Good morning. Welcome to C&A's quarter two 2026 earnings call. Today we have with us Paulo Correa, CEO, and Laurence Beltrão Gomes, CFO and Investor Relations Officer. This presentation and the earnings release are available on the results center of our IR website. This call is being recorded and simultaneously translated into English. To access the English version, click on the button Interpretation. The replay will also be available on our IR website. After the company's presentation, we will open the floor for questions. To ask a question, please click on Raise Hand, or you can send your question directly through the Q&A icon on the bottom of your screen.
Before proceeding, let me note that any forward-looking statements that may be made during this conference call relative to the company's business prospects, operational, financial targets and projections are based on beliefs and premises of the company's management, as well as information currently available to the company. These forward-looking statements are no guarantee of performance. They involve risks, uncertainties and premises. They refer to future events and therefore depend on circumstances that may or may not occur. Investors and analysts should understand that overall conditions, industry conditions, and other operational factors may affect the future results of C&A and may lead to results that differ materially from those expressed in said forward-looking statements. Now I'd like to hand the conference to Mr. Correa to start his presentation.
Good morning, everyone. Thank you for attending this C&A second quarter 2026 conference call.
Let's begin with the highlights of quarter two, which highlight the impacts of the execution of our Energia strategy. Despite the very challenging consumer environment, we were able to deliver 5.6% net revenue increase. This was driven by the strong performance of our winter collection. The FIFA World Cup, which began on June 11, affected the customer traffic throughout the event. This year's competition lasted longer. There was a higher consumer engagement, which resulted in lower sales in the final weeks of the month of June. We still were able to deliver 4.1% apparel same-store sales growth on top of a very strong comparable base in the second quarter of last year's, where we grew 17%. At the same time, we also achieved a record quarter two apparel gross margin of 59.1%, an expansion of 60 basis points year-over-year.
This marks our 20th consecutive quarter of expansion of our apparel gross margin, a historical result which reinforces the consistency, the discipline, and the effectiveness of our commercial management. Digital was also one of the quarter's highlights. Net revenue increased 33.3% year-over-year, reaching 7.7% in merchandise sales, a 1.8 percentage point increase. This combination of profitability and operating discipline helped us achieve record-adjusted net income for quarter two totaling BRL 130 million. Also in line with our Energia C&A strategy, we continue to invest in our growth drivers, including renovations, new openings, logistic capabilities, technology, and also the launch of our first ACE store. Our very disciplined capital allocation was also reflected in our share buyback program, which is now at approximately 85% execution, BRL 64.3 million repurchased during this quarter alone.
Finally, our ROIC reached approximately 20% in the last 12 months, above our cost of capital and reinforcing our commitment to creating long-term value in our company. On the next chart, I want to share with you the main milestones under Energia C&A, which is now entering its last year of execution. Let's start with the product pillar. Our test and learn continues to act as an engine behind the continuous renewal of our collections. We are launching product capsules, learning quickly from customer response, and scaling the products that are performing well. This improved the accuracy of our winter collection stock this quarter, in which the average temperatures were slightly higher compared to last year.
The evolution of our logistics structure is contributing to accuracy and the allocation and distribution of products to the 341 stores that we have, which allows for greater precision in our distribution, and also other processes are also being automated, which will not only increase our processing capacity, but also accelerate the distribution of our products. The central cornerstone of our strategy is this journey of our stores or the journey of our customers in our stores. The first Energia store was our flagship store at Center Norte Shopping Mall in São Paulo last year, where we tested and validated this new concept, and this led to improvements in traffic, conversion, and sales per square meter. Based on this pilot, we developed other versions with a lower level of investment, and we started to expand the Energia concept.
In quarter two, we opened two new stores in the state of Santa Catarina under the Energia concept, and we now have another three openings scheduled for quarter three this year with the same concept. We also expanded with two new flagship stores. In August, we're going to open a new flagship store on Paulista Avenue, one of the most iconic locations in the city of São Paulo. The day after tomorrow, we will reopen our Barra Shopping store in Rio de Janeiro, another iconic store in our store network, already under the Energia concept. In parallel, we are also accelerating our store remodeling program. We completed two renovations this quarter, including the Ibirapuera Shopping Mall store, and currently, we have another 18 renovation projects underway. According to the spoiler in our last earnings call, we launched the Ace brand, which was a historical milestone for us.
This is complementary to C&A's proposition. This is a sports brand integrated to the everyday life of our customers, integrating fashion, performance, and the healthy lifestyle. This is reflecting a structural shift that we're seeing in the market, driven by an increasing demand from our consumers for this segment, and this is one of the fastest-growing segments in the fashion industry to date. C&A has been acting in this area for decades, and now we're taking a step forward because the Ace brand now has its own identity, benefiting from the structure and the expertise built by C&A over time. The Ace collection has women's and men's apparel with technological fabrics and minimalist design. We expect to have another two Ace stores operating by the end of this month. We're continuing the testing phase to validate our expansion within the same concept of testing and scaling.
We believe that the ACE brand has all the elements it needs to become a very important growth front for the company over time. Let's talk about digital. We remain focused on continuously improving the customer experience across our digital channels, providing them with a simpler, more intuitive, and very personalized journey. This, of course, starts with product discovery. We enriched our fashion content, and this is extending throughout the entire customer journey. We previously announced this in our conversational commerce platform. The integration between our brick-and-mortar physical and digital channels is also advancing. Our store mode, which is this format that we created, strengthens connection between customers and our stores because they can use the app while shopping in the store to locate products and expand their shopping experience.
These initiatives altogether contributed to a 33.3% year-over-year growth in our net revenue from our website, reaching nearly 7.7% of our total merchandise sales. Finally, talking about brand and customer engagement, we continue to make progress in our transformation journey. We really want our brand to be increasingly relevant for our customers. We know that trends and preferences are evolving, so staying connected to our customers is essential so that we can stay ahead of the market. It is precisely that connection that allows us to capture opportunities, strengthen the relevance of our brand consistently over time. We were once again a partner of Todo Mundo no Rio, this time for Shakira's concert, and in September we will be in Rock in Rio, two of the largest entertainment events in Brazil. This, of course, improves the brand visibility and strengthens our connection with millions of consumers.
This year, we'll also celebrate C&A's 50th anniversary in Brazil in August. Together, all these initiatives are reinforcing C&A's position as a brand that is very present and connected, and present in the moments that matter the most to our customers, building consistent and continuous relationship with them. I'll hand the call over to Laurence, and he will walk you through our financial performance for quarter two.
Thank you, Paulo. Good morning, everyone. Let me start with our merchandise net revenue. We delivered another quarter of growth. Apparel net revenue reached BRL 1.9 billion in quarter two, a 5.6% increase year-over-year. This was accompanied by a 4.1% increase in our same-store sales, despite a very strong comparable base of 17% in quarter two last year.
Over a two-year period, our apparel net revenue posted 23.9% growth, which highlights the strength of our value proposition and the effectiveness of the initiatives of our Energia strategy. This performance was mainly driven by the very good performance of our winter collection, which was developed using our test-and-learn methodology, and the continued evolution of our commercial management. In merchandise, it's also important to note that this is impacted by the discontinuation of our mobile phone business, which was completed last year, and also our beauty category was operating in a more challenging environment during quarter two. Let's turn now to digital. Our website and the app continued to present a very consistent performance, and they remain one of the main growth levers of the company. Digital net revenue reached BRL 154 million during the quarter, a 33.3% year-over-year growth. This marks our 10th consecutive quarter of annual expansion.
Consequently, digital now accounts for approximately 7.8% of merchandise sales, a nearly two percentage point increase versus the prior year. This growth also reflects the investments that we've been making in the evolution of our digital customer experience, including the use of artificial intelligence and the conversational commerce journey, which drives higher engagement and conversion rates. Also, we continue to strengthen the omnichannel modality, expanding inventory availability and convenience, improving the purchase experience, which makes the omnichannel experience an increasingly important advantage before our customers. Here we have our gross margin. The apparel gross margin in quarter two reached 59.1%, a 0.6 percentage point expansion year-over-year, which marks our 20th consecutive quarter of year-over-year expansion of our gross margin.
This reflects a combination of our disciplined commercial execution, better availability of our fashion products, and the advancement of analytical tools that we developed within the commercial intelligence hub. Also, as you heard from Paulo, the test-and-learn methodology, combined with our refined pricing algorithms and also the appreciation of our currency, also contributed positively to this increase in our apparel gross margin during the quarter. As for our operating expenses, I have some important comments to make here. We know that this low dilution of our expenses is a result of the mix of our total net revenue. Let's start with the SG&A pre-IFRS, which had an increase of 2.7% year-over-year. This was well below the inflation rate for the period. Our selling expenses increased mainly due to new openings.
We have 11 more stores compared to last year, and also we had higher marketing investments, particularly those associated to our brand-strengthening initiatives. Our general and administrative expenses, on the other hand, decreased 6.4% due to our operating efficiency gains and lower provision for our long-term incentive plan. We still had a pressure of about 0.6 percentage point in the SG&A as a percentage of net revenue, and this is explained by two comparison effects, the comparable base in relation to the total net revenue. First, we had the termination of our partnership with Bradescard, which reduced our revenue from financial services compared to last year. The second point is the completion of the discontinuation of our mobile phone business, which also reduced our merchandise revenue when compared with quarter two 2025.
When we adjust for these two comparability effects, the company would have delivered approximately 0.8 percentage point of dilution of our expenses during the quarter, which showcases our attention and rigorous control in the management of our operating expenses. Let's talk about C&A Pay. We continue to view C&A Pay as a very important customer engagement and loyalty tool. In quarter two, C&A Pay's revenue reached BRL 93.4 million, a 9.4% increase year-over-year. This evolution was driven mainly by the better performance of interest-bearing transactions in this modality. C&A Pay's penetration reached 28.2% of retail sales, which was a slight increase of 0.3 percentage point, and it is still at very healthy levels. Our portfolio up to 360 days ended the quarter at BRL 978 million, a 10.2% increase year-over-year, and this was accompanied by a consistent improvement in our portfolio quality indicators.
Another important highlight was the decrease of more than 25% in our selling expenses. This reflects our increased efficiency and the flexibility of our operating model. The combination between this growth of our portfolio and the assertiveness in credit granting under C&A Pay helped us deliver BRL 15.4 million in operating income. On the next chart, I would like to zoom in on our delinquency rates. The main point on this chart is the improvement in our credit indicators. The over 90-day NPL ratio ended the quarter at 13.4%, a very expressive decrease of 3.7 percentage point year-over-year. NPL formation also continued to improve, reaching 4% of the portfolio. We maintain a very comfortable coverage ratio, more than 113%. On the next chart, we have our EBITDA. The pre-IFRS 16 adjusted EBITDA totaled BRL 307 million in quarter two, with a margin of 14.7%.
Despite a small decline in the margin compared to last year, it's important to emphasize, though, that this dynamic is related to comparability effects of our total net revenue in 2025, like I mentioned in our previous chart. This limited the dilution of our operational expenses. Our adjusted net income. Next chart. Our adjusted net income reached BRL 130 million in quarter two. This result represents a 4.3% year-over-year increase and establishes a new record for a second quarter. The adjusted net margin reached 6.2%, a 0.2 percentage point expansion. This shows our ability to combine growth, gross margin expansion, financial discipline, and operational efficiency. On the next chart, we show our investments. Here, particularly this quarter, we invested about BRL 120 million, a 6.6% expansion compared to last year.
These investments were particularly for the modernization and expansion of our stores, evolution of our supply chain, and continuity of our digital transformation initiatives. Among the highlights for the period, we have the opening of new Energia concept stores, the first ACE store, and the progress in our store renovation program. On the next chart, we have our working capital. There was an increase of approximately 19 days in our cash conversion cycle compared to 2025, primarily reflecting an 18-day increase in our inventory days. This variation in our inventory days is due to four main factors. The first one accounts for roughly half of the decrease, which was the discontinuation of our mobile phone category, because the turnover was significantly higher compared to apparel.
The second factor was the lower inventory levels at the end of quarter two 2025, due to very and exceptionally strong winter sales last year. Third, the third factor is that the sales during part of the month of June were below expectations due to the lower traffic during the World Cup. Finally, also, the acceleration of our store expansion and new openings plan, which required, of course, preparation, more preparation, and better coverage of our stock. We had an increase on the receivable side. We had an increase by three days, particularly due to the higher mix of the interest-bearing payments within C&A Pay. This was partially compensated by a two-day increase in our average payment terms with our suppliers. Our cash cycle for quarter two increased by 19 days, and we believe that we should expect a normalization still this year.
On slide 21, here we have our return on invested capital. Despite the higher levels of investment this quarter and the pressure on our working capital, we were able to end the period with a last 12 months ROIC of approximately 20%. This is still significantly above the cost of capital of the company and reflects our discipline in resource allocation. We continue to prioritize projects that have a higher potential for return, and this reinforces our ability to create sustainable value over time. On the last chart, here we show our net debt and leverage. I want to talk a little bit about our financial position. We continued to reduce the company's leverage. Our gross debt ended the quarter at BRL 952 million, a 26% decrease year-over-year. At the same time, we maintained a strong cash position of BRL 782 million.
As a result, our leverage is at just 0.2 time the net debt to EBITDA ratio, one of the lowest levels historically. This already includes the execution of our share buyback program, which is now approximately 85% complete, with approximately BRL 65 million in C&A shares that were repurchased in quarter two 2026. This very solid financial structure allows us to continue investing in the company's growth. It allows us to advance in the execution of our Energia C&A strategy, and at the same time, it also allows us to tap opportunities to further increase the return to our shareholders. I stop here. This is the end of my presentations, and we will now open for questions. Thank you. We will open the floor for questions.
To ask your question verbally, click on the button Raise Hand to join the waiting line, or if you prefer, you can send your question directly through the Q&A icon on the bottom of your screen. The first question is from Luiz Guanais, BTG Pactual.
Good morning, Paulo. Good morning, Laurence. I have a question. Could you please comment on the gross margin dynamics, which was a positive highlight for the quarter? Can you please comment on your price positioning and also the positioning of your collections in your product pyramid? How do you see the composition in the upcoming months?
Hello, Guanais. Thank you for your question. I think the dynamics is very consistent. The price positioning also very stable. We have a very competitive position on top of our main categories, with continuous monitoring of the main categories and the price positioning for each of them.
In quarter two, we had two events, Mother's Day and Valentine's Day in Brazil, which is in June, which always creates a dynamic of specific offers, of specific promotions for these two events, and I think we were quite competitive. At the same time, we took a step forward in the management of our margin as a whole. It was a consistent demand. There was no major change in what we were doing, very positive results.
Sounds great, Paulo. Thank you.
Our next question is from Victor Rogatis, Itaú BBA.
We have two questions here. Thank you for taking our questions. The first question, Paulo, I think we can't really escape the question about the evolution of your sales dynamics in quarter two. When talking to the investors, they're really concerned with the macro deceleration, the higher interest rates for a longer term.
Specifically in July, which is when we look at the IDAT data, we saw a more relevant deceleration of the economy. It is what it is. Of course, when we compare with the performance of quarter two, the performance of the month of June. Can you please clarify on that? My second question is about inventory. It was very clear in your presentation, but how much of this decline in your inventory will be normalized in quarter three and quarter four this year? When you talk about normalization, do you mean going back to historical levels? Do you think that at some point we will see a normalization of the turnover of your stock? What is the risk that that could pose to your gross margin, for example, having to sell your stocks at a lower margin? These are my two questions.
Thank you for your questions. First, in quarter two, I think I even mentioned this in my presentation, but one of the indicators that have the highest correlation with our sales performance is the traffic. Now, when you look at the flow chart, it is very clear when we see what happened pre-World Cup, then during the World Cup, lower levels. Nearly 20 days in June, 20 more days in July. Right after the World Cup, here we were talking about this this week. Right after the World Cup, traffic went back to the same level pre-World Cup. I think that on top of the analysis that you make, the really nice indicators that you use, I think the World Cup phenomenon also impacted retail. I don't know if the economic activity is the only factor to blame here.
I think there was a specifically different consumption dynamics during this period. In the first weeks of July, we saw a similar impact to what we saw in the end of June. Our growth in the quarter would certainly have been higher if not for the World Cup, not just for Q2, but also for Q3. There was an impact. There is no question about that. I also agree with what you said about the economic activity, this certain dynamic of the elections, this should certainly have an impact also in the consumption dynamics. We have a very positive outlook when we look at the whole quarter.
First, the level of preparation, the preparation that we are carrying on for our collections, value perception, product evolution, and consistency in our key products, combined with the resumption of the traffic, which we saw right after the end of the World Cup, makes us very excited. Not excited, but very positive that we will advance consistently until the end of the year. Of course, we cannot control the macro factors. We will be very attentive to them, though, but it was important to comment on this. Regarding our inventory, Laurence can add if he wants, when we speak of normalization, where it is within the strategy that we were talking about, we have a lot of moving parts in this conversation.
First, last year in Q3, we still had an effect of the mobile phone category, and this continues to be an obstacle for pure comparability of our inventory levels this year and last year. Another element is the share of imported products. When you have a slight increase in your imported goods, as soon as it boards a plane or ship, it starts to count. This also has an impact on our inventory. The mix of imported and national products is also another factor that will affect the calculation of our inventory. In the end of the day, I think the right question is what you said in the end of your question. If we expect to see a negative impact on our gross margin in quarter two, no, we don't see that happening, at least not for now.
We really think that we have a very well-controlled and healthy level of inventory right now, the tools that we have, the management pricing and granular distribution management tools that we have should really help in this journey in the second quarter. I don't see any clear impacts on our gross margin in the second half of the year. There's also the exchange rate. I think the exchange rate can help our gross margin. We have a significant volume of imported products. Just to reinforce, there was also a boosting of our winter inventory because we were explaining to sell more in quarter two. Last year, we had very strong sales. We even had stock-outs in quarter three, winter products, particularly in quarter three.
This year, we did something different Also considering Q3 market conditions and expecting to have a very competitive promotional environment in the second half. We have been talking about this throughout the year, the importance of being competitive and the relative price positioning of our products. This means that we have opportunities for normalization of the commercial events that we'll have in the second half of the year, and also based on the commercial planning, which already expected and provided for a more challenging environment in terms of pricing. It's important to note that through these tools, dynamic pricing and the evolution in our analytical capacity, we're mastering the management of our gross margin, I think that this will be very important considering this very price-sensitive scenario that we expect for the second half.
As you heard from Paulo, and I agree with him, we don't see any relevant impacts on our gross margin in the second half of the year.
Very clear, Laurence. Thank you, Laurence and Paulo.
Our next question is from Pedro Pinto, Bradesco BBI.
Good morning, Paulo and Laurence. Thank you for taking my questions. I have two questions. I want to better understand your productivity drivers looking forward. You talked about the store renovations and some categories that are doing really well, but you just mentioned that your initiatives are already at 85% execution under the C&A Energia strategy. I want to know what are the next steps to continue to improve productivity, considering that your initiatives are getting close to maturity now. Thinking in the longer term, how will you ensure the improvement of your levels of productivity in same-store sales?
My second point is about capital allocation. You always mention this, but when you think of the annual budget, it would be about BRL 500 million of CapEx to be invested in the second half, and we already mentioned in this call that the consumption and interest rates environment could change this allocation. Could you pivot to buyback? What would be your strategy? How is this debate taking place in the company?
Thank you for your questions, Pedro. Let me start with your first one about same-store sales, and then Laurence can talk about capital allocation. Our productivity levers are still being implemented. Let me talk in concrete terms. Right now, we have 20 stores being remodeled or renovated. Of course, in the short term, there will be a penalty due to that, because these stores are not productive during the period when they're being renovated.
There will be an upside when these stores are reopened after their full reopening. This is good news, because in the end of the day, we are expecting these 20 stores, and these are major stores. We started with our major stores, which have a higher share of our sales. We think that this will be an important driver for Q4, still in 2026. As for the evolution of the Energia strategy, in the end of this call, I will announce that. We will, of course, give more clarity and more visibility to what you're asking in a more structured way. We want to spend more time talking about this subject out of this call so that we can go over the next steps to increase productivity in C&A, and we want to discuss this with all of you.
Pedro, as for the second part of your question, here at C&A, I think the most important is that we have a strategy and that we are executing the strategy, the Energia strategy. We have this strategic steering of the company towards execution of these initiatives. This is what will give us the tool to capture value and increase the company's value in the upcoming years. These are structuring investments that we're making that were already tested, like the renovations, the new Energia store. These are investments that will certainly bring good return in the mid and long term. We also have some structuring investments that are being made, and we will capture the value of the return from them in the longer term. We have a lot of clarity and conviction about our strategy and the execution of our plan.
We still have the same level of certainty about our plan and our strategy. This is the first part of my answer to your question. We will continue, and we have very clear opportunities to increase our sales per square meter and gain efficiency within our stores. My second point is that we will avoid increasing our debt. Actually, our strategy is to reduce our gross debt and not take on new debt, considering the current context and the current level of the standard interest rates in Brazil. This is an important variable, and we should continue on this trajectory. Of course, first, executing our strategy, executing our investments, and the second point of our strategy is to reduce our gross debt and our financial expenses.
Lastly, yes, now, with a very strong balance sheet, a very strong cash generation, we will not miss any opportunities that we have to increase the return to our shareholders, or through buybacks or through increased payout to our shareholders. Like you said, this is very dynamic. We are always monitoring. We have weekly conversations. We monitor all these factors. In sum, the structural investments and the value capture investments will continue to be executed under the C&A strategy.
Thank you. Very clear. Thank you, Paulo and Laurence.
The next question is from Felipe Rached, Goldman Sachs.
Hello, good morning. Thank you for taking my question. I'm sorry to insist on the point about sales. [Gustin's] question was about the expectations for the second half, but I want to further explore your performance in the month of July. Can you give us more information?
It's clear that you had a clear negative impact of the lower traffic. I want to better understand what was the traffic and the sales performance on days where there was no match, at least no match involving the Brazil national team, particularly compared to April and May. I want to know how much of this deceleration was due to the World Cup and how much of this was due to other factors. Can you give us more details? Thank you.
Felipe, thank you for your question. Well, I tried to touch on this in my presentation, but when we look at the aggregated numbers for the week, whenever there was a Brazil match, there was a valley, there was a spike in our traffic.
If you look at the weekly charts, there was a clear difference in the traffic growth rates that we were having during the year and the moment the World Cup started. It is my sixth World Cup while working for C&A, and I had never seen this size of an impact. Because in the past, it was precisely on the days that we had Brazil play, but the other days were normal. This was different this year. Even on the days when Brazil was not playing, but there were other matches, whether because of coincidence of the working hours and the match hours and the availability of the World Cup this year, everybody had the World Cup in their hands. I think this had an impact on all the weeks during the World Cup. It was not a specific week, regardless of Brazil playing or not.
Even after Brazil lost and left the World Cup, we saw the same behavior, the same decline in the traffic during the World Cup compared to pre-World Cup. Most interestingly is that right after the end of the World Cup, traffic resumed. It was very clear to us that it was a very high level of correlation between World Cup and our traffic. Traffic for us is a very important indicator and a very important sales driver.
Excellent, thank you.
The next question is from Danni Eiger, XP.
Good morning, Paulo and Laurence. Thank you for taking my question. I have a question. Actually, two questions put together. We talked about the consumption dynamics, and you also mentioned the competitiveness. This brings us back to the federal tax exemption, and maybe after the elections, this will change. I want to understand what are you monitoring?
What do you plan to monitor? What would make you change your mind regarding the composition of your growth and margin? Laurence said that you were very comfortable about the resilience of your margin in the second half. Of course, this is for exogenous factors, but if at any point you think that considering the good evolution of your margin, if you ever think it makes sense to give up some of your margin to have better growth, what would make you change your mind in that direction? Would it be an impact on your traffic or maybe an analysis of the competition? It would be great to know so that we can monitor and know if we can expect any change in your strategy and pricing strategy, particularly.
Danni, it's not in our radar to make any foundational strategic change in our price positioning, regardless of the federal tax. We have a radar that continuously monitor consumer behavior, their level of interest for each of the brands, their level of preference for the brands, we monitor this every month, trying to anticipate any major movements between different competitors. What the federal tax does, at least initially, of course, it has an impact. I think the greatest impact is the imbalance in favor of one competitor, a foreign competitor, one specific foreign competitor in this case. This doesn't make sense. We don't think this is sustainable in the long term. What's also interesting, Danni, is that despite all this, our growth in online was more than 33%.
Perhaps this is proof that maybe we're talking about some type of correlation, it is not a one-to-one correlation. It's far from that. It's important to give some context because, of course, we have to have a clear strategy in terms of price positioning and the value proposition. What is the value that you're providing for that price? This is my point. Fighting over price only, this is not how the consumer algorithm works. The consumer algorithm looks at the price as a possibility, starting from that possibility, there's an algorithm that expresses the value brought by each product. Our game is the game of value.
We want to make our products more versatile, more flexible, that we can strengthen more and more this value perception, the perception of the value of our products, not just looking for a specific price target or a specific price range. Of course, that we have multiple categories and some are more or less price sensitive. What we are trying to do is to achieve consistency in the evolution of value perception. This is the game that we play, this is the game that we plan to continue to play. Not structurally, looking at the context, we can, of course, tackle one or another category to boost our growth. Structurally speaking, we will continue on this journey of value construction or building value and improving value perception.
Talking about the gross margin, if this competitiveness has to be translated into investments for changing the attractiveness of our products, this is not in our radar right now. We are focusing on consistent value creation, whether inside our stores or in the display of our products or the specific building of our products.
Thank you. Very clear.
The next question is from João Soares, Citi.
Good morning. I have a question. I think this is an important question. When we look at your numbers since Q4 last year, there was a higher demand for entry price products. I want to understand if this has been fixed in your strategy. You also made it very clear that with the federal tax exemption and the entry of the competitors, you will not change your price strategy. I think it is important to understand.
You said very consistently that you want to add quality to the products so that you can increase the prices. Should we expect any tipping point looking forward? The demand for entry price products will continue to be a problem considering the current situation. It is important to better understand what you expect in the second half, particularly about this topic, the quality and the need for further price increases and the competitive environment. My last point is about inventory. I am sorry to insist on the topic of inventory. You talked about normalization. You said that half of the increase that we saw this quarter was due to Fashiontronics. Looking at the second half, this continuation is already completed, so we should see a positive evolution in our inventory levels, at least in the annual comparison. We shouldn't see any relevant increase driven by this factor.
I want to understand what you mean with this normalization. It wasn't very clear. Thank you for your question, João. Let's go back to the price discussion to try to make things clearer. At the end of the day, our strategy and price structure is category by category. We monitor what is happening with the competition at all times. Based on this analysis, we will define our price ranges and the value proposition for each price range. For each category and specifically for each product. The tag price shows a possibility for consumers. However, the value of the product will have a different impact on consumers in terms of conversion. Let's give you an example.
One of our very strong products that has been showing very strong growth is a product that we call a Peruvian cotton T-shirt, that I even recommend to anyone listening to us today because it is the best product, the best basics product available in the market. This product has an average price that is higher than a basic T-shirt that is being sold by other players that are exclusively focusing on price. Why is this product growing so much in C&A right now? Because we are talking about added value. It is a combination of the fit, of the fabric, of the texture, of the tactile experience, and a consistent presentation at the point of sale. This combination increases value perception. It is worth investing in this product.
I've been telling you for a long time now, for several consecutive quarters, that in a more competitive environment, apparel becomes an investment. It's even more important to have a versatile product. A very highly fashionable product could be an imperative right now. Going back to the basics is strategic. Let's go back to the basic principles. We're trying to evaluate category by category what our price structure is and trying to discuss what the value is. This is becoming stronger and stronger in our strategy so that we can compete well, and compete not on the basis of price only. Because the absolute price, depending on the player that you're talking about, it's very complicated, very difficult to compete because other players can switch price for quality, and this is not our strategy.
The idea behind our strategy is to build consistency in terms of the value of our products, perception of quality, presentation at the point of sale, and the feeling that you're buying something good, that that product is a good investment. Yes, the second part of your question about our inventory days. As you heard, the fashiontronics had lower inventory days and higher turnover. In Q3, we will no longer have this comparable base, and we have the same comparable base in terms of product. We should start to see this normalization in the next quarter. During Q3, we should start to see levels normalizing, and we should reach full normalization by the end of the year. This is the takeaway, that already in Q3, we will start to see these levels normalizing, and this will be fully normalized by the end of Q4.
This is also a consequence of the free cash flow that we are estimating for the second half. We're estimating a free cash flow very much in line with that of last year, but also more concentrated in quarter four. This is the visibility that we can give you. This is our estimate for the next few months. We're expecting an improvement in inventory days already in Q3.
Sorry, I have a follow-up question. Do you have any benchmark levels for us to have in mind, or should we look at last year as a reference for normalization?
When you say normalized, you mean that you're back to the levels that you had last year?
What is the reference that we should use?
Yes, similar numbers to those of last year.
Inventory days are also related with sales levels and the cost of the merchandise sold, but very close to the levels of last year, and also considering the growth of the company. Considering the new stores that are being inaugurated, but I think the historical numbers are the best reference right now. The historical numbers of the company itself.
Thank you.
Our next question is from Isabella Lamas, UBS.
Good afternoon. I'll try to be brief. I have two questions. The first question is about retail, something that we haven't explored, the evolution of online. We saw a sequential evolution and penetration is reaching 8%. Can you say more about the drivers behind all this and where you still see the ability to improve and continue to evolve?
How do you see, or what are you doing today to improve profitability of the online channel compared to the physical channel? Do you have more incentives for performance? What is your strategy, and what is the weight it has on your margins? My third point is about C&A Pay, because this was a positive surprise. You had an expansion of your 360 portfolio, double-digit expansion, and you had a relevant decline in your NPL, and the coverage sounds healthy. How do you see this? We know you have a very cautious take regarding credit granting. Do you see any room for acceleration, or do you plan to maintain the same rhythm? What are the possible scenarios looking forward? These are my questions. Thank you.
Isabella, thank you for your questions.
For online, what are the greatest drivers for online growth? There are a few. First, this is part of the Energia strategy and our decision to advance in this omni-channel dynamics. This is causing us to invest in improving the omni-channel experience of our customers. This is causing a huge change in the conversion of our app and our website, this conversational commerce. If you look for it, for example, there's a party this weekend and I want to wear something different. You have a conversation, you have the identification of the buying journey. Second, if you go to our website, if you're logged in, you can see suggestions and things that are recommended to you. This also facilitates conversion. Third, everything that we're doing in terms of building intelligence and the history of consumers here at C&A.
Our CRM work, our messaging work with our consumers is becoming more and more personalized, more and more focused, which also boosts conversion, boosts traffic and conversion. This evolution of the proposition itself of our online journey is the great breakthrough or watershed between what happened before and what's happening now. This is also intensifying the participation of brick-and-mortar stores in this journey, and this is still incipient. We still have a lot of work to do. A lot of things will happen. This is another element that also broadens the spectrum and makes a difference in the investments, which has to do with your question about profitability. Profitability is always monitored in this channel, because if you need a lot of media to boost your traffic, the bottom line becomes more challenging.
If you have the brick-and-mortar store working together with online, if you can be more granular and more assertive in the messages and the incentives and encouragement to your consumer. For the second part of your question about C&A Pay, if at the same time you can truly work to improve the customer base of C&A Pay, trying to boost personalization and relevance. Because, for example, if you tell them to buy with C&A Pay, if they have to go back at least five times to the app to pay for your installments, these are five golden opportunities for C&A to talk to you and tell you what they have recommended for you, and the more assertive and the more granular you are in this offer, the greater the chance of converting, and this all will help improve your profitability.
Profitability also advances in a way that you depend less and less on paid traffic. Expanding the customer base in your app is a consequence of the expansion of C&A Pay as well. As you expand C&A Pay's reach, you automatically increase the possibility of creating traffic with a much lower cost, unpaid traffic. This is the strategy for online. We will continue on this journey. This is the evolution that we expect to see. This dynamic that you mentioned about C&A Pay, we are accelerating participation or share of C&A Pay because of this capacity of having a continuous dialogue, very focused, very personalized dialogue with our consumers, which compose the customer base of C&A Pay. I would just like to add a comment. Our focus continues to be recurrence, recurrent spending of our current consumers.
We are more and more mastering all these drivers and measuring all the incentives, all our initiatives, and the return in terms of spending, but also what is the reaction in this operation when we move these pieces around. We will continue to focus on recurrence and mastering this operation. We continue to have high discipline in our credit granting models. Based on the macro scenario and all the variables that we have to consider right now, this still points to a conservative position in terms of credit granting. At the same time, we are testing new initiatives, products, some one-off products or payment conditions, different fees or rates, trying to test different incentives to different customers, trying to have a more granular strategy for C&A Pay.
Whereas we're maintaining this very cautious and conservative credit granting strategy, we're also turning inwards and focusing on how we can improve our commercial efficiency, our operational efficiency in this operation.
Very clear. Thank you.
Our next question is from Joseph Giordano, JP Morgan.
Good morning, Paulo. Good morning, Laurence. I want to further explore your initial topics. Could you give us more details about what would be a sustainable cash cycle and debt conversion cycle throughout the year? We know there's some fluctuation, and this has an impact on the structure of your inventory line. How do you see the conversion of your EBITDA into cash this year? Is there a target for the year?
Joseph, I think this has to do with my previous answer. The priority is to execute our strategy. We have very clear initiatives targeted at capturing opportunities.
I think that we are now going through a context with very high interest rates, so it's important to protect our bottom line and avoid financial expenses. Also considering the context of the market, of the capital market, and the price of our share, I think there are also opportunities here. The share buyback is a very important capital allocation right now, particularly in moments of higher pressure, higher uncertainty, and high distortion of our share price. I think that having a target, I think this target is a mobile target, a moving target. First, it's very important not to sacrifice in the long term the opportunities that will bring gains in terms of value in the long term, by sacrificing the short term.
That's why it's so important to have this long-term strategy that we have, so that we can have our convictions and right prioritization in capital allocation. Of course, this will depend on the company's performance, the cash generation. This will all dictate the speed and the magnitude, and our level of acceptance of our working capital levels. We may invest in working capital or in CapEx, or in buyback or payout, depending on the specific moment, particularly because we have this very good cash generation and a strong balance sheet. Once again, the determining factor here will be the balance between the execution of our strategy, maintaining our debt low, and capturing all potential opportunities for better return to our shareholders.
Thank you.
Our next question is from Eric Huang, Santander.
Good afternoon, Paulo and Laurence. I have two quick questions. My first question is about expenses.
We saw strong discipline in terms of expenses, but now in the second half, what should we expect from this line? Do you see any flexibility for a more challenging sales scenario? How will this affect your margins, your EBITDA margin particularly? Now this is a follow-up question. I apologize for going back to sales, but I want to better understand. If you look at June specifically, with the impact of the World Cup, June is also a month that has relevant seasonality because of Valentine's Day in Brazil. If we look at the second quarter, we know that July does not have any relevant seasonality, but do you think this could have a worse impact considering that the more relevant seasonality is in August because of Father's Day?
I want to understand if there's any specifics that you can share with us about the seasonality of this quarter that could have an impact to considering this very relevant change in your traffic due to the World Cup.
Let me start with your second question, and then you can answer about the SG&A. Eric, thank you for your question. The practical impact is when we compare with the previous year, both in terms of traffic or conversion. We're trying to understand what the impact will be. For every week of the year, you have a historical relevance in the total sales that year, and this negative or positive percentual variation versus the previous year is what will give you your conversion rates or the same store sales rates that we're seeing.
Specifically about the last 20 days of June and the first 20 days of July, what happened there was that the comparability in terms of flow and sales was different from what was happening pre-World Cup and what happened post-World Cup. As I said, there was a slowdown during that period in quarter two, just like we had a slowdown in the first days of July. After the end of the World Cup, numbers have normalized, the traffic has normalized, and we see a different evolution of our same-store sales. This is what happened, at least in our case here, based on our measurements, and we have been measuring this in 340 stores all over the country, so it is a reliable measure. It is actually very accurate. This is the difference between before and after the World Cup and during the World Cup.
As for our operating expenses in the second half, just as an introduction, I must say that we have some very strong management strategies, very granular, to monitor all our expenses in all our packages. We do this with a lot of discipline and very frequently. The context of the past two years itself, I believe that this year we have already built a budget by mapping opportunities, considering all possible scenarios, and if we face a more challenging scenario, we have some strategies that we can use, they are already defined, to adjust our expense structure. Of course, remember that C&A is a company that is under transformation. The execution of our Energia strategy is bringing us to a better place, and some expenses have to take place before the gains.
We are also striving to seek funding by reviewing our expense structure, not just by reviewing our processes, but also activities. Not just eliminating, but also optimizing our processes and activities across the company. Having said this, I think that what we expect for quarter two is a discrete dilution of our expenses compared to quarter two 2025, but concentrating in quarter four, considering that quarter three will still see some relevant one-off marketing investments due to Rock in Rio and C&A's 50th anniversary in Brazil. This is basically what we expect for the second half.
I would just like to add, Laurence, I think this is a very important point, what you said about this very conscious investment that we're making in our brand in quarter three, because it symbolizes our 50th anniversary in Brazil, and we also have some specific events taking place in quarter three. I was looking at my notes, and I would just like to add something, Eric. There are two things that are helping us in the second half. First, we know that we made a conscious effort and a planned effort to have a winter collection this year. We know that the winter collection has significant sales performance until September, and we are better prepared to make the most of the winter period until the end of September this year. This is a positive point.
Obviously, like we said before, these special events and the visibility of our brand during the month of August should also be a better visibility and awareness driver for C&A during the period. These are two additional drivers to those that we mentioned before relative to management of the categories like you heard before.
Perfect. Thank you.
This question and answer session is now closed. I would like to hand the conference to Mr. Correa for his final considerations.
Thank you all for attending our call. Before we wrap up, I would like to invite you all to join us for our Investor Day, which will take place on August 26th at 9:00 A.M., broadcast live through our IR website. This is a complement to that question, what comes after Energia?
The answer to that question will become much clearer to all of you on August 26th in our Investor Day, when we will share with you what will be the continuity of this trajectory of value creation in our company. Once again, I thank you all for attending our earnings call. A special thanks to our team. This result would never be possible without you. I send you the traditional C&A heart, and I'll see you next time. For pending questions, please send them directly to the IR team. This conference call is now closed. Thank you all for attending, and have a great afternoon