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2020 ANNUAL REPORT

Letter from the Chairman of the Board of Directors to the Shareholders of Grupo Sanborns

2020 Economic Outlook

2020 was a year marked by a worldwide crisis, caused by the COVID-19 pandemic, which at this time has already surpassed 100 million confirmed cases throughout the world and several million deaths. The travel restrictions imposed in order to mitigate the propagation of the virus, along with a lack of knowledge in regard to an effective treatment gave rise to temporary shutdowns in a large part of the world’s economy, especially during the first half of the year, causing a drop of 8.93% in the GDP of the world during the second quarter and 3.50% for all of the year, even with the activation of unprecedented monetary stimulus programs.

$2,300

million pesos of increase in cash position.

The United States economy shrank by 3.5%, caused mainly by a drop of 7.31% in the aggregate demand of the services sector, as well as by a drop of 5.27% in fixed gross investments. As a result, the Federal Reserve lowered the benchmark interest rate two times, to end the year at a range of 0.00% and 0.25%. Additionally, stimulus payments in the amount of around 3.5 billion dollars were distributed during 2020, raising the public debt as a percentage of GDP from 108.68% to 131.18%.

In Mexico, GDP fell by 8.46%, with secondary activities showing the greatest impact (-10.20%), the hardest hit being construction and manufacturing, with drops of 17.42% and 10.34%, respectively. Tertiary activities, which represent 64.05% of economic activity, fell 7.85%, affected mainly by commerce – which diminished by 9.67% - and by tourism.

The Mexican peso underwent a devaluation of 5.22%, closing at $19.91 against the dollar, showing a high volatility during the initiation of the pandemic and reaching a maximum exchange rate of $25.36. Its recovery took place during the end of the year because of the current-account surplus, which reached 26,571 MDD, representing 2.41% of the GDP and because of the difference in interest rates between Mexico and the United States. Banxico lowered the benchmark interest rate on seven occasions during 2020, to close at 4.25%, down from 7.25% the previous year.

Inflation in Mexico closed at 3.15%; the underlying component increased by 3.80%, offset by the smaller rise of core inflation of 1.18%, which benefited from the fall of petroleum prices – principally gasoline –, which fell by 8.90% during the year.

The trade balance had a historic surplus of $34,476 MDD, compared to $5,409 MDD for the previous year. The oil balance had a deficit of $13,995 MDD, $7,370 MDD less than in 2019, while the non-petroleum balance increased its surplus by $21,698 MDD, to close at $48,471 MDD. In exports, manufacturing, which has the greatest weight, fell by 8.92%, while importations fell in all categories, especially in consumer goods, which fell by 26.20%, while capital goods fell by 16.87%. The latter is explained by the decrease of investments in the country.

The public balance had a deficit of 674,160 MDP (2.90% of the GDP) compared to the previous year’s deficit of 393,608 MDP (1.60% of the GDP). This increase was due to lower revenue (-4.10% real), impacted mainly by the drop in oil prices, which fell by 38.70% in real terms and which were not compensated by the drop of 4.90% in real expenses.

Grupo Sanborns

In 2020, due to the pandemic, we took optimization measures: we streamlined our administration by merging some of our companies, and reduced our inventory and our capital investments.

A strict control over operating expenses was instituted, without affecting the quality of our service standards. The principal savings were observed in the payment of rentals, a lower consumption of energy, the payment of commissions, and lower advertising, promotion and depreciation expenses and costs. Other measures such as these provided us with an increase in our cash position, with which we managed to finish the year without debt and with an increase of $2,300 million pesos in cash.

A strict control over operating expenses was carried out, without affecting the quality of our services.

Online sales grew by 400% in respect to the previous year. Our objective has been to reduce delivery times by 70%. Substantial improvements have been realized in the ClaroShop MarketPlace, and alliances have been formed, such as with the SAE accounting system, which enables providers to automatically carry out transactions in the platform.

The total closure of the stores and remote work and study generated a greater need for connectivity, which had a positive influence on the sale of technology items such as computers, telephony and video games, as well as in the category of “big-ticket” electronic items. The Fashion category saw a decreased demand in formal clothing and footwear, and in perfumes and makeup.

In business on credit, the quality of the portfolio has been kept under control, with late payments of more than 90 days at 5.2%. We extended very timely support to those of our customers who needed it, in view of their economic situation.

In Sanborns the number of units was optimized, with the elimination of 11 stores that were not productive. On June 30 of 2020 the Sanborns Café, Dax, and Saks Fifth Avenue formats were merged into Sanborns, along with their respective services companies and the administration of the Sanborns and MixUp credit cards. On July 31 of 2020, Sanborns Hermanos, S. A. de C. V. merged with its subsidiary Comercializadora de Tiendas Internacionales, S.A de C.V.; Promotora Musical, S.A. de C.V. merged with its subsidiary Paden, S.A. de C.V., and Sears Operadora México, S.A. de C.V. merged with its subsidiary Secorh, S.A. de C.V. On November 30 of 2020, ClaroShop.com merged ClaroShop.com Holdings and Empresa de Personal Claroshop.com S.A. The 25 Dax units continued to operate, since they are self-service stores and with a good performance in sales. In Saks Fifth Avenue the Plaza Carso store was closed and it was converted to the new concept of Sanborns Home & Fashion.

Promotora Musical recorded a 4.7% decrease in sales. A good sales level was maintained throughout the greater part of the year, due to the nature itself of the pandemic, wherein remote work and virtual schooling created a greater demand for technology and connectivity and for entertainment accessories such as tablets and cell phones. Three iShop stores were opened during the year. In this format we continued to stand out because of the quality of our brand, the network of stores, and our better customer services.

The Company’s administration was optimized by mergers within our own Company and by reducing our inventory and our capital investments.

From the time of initiation of the pandemic, Grupo Sanborns strove to maintain the long-term viability of the Company and the strongest group of personnel possible.

When the pandemic began, the Carlos Slim Foundation reacted with great celerity, and despite the uncertainty in regard to the knowledge and behavior of this new virus, the necessary actions were quickly determined and implemented, such as:

  • Donation of equipment and reagents for PCR, Antigen and Serology tests, as well as ventilators and medications.
  • Provision of protective equipment to health personnel, such as N95 masks, gloves, medical caps and gowns.
  • We provided food for the health personnel in 35 hospitals.
  • In order to expedite access to the vaccine, we carried out the necessary agreements, accepting the risk involved in the transfer of AstraZeneca technology to ensure the production of at least 150 million doses in and for Latin America in the mAbxience Laboratories of Argentina and Liomont in Mexico.
  • We supported the expansion of capacity of several hospitals, as for example the Temporary COVID-19 Unit of Mexico City, which has changed the life and destiny of thousands of persons and their families. This Unit was forced to continuously expand its capacity in accordance with the circumstances, to finally become, with its 607 beds, an important facility in the treatment of COVID-19 in Mexico City. It has an exceptional group of people who have treated more than 8,000 patients and it will continue to operate as long as necessary.
  • We established a monitoring system that has been a valuable adjunct in the prevention of contagion and in the provision of timely medical treatment for all our collaborators, thus decreasing the cases of serious illness and death.

Sincerely,

Carlos Slim Domit

Chairman of the Board of Directors of Grupo Sanborns, S.A.B. de C.V.