Thank you for being part of this conference call in 2025. We have with us for the first time, welcome, Eric Alencar, our CFO. And for this time, David Viton from Hering. It's been one year from creating the Azzas Group, and in this past 12 months, it was a time of a lot of learning, a lot of changes, and a lot of correction. We start the second year with great changes made, and we now stabilized with a well-defined organizational structure, very lean. We have three CEOs with a lot of experience: David Viton, that I just introduced, Rafael Sachete, and Bruno. In addition to Eric, we have William Cummins, as our CFO. So it's a very lean C-level, and I'm sure that in the second year we will go into a growth structure. The Azzas Group, it's important to everyone analyze more than just big numbers.
We went beyond BRL 422 billion per quarter. We are the largest group of brands in Brazil. Our role is to give space so that the brands have their creative capacity and that the change, creation from product and sales, be the best way possible. We're very proud to have the largest shoe brand of Brazil, Arezzo, the largest men's apparel, Reserva, Farm, and Hering. So the brands in our group are very relevant. The figures are very high. We're going to have revenue above BRL 14 billion, and we're seeing the main brands that are all very well positioned, and we know we have to turn this into constant results. Our presentation, our messages, our key messages. We had a result in the third quarter, very heterogeneous among the several business groups. This result was okay. It was satisfactory, to be very honest, but it's solid.
Our growth was modest in revenue, but maintaining its Beta brand and cash generation. I'm not going to say that we're happy with our results. We're very encouraged to work and improve our efficiency, but our opinion, these are strong results. When we analyze our EBITDA margin and our business unit that starts this renewal of Hering, it should be 15%. That would be a result that would make us very happy. However, we're a whole, and this is our feeling. More specifically, highlight and congratulations to the entire team of our fashion, women, and men business unit. It went up 41% this quarter and is very relevant. We consolidated shoes and bags with a 28% growth in the domestic margin and accounts for 13% of our revenue with the total of our international operations. We're very proud.
Congratulations to Ruy that is now one year spearheading our men's fashion from Rio de Janeiro. We were very concerned with the transition that we were making in the past with the founders of the Reserva brand to a professional management to be able to expand these brands and keeping the irreverence, the unique service. We had a very important financial goal: improve EBITDA margin, reducing expenses, and improving gross margin with fewer promotions and reducing inventory. This result was brought by Ruy very well. Although the growth, we had an exceptional leverage, growing 5% top line and 3% of EBITDA. Now, our business units that were not that satisfactory. Our core business, which is shoes and bags, we just announced the transition of leadership. Forty-five days after Eric arrived, Sachete is now completely involved in his business unit.
He was supported by product, João Fernando in product engineering. Today, we have conviction that the power of this business model is a powerhouse. With 5% of the revenue, had a cash generation that was exceptional. It is a business that, with the restructuring that we're doing with our franchisees and the decisions of leading a hand when they needed it, because the winter did not have the same performance that we expected. We had a lot of leftover, but our franchise is very important for our business and shoes and bags. Now, going to our opportunity of turnaround and starting the process and giving the floor to David Viton, we started a cycle of transformation. If you ask me, Alexandre, what is the essence of this transformation? It is a change in culture, a change of a mindset. It is a symbol that goes beyond any issue.
It's a transformation. We're changing the C-level of, we're moving C-level of Hering to Blumenau and transferring the product team. It's being completely reimagined. Blumenau will not only be the headquarters of Hering, but its Vale do Itajaí is where the textiles in Brazil are very powerful, and it will be great for the products and the partners. We started this new cycle to Hering in addition to David Viton, a CEO, and Fernando Porto, CEO. And Gustavo Buchi, he took over the temporary role of spearheading. Thank you for your support. It was a pleasure to work with you, Gustavo. And he's the COO, planning the collection and distribution. And Fernando Porto, for those who don't know him, is the person who most knows merchandise in Brazil with relevant works, creating a category of handbags for Schutz, products developed 10 years ago and that are to date bestsellers.
It's a very segmented product. He supported us in our U.S. operation. Fernando is going to work with Gustavo and David to spearhead Hering, and he's going to be the Chief Creative Officer. David, I'm sure that your energy is going to spread to everyone, and good luck.
Thank you, Alexandre. It's an honor to be back spearheading Basic BU. I have a history of more than 20 years in retail and consumption, but always looking at brands. I work in more expanded constructions to managing products and managing people. My advantage is I'm very pragmatic. I focus on results, but I pay close attention to relationships and trust-building processes and very careful with complexity. We're going to manage complexity in a very structured way. I'm very motivated because of the power of the brand Hering. It's a heritage in Brazil.
It is a synonym in the category, and there are very few brands that have that power. I am very confident with the team that will spearhead this transformation process, that we can count with a passionate existing team, and also Gustavo and Fernando, and as Alexandre said, that are joining this new leadership team. Gustavo, having more than 10 years in planning operations in apparel, and Fernando, 13 years of a very close relationship managing brands and products. Going into the diagnostics, it is worth reiterating the process to achieve this diagnostic. It is almost concluded, but it was done very closely with the Azzas board and the franchisee network. This is a very important observation.
In this little time I've been ahead of the brand, I have more I've been more than half with our franchise operators, and it's a very important asset for Hering that has great value both in strategy and in culture. They're at the center of the definition of this new path and reflecting on the root causes on the left side of the chart. They're from the door in, which brings a positive message of the health of the brand, according to the research. It's in plain evolution. One of the most important topics that let our results be below expectations is the company's operating cycle.
We work with purchasing before the sell-in for sales, like to growing imports with greater lead time in product management with the opportunity of the lack of balance of the collection pyramid that has also reducing dispersion and also opening occasions of use and categories with high potential. Another thing about channels, the franchise model needs adjustments, focusing on the network's financial health, alike to excellence and execution on the other end, and a multi-brand channel with very little penetration despite having a huge potential in this channel. Lastly, internal management. There's a collective intelligence in the network, almost 700 stores and thousands of multi-brand channels that we can be more assertive in both in operations and product segmentation. If we think about these actions, it's a 360 degree. It's a horizontal project and requires a very sensitive and careful execution.
On the one hand, when we change the brand's operating cycle, as I mentioned, we're going to stop to buy to then produce. We have to sell to sell in, and then we're going to produce and purchase with our production partners. This today leads to two phenomena. We buy in advance, and we have high potential products that end quickly. There is a break of revenue in the business units. On the other hand, we bet on some products, and they are left over, which impact our gross margin, be them exposed on the shelf or trying to sell them in alternative channels. This requires our priority in centralizing planning and reviewing operating cycles. A sensitive new look in the industry that has the potential to compete with our business model, focusing on profitability and also balancing product pyramid with new categories and locations of use.
As I mentioned, reviewing managing the channels will be a step right after that with a program of excellence in franchise and preparing the expansion of the multi-brand channel. That is a process of structuring actions, as you can reflect, that by the end of the first quarter next year will be implemented. I would like to thank Alexandre very much for the trust, thank the board of directors from Azzas and Thiago for being so generous in my learning. Thank you very much.
I know that your diagnosis is well done, and your energy and experience will be fundamental so that we can be a great company. David will stay here to answer all the questions. Now, I am going to give you an overview, and Eric will go deeper into the results. We have gross revenues of BRL 3.7 billion, 4.4% growth year-over-year.
Gross margin practically flat, 54.7%, EBITDA BRL 476 million, maintaining a bit more leverage year-over-year, 0% compared to that. Considering the Hering margin, it would be 18.4% EBITDA margin, which is our dream of being over 20%, and net income 23%. Now, more specifically into our four business units. About the channels, shoes and bags, for instance, we have the highest contribution in our operations is for new franchises. As I mentioned, it is a reduction if such a thing exists. It is healthy, though. We deliberated that we would support our franchisees. We have an integrated ecosystem of the franchisees and shoes and bags. We want to be a link that connects both sides, owning the brand and the product. We have to take care of our partners and support our franchisees. That was very important.
In multi-brand, we need to rule out, remove Vans, and then we would have growth if we do that. We have to consider e-commerce for the legacy brands, Arezzo, Schutz, and Anacapri. They had a growth of low five digits. That is for shoes and bags. I would like to highlight the Schutz brands and the DTC channels, especially in premium places, which is our objective, and the relevance of the Schutz brand in recovering its premium positioning and decreasing that other aspects. We have a campaign now, the new model, and in Guatemala, we would like to highlight that number with same-store sales of 35% in the first month in October of operation with a completely different concept. We are very proud of Schutz, and growth in monobrands would be a consequence of that.
In fact, the star of our business for this quarter, congratulations to all in this business unit, growing 18%, mainly driven by the 41% of International Farm. We have premium brands, excellent growth. It is great to see the recovery of Animale. The renovation of the new Animale stores at the JK Iguatemi Shopping Mall and the Leblon Shopping Mall had star growth over 40%. The brand was refreshed, well-positioned. In fact, premium brand and the attention of all of management, knowledge of all brands, all channels, it is very solid. We are very proud of the results of F&L Women with the highlight to our business. About F&L Men, as we mentioned a year ago, and here it proves our capacity that executing complex transitions of picking the right people and actually trusting what was done, the path that was taken.
The objective here is diluting the losses with a negative margin. When we see that it is driven by e-commerce, it is deliberate here. This was a big impact about some of the sales that happened before, and the work was completely changed through full-price sales with higher value added. The drop in e-commerce is healthy, so to speak, at this time for this business because it is supported by the increase in gross margin and a reduction in CAC, and therefore there was excellent growth for the operation here at Reserva. Congratulations to the entire team. As David showed, the results here as the need for this greater change that just happened as of October fourth quarter, a moment where we will continue the work to look into the franchisee network.
The Azzas Group has the diligence and deliberation and long-term vision and makes difficult decisions when necessary in all senses. When we help our franchisees, it is because we know that this is all about forehands. It is a two-way street. When we have to adjust things, we take risks. It is part of our business, not the ideal scenario. Sometimes it is the medicine that you have to take every three years, though otherwise you get addicted to that, and that type of performance will no longer be accepted in the next 12 months. Now we are going through a cleanup. Owned stores pretty much flat, same-store sales of 8%, and we handed over nine owned stores to franchisees and e-commerce with a grow of 1.7% as in Reserva. This is when we removed the Hering brand in marketplaces that had a very low margin.
Those are the highlights and strategy for the brands. Now I'm going to Rafa and Eric to talk about the results.
Thank you, Alexandre. Good morning, everyone. It's a pleasure to be here with Alexandre, David, and Bianca for the 3Q 2025. I joined the company on September 10, and I had an opportunity of drilling down into this, and I realized that we have a very aligned team for company growth and financially to have the best return on invested capital. I'm going to contribute in governance for capital allocation and capturing efficiency and performance opportunities. Let's go on to the results for 3Q 2025. The recurring growth revenue of the continued brands, total of BRL 3.7 billion, a growth of 4.4% year-over-year. Reported growth revenues, including discontinued brands, grew 1.2% year-over-year.
As was already mentioned by Alexandre in this presentation regarding growth, we had a mixed performance between the business units. The fashion women and fashion men units were the highlight. In the quarter, net recurring revenue achieved BRL 3 billion, a drop of 2.3% year-over-year. That means a gap of 3.6 percentage points regarding the growth of gross revenues. That difference is explained by the higher number of deductions that accounted for 21.2% of gross revenues, an increase of 8.8 percentage points year-over-year. The main factors for that were, first of all, an increase in the volume in the sell-in channels as a result of our decision to reduce the coverage levels of the franchisees in shoes and bags and guaranteeing more assertive sales and less discounts.
Second, reducing the revenues and grants, especially in fashion women, regarding the sale curve and inventories, and also the high growth of revenues of international operations of 22.8% that does not have associated grants. Recurring rates, BRL 1.6 billion, an increase of gross margin of 30 basis points explained by a lower level of discounts in fashion women and fashion men that had more promotions year-over-year and a higher share of the sellout channels that has a higher gross margin. The positive effects were partially offset by the decrease of gross margin in the basic unit, and if we could disconsider that, we would be 120 basis points higher. Recurring EBITDA, BRL 174 million, with an increase of 40 basis points, which reflects the discipline in expenses, and even though the net revenue has dropped.
That negatively impacted EBITDA by basic, and if we exclude that, we would have 240 basis points extra. Now, on the next slide, the company has recorded financial expenses of BRL 209 million versus BRL 159 million expenses year-over-year, which is interest on financing the increment to gross debt and financing. It was partially offset because of the revenues from active interest updates of the SELIC rate and debits given admin procedures and negative balances of income tax and social contribution tax. Net income totaled BRL 201.3 million, growth of 22.9% year-over-year, and net margin was 6.8%, which is an increase of 140 basis points. As mentioned in the earnings for second half, we start to provision income tax and the CSL, and that impacted net income year-over-year. That is where we are generating. Let's talk about cash.
Third quarter, we had operating cash generation, BRL 275 million. Operational cash after CapEx, BRL 166 million. In 3Q LTM, cash generation was BRL 731 million, and after CapEx, BRL 248 million. It's worth noting that in LTM, there was an irrelevant impact after the merger of the companies that impacted fourth quarter 2024. Next slide. Let's talk about the evolution of the financial cycle, 130 days with an increase of 21 days year-over-year. The extension of the cycle is mainly explained by the reduction of the suppliers for 21 days to be more conservative in our units. On the other hand, inventory days haven't changed, and account receivable days have shown an improvement of four days. Now, on the next slide, let's talk about company indebtedness. At the end of 3Q 2025, the company presented a cash position of BRL 135 million and debt of BRL 2.3 billion.
The indicator of net debt over EBITDA, pre-IFRS 16, is 1.37x . To reinforce the strategy of extending the debt profile in August, the company had its second issuance of debentures with BRL 600 million funded of 3.4 years on average. As a part of the program of the share buyback informed on May 5th, 2025, the company bought back BRL 27 million, totaling BRL 127 million for the year. Considering the buyback, the indebtedness indicator would be 1.27 times. It ended the quarter with a relevant balance of BRL 1 billion in credit card receivables, reinforcing the operational liquidity and short-term operations. That's the end of my presentation. Now I'll hand it back over to Alexandre.
Thank you, Eric. Congratulations on management in these past 60 days and all your dedication. Now it's open for Q&A. Bianca.
thank you, Alexandre, Eric, and for your presentation. Good morning, everyone.
I'd like to remind you to ask a question. Just click on the Q&A icon. First question, Alexandre, is from Luiz Guanais from BTG, and he's asking about normalizing sell-in in Hering and Schutz. He'd like to know the process of normalizing the sell-in process, not only for Schutz but also Hering.
Thank you for your question, Guanais. I understand that we are talking about franchises, right? Where we control the inventory and consequently we replenish the chain so that they have healthy coverage levels. It wasn't the reality in the past two quarters, so we had to support our franchisees reducing the sell-in and accepting returns that have been getting lower in the second and third quarter and will go down to zero in the fourth quarter. As of this quarter, we have a different reality for shoes and bags and Hering. They're completely distinct.
More specifically about Arezzo, which is our biggest brand in the franchisees channels in shoes and bags. Now we have a stabilization of the sell-in in the fourth quarter, and we decided together with the franchisees to not sell into products for pre-fall that would be sold and sell out end of December, beginning of January. We decided to hold that to the second half, and if we do not exclude that difference, then we would already grow approximately 4%. For 2026, we have already established that. For Hering, here in the overview, I already gave you that, but that support to lower the inventory levels for franchisees would be stronger. Exactly about Hering's reality. In the third quarter, we could see that the sell-in reduction was around 60%, while at the other end, the same-store sales of the franchisees was a positive 5%.
It is a healthy process of recovering this coverage with the compensation expected for the second half of 2026, where we will have our summer collection already under the new operating cycle. Thank you.
Our next question, still BTG. If you could give us more structure about the evolution of channels for the Schutz and Hering, especially owned stores, what can we expect for the next quarters?
About Schutz, our owned stores, and we are going to exclude Vans from this talk. It had an increase of 16%. There are two causes that explain Vans' performance. They had an increase of 11% this quarter, so it is going through a repositioning process. Being more specific, the skateboard world lost space to the running world, so we are making it more appealing, especially more casual wear where we can go in. This will happen.
The second cause is that Vans in Brazil, in the universe of Arezzo&Co, in these five years, had a very good base, and the result of 2026 is now centralized in Vans. About owned stores of Arezzo, Schutz, and Alexandre Birman, we have a healthy growth of high single digits, close to low double digits in our owned stores. We do not want to increase owned stores. We are comfortable with the number that we have today. Only some sporadic changes can happen, and it is well-established. E-commerce and multi-channels. E-commerce, we are doing very well. The percentage has been gaining a very good bottom line efficiency. About franchisees, we are in a growth trajectory with the legacy stores in the two digits.
About Hering, in our owned stores for Hering for the next quarters, there's a stabilization of the number of stores with some change, focusing on a better return on invested capital. On the other end, we also expect same-store sales in high single digits. In the e-commerce, another channel of the brand, the same focus that we saw in fashion and lifestyle men is what we're doing to manage Hering, focusing more on the gross margin than top line, and also a drastic reduction in the work that we do in the marketplace because the contribution margin was very low.
Thank you, David. The next question is from Daniela from XP. It's a question about Hering. In Hering, I know that the changes are still recent, and there's a lot of moving quarter here. When will we see a more stabilized operation? How is the cash demand for this transformation? Do you need to invest in working capital and giving the franchisees some time and CapEx?
I would like to start with good news. The focus of this transformation is on return on invested capital and cash generation. In the third quarter last year, the business unit had a BRL 30 million cash consumption, and in the third quarter of this year, we generated cash of BRL 10 million. There is an important difference, and what we expect of improvement is a financial statement and the next quarter of next year with return on invested capital in good standing.
Daniela from XP now for the Schutz business unit in shoes. You mentioned a positive performance in the fourth quarter.
Could you give us a little bit more flavor of how the BUs' initiatives are maturing between brands and channels and how to connect that to the evolution of the franchisees that impacted the quarter? Were they concentrated on one brand?
Okay. Starting with the—thank you for the question, Daniela. They're concentrated on Arezzo brand, and it went from a growth in 2024 of 30% in the second half to 20% in the third quarter to less than 5% in the fourth quarter, and it will close in 2026. For the fourth quarter, excluding Vans, we had a growth of shoes and bags in single digits, 5%, which is important growth, a delta of almost 7%-10%. And the Vans brand is reducing this reduction index in the fourth quarter for sure. What makes us confident is that all the changes were carried out. They're in place.
All the team stabilization and processes, stabilization, team building that happened this weekend under the leadership of Rafael Sachete is also in place. Now it is a moment to stabilize and resume growth in a business unit model that is highly profitable with strong cash generation. This makes us very confident with a positive result already next quarter.
Thank you, Alexandre. Next question from Itaú BBA, Rodrigo Gastim, and it is about working capital. We saw a pressure on suppliers in this quarter. Is this continued next quarter? What about cash generation in the fourth quarter?
Hi. It is a pleasure to be here with you. We saw this pressure with a drop of 25 days in the days to paying suppliers, but this is a consequence of the company's decision to be more effective in purchasing purchases and buying once you have sell-in for the channel.
We could hold back this procurement. It was not that we bought less and became more efficient in our collection. We hope that this does not stop now and this continues. How do we think this will continue? In fact, working on inventory, we work with 169 days, and we are sure that we can reduce this number with time. Little by little, we know that business Hering, as David said, with this methodology, although going into the financial statement with a lower gross margin, we saw huge cash generation, minus BRL 30 million to plus BRL 60 million. At the end of the year, to help you here at the call, we have a target to achieve close to the leverage levels of last year because the fourth quarter, by nature, is a good cash generator.
Thank you, Eric. The next question is from Goldman Sachs from Philippe Racha. He asked about the Vans scenario. I want to explore the performance of Vans. I understand that the brand is going through a global difficult time, but I want to understand your expectations for the future. You mentioned that the brand might have reached their fair share, and now they generate cash for other brands. Do you think it has to shrink, or do you have an expectation to stabilize it going forward?
Thank you for your question and helping me with the answer. I like to say that the goal now is to stabilize and generate cash not only with inventory, but our own brands, own stores, franchisees for Vans, and to speed up. We opened our own stores in the past few years, so we have more aptitude for the business.
We want to focus on return on invested capital, cash generation, and it has this nature, but it does not need to reduce. We are going to stop reducing the brand as of 2026, and you are going to see the results of the reduction that we did from the third to the fourth quarter already. At global levels, we are very close to the Vice President of Latin America headquartered in Mexico. Two weeks ago, we went to Mexico to meet with him, and this shift that the brand did brought a lot of confidence. Brands that entered the sneakers landscape the past years, and Vans has a very specific profile. Vans starts now working on positioning itself more towards casual, not focusing so much on skateware, which was the beginning. We are very close to that. We have 52 stores, the best in Brazil.
We're not intending to open many stores, just sporadically, and that's what we're going to do going forward.
Thank you, Alexandre. Still, David from Goldman Sachs about women's apparel. What is the landscape for women's apparel that continued to have a solid performance in this quarter?
Great, Philippe. Thank you for your question. I would like to congratulate once again all the brands that they've been doing a stellar job, and that helps a lot in the quarter. The positioning of the brands with very strong marketing also increased, and Farm with a higher percentage of share in this business unit that showed increase in the past 12 months, extremely strong in Brazil and the foreign market.
In the fourth quarter, due to comparison year-over-year, we might not have the same growth in same base, but double digits, very healthy, very strong with an outlook of expanding stores, renovating other stores, and that's what we expect.
Thank you. Next question from UBS, Vinicius Strano. He asked about inventory of the franchisees. How do you see the level of inventory and sell-out of franchisees in shoes and Hering? What stage is sell-in and sell-out? Do you still expect relevant changes in this landscape?
Thank you for your question. Very similar to Guanais' question. Just to give you a little more flavor, the sell-out for franchisees is very positive. We do not have a sell-out problem. Actually, inventory that is different for Hering and shoes and bags, we go into inventory levels that are correct, approximately 3.5-4. It is very close to that.
As of 2026, we will have growth of same-store sales sell-in and stabilization compared to the same-store sales sell-out. That is what we have for shoes and bags. At Hering, we have high rates of coverage in the beginning of the year and a reduction down to healthier levels. As I mentioned, the sell-out is healthy, single digits, with a drop in double digits for sell-in. That process should continue up to the first half of next year, not only in the collection processes, but also streamlining automatic replenishment at Hering, which is one of the internal things that we have.
Thank you, David. The next question is from Vinicius, cash generation, a bit of what you mentioned before. In this case, more specific, he asked, how do you see the evolution of working capital and inventory levels for the main brands today?
Do you consider future markdown scenario to lower inventories? How should we consider cash generation and evolution of net debt in general?
Hi, Vinicius. Great to hear from you. For working capital, we have a huge mission to improve the working capital for the company. That basically exclusively goes through inventory because accounts receivable is something that's very hard to change. The days of supply are very similar. We have to be more efficient in working capital through inventory. Our mentality is to generate the cash and be able to have the older inventory go through the base as we did for Hering. It's worth showing our mentality and our obsession towards that topic, giving you some signs about how we're working on that internally. First of all, our trigger is cash generation.
Second is, even though we're talking about Hering restructuring, one of the objectives is to remove all the capital that are allocated in excess to have a healthier operation. As David already mentioned, it's an operation that will generate cash constantly. The third, as some of you already seen, is the reduction of the grant in the income statement. Although you have a negative result, that took place because we lowered inventories in the men's unit and had less inventory going through income statement and less result through replenishment. That is for a better capital cycle. We want to reach similar levels to last year in terms of leverage, but in the short term, cash generation is one of the company's priorities, Vinicius.
Thank you. Next question from Vinicius is about Hering health. How do you assess the health and the loss of the brand for consumers?
Thank you for the question, and that's excellent news. The evolution has been recurrent in the main indicators. Considering the purchase conversion and awareness, it's pretty much a brand of full awareness. More recently, A, B1, B2 with consistent evolution. We bring great news in that. Our transformation in great part is on the inside because on the outside, the health of the brand and the quality of the franchisees is very high.
Perfect. Thank you, David. Next question is from João Sardes from Citi about the basic business unit. He's talking about gross margin. He'd like to understand the dynamics of margin for Hering. Why is the margin so low? Is the fixed expense framework higher? Could that explain stronger deleverage, operational deleverage?
I'd like to start. David could add. The equation of Hering was an equation of gross margin.
We simply decided to flow inventory that did not make sense, keeping it in the company. That is how we worked it to generate cash for the company and transferring a part of that inventory. The new collections are coming in with higher margins than the previous ones. Regarding SG&A, if on one side, all the business units do have opportunities to lower their SG&A, that was not the specific point that we worked on Hering. It was actually about selling, gross margin, inventory versus collection.
To add to that, when I analyze the root cause and the excess inventory, that takes me to the structuring action of changing the company's operational cycle. Because when we make inventory decisions on behalf of a chain, obviously, it is more than if we leverage the intelligence of the 200 operators and thousand small type brand.
If we have the counterproduction, we will generate less leftovers and less markdowns because that affects the gross margin, as you mentioned. To add, to flow, most of the sales were made to multi-brand channels or some that even had negative margins. It was that way to generate to free cash, be more assertive, and be healthier. You will see that in our income statement as of the winter of 2026.
Second question of João was about strategy. He says, is the market talking about major divestments or spinoff of units? How do you see that?
Thank you, João, for that provocation. I have to confess, and you probably imagine based on the magnitude of the transitions based on our history and dedicating ourselves exclusively to see an act that comes from the legacy of our founder, my father, in the past three months.
It was really to make this new structure come to life, especially in Hering. You can see that all the speed that David has included and all of that in this period. Now we've begun to dig deeper. We had five priorities according to the board of directors. The first one was turning over the leadership of Arezzo&Co . That was simpler. The turnaround of the Hering brand, that's ongoing. Third, integrating the back office and corporate operations in Rio de Janeiro, that's ongoing. Fourth is determining our 2030 vision. Fifth is caring for our financial KPIs. So far, we've played that role. However, we had to set aside our vision 2030. That's part of the deal. We always have to analyze the best return for our investors and the best way to invest our capital. That's a process that's always ongoing.
This is an evaluation that's always part of the strategic planning.
Perfect. Thank you, Alexandre. Next question is from two analysts, from Alexandre at Morgan Stanley and Joseph at JP Morgan. This is for Eric. Looking at the process to simplify and integrate the company, what were the main levers to rationalize expenses? How should we consider additional potential gains in the upcoming quarters?
In fact, this quarter what helped the results of the company a lot in this time was the discipline in SG&A. When we compare this quarter-over-quarter, it is minus 3.3%. That happened in a generalized manner, be it by reducing the number of stores that had losses, a more intelligent use of the marketing funds that we had, or reducing staff. It's important to mention that we're just at the beginning of this process.
We see opportunities in all business units in lowering our SG&A. See a lot of work that you can see of using the debt cost, the bringing together fashion and lifestyle men and women that has opportunities, marketing teams are reviewing their work. We also see the work that we're setting up to fine-tune the purchase of improductive material. We're not going to generate expectations about the figures that we're working on, but we can be very confident to say that we're just in the beginning of that process. One of the things is for 2024, when we closed brands that had very low margin or deficit. In 2024, we still had some brands in our income statement, and that's one of the factors that helped us reduce our fixed expenses and have a stable EBITDA margin.
Perfect. Thank you. Next question is from Santander. He's asking if you could share the main KPIs that we should follow in the upcoming quarters to understand the evolution and the turnaround of Hering. That would be great.
I'll give you some general lines if anybody would like to add. It's very simple. The gross margin and cash generation, that's where we will focus 100% of our time on. Exactly. Gross margin, cash generation, and the reduction of employee capital after that.
Perfect. Thank you. Next question is from Bob from Bank of America. He's asking, how do you assess the opportunities to improve the execution of the Hering distribution channels? In addition, are there any structural changes or contractual changes that are necessary to make a better execution feasible? For instance, can you balance out the sell-in and sell-out incentives better?
Yes. Thank you for your question, Bob.
The answer has to be very segmented according to the channels. As I mentioned, in own stores, the level of fine-tuning in execution is good, execution with positive results. There is a pursuit for better health of revenues through gross margin. Where we have more transformation is franchisees and especially multi-brand channels. In the franchisee channel, there's an opportunity to review the franchising model, the incentives, in addition to a program of excellence, be it a meritocratic program that also recognizes the best operators that we have, bringing in better financial health so that we have an excellent program that's correlated to the franchisee success. That would be their compass for us to operate the channel. That would be a structuring program that we will advance as the first quarter next year.
The positive aspect is that the best enabler of that is the quality of our chain of our operators and the constructive bias of the franchise concept for Hering operators, which is an excellent asset that we have to build the next chapter. In multi-brand management, there is a transformation of how they operate. It is not just through incentives, commercial policies, but also a lot of in-house work that the multi-brand channel requires. A specific approach for products for that channel share. Focusing on opening up new customers. That starts off in a way where you operate, go back to the operational cycle. Without a doubt, in the commercial team, there is a higher focus on that indicator. That is how I see it.
If I could add to that, Bob, two points about the interactions.
You also have the own channel of leadership of the channels that you already worked on with the past and new aspects and also sell-out. You also had the courage to make important decisions. Now the new team with David and also about your experience where in 2015, integrated the process with Sachete and also the synergies to create the franchise seal with a lot of efficiency that will make us very proud of our legacy. I know that you'll deliver that in a great way.
Thank you. We have no more questions. Over to you, Alexandre.
Thank you, everyone. Welcome for all your work and the turnaround of Hering to all the Azzas team. Congratulations on your work, your trust, resilience. We believe that until the end of 2025, we have a lot of work and excellent sales.
Thank you to the board of directors for having supported all the transformations in place. Thank you very much. Excellent sales.
Thank you.