) decreased by 23 percent, and et income went into negative territory to -$21 million. Witnessing these unfavorable results, some investors and analysts started to question the wisdom f Magazine Luiza's integration of its online and physical stores. Although the financial market had ncouraged the company to separate these operations, then-CEO Marcelo Silva, supported then-COO rederico Trajano's vision: integration of all processes, tools, and capabilities related to finance, gistics, operations, marketing, and sales. Addressing market analysts, Trajano explained his rationale the following terms: I don't see any online-only pure player in Brazil making money and they do sell but they don't make money. They burn a lot of cash, so our model is through omnichannel with a human touch, which is very important for Brazilians. 13In November 2015, Frederico Trajano assumed the role of CEO amidst the largest economic recession ever recorded in Brazil. He faced a declining stock price (which fell from the May 2011 IPO price of $5.15 to $0.70 in January 2016). Even amid this challenging context, with online retail accounting for less than 4 percent of the total retail sales in Brazil, he held true to his vision. Trajano embarked on a digital transformation journey to bolster ecommerce sales, and to shift the company's business model from a traditional retailer with a digital presence to a digital company with physical stores. See Exhibit 4 for a timeline of Magazine Luiza's history. Journey towards Full Digitalization Trajano began his career at Magazine Luiza by overseeing ecommerce. As C00 and then CEO, Trajano had determined that future growth would result from a dramatic digital transformation of the company. In order to accomplish this, he established ve key pillars: corporate digital culture, digital inclusion, the digitalization of the physical stores, a digital sales platform, and an omnichannel strategy. Pillar 1: Corporate Digital Culture In 2015, the company executed an internal marketing campaign designed for all employees to \"embrace the new.\" Employees were encouraged to immerse themselves in digital culture, using digital tools to execute their tasks. Part of the campaign included a fan page for each of Magazine Luiza's stores, which enabled sales clerks to create their own content and to communicate directly with their local clients via social media. Teams within the stores also created videos and management awarded prizes to those that garnered the most views. Luiza Labs marked an important milestone in the development of Magazine Luiza's digital culture. Trajano embarked on this project in 2011 when he was still COO as a research and development initiative. Three years later, the venture morphed into a technology and innovation laboratory, offering digital solutions to improve the customer experience by means of big data and mobile and digital platforms. With Luiza Labs, Magazine Luiza incorporated a start-up concept into the business and established one of the most important pillars of its digital culture. Chief Technology Officer (CT 0) Andre Fatala oversaw the project. At the time, mass retailers in Brazil did not typically have CT Os. Fatala's projects proved decisive for the digital transformation of Magazine Luiza (see Exhibit 5 for Luiza Labs' main projects). Trajano had bet on Luiza Labs' potential and gave his team the autonomy required to revolutionize online platforms and physical stores alike. By 2017, Luiza Labs employed more than 400 people. Projects proceeded according to the minimum viable product (MVP) approach; that is, one did not wait for the technology to be completely built before launching it on the market. This technique, commonly known as agile development, remained a hallmark of this operation from the very beginning. For instance, the company' 5 social commerce platform was launched in just three days. Its membership-based website with discounted products took only 16 hours. After inmarket tests, these technologies received constant updates. Luiza Labs proved its importance for the organization itself--conferring Magazine Luiza a competitive advantage--and for innovation and technological development in the retail trade more generally. \"Differently from many retailers, the mindset [of Magazine Luiza] is to innovate and create proprietary technology rather than buying it", claimed a ].P. Morgan report.14 The Financial Market' 5 Reaction Since the early stages of its digital transformation, Magazine Luiza's management sought to develop a long-term strategy to take advantage of the online sales growth it anticipated in Brazil. Under Trajano's leadership, the company began experiencing positive results following the growth of online sales, the marketplace, and the addition of new stores, all of which helped increase profitability. In response, the company stock price grew 3,300 percentC from December 2015 to September 2017 (see C The stock price increased from $0.68 on December 30, 2015 to $23.12 on September 1, 2017. Figure A). Trajano believed that prior to this increase, investors hadn't realized how strong the omnichannel operation would potentially become and they were skeptical about whether, given the competitors, Magazine Luiza could have a profitable online channel. When the company announced positive results in online sales and EBITDA, investors quickly bought up Magazine Luiza's stock. Figure A Magazine Luiza stock price, December 2015 to September 2017 USD 24.00 USD 21.00 Highest quarterly net income since USD 18.00 its IPO USD 15.00 USD 12.00 USD 9.00 Profitable USD 6.00 Not Profitable USD 3.00 USD 0.00 Dec-15 Jul-16 Feb-16 Sep-16 Jul-17 Jun-16 Jun-17 Dec-16 Jan-16 Oct-16 Jan-17 Apr-16 Apr-17 Sep-17 Mar-17 Mar-16 Aug-16 Aug-17 May-16 Feb-17 Nov-16 May-17 Source: Bloomberg. In 2014, ecommerce sales accounted for 16 percent of Magazine Luiza's total sales. By mid-2017, that figure had grown to 30 percent. That year, while other retail companies in Brazil had reported losses and negative net margins with their ecommerce operations, 18 Magazine Luiza had achieved a positive net margin with its ecommerce operation, owing significantly to Trajano's decision to integrate ecommerce and physical store operations. The financial markets started to believe that Trajano could pull off this ambitious plan. Indeed, some analysts and industry experts observed that Magazine Luiza's strategy and financials made it poised to become a technology company. From December 2013 to mid-2017, Magazine Luiza's price per earnings (P/E) had grown from 12.4 to 27.2. According to Trajano, the stock's price relative to earnings was still "far away from Amazon, Mercado Libre, and other tech companies".19 In mid-2017, Mercado Libre's P/E ratio was 83 while Amazon's was 246. As part of the plan to support digital transformation and an even higher growth trajectory, and motivated by the all-time-high stock price of the company, Trajano and the senior executive team decided to sell additional shares. This would help finance new investments and acquisitions, expand logistics, launch improvements in technology platforms, open new stores, and digitize preexisting ones. In sum, most of the money would go into completing Magazine Luiza's digital transformation journey.The New Magazine Luiza Shopper The omnichannel approach started to change the retailer's customer base. Magazine Luiza's shoppers gradually became more diverse. The merger of online and the ofine channels had attracted customers from different segments of the population. As the company's marketing director, Ilca Sierra, observed:20 We see differences in the profile of those who prefer to buy in the physical store and on mobile. [. . .] So we need to start concerning ourselves with speaking to the various new audiences to meet their needs. The physical stores' clientele comprised digital \"immigrants,\" baby boomers, and generation Xers who lacked ease with technology. The internet clientele mostly consisted of digital \"natives\" as well as consumers habitually online. Table A shows that, overall, online consumers were younger, predominately lived in state capitals, and were less dependent on store credit than people who shopped at physical stores. Physical-store customers needed store credit to buy more expensive products, while online consumers relied more on their own credit card. Multichannel consumers shared a similar profile with their online counterparts with respect to age and income but not for residency and form of payment, which was closer to the offline shopper' s profile. Table A Differences among offline, online and multichannel shoppers Offline Online Multichannel Age Groups 18-33 27% 45% 43% 34-53 47% 45% 47% 54 or Above 26% 10% 11% Family income (monthly) Less than $319 57% 43% 46% Between $319 and $639 27% 28% 30% Between $640 and $1,599 12% 22% 20% Above $1,600 4% 7% 4% % Urban State capitals 26% 39% 28% % Form of payment DebiUCastheposit 25% 30% 23% Credit Card (third party) 30% 65% 25% Store Credit Card (LuizaCred) 35% 5% 40% Store direct credit to consumer 10% 0% 12% Source: Authors, based on information provided by the company. facilitating access to digital technology. In Trajano's words: \"My aunt sold the first colored television sets, my mother made access to the first washing machines possible, and I want my legacy to be the customers' digitalization.\" 15 This was accomplished through the sale of smartphones, the creation of online content, the provision of services for internet connectivity, and the transformation of physical stores into centers of experience (Pillar 3). Magazine Luiza created a virtual assistant called Lu, who combined the power of a chatbot and artificial intelligence to help guide customers through their shopping journey (see Exhibit 6). As Marketing Director Ilca Sierra commented, \"Lu translates into clear Portuguese what is complex for many people. There are countless reports of people who say, 'Lu, I was in doubt, but I saw your video and that clinched it.\"16 The company also offered a subscription-based service to assist so- called digital migrants, (i.e., those who lack ease of use with new tech products). Another suite of tools provided Wi-Fi, anti-virus protection, the initialization of the smartphone as well as the installation of Facebook and WhatsApp. Pillar 3: Digitalization of Physical Stores Part of digital inclusion involved revamping physical stores. Trajano believed that physical stores should serve as technology hubs in order to maximize the customer experience. He believed that the company' 5 physical stores could thrive in the digital economy with store automation and new services that benefited consumers and salespeople. Some initiatives that the company operationalized included a sales app to optimize the sales process when assisting store customers and an inventory tool designed to optimize the inventory available at stores. The company also offered digital credit verification, free WiFi for customers who had visited the stores, instore pick up, and intra-store shipment for customers who made online purchases. Pending the availability of capital, Trajano planned to retrofit all the physical stores into \"shoppable\" distribution centers (i.e., a mix between distribution centers and traditional store formats). Part of the physical space (i.e., 30%) would function as a small distribution center to stock products and support ecommerce deliveries. Pillar 4: Digital Sales Platform Trajano was convinced that the company could grow even more. The management team was prepared for a more competitive retail landscape in Brazil and growing competition with Amazon. In 2014, when Amazon began selling books in Brazil, many believed that the world's largest online retailer would eventually start selling consumer items like home appliances and electronics, via its online marketplace in a few years. In response to an increase in online competitive threats, Trajano decided to accelerate the digital transformation already underway at Magazine Luiza. Among the new initiatives was a marketplace platform, launched in 2016. The company established and pursued the following three principles in this new marketplace business: (1) a customer's purchase experience via third-party (3p) sellers should be identical to that of its own fulfilment (1p); (2) its marketplace would be the best platform for customers and sellers; and (3) it would offer multiple services for traditional ecornmerce t0 sellers, including a platform for advertisements and payments. One year later, by late 2017, the company's marketplace had attracted over 750 third-party sellers offering 1.5 million stock-keeping units (SKUs). Overall, the platform supported Trajano's strategy to shift the focus from low-frequency categories (e. g., furniture, home appliances, and electronics) to more high-frequency goods. According to company executives, among the top ten categories sold through its marketplace, seven were frequently purchased and low priced items in categories belonging to beauty and health, home and garden and electronic accessories. This 5 was generally not the case in other channels. Relatedly, the company spent fewer dollars per customer acquiring new customers for their marketplace.17 Magazine Luiza was highly selective with its sellers, dropping 27 percent of them within a year if they did not abide the company standards in order to avoid any damage to its customer experience. A great customer experience was nonetheless a challenge. An independent simulation which compared similar products sold through 1p and 3p channels revealed a longer delivery time for 3p (13 days) than 1p (2 days) for the same city. Marketplace delivery time was also longer than three of the company's competitors simulated. The same pattern held true for other products and cities. That same year, in an effort to integrate channels, Magazine Luiza planned to improve its marketplace logistics and to roll out a pilot project, offering products available through its marketplace at many of its own physical stores as part of the omnichannel strategy. Pillar 5: Omnichannel Strategy Magazine Luiza's multichannel orientation began in 1992. During Luiza's tenure as CEO, she rolled out virtual showrooms (i.e., physical stores without inventory). In this format, sales clerks guided customers through the shopping process by using a computer to order products which would be shipped to their homes. With 120 such stores, accounting for approximately 5 percent of the company's sales by early 2017, Magazine Luiza had managed to expand its geographic reach by reducing distribution costs for cities with up to 50,000 inhabitants. A more recent initiative to become omnichannel was the introduction of a smartphone app in 2015. In order to incentivize its use, the retailer decided to offer free delivery for purchases over $32, a benefit that was not given to web purchases done over a desktop computer. As a result, by late 2017, the app had garnered more than 10 million downloads. Eventually, the company wished to create a seamless customer experience across all touchpoints. The use of a single brand strategy across all channels allowed for the leveraging of marketing and customer relationship management (CRM) efforts. The multichannel delivery and shared distribution centers served to spread the company's operating costs across online and offline channels. A logistics platform connected 1,300 delivery partners and 10 distribution centers across Brazil to serve both channels, which delivered directly to 82 percent of its customers (post ofce and other large transportation companies made up the rest). Due to the inefficiency of mail delivery throughout Brazil, this was advantageous as it reduced delivery times and costs. Featuring the same purchasing team across channels, furthermore, conferred bargaining power over manufactures. The finance team and administrative processes further reduced expenses and increased working capital efficiency. Therefore, while the leading ecommerce players in Brazil reported negative net profits, Magazine Luiza's net margin for its online sales was almost twice as high as its physical stores' margin (see Exhibit 7). The retention rate, measured as the number of customers that made at least one purchase in a given year and made any purchase in the following year, was still low. The retention rate was higher among marketplace customers (75 percent) than people who had shopped on ecommerce (1p) platforms (45 percent) or at physical stores (50 percent). The frequency of purchases with a year per customer was three times higher on the marketplace than in other channels, but average spending per purchase was almost half than on the company' s ecommerce (rst party provider) and physical stores (see Exhibit B). In order to increase loyalty among Internet consumers, Magazine Luiza sought to bring the benefits of the physical store online, extending store credit, in-store pickup, and personalized assistance to those who purchased from online channels. As of early 2017, the online purchase and in-store pick-up service exceeded 25,000 products per month. The physical and online customer bases had little overlap, which made it possible for Magazine Luiza to grow in both channels, despite charging different prices. Multichannel customers made up 15 percent of all active customers, and almost 70 percent of them had their first Magazine Luiza shopping experience at a physical store. Despite the retailer historically catering to the middle to lower class in Brazil, its digitization efforts were working as low-income consumers gradually migrated to the Internet. Trajano believed that the middle class would come to play an important role in future ecommerce sales. For this vision to be fulfilled, pricing was at the center of it all. Price Policy across Channels Brazilian consumers were very sensitive to Internet pricing because of how ecommerce had traditionally operated in the country. Online shopping had always been a way to save money. Price wars between competitors were frequent and intense. In 2017, about 25 percent of Magazine Luiza's ecommerce assortment was priced by an algorithm that evaluated the elasticity curve of salesdL by category, competitors' prices and availability. Ecommerce price adjustments were made in real time using these factors. The physical stores' prices averaged 10 to 20 percent higher than their online counterparts. Magazine Luiza's top management believed that products sold in physical stores had to be priced higher due to greater operational costs such as real estate, payroll, and other service fees. They did, however, expect that this price discrepancy would diminish over time. As Trajano explained:21 The online shopper is increasingly demanding the same price as in the physical stores. On average, a difference of 5 percent or more in the store price is acceptable because of the convenience of being able to get the product immediately, receive the personal attention of the sales clerk, and have access to additional services such as credit. I think the price difference today is very high. We want to reduce fixed costs in the store to reduce the gap in costs between the physical store and the Internet, eventually making prices similar. smartphones, televisions, refrigerators, and irons in eight of Magazine Luiza's stores located in Sao Paulo, Brazil. They entered the store asking for the product, researched the price on the "Magalu App,\" and asked if it was possible to purchase it for the same price. When the sales clerk declined, they asked why. The study results showed that the difference in price between the store and the app varied between 10 and 33 percent for smartphones, 5 percent for televisions, up to 24 percent for refrigerators, and 10 to 25 percent for irons. Magazine Luiza sales clerks offered discounts of about 5 percent on refrigerators and 10 percent on irons, and declined any discounts on the smartphones and televisions. The iron was the only item to be fully price-matched. Most sales clerks used their analytics app to verify how substantial a discount they could offer, and the reasons they cited for not offering a matching price were the operational costs of running the store and the advantages of speed, assurance of delivery, or a personal touch that brick and mortar entailed. To Grow or Not To Grow as a Tech Company? That is the Question. For Magazine Luiza, becoming a tech company entailed two things. First, building technology in- house as opposed to buying it from outside vendors. Through Luiza Labs, that had become a reality. And second, pursuing growth at higher rates than ever recorded by the company (i.e., high double digits). This approach had come into question. One means of achieving this was through aggressive pricing vis-a-vis competitors. But that would undermine margins and profitability. This was not a trade-off that Trajano was comfortable making, particularly given the volatile economic environment that prevailed in Brazil. As he explained: In Brazil, we have recently enjoyed a strong economic and political moment, but in the future anything can happen. So, I think the most responsible choice for business leaders that operate in unstable markets like Brazil is to preserve their margins. To greatly reduce one's margins in an attempt to grow fast, following the American tech model, often with negative net income, is not a sensible decision for our market.22 Trajano's decision in early 2017 to resemble a tech company could have the potential to undermine gross margins. As an example, Magazine Luiza began reducing the price gap between physical stores and ecommerce by lowering average prices across the ofine channel, and by offering free-shipping for online sales. Was this approach the best way to grow fast? Growth or Protability? By late 2017, Trajano was convinced that the company could significantly grow sales and accomplish its aspirations of digital transformation. What was unclear in his mind was whether he should act as a tech company and grow as fast as possible (e.g., high double digits) or be more conservative and grow sales at a financially healthy rate, like traditional retailers did (e. g., single digits). The primary way e-retailing companies achieved these abnormally high rates of growth was through lowering prices and foregoing profitability. Historically, mass retailing had razor-thin margins. It was thus unlikely that he could have it both ways: grow fast and be profitable. Should Trajano opt for more aggressive growth or proceed more conservatively? This needed to be decided before Trajano and his CFO went on a road show to raise capital to finalize the retailer's digital transformation journey. The follow-on offering was scheduled to be executed in September and October 2017, and the company had planned to target tech-oriented investors to raise approximately $500 million. An estimated 60 percent of the proceeds would be used to finance long-term investments like the acquisition of technology companies, the expansion of logistics networks, improvements in technology platforms, the opening of new stores, and the 10 transformation of existing physical stores into "shoppable" distribution centers. Whatever growth rate he promised to investors, he would be on the hook for delivering. Raising money in Brazil was expensive. Financial markets were highly risk-averse and very impatient compared to other mature markets such as the United States. As seen in Table B, the risk-free return required by investors in Brazil were significantly higher that returns required by American companies. Table B Annualized Risk-Free Rate of Return Comparison Brazil United States 3-month maturity 6.22% 1.05% 6-month maturity 6.26% 1.17% 1-year maturity 6.20% 1.28% 5-year maturity 8.90% 1.80% 10-year maturity 9.73% 2.20% Source: Compiled by FGV's professor Hsia Hua Sheng from secondary sources as of September 1, 2017. Complicating matters were Amazon's aggressive growth aspirations. Amazon had been selling books in Brazil since 2014. It was rumored to be entering as a third-party marketplace seller of electronics by the end of 2017 and had plans to become a first-party seller of electronics and other categories (e.g., beauty and personal care) in 2018. In mid-2017, Amazon represented 1/5th the traffic of online market leader and half the traffic of Magazine Luiza. Trajano could not avoid considering this giant retailer's future plans in Brazil. Should the CEO of Magazine Luiza dramatically increase the pace of growth for his company? Should he lower prices online as the fuel for high growth? What should he tell potential investors?Exhibit 1 Brazilian Online Shopper' s Profile a) Online Shoppers by Brazilian Region North b) Age Groups of Online Shoppers c) Family Income of Online Shoppers Family Income (monthly) % Less than $958 Between $958 and $1,597 Between $1597 and $2,555 18.3 Above $2,555 Exhibit 2 Growth of Active Online Shoppers Year Online consumers ( in million) 2013 31.27 2014 37.99 2015 39.14 2016 47.93 Source: Webshoppers 2017 (https:/ / oscarcasagrande.files.wordpress.com/2017/08/webshoppers_36.pdf) Exhibit 3 Key Financials of the Top Ecommerce Players in Brazil B2W 2015 2016 Q1 2017 Q2 2017 Net Sales (USD, in thousands) 2,879.8 2,748.0 511.4 523.6 Estimated share of ecommerce sales 100% 100% 100% 100% Gross margin rate 17.2% 16.5% 14.2% 16.1% Ebitda margin 2.4% 1.9% 5.8% 9.5% Net margin 4.6% 5.6% -11.0% 6.8% Stock price 14.9 10.0 12.4 11.7 Price-to-earnings ratio NEG NEG NEG NEG Price-to-book ratio 1.4 1.1 1.2 Via Varejo 2015 2016 Q1 2017 Q2 2017 Net Sales (USD, in thousands) 6,155.9 6,331.9 1,914.7 1,963.6 Estimated share of ecommerce sales 19.7% 19.5% 18.3% 19.8% Gross margin rate 31.1% 32.9% 30.2% 30.3% Ebitda margin 3.8% 3.2% 5.2% 1.6% Net margin 0.1% -0.5% 1.6% 0.7% Stock price 1.5 3.6 3.6 4.0 Price-to-earnings ratio 44.6 NEG NEG 46.8 Price-to-book ratio 0.1 0.6 0.5 0.6 Magazine Luiza 2015 2016 Q1 2017 Q2 2017 Net Sales (USD, in thousands) 2,868.5 3,037.9 896.8 862.4 Estimated share of ecommerce sales 19.8% 24.0% 28.7% 28.5% Gross margin rate 28.7% 30.7% 29.7% 30.9% Ebitda margin 5.2% 7.5% 8.3% 8.7% Net margin 0.7% 1.1% 2.1% 2.7% Stock price 2.2 13.3 22.1 32.0 Price-to-earnings ratio NEG 26.7 27.2 47.5 Price-to-book ratio J.7 3.2 7.3 16.3Exhibit 4 Magazine Luiza's Timeline 1957: Luiza Trajano Donato and Pelegrino Jose Donato bought a small store in the city of Franca and christened it "Magazine Luiza". 1970s: The company grows through the acquisition of a chain of local stores near the head-office in Franca (i.e., Lojas Mercantil) 1980s: The company installs a computing system in its stores, inaugurates its first distribution center (already automated), and begins to expand beyond the state of Sao Paulo. 1991: Luiza Helena Trajano becomes CEO. 1992: The company bets on the concept of virtual showroom stores, in which sales clerks guide customers and sell products by means of multimedia terminals, without exhibiting physical products or stock. 1999: The company launches its website: http://www.magazineluiza.com.br 2000: The ecommerce operation begins. 2001: Financeira LuizaCred holding company is created in partnership with Unibanco (as of 2017, Itau Unibanco, the largest private bank in Brazil). 2003: New chains of stores (i.e., the Lojas Lider Wanel network) are acquired and of the "Lu" brand personality launches 2004: A new chain of stores (i.e., Lojas Arno) is acquired. 2005: New chains of stores (i.e., Lojas Base, Kilar, Madol) are acquired. 2007: Demonstration videos of certain company products begin appearing on the company's exclusive YouTube channel. 2009: Marcelo Silva becomes CEO. 2010: The corporate headquarters moves from Franca to Sao Paulo, the largest city in Brazil. A new chain of stores (i.e., Lojas Maia) is acquired. 2011: Initial Public Offering. A new network of stores (i.e., Bau da Felicidade) is acquired and "Magazine You" is launched. 2012: Ecommerce exceeds $320 million in sales. 2014: Luiza Labs is created. 2015: "Magalu App" for smartphones is launched. 2016: Frederico Trajano takes over as CEO and the marketplace launches. 2017: The company starts to use the sub-brand Magalu online. Marketplace products are sold in physical stores.Exhibit 5 Main Projects Developed by Luiza Labs \"Magazine You" The first social commerce site in the world. People create their own virtual store and sell Magazine Luiza products on social networks (e.g., Facebook, blogs, etc.), receiving a commission for each product sold. Application of big data for the recommendation of the site's products and for purchase suggestions sent by e-mail and display networks. Collects information based on the history of purchases and the navigation of the site and transforms it into customized content. \"What I want for my wedding\" Online wedding registries integrated into social networks. A couple creates a personalized site with photos and information about a wedding (e. g., the ceremony venue) and tags the products they both wish to receive as presents. \"Lu's Club" Subscription-based model to incent online consumers to shop for discounted items with member-exclusive advantages for associates (http: / / www.clubedalu.com.br) \"Magalu App\" Smartphone app allowing the customer to buy products with free shipping. On the app, customers can research products, receive information about promotions, consult consumer reviews of the product, carry out the purchase and follow the order through. They can also check for the closest physical stores, in case they opt for in- store product pick-up. \"Mobile Sales\" Smartphone application allowing sales clerks to sell products, verify product information, confirm product availability, review history of sales, and allow sales clerks to track the delivery of products. \"Mobile Sell Well" Smartphone application that helps sales clerks determine the optimum pricing for each sale. \"Mobile Pinpad\" mPOS machine that dispenses with the need for the customer to go to the cash desk and permits payment for purchases in the corridors of the stores by means of the interaction with the sales clerk. \"Mobile Inventory" Smartphone application that helps inventory managers locate in-stock products more quickly. \"Mobile Furniture Assembler\" Smartphone application that helps find service providers to assemble furniture. Exhibit 7 Financial Metrics by Channel Ecommerce Ecommerce Ph sical Stores 1 n 3 . Share of sales* 70.0% 28.5% Selling, General and Administrative Expenses (SG&A) and equity income\" (23.5%) (13.5%) (60.0%) EBITDA margin (EBITDA / net revenue) 8.5% 8.5% 40.0% Depreciation, Amortization, interest expenses and income tax\" (5.5%) (4.5%) (15%) 4.0 Source: Authors based on company documents. The numbers are approximate and do not reect the exact numbers. * Physical store sales represented 76 percent of gross revenue in 2016, and 70 percent in 2017. The company expected that this share would decrease between 2018-2021 to 66 percent, 61 percent, 56 percent, and 50 percent each year. Online sales (1p and 3p) were expected to comprise the rest. In 2017, products sold directly by Magazine Luiza (1p) represented 95 percent of the company' s online sales. The company sought to decrease this share between 2018-2021 to 90 percent, 79 percent, 66 percent, and 55 percent each year. Sales through third-party marketplace sellers were expected to comprise the rest. ** Advertising spend was the same between online and physical stores; logistics and fulfillment costs were 3 times higher for online versus physical stores; salespeople costs were 5 times higher for physical stores versus online platforms. The company did not spread its SGcA with the marketplace channel (Sp) by Q2 2017 and sales conunissions which sellers paid to Magazine Luiza were 10-12 percent. Magazine Luiza planned to increase overall commissions and spread SG&A across physical stores and 1p with the marketplace channel. \"* After accounting for depreciation, amortization, interest and income tax, it was estimated by Q2 2017 that Magazine Luiza generated a higher net margin for the marketplace followed by ecommerce (1p) and physical stores. Interest rates are higher at physical stores than ecommerce platforms because of the fees charged to anticipate receivables from sales generated through physical stores (i.e., finance costs), where consumers enjoy more credit through financial services offered in-store. There were also high capital costs related to inventory to support physical stores and 1p channels, while the marketplace (3p) did not require inventory. As of Q2 2017, sellers were responsible for delivering products sold, thus optimizing Magazine Luiza's gross margin in this channel. There was a large proportion of the income tax charged in the marketplace (3p). Depreciation is greater for physical stores due to increased use of tangible assets over ecommerce platforms. Magazine Luiza, SA is the largest omnichannel retailer in Brazil with a diverse array of interconnected businesses, platforms, and services. The company, which is publicly traded on the Brazilian BOVESPA (MGLU3) and operates almost exclusively in Brazil, was highlighted in a recent 2021 report issued by Boston Consulting Group (BCG) as the retail company with the highest total shareholder return in the world over the past five years. In recent years, under the leadership of company CEO Frederico Trajano, Magazine Luiza has begun actively positioning itself as a leading vector driving the mass-digitalization of Brazil. Although a publicly traded company the organization has always been led by members of the Trajano-Donato family and the founding family's roots are still very much alive in the company's present-day values and culture. Magazine Luiza has garnered international attention in recent years for leaning into some of the more hot- button issues in Brazil, such as sustainability, diversity and inclusion, and combatting fake news, oftentimes brought to life by the company's virtual spokeswoman, Lu, the world's most popular non- human influencer with over 25 million followers. Magazine Luiza was the focus of a 2018 Harvard Business School case study on large scale digital transformation that has served as a roadmap for many traditional global retailers looking to rethink their digital and online presence. Today the company has over 1,300 physical stores.Overview of Business Case Study: Magazine Luiza was founded in 1957 in Franca, a small city in the north of Brazilian state of 550 Paulo. As the company grew, it. focused its brick-and-mortar stores primarily on hard goods such as appliances, furniture, electronics, and, in recent decades, technology devices such as smartphones, tablets, and PCs. However, with the development and growth of an increasingly robust array of online offerings, third-party enabled sellers on in its Magalu Buddy marketplace, and a series of key acquisitions such as the 2019 purchase of Netshoes, a leading Latin American sporting goods, clothing and fashion retailer, Magazine Luiza gradually began to broaden its product mix across an its diverse portfolio of online properties. Although still in its infancy, executives at Magazine Luiza recognize that the beauty, apparel, footwear, and accessories (BAFA) sectors represent a high-growth opportunity for expansion across its online platforms. Company leadership believes that the key to establishing a robust BAFA business is establishing its reputation as a dominant player in \"fashion." As opposed to a being a company that simply purveys items across an array of BAFA categories, the company sees incremental value in curation, label mix, product mix, customer experience, and brand communications. Yet therein lies the underlying quandary: how does an immensely successful retailer that made a name for itself in hard goods most notably high- tech devices, TVs, and appliances as of late - quickly and efciently, establish itself as a leader in high margin soft goods, namely fashion