Morning. Welcome to the Azzas 2154 about the results for 1Q 2026. I'm gonna start with the agenda. We're gonna start with a message from our CEO, Alexandre Birman, with the highlights of the quarter and the different business units. Then he'll pass the floor to our CFO, Eric Alencar, who's gonna highlight the financial information. We will finish with the Q&A session. I would like to pass the floor to our CEO, Alexandre Birman.
Good morning, everyone. Thank you for being here with us at this video call on the results of the 1Q 2026. As Bianca said, when I'm here with our CFO, Eric Alencar. For those who don't know, Eric Alexandre Alencar.
I would like to hear more of my words because the message here will stay, so you can check if you're interested, and very straightforward talk about our results, and that's the goal of being here. It's undeniable that they were below our expectations and are not aligned with our capability of executing, much less with the power of our brands. We have brands that are leader in all the segments that we operate in, from Arezzo, 100 years old, Hering, 100 years old, Reserva, Farm Rio, and so forth. We have several multi-channels that we operate very well: own stores, franchise, e-commerce with capillarity in an external market that is becoming more powerful, and a very well-thought business model. We did have a significant decrease in revenue, especially net revenue.
We're gonna talk about this difference of the net and gross revenue, this just like a little growth in revenue does create leverage, the opposite is true. We had 22 people in our company. We have a highly engaged team from management, and our focus is totally on our business. The execution of a leaving summer collection and getting ready for Carnival and the turn to winter in March happened seamlessly or flawlessly without any type of issue. Procurement, production of hundreds of advertising campaigns, all 24, five brands are very well-accepted at the consumer's end. I would like you to Of course, the results of Azzas have been in our P&L statement.
It's very important for you to understand our multi-channel and geography, what matters the most, the quality of our brands at the end translated by our sell-out, our sell-out, in general, was very positive. We do have a challenge of one-off, nothing structural, something that has been our focus for some time, which is management very close to our franchisee. That's why we are the greatest franchisees in fashion for more than 30 years, the trust we have in our franchisees is huge. I experienced a meeting in Blumenau with the franchisee board and Omni on Wednesday. We're very close to our network in our decision of reducing inventory so that sell-out, sell-in coefficient is better. It's tough. It impacts our P&L, that's why we're here, we will continue to help our franchisees.
This impact on the sell-in is very big. Speaking of our multi-channel, we have two issues that are significant. One of them is broader. I will explain. We're going to talk about Vans and a multi-brand segment, especially large retailers for surf shops and sport shoes, and also a problem with global sourcing. It had a very important impact of more than 40%. Hering in the multi-brand channel, and again, as I said, it was a deliberate decision in reducing greatly sales of products. That's why it's mirrored in a very strong reduction in 212 days of revenue to a little over 60 days. The reduction of sell-in because of a deliberation of the franchisee will continue with Vans and Hering. Speaking of Vans and Hering, these are the two brands that we can say and detractors of our results.
What we dropped in revenue is BRL 169 million. When you just consider, the numbers are high, but two brands, Vans and Hering together, dropped BRL 160 million. I can highlight several brands in which we had expressive growth, and we are going to talk about this especially for premium women apparel. Also my initial message, I would like to point out 10% growth of the sell-out of Arezzo. This campaign with Sarah Jessica Parker bringing focus to a product category that is key for shoes, which is slippers and highlights pumps. Farm Rio International, that increased greatly. We will highlight that as well. Speaking of the main metric in 2025, and it will still be in 2026, which is generating cash.
In this point, we were able to overcome our goals with the delta between cash consumption and cash generation year-over-year of BRL 220 million. These are the highlights. Now let's go to the presentation. The main highlights for the quarter, gross revenue, a drop of 4.4% year-over-year. In net revenue it's high 8%, gross income dropped 8.6% year-over-year. This comparison of numbers in high percentages of our EBITDA year-over-year accounts for less than 4% of the EBITDA year. That drop of BRL 100 million. We are sure that we can work towards. We will recover this margin in the second half. We know that the challenging results of our P&L, not only in managing working capital, but also managing CapEx were very strong, reducing 27% of CapEx year-over-year.
I highlight what most matters, which is the health of our brands at the end. Other than Hering and Vans, our brands are all positive. I would like to highlight Arezzo specifically. We also had a capacity to control fixed expenses, even if the drop of expenses was lower than the drop in revenue. In a company this big with inflation, we're able to reduce expenses, we were able to reduce 2.8 in our SG&A. Working capital was very relevant. We reduced 20 days in our operating cycles for the DIO with BRL 148 million with the cash consumption. Now let's go in detail in our four business units. We have tow chapters and Hering.
About our business unit, which is fashion women, with a revenue of BRL 1.3 billion, with a growth of 4.5%, with a highlight to e-commerce. This difference between own stores and e-commerce is explained by a reduction of sales through cross-shipping and a bigger delivery through e-commerce coming from our distribution centers. The revenue was driven by strong growth in the premium brands, highlighting Cris Barros with 21%, Maria Filó 18%, and NV with 8%. We go into a very special chapter of our women's apparel business which goes beyond any capacity to see what is the strength of this brand in numbers. It is worth reading here. In one quarter, the Farm brand consolidating Brazilian and international operation achieved BRL 760 million in revenue, being 24% of our revenue.
The international operation corresponding to more than one-third of this figure, with a growth in USD of 21%. It's also worth pointing out this is not a temporary growth, it's something that is expected. Considering the past six months, CAGR of 30%. International operation, if we consider the past 12 months, the revenue went over BRL 1 billion, reaching BRL 1.3 billion. About Farm Rio in Brazil, it has a very comparative base with a growth of 46%, a brand with great adherence from its clients. A very interesting work of leveling what Farm Rio International is doing with Farm Rio Brazil is doing, it's only one brand, Farm Rio, selling higher priced products with the process that we started.
To strengthen the continuity of the Farm brand, I'd like to give some highlights of initiative that the team realized. Of course, besides generating more revenue, it's going to leave a legacy, the effect of brand awareness at a global level. It will be six pop-up stores in the places that are highlighted here. Ibiza, Saint-Tropez, Hamptons, where we have our biggest operation in the U.S. Marbella in Spain, Capri in Italy, and Mykonos. They will be running for 90 days and will surely help a lot in consolidating the strength of Farm globally. About our men's apparel business. We are on the same pace despite a slight reduction in sales. It is a drop that is deliberate, very focused as well in reducing stock with the franchises, and they had a delta between sell-out and sell-in that was very positive.
They grew 8% in sales to clients with a reduction of 29% of wholesale to franchises. This is the goal, reducing the average inventory for franchisees, so they can have capacity to grow together with our men's apparel brands. Foxton was the highlight with the biggest growth after they joined our business unit and their own store channels with a reasonable growth and the reduction of e-commerce as it was presented already in the past quarters. It was a deliberate action, resulting from the reduction of the offer of entry-level products with a lower margin, and also a better application of our resources related to investments in acquiring new clients that today bring within a more acceptable level, generating a EBITDA margin that is more interesting for the company, although the top line was reduced in 8%.
These were the main highlights for our fashion men unit. Now about shoes and bags. Starting with our core brand, our legacy brands, we have three big brands that operate within the same, the same structure with more premium prices for shoes, Arezzo and Anacapri. The Arezzo brands with a strong in sell-out, bringing all the defined strategy of a higher reach in the brand, something that we were missing. The range of products with entry products and a growth in awareness through our winter campaign that throughout this season we're going to keep on fostering this work. This Sunday, it's Mother's Day, and so far sales have been very positive. The multi-brand channel for this unit, as I mentioned, was highly impacted by Vans, and we prepared a presentation that gives more context about Vans.
First of all, we expected to have a 2026 with better results for Vans within the new leadership from the shoes and bags business unit. It was also decided by our leader, the change in leadership for the Vans brand, bringing a person with a lot of experience in the international sneaker sector. The diagnosis is very clear today. We had this week, the presence of the CEO from Vans for Latin America. We managed to make a decision that seems small, but it's worth giving the background. The causes in the increase in inventory and reduction of sales was the increase that we had that was imposed in the imported production mix, as you see here, as the main item that is highlighted.
We are converging to a second semester, and especially for 2027, returning to a more relevant percentage in local production. This also reduces our lead time and reduces our inventory. Reducing also something that impacted multi-brands, which were the breaks between what store owners buy and what is invoiced due to a more complex process in imports, which was also a cause, not only for the operations here, but also from the global level. This slide brings the main points presented in the previous slide. Our business model, the production cycle with more participation of local providers, segmentation of products aiming at better sales, especially multi-brands. Due to this international sourcing, the we've lost our entry price in a line that had helped a lot in more democratic sneaker stores.
With that, we're going to be able to recover the growth for Vans more concentrating on 2027. 2026 is going to be a difficult year for this brand, not in the levels that we just showed for the first quarter, 2026. For commercial strategy, we also managed just something small that translates that work that's being done together with VF. For the first time, we were authorized to have a Mother's Day campaign. If you look at Vans and the stores, we're focused on Mother's Day. The brand never believed mothers were relevant due to the Vans profile. In Brazil, we all know that we know that the biggest sales days are tomorrow for any brands and for the Arezzo brands, and it's not going to be different for Vans.
We are in this process. We have a very dedicated team and this possibility together with the multi-brand franchisees. I'm sure that everything that we've built in the five years with Vans is going to generate growth of five times the value of the revenue since we acquired this license. It is going to go through this transition, but now that we're interested and we are sure that we're going to recover growth. Finishing with shoes and bags, just leaving the message. The core shoes brands are doing very well, especially the sell-out for the Arezzo brand, which was the main goal for the first, the first Q in 2026. I will finish my presentation talking more details about our basic business unit, exclusively the Hering brand. The data are very challenging numbers.
If this could somehow bring some solace to you, they are 100% aligned with our expectation. In the next slide, I'm going to present our projection for the year. We're going to analyze the revenue per channel. Own stores, there are some effects that are not explained here, which is the closing and the switch from own stores to franchise. There is also a reduction of sales in markdown and a positive highlight to all the stores that are still a few, but the store in Ibirapuera Shopping Mall, Iguatemi Shopping Mall, Campinas with expressive growth. I'm talking about over 20%. With a mix of own stores with the number consolidated is negative, but there are great highlights.
E-commerce is totally explained by the stopping of sales in marketplace with the gross margin that was zero, which brought negative results. Multi-brands, as was said, deliberation of not reducing inventory and not having products to be sold with a negative gross margin. Franchises, we're together going to show some photos. The biggest launch of the Hering brand, the inventory level of the network is almost as close to ideal, and we're very happy with these decisions. Highlighting, as I mentioned, the consolidated figures for Hering brand with own sell-out channels and in our inventory that supplies multi-brand sales and franchise with a reduction of 20 and 12 days of revenue to 164 days. This slide is very important.
It shows the summary of our strategic planning that was designed throughout August and September in 2025. As I mentioned when I started talking about the Hering, this plan is ongoing. New management, the leadership of Davi and Gustavo, but a very connected and dedicated group of directors, I'd say the best in their areas. This was redefined based on the mix of management from the past year. These results today are collections that they've been done throughout 2025. They don't reflect the new feel, the new merchandising style. It will start to appear with some capsules. For example, we launched the jeans capsule that had great turn.
It's going to appear in Mother's Day, some actions, but it's still the base of Hering inventory, still old inventory, but it's going to switch throughout Q2 that we started in April. We already have interesting branding adjustments. The Hering brand lost adherence in classes B, especially B2 and C1, up to which was 50% of Hering sales. Interesting data is that the average ticket of A1 class in Hering is around BRL 460, and the average ticket for class B2 is around BRL 400. That is you increase the addressable marketing places, classes B2 and C, and you don't reduce your average ticket. The strength is again democratic and again have entry-level prices.
As mentioned in this slide, the turning point will be the Q3 when the summer collection, the first presented to the franchises in March, is going to come to the stores together with Father's Day. Having in the month of September, the historic landmark, we're going to launch the icon product that is best developed, I just say, in the Brazilian apparel sector, which is going to revolutionize the most important product category that Hering works, which is basic T-shirts. Q4 tends to have strong acceleration and growth and the capture of value of all these investments. I thank you for the confidence and the patience that everybody has in this difficult process, with short-term results that do not reflect what's going to have in the long term.
What was said here, the full brand diagnosis, performance history and channels, this transformation, the operational cycle, this launch I mentioned this week, does not differentiate what's imported and local sourcing for the franchisees, and the sales are open without having the purchase of inventory. Every sales done this week will be expressive. It's figures above BRL 300 million and BRL 400 million. That we can after put in production. Nullifying any issue with inventory. As I said, this is a full price sales, much healthier. The role of the p urchase model is more guided by data, capable of reacting in the chain, and will have an important and relevant result.
These are the highlights. This is the icon on the top corner, the T-shirt for Brazil. This is the communication and marketing. The date is September 3rd, 2026. Brazil will stop. This icon will continue for decades, and we will launch it very strongly. I'm sure that this picture on the lower corner shows the energy, the passion, and everything that is involved in Hering. Lastly, I also highlight in detail the seasons, high summer and winter as we're showing today, and the others. Fall was the first week that launched the collection. No product reactivity marketing strategy.
In winter, it was launched in January with a partial evolution of the reactivity model, a better defined marketing strategy and some key articles, as I mentioned, with new developments, new price. I highlight jeans. That accounted for 7% of Hering total, and now it's more than 12%. We have a benchmark of a retailer that is 15% of the category. The summer collection launched at the end of March, already 100% of free sale. However, high summer that is being launched now checks all the boxes for this plan. We have a plan broken down in four half years. In the first half year, was what we are achieving.
You're gonna see that we're gonna have a negative number, but much closer to a single digit, which gives us confidence that the results will be resumed at the end of the second quarter, second half. Thank you for your patience. I would like to pass the floor now to our CFO, Eric Alencar. Just another highlight, the reduction in Hering's portfolio was relevant, 35% of their product mix. Now, Eric, I would like to pass the floor.
Thank you, Alexandre. Good morning, everyone. It's a pleasure to be here with you and with Bianca. For the results of this quarter, the first quarter of 2026, the grossed revenue of the continuing brand totaled a drop of 4.4% year-over-year. This drop in gross revenue, especially 10.9% in the sell-in channels, due to our rebalancing of the sell-in, sell-out in our franchising network.
On the other hand, reducing this impact, we had our international operations of Farm Rio that grew strongly, 21% in USD. Sell-out channels achieved a gross revenue in line with last quarter, especially owned sales of Arezzo and others. They grew more than two digits. Gross revenue reported had a 5.8% drop. In the first quarter, it totaled BRL 2.5 million, an 8% drop year-over-year. The deductions of gross revenue accounted for 20.5%, a 1.1 percentage point increase year-over-year, explained by the following factors: A lower level of, in tax incentives due to our better efficiency in inventory. Increase of sell-in returns due to the process of reducing the unfranchised inventory. Growth of international in e-commerce in Farm Rio, but the domestic market also has higher than expected, more than 50% overseas.
The gross income had an 8.6 reduction due to the reduction of the tax incentives reduction and returns. The brand expanded 2.2 percentage point, as we showed in our business unit. Our next slide about the recurring EBITDA that accounted for BRL 329 million, a 23% drop year-over-year. The EBITDA margin had a reduction of 2.7 percentage points. Although expenses and cost are controlled with a 7.3% drop CMV and 2.8% of revenue year-over-year, the drop of a net income showed its impact. We had BRL 173 million compared to BRL 157 year-over-year. The increase of net expenses and exchange rates. Due to the contracts in former exchange rates that were higher than actual caused this impact, and these impacts were partially offset by greater revenue in our investments, and our cash was higher.
The recurring net income showed a drop of 45% year over year, with a net margin of 2.6%. Next slide, we're gonna talk about cash and working capital. As we've been saying, cash generation continues as one of the main KPIs of the company. We achieved in a bit of better quality, meaning more convertibility into cash. The first quarter of 2026, the company recorded a cash generation of BRL 147 million, with a cash consumption of BRL 50.3 million. This accounts for a conversion of EBITDA of 57%. In the accrued 12 months, the cash generation was BRL 1.5 billion, with cash generation of BRL 1.2 billion after CapEx, which was around BRL 300 million in the past two months. Let's go to the next slide, where we detail the evolution of the financial cycle and showing the factors that contributed to improve cash.
We achieved 103 days, which accounted for a significant reduction of 20 days year over year. This improvement in the cycle is explained mainly by improvement of 15 days in inventory, where we highlight greater operational efficiency in basic and fashion men, women. The supplier day also improved, meaning that the entire cash cycle evolved year over year. In my next slide, we see our level of indebtedness. At the end of the first quarter 2026, the company had cash position of BRL 1.1 million and a BRL 2.2 billion in debt, 1.4x . The company's net debt is in line with the year over year, so the increase of leverage is due to operational initiatives. The profile of the debt is concentrated more in the long term.
Today, we have 83% of our maturity date in the long term, and at the end of this quarter, 41% in the first half of 2026. You know that this was a great measure since the market is more restrictive in terms of credit. The company closed the fourth quarter with a relevant balance of BRL 880, already offset by anticipated payment, increasing the capacity of financing in the short term. This is a summary of my presentation. I would like to pass the floor back to Alexandre.
Okay. Let's go to the Q&A session. Congratulations to our team. The results are challenging. However, our brands are very strong, and the winter collection will have excellent results.
Thank you, Alexandre and Eric. Let's go to our first question. It's from Dani from XP, and it's about inventory and SG&A.
You've been very emphatic in leverage and working capital. I'd like to explain, explore what you think, and if it doesn't make sense for balance optimizing inventory and expenses because revenue is dropping consistently and SG&A is becoming more and more representative. Is this reduction in inventory being a challenge to resume growth?
Good morning, Dani. Thank you for your question. I would like to show you interesting topics that I think will explain well. When you look at our revenue, it is dropping, especially in the sell-in channels, as we explained, especially the repercussion of what we did with franchise and multi-brand, especially Vans and Hering. Our growth and sell-out is positive, especially in women fashion, in brands like Cris Barros growing 22%, Maria Filó growing 16%, and Arezzo growing 10% in the sell-out. The sell-out channels of the company are having excellent growth.
We don't have a problem with inventory. There's a structuring issue at Hering, which we had some structural issues with inventory, low usage of the great capacity that Hering has of reactivity because most of its production, especially for T-shirts, it's poorly explored and developed. You're gonna see at the stores, and if you look at the showroom in São Paulo next week, the percentage of products that we are developing is great. It will have the greatest reactivity and consequently a lower inventory. We have opportunities this time to market of important products in women's apparel. We will continue pursuing and it will affect our results in the future.
The second point, the reduction of SG&A, we do have constant monitoring to eliminate redundancies, reducing corporate departments, a process that could be faster, but our budget was based on the brands in Rio de Janeiro showing good SG&A reduction. It's a process that is ongoing in our company, and you probably saw a reduction of the one-off expenses. Our expenses are dropping in our P&L, but in general, we are very aware and we are gradually reducing expenses. I don't know if Eric wants to add.
No, it's exactly that. Just one more thing. Hi, Danny. Reducing inventory is not just a leverage for working capital, it's a change of operating philosophy. When we looked, we went to 112 to 64 days. We want to achieve the 100 in days in the sector.
This model that we were betting on, opening the store and selling and then buying, will probably in the long term improve sales. It's an operating change. Exactly. It's an example that although inventory reduction does affect us, it's a change that we're doing, and we increase the unit price and the production that is coming imported to Brazil. We're having issues with Vans inventory as well. Each brand will have its issue.
Perfect. Next question, still from Danny and about recent restructuring. About Rui's exit. What was the rationale to put fashion man with shoes and bags and basics?
Well, I want to thank Rui for Rui's work. He's a great partner. He, this hiring from the board has the goal, the initial goal during his first term that was very successful with the replacement that we see today. As it was in the past, he was a bit concerned, which was the founders of the Reserva brand, and he executed it perfectly with a very dedicated team. Throughout last year, we saw some possibilities of bringing operational efficiency in Rio, which are still captured and are not going to be interrupted. However, when we look at the time allocation from our executives and the core capacities, Roberto has great experience in women's fashion. It's a business unit that's three times bigger than the men's fashion as a great option for growth with Farm.
David, together with Hering, has a great ability here in the selling channels. It's worth saying that Reserva has a relevant percentage of franchises that today is going through some challenges. You see 29 decrease in franchises. We're going to need to come closer to the franchise network of Reserva and the expertise that David has, and he's doing it already at Hering perfectly. It's worth pointing out that the Reserva business is around 22% of its revenue coming from shoes, which is going to grow, shoes and accessories. Each decision has good points and bad points, and we're certain that in the leadership that was implemented, this is the best model for the business today.
Thanks, Alexandre. Next question come from BTG from Guanais, and it is about the Hering franchise channel.
About the sales adjustments for the Hering franchise channel, how should we evolve in the next quarters?
Thanks. Good morning. Thank you for participating. As I mentioned, as we speak, we're having the biggest sale in the history of Hering with great anticipation. It was a sale that happened only in July, when everything was purchased. If you compare what was done in July 2025 with May 2026, it's a huge exponential evolution. Translating it into figures, you can be certain that the growth in sell-in in Q4 2026 is going to be very strong. Until there, it's going to be a gradual acceleration starting already in April with good growth.
Still, in Q2, we're going to have consolidated a deceleration, but smaller than what was presented before, but it gonna have a great landmark in the Q4.
Next question is from Vinicius from UBS. He asks about the multi-brand and franchise channel, about inventory. How do you see the level of inventory in the franchise multi-brand network? Do you consider already the more suitable level of coverage? How can we consider the trend of selling sellout looking forward?
Vinicius, good morning. Thank you for your question. I'm going to allow myself to separate your questions in two because they are two different realities. I will start talking about the multi-brand segment. When you look at this channel, which is mostly wholesale, it has a participation percentage that is very different in each one of our business units.
I'm going to start with the biggest incidence, which is in shoes and bags and Hering. The multi-brand store owners, they are spread. We do not have the management of their inventory, but we have a very big penetration and a share of wallet that is always relevant, especially in shoes and bags. We noticed at the difficult end of year and also the beginning of the year, but the switch to summer collection was great. Stores are having good results. Mother's Day here for the next days has been strong sales throughout May. Next week, on Tuesday, on the 12th, I invite all of you to our event that is already a classic event that is Pulsar. We can have hundreds of multi-brand store owners, and the level of motivation is very high, and these brands have positive brands.
The same is worth for Hering. The sell-in for women's fashion has happened in March and ended in April. The data was in line with 2025. There is a migration in the purchase power of this of the multi-brand stores to other product categories not related to apparel. In terms of share of wallet, our brands are still very relevant. Now I'll talk about franchises, which is different. Firstly, we are co-responsible for the degree of inventory of the franchises. We monitor this constantly, and we have today a total of 1,500 franchises within the shoes business unit. We're talking about a percentage of around 35% of the revenue, and for Arezzo more than 45. Around 35% of the revenue.
In Reserva, although have a big sell-out, it's more than 120 franchised operations, a very important percentage. We need to take care of the financial health of our franchisees because this is reflected in our P&L with a very good level of. There's no level of default, and this is due to our capacity. We're going to wrap up winter, to your question, with a satisfactory inventory level. At Hering, we have six months of sale. What I said was four. It was above seven, this process has been ongoing. For summer 2026, we tend to have globalization and consequently recovery of growth that we as is in our sell-in for the franchisees channel. Thank you for your question.
Thanks, Alexandre. Vinicius has a second question referring to returns.
How can we think about the evolution of returns over gross revenue forward? When are you going to normalize that? Can you explain the moving parts that go to a smaller ICMS?
I'm going to leave the second portion of the question to Eric, and I'll talk about returns. First, we have to separate returns from sell-out and sell-in, as I'm gonna talk about sell-outs for a bit now. It seems that it is an explanation, but it is a fact. The strong growth in Farm operations globally and internationally, where the return rates due to a better logistics and the speed that we have for reverse logistics for returns in e-commerce, it is above 35%, 40%.
With the growth of this operation, with a total percentage of the Azzas Group, we have a group that can be continuously improved through better fitting, better explanation of the product in the website, of maybe a better experience for the exchanges in the store. This is part of the market, and it is explained. About sell-in, the returns, they are deliberate. It was a strategic decision from the company. It was a decision with focus on the financial health for the franchisees, a focus to not repeat errors from the past, especially in the Hering brand, which to leave the franchises with old inventory. This is a deliberate process that happened in the second Q of 2025. We also had this in the, in Q1 2026.
In April, we ended with a huge reduction of returns in sell-in, which tends to normalize at the level that is part of a wholesale commercial operation. This is something that we did so that franchises could lower their inventories and open space to receive new products. It is a sour remedy. It's not something that can become our routine, otherwise it will generate a negative spiral for business. These inventories are sold in international markets at a much lower price. We need to have a sell-out linked to the sell-in and a turnaround of our inventory. Between taking this remedy or letting the franchising die with old inventory generating default, what happened in the past, we're not going to let that happen. This is the more specific answer about ICMS.
I'll invite Eric to answer your question.
Hi, Vinicius. Just to remind everyone, Vinicius asked what can explain these moving parts that lead to subvention of ICMS or lower tax benefit. Vinicius, the benefit of the ICMS is directly related to the level that we buy for inventory, industrialized inventory. Once we reach the level of stock that we have found adequate in the company, this value tends to normalize, and that's our expectation. What happened in this quarter generating this evaluation was a collateral effect that was negative and a very positive action. It's more efficient company in generating stock and managing stock. We are getting thinner and have this side effect. While we are optimizing inventory, we're going to have this collateral effect. Until when? Although it's continuous, but it's going to finish this year.
We believe that this year we'll be working with a normalized line.
Perfect. Next question comes from Eric from Santander and related to EBITDA margin. He asked, "In EBITDA margin, what are the main levers for recovery? Would it be through normalization of top line, or can we expect more adjustments in expenses in the next quarters?"
Eric, I hope you're doing well, this is a question that has several answers. Very simply, in the fashion interest that work with gross margins above 50%, the main recovery lever for the EBITDA margin is the top line. Our net revenue dropped 8% in the first quarter. This demanded operational leverage. You see fixed expenses dropping, but as a percentage of the revenue, they disappear. This is classic.
The short and simple answer is yes, comes simple from revenue. This being said, I think it's worth remembering that the company's not looking only at that. From the side of the expenses, you can see our SG&A dropped in nominal terms 2.8%. We're going to be diligent, but the incremental space for reduction is more limited. We are close that floor. Revenue will come with selling coming back because our sell-out too has this traction. Another important item is the lever that Vinicius asked a while ago is, which is the reduction of deduction on gross revenue. They went up 1.89% in the first quarter. It has a difference from gross to net revenue. It's not proportional. It was the moment that normalized that.
When this arrives, the effect are going to be direct. Lastly, Alexandre mentioned it a lot, but I can also reemphasize, is Hering. Hering is in this turnaround moment when revenue stabilizes and the decisions of the new management coming to a suitable margin, it will stop to be in the detractor and starting to collaborate positively. One interesting aspect is that Hering gross margin has gone up. Yes, it's worth saying that the ROIC is going to be, you're going to see a single digit. That gives us some breath to know that it is an investment that when it normalizes with the top line in the next quarter, it's going to generate an ROIC that is great. To wrap up in the 2Q, these are the pillars that we are looking at.
Three factors: revenue, reduced deductions, and start reaping the fruits of our Hering work. This is going to bring this slow improvement of EBITDA.
Next question from Eric is about working capital. About working capital, was this yet a different Q with the reduction of the cycle, especially with inventory? Well, what much more can we see as additional improvements? What would be a recurring level for cash cycle?
This is an item that to generate cash, you need to generate EBITDA and reduce the financial cycle, and this is in the financial portion. We're very happy with the results that we're reaching. As you mentioned, we dropped 20 days in comparing to last year from 160 days to 96 days in the cycle. This is a reduction of 15 days in inventories.
The natural question that we did, is how much more can we extract? In inventory, we still see space. The space is mostly focused on Hering because we left from 218 years to 164, you know the market works with 120, we're going to align to the sector. In the other BUs, you have more normalized inventory, except Vans. Yes, we have Vans. Sorry for my fail. Except for Vans, our units in general are close to the normalized level. Some brands that are premium have some space. There's no more opportunities for accounts receivable. The sales team is asking to increase the time of the sell-in, we will have a cash issue if we do that.
We have a sell-in next week, and the sales team wants a little bit more time so people can buy more. You're gonna have to do the math there. Another thing is if we reduce 40 days of inventory that we're talking about at Hering, since we reduced 20% of the group, this gives us a better cash cycle. The number that the investors can see is that we still have space.
To achieve that if we reach a good level.
Great. Our next question is from João from Citi and related to divestments. How do you evaluate divestments and securitization? We look at the potential that looks for alternatives to simplify the business. It would be interesting to understand that.
João, thank you for your question. I'm gonna allow myself to go back to the learnings that I had, and I still have, as the founder of the Arezzo brand, Anderson Birman. It become a manager of a brand portfolio, and we have to be assessing constantly the possibilities of what he said. Our life until a few years ago was make money interpreting trends, produce, sell, put them in the store, sell them again, pay the bills, and whatever was left, we would share with the investors and shareholders.
The dynamic of the group is as dense as ours that start working in the inorganic growth strategy. We have to constantly evaluate our capacity of generating value to the shareholders in a perennial manner. It's normal for us to be at a moment of understand the best capacity of each one of our assets and constant adherence, be it to divest, as we did at the end of 2024, brands that had their moment when we acquired them, but the business plan didn't consolidate, the market changed, the product profile and target audience wasn't adherent anymore, and it also is true of having business units with strong growth and higher investment needs to support that growth and even stronger and perennial growth.
This is a cycle that those who have wide experience in portfolio management allocate capital in a strategic manner, and it's part and will always be part of our business. We want to evolve to not only have revenue, but also generate value to our investors and shareholders, allocating portfolio, be it purchasing or divesting throughout our journey. I can't say anything more specific about this right now.
Thank you, Alicia. Our next question is from Philippe Racher from Goldman Sachs. He's asking about the franchise channel in shoes and bags.
We already mentioned it, but he wants to know with the balance of the channel was already addressed or if we still have something in the short term, and it would be interesting understand what tools the company has at its disposal to prevent relevant adjustments like this are necessary in the future.
Thank you for your question, Philippe. I'm going to highlight the topic in franchise channel, especially at Arezzo. It impacted our results, but this impact will last a while until it normalizes, which is to charge the royalties that were 5% of the sell-in traditionally so that it is a relevant part of the sell-out, a greater alignment of supply of the store that is being franchised so they have a more intense supply and they increase their sales. This pilot that we did in some franchisees in the winter of 2026 generated great results. We're very happy. They're increasing sales. We have several tools to dynamic tools in our entire network. We have an open grid replenishing for shoes and bags. The number of the shoes has an impact in our product, and we have to calculate very well.
A 35 is not a 36 with an insole. We are investing in distribution, in a software that will give us more flow capacity to replenish this open grid, and our goal is based on this pilot test. David is in that, and his time is very much allocated in 2026. In June, he already presented to the board a vision of an interesting strategy of the levers, like he did with Hering. He wants to turn the shoes business in 2027, and this sell-in, sell-out relation and the way of replenishing and the way that we compensate the entire chain is very dynamic. We talk about franchise. It's a practice that is constantly changing. I remember the first structured franchise market was in 2016. It's dynamic.
For the second half of 2026, it won't increase. With the test of the franchisees that we did in the meeting we had with the franchisees of Anacapri. They want the test as well. We have five franchisees that we intend to start. We have the commitment of testing with them, so it's very poor dynamic in the behavior of the franchisees. We're very close to them, and that's very important. For the second half, the trend is to resume sell-in in line with the sellout in a healthy way as we've been having.
Thank you, Alicia. Our next question is from Gustavo Sacchini from Bank of America. He talked about integration. Could you give us an update about the integration and expense cuts? Does it make sense that we still have challenging times in terms of demand and a way to reduce expenses?
Hi, Gustavo. I hope you're well. When we talk about expenses, we always have to consider that the next quarter will be challenging, otherwise we get lost and we bet on things that we might regret. It makes sense when you want to reduce expenses and have the sales team working to generate more sales, which are the greatest drivers of our recovery. About expense cuts, one of the learnings from 2025, and it is still ongoing, 2026, is that when we put together all the brands, and it's not just for integration, but the learning between the units where each one could give more. Looking at control that marketing efficiency, corporate expenses, logistics expenses, and we use those benchmarks to work. We have very strong drivers for cost reduction.
It's too early to mention numbers, but they're related to indirect expenses, efficiency in marketing, and those corporate expenses in general. In some of these areas, we're reaching an area that is getting close to a quality we don't want to touch. Greater delivery logistics speed, packaging, marketing. Packaging, our customer has a exclusive unboxing. Some expenses that we already cut. There are some places where the space to cut is limited, but there's a lot to do. Our next question from Gustavo is about the gross margin. He asked, "The level of gross margin was below expectations despite a greater sellout. How should we think about this going forward?" It's funny, that part of gross margin is a bit misleading. It doesn't represent the channel. What matters is the sellout, which should reflected the gross margin.
I'm going to give you some figures that will give you some direction. Our gross margin was 54.5 and 54.8 last year. What happened if you have more sell-out? Just of removing the benefit of ICMS because we produced less or bought less, this margin would already be higher. Just by normalizing returns to zero-six, this means that gross margin other than ICMS items and returns increased one percentage point. What we can expect is that once these two items become normalized at, by the end of the year, we still have at the second quarter, a higher level of returns because we're still adjusting. After that, we have a positive trend. Just highlighting the sales of the winter collections, all categories, apparel for men, women, basic, shoes and bags, is very positive. The ticket price is higher than last year.
In shoes, we have the boots, which is very strong this year, even without having cold weather yet. What matters, if we were a pure retailer, our issues were just tax benefits and returns, our gross margin would be very healthy.
Perfect, Alicia. The next question is from Gaston, from Itaú BBA. He's asking about growth in the business units of women fashion. What was the base effect and what is the outlook for growth?
Women fashion, we have Farm. Global operations is still growing very strongly, and the investments, as mentioned, we're opening pop-up stores in places that generate awareness, and it should continue to grow in an interesting manner. Operations in Brazil, Farm has the capability of strengthening the brand. This is being analyzed, how much we have to give it capillarity. The premium fashion for women still have a lot of space to grow.
The Azzas Group brands have the lowest market share. It's very spread out, and the brands have shown a positive trend to growth as I mentioned. Just to add, this week is Mother's Day. You, all our brands will hit record sales. Your mother will love it.
Our next question is from Joseph from JP Morgan. He asks, "How is the exception, acceptance of collections and main brands?"
Thank you for your question, Joseph. I just mentioned it's very positive in all categories. We're very confident for this winter and Mother's Day, month of May. We had strong sales. This is a decisive month for our sell-out due to Mother's Day. Then we get ready for the Brazilian Valentine's Day, and also the pre-summer collection.
The purchase that was done in a more restricted manner or the advertising campaign is giving us a sell-out which does not translate the health of our brands and our sell-out. We'll be very positive in the second quarter.
Thank you, Alexandre. Our last question, still from Joseph, is about cash generation. He's asking, what is our outlook for the year with this important KPI?
The outlook is positive. We're working to having a conversion of EBITDA that is above last year's. Just to shed a bit more light as we can transmit some guidance to you. We didn't mention in this call, but in the first quarter last year, the valuation of net debt, which is used by investors, was BRL 318 million. In Q1 last year, about BRL 330 million. This year it went up BRL 50, there was an improvement of BRL 270 million. Of this amount, if we sold less, we consume less working capital. Only BRL 50 million of this BRL 290 is explained by that. The BRL 190 is due to the improvement in our working capital and more quality of EBITDA. When we have EBITDA, you have less tax benefits. The EBITDA you're generating is cash.
It is stronger even with the increase in interest rates.
Exactly, Alexandre.
This shows a bit our mentality. For the year, we're trying to have a higher conversion, but it depends on how much we're going to sell. The interest rate is not helping. In an extraordinary manner, on one hand, going from 164 days trying to reach the market level, 120 days at Hering, will bring an additional benefit of 40 days at Hering additionally that we have in our originary cash generation. I hope we have answered.
Thank you. This was the end of our questions. I give the floor to Alexandre.
Thanks everyone for participating in this video conference. I want to reinforce that the short-term results, they do not convey what is the strength of our brand, our business model, and the engagement and the work of our team. We have no structural issue in our business. We go on believing deeply in what we have from our biggest asset, which is the strength of our brands, our team, our distribution, and our creative capacity. We have the best creative people for products and marketing that know how to innovate, be bold, and raise desire, and make our brands very relevant for people well beyond the functionality of a product.
They are brands that are significant, that make people feel different, and this is the biggest value that the Azzas Group has, and I'm sure this is going to be translated in financial performance in the medium and long term, and our vision towards 2154. Thank you.