Magazine Luiza S A : 2021 Management Report

Management Report

2021

| MESSAGE FROM THE EXECUTIVE DIRECTORS

In 2019, after completing the most successful digital transformation in the history of Brazil, Magalu began a new strategic cycle. The cornerstone of this new strategic cycle was the creation of a multi-channel marketplace which would act as an onramp for onboarding millions of analog retailers to the digital world. Other important objectives included radically expanding the breadth of new product categories and services offered to our more than 37 million active customers and building new revenue streams beyond Magalu's traditional businesses. Despite a global pandemic and a macroeconomic crisis, we see strong evidence that we are following the right path including:

• Total GMV doubled in just two years. The sum of all offline and online sales made by the company (GMV) reached R$56 billion last year with 30% growth and 104% growth since 2019.
• E-commercesales tripled. E-commerce sales were R$40 billion last year, 40% more than in 2020, which was, itself, an extraordinary year for Magalu. Over the last two years, online sales grew 221% year to date and the company's e-commerce business reached the unprecedented mark of 200 million items sold during the year.
• Marketplace sales quadrupled. In 2021, Magalu's 3P sales reached R$13 billion. This is an expansion of around 70% during the period and accumulated growth of 332% over the last two years. Compared to 2019, our marketplace is now four times bigger. Here, the beauty of our strategy is revealed: to grow, digitalizing Brazilian retail. Marketplace sales surpassed physical store sales. In February of this year, we reached a milestone: for the first time in the Company's history, marketplace sales¹ surpassed physical store sales.

The numbers are impressive, but how did we get here and how do we plan to continue to grow?

Marketplace Magalu: The Rise of 3P

The same sustainable competitive advantage that enabled Magalu to achieve leadership in its 1P business - the Company's multichannel business model - is now being used to strengthen our 3P operation.

Over the last two years, the marketplace has been the main driver behind the acceleration of Magalu's e-commerce business. Currently, more than 160,000 sellers, most of them small local retailers, are integrated into our platform. They sell absolutely everything, formally and in full compliance with the law.

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Of the 160,000 sellers on the marketplace platform, 96,000 were originated through our Partner Magalu initiative. The initiative, created at the beginning of the pandemic, aimed to help small, analog shopkeepers overcome the hurdles imposed by social isolation. We knew that, for these small entrepreneurs, there were only two options: sell their products online or die. We also knew that these small merchants would not be able to create a solution on their own and would only survive if someone created a retail operating system for Brazil. By offering a complete, turnkey solution - a marketplace; billing systems; back office accounting; credit; logistics, advertising and marketing services - we helped migrate companies that only knew the physical world to the digital universe.

In terms of assortment, Magalu offers products from a wide variety of categories and the number of offers available on the marketplace is currently 60 million, more than double the number at the end of 2020.

By increasing investments in logistics bases - we reached 272 distribution centers and dedicated cross-docking stations in 2021 - and integrating the fleets of GFL, SODE and Logbee into Magalu Entregas, we were able to significantly increase the number of 3P deliveries handled by our own logistics network, dramatically reducing the role of Correios, the national mail service. Currently, about 80% of 3P orders are made by Magalu Entregas and more than 30% of 3P orders reach customers' homes within two days. Faster deliveries and more efficient operations contributed to a 50% increase in the 3P sales conversion rate in 2021 and an improvement in marketplace NPS (Net Promoter Score).

Marketplace growth has also been driven by something that only Magalu has: physical stores. Not the stores of the past, where you can only buy products. Magalu stores have, year after year, evolved, gaining new functionalities and a new purpose. We were the first to believe in the value of a multichannel model. We were also pioneers in transforming physical stores into hyperlocal mini distribution hubs. Physical stores played a key role in the growth of our 1P business and now we are leveraging our physical store assets to help accelerate our marketplace.

More than 400 stores have already been transformed into mini postal agencies, where sellers can ship their orders. The 9,500 sellers who switched from Correios to our mini postal agencies experienced an average order growth of 293%; an average GMV increase of 143% and an average decrease in freight costs of 51%. Customers can also pick up their marketplace orders in more than 1,100 Magalu stores. Today, 13% of purchases made on the Magalu marketplace are picked up by customers in-store. But our physical stores aren't just important for logistics, last year, almost half of the 100,000 or so new sellers who joined our platform were originated by the local physical store teams.

Greater convenience. More services. Faster deliveries. Nationwide coverage. Lower costs. Connection with local retailers. That's why we continue to believe in the enormous potential of physical stores and multichannel. That is the rationale behind the opening of 182 stores over the past year and our entry into Rio de Janeiro, the second largest retail market in Brazil. The 51 physical stores in operation in Rio de

Janeiro have already made a significant contribution, increasing Magalu's market share in the state by five percentage points in just five months. In addition, the Rio de Janeiro physical store teams distinguished themselves as the most successful at attracting new sellers to the marketplace platform.

New categories, services and sources of revenue

We've been selling durable goods for six decades. Thanks to changes in consumption patterns driven by the pandemic, a little over a year ago, we became the market leader in Brazil. When the consumer wanted to change smartphones, buy a more modern television or a refrigerator with more features, Magalu was there, as a first option. The Company is now the largest seller of products from manufacturers such as Samsung, Apple and Whirlpool in Brazil. And scale makes all the difference in a business like this - regardless of cycles that, by definition, are temporary.

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Through acquisitions and organic investments, Magalu has been pursuing a revenue diversification strategy since 2018. In 2021, sales

of products from new categories represented 45% of e-commerce sales (in annualized terms), driven mainly by the marketplace, one of the fastest growing in the country.

The opportunity for expansion in these new, non-traditional categories is enormous. In order to accelerate our entry into new categories and help us to capture greater operating efficiencies, we have been accelerating our mergers and acquisitions activities. In 2020, Magalu acquired ten companies and last year, the Company made twelve acquisitions including Jovem Nerd, Steal the Look, KaBuM! and VIP Commerce. These movements demonstrate strategic acumen, executional prowess and financial discipline. The vast majority of consideration was paid in the form of Magalu shares, aligning the founders of the acquired companies with Magalu's long-term strategic interests.

All of the acquired companies have been generating positive results, exceeding expectations, and proving to be resilient to the current macroeconomic scenario. Here are some of the highlights:

• Gaming and computer accessories, R$4 billion in GMV. KaBuM!, the leading technology and gaming e-commercesite, purchased in July, generated R$4 billion in GMV and a recurring profit of R$300 million in 2021 - a result that doesn't yet appear on Magalu's balance sheet, since KaBuM!'s numbers are only consolidated with Magalu's in December. Sales growth was 32% compared to 2020 and over 200% during the last two years. There are more than 20,000 items for sale on the platform, which include computers, components, hardware, peripherals, products for the gamer universe and for the smart home - a complete assortment for technology lovers, extremely complementary to the more limited selection typically sold by Magalu. KaBuM! currently has 2 million active customers, 63% of whom were not Magalu customers. KaBum!'s customers skew younger and are very loyal.
• Netshoes, R$4 billion in GMV. Together, the sports and fashion categories reached R$5 billion in total sales in 2021. Now fully connected to the Magalu ecosystem, Netshoes recorded the highest annual profit in its 20 year history, R$135 million in 2021. GMV totaled R$4 billion, a quarter of which was derived from the approximately 8,000 marketplace sellers. Netshoes' product catalog currently lists 250,000 items and, over the course of the year, Netshoes sold 10 million pairs of athletic shoes and 1 million football jerseys to its more than 7 million customers.
• • Fashion sales grew 170% over the past year, becoming one of the most important traffic generating categories for our channels. 3P's share in the category rose from 33% in 2020 to 45% in 2021. Today, the fashion vertical, with its 3.5 million items and 300 brands, has 30,000 sellers, up from 6,000 sellers a year ago.

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With the help of Hubsales, the number of manufacturers that sell their fashion items directly to consumers went from 136 to 300, distributed across eight different manufacturing regions. Together, these manufacturers sell over 350,000 items.

• Beauty, R$1 billion in GMV. The beauty category, led by Época Cosméticos, reached R$1 billion in GMV in 2021, gaining three percentage points in market share. Direct sales expanded 60% and large improvements were made in relationships with major luxury brands. On Black Friday, for example, Época hosted a live commerce broadcast with the French brand Dior, which was their first live commerce broadcast in Latin America.

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• Groceries, R$1 billion in GMV. Vip Commerce, a startup company acquired by Magalu in 2021, has been working to digitalize supermarkets across Brazil. Vip's e-commerceas-a-service solutions are behind more than 2.4 million purchases, with 190 million items sold to consumers in 280 cities. In 2021, Vip Commerce's GMV grew by more than 200%, reaching R$ 330 million. Vip is already integrated with the SuperApp and the plan for 2022 is to begin to expand Magalu's grocery offerings across the country. Including Magalu's own 1P sales, the grocery category - hygiene, cleaning products, beverages and non-perishable food - generated more than R$ 1.1 billion of GMV. Groceries is also Magalu's largest category in terms of the number of items sold.
• Food delivery, R$1.3 billion in GMV. AiQFome, the food delivery startup that we acquired in 2020, has become the second largest food delivery company in Brazil, in terms of number of orders. Together with ToNoLucro, from Tocantins, and Plus Delivery, operating in Espírito Santo, AiQFome generated R$ 1.3 billion in GMV last year and is profitable. Currently present in more than 700 cities, AiQFome serves 5.3 million customers, principally, in rural areas. In 2021, AiQFome was integrated into the Magalu SuperApp and should begin to expand to larger cities this year.
• Magalu Ads, R$100 million in revenue. In 2021, Magalu and its affiliates generated R$ 100 million in advertising revenue, much of which came from seller ads placed on Magalu's proprietary advertising platform. Among other properties, Magalu's advertising platform consists of content portals like Steal The Look (fashion, beauty, home), Canaltech (technology, product reviews, daily news), Jovem Nerd (cinema, series, video games, role playing games, science), as well as Magalu's e- commerce channels such as the Company's website and mobile. SuperApp and those of ecosystem members such as KaBuM! and Netshoes. In December, Magalu's total online audience - which includes the portals and mobile platforms - surpassed the 450 million mark, giving Magalu one of the largest online audiences in Brazil. And we are just getting started!
• Fintech doubled in size to R$65 billion in TPV. In 2021, Magalu acquired fintech startups Hub Fintech and Bit55. 2021 was also marked by an exponential growth in the volume of transactions, from R$ 36 billion to more than R$ 65 billion, growing 82.5% compared to the previous year. MagaluPay, our digital account integrated with the SuperApp, reached 4.8 million users. Taking into account Magalu's sub-acquiringand Banking as a Service (BaaS) businesses, more than R$ 24 billion passed through Magalu Pagamentos, with a net profit of R$ 156 million.
  In terms of the Company's credit card business, we exceeded 7.2 million active credit cards and, in just eight months, we issued more than 1 million of the recently launched Magalu Cards through our digital channels. Over the course of the year, credit card total payment volume, or TPV, was more than R$ 41 billion. The Company's credit portfolio reached R$ 17.5 billion and generated a profit of R$153 million for Luizacred.

Real sustainability in practice. For a long time already.

We approach our sustainability initiatives with the same enthusiasm, passion and dedication as our core business operations. We have always had an umbilical relationship with the communities in which we operate and with Brazil in general. But we know that the path to sustainability has no finish line. We can only improve our day to day practices and the way our business impacts those around us.

We made considerable progress over the last year. An important demonstration of this was the inclusion of Magalu in the Brazilian stock exchange's B3 Corporate Sustainability Index (ISE), in 2022. The index aggregates 46 companies from 27 different sectors that are recognized for their commitment to corporate sustainability.

In the environmental realm, Magalu concluded the process of implementing new waste disposal practices in its 26 distribution centers and installed collection boxes for used electronic products in 250 stores. More than 1.3 tons of electronic waste was collected and sent for recycling or environmentally sound disposal. About 40% of all energy consumed by the company already comes from clean energy sources. Fifty electric trucks were added to Magalu's logistics fleet, avoiding 1.7 tons of carbon emissions.

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Mundo Social, a mini world inside the Magalu SuperApp, started to offer products from more than 60 non-profit organizations and social impact businesses. And, in a time of increasing violence against women, the domestic violence report button, embeded in the Magalu SuperApp, was also improved.

In terms of diversity, for the second year in a row, Magalu organized a trainee program exclusively for people of African descent, with the goal of identifying and training talented young people to join our leadership ranks. A census, carried out in September, showed that 41.5% of the company's leaders declared themselves to be of African descent.

In terms of gender equality, we hosted the third edition of LuizaCode, an acceleration program for women in the area of software development. We have distributed over 210 scholarships and 330 women have been trained by the program.

In order to retrain older individuals and bring them into the digital workforce, we created the Magalu Development 40+ initiative, a training program for people over 40 years old that want to learn to be programmers. As part of the initiative, we provided 100 scholarships, half of them to people of self-declared African ancestry. Another initiative is designed to recruit people over 50 to join our customer service department.

As a result of these and other initiatives, Magalu was named by the Great Place to Work Institute as the overall best company to work for in Brazil.

In recent years, we have made a series of investments in assets that, connected to each other and leveraged within our ecosystem, will serve as the foundation for yet another great cycle of growth. In doing so, we will also be fulfilling our strategy of digitalizing Brazilian retailers, through an inclusive marketplace - which helps to formalize what today, due to a lack of tools, is often outside the law. A marketplace that includes sellers of all sizes (but, in particular, small analog entrepreneurs), of all categories, from all regions of Brazil.

We ended the year with the largest cash position in the Company's history, R$12.3 billion. In 2021, Magalu raised R$8 billion reais in the market, 50% in equity, with a follow-on offering in July, and 50% from the issuance of debt which matures in 2024 and 2025. These are resources which will be used to support the digitalization of Brazilian retail.

We remain on this path, which we consider to be the most promising and best suited to the company's strengths, culture and beliefs. We believe that the future is here - a future that, once again, Magalu is building.

To our partners - customers, employees, suppliers, sellers, and investors - we thank you for your trust and support. We continue together and optimistic in 2022.

EXECUTIVE MANAGEMENT TEAM

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