Good morning, everyone. Thank you for hosting. Welcome to Magalu's conference call regarding the quarterly earnings. For those who need simultaneous translation, click on the Interpretation button via the globe icon at the bottom of your screen and choose your preferred language, English or Portuguese. We would like to inform you that this event is being recorded and will be made available on the company's IR website at ri.magazineluiza.com.br. The earnings release and the presentation are already available in Portuguese and English. The link to the presentation in English is also available in the chat. During the presentation, all participants' microphones will be disabled. Later, we will begin the Q&A session. If you have questions, please click on the Q&A icon at the bottom of your screen and enter your name, company, and question language. Upon being announced, a request to activate your microphone will appear on the screen.
You must then enable your microphone to ask your question. Questions received in writing will be answered later by the investor relations team. Now I would like to turn the floor to Fred Trajano, Magalu CEO. Fred, please take the floor.
Good morning, everyone. Thank you for participating in our earnings conference call on the third quarter of 2026. This quarter, a good name for it or a title would be that the film says a lot more than the snapshot. It is a quarter with an interesting aspect.
There has been a movement in the tectonic plates in retail with a significant change in competitive positions in categories where we are strong, which represents an opportunity, a perspective to consolidate the market and gain market share significantly, even historical, I would say, that protects the company from a macroeconomic context that we know since the beginning of the year and with the outlook for next year being less favorable. I will detail some numbers that clearly show that this film where we are already capturing these opportunities with actual captures in a more than 60-day horizon. But before we get to the quarter, I would like to give some context about the moment we are living and why we are so well-positioned to capture this opportunity. Because sometimes opportunities come up and you are not well-positioned, or your strategic position is not the best for that capture.
Magalu now, at this time in the strategic cycle, precisely with the focus of establishing the leadership in core and extended core categories, at Magalu, I like to work with five-year strategic cycles. Last year, I celebrated 10 years as a CEO with our team, and the whole team is here to answer your questions at the end of our earnings call. We had two strategic cycles, digitalization of the company from 2016 to 2020, and building the company's ecosystem, diversifying results from 2021 until last year.
Talking about 10 years, the company came from BRL 10 billion GMV with 20% or BRL 2 billion online share to BRL 45 billion online, more than 70% share of the online with a much more diverse business with different financial companies under the holding, MagaluPay, a business with more than 2,500 cloud clients, that Magalu Cloud with a cloud infrastructure, one of the biggest logistics operator in Brazil, Magalog, and assets in leading brands in the retail categories, Netshoes, KaBuM!, Época, and Magalu itself. 10 years of building that bring us to this new strategic cycle that we defined starting this year, which is the cycle dominated by a few important decisions. First, the decision that we communicated to the market since the beginning of the year with a full focus on our core and extended core categories. What categories are these?
Durable goods for Magalu, home technology, and the combination of both, and I'll detail this further. These on and off categories, we have 25% of the market. Sports and leisure for Netshoes. Netshoes holds 27% of the online market in sports and fitness. Games and peripherals with KaBuM! were online leaders with more than 5,000 GMV. And the beauty category, especially fragrances for Época Cosméticos, and we're also one of the leaders in this category. We made the decision to focus on the categories, on those championships where we can win. We're not going to play all tournaments in Brazil, but some tournaments we want to win. And in these categories, we will always work with a combination of 1P, 3P, and physical stores, always a blend of these three channels, which gives us the competitive edge compared to the players in the segment.
We made this decision, and as I'll talk about later, it has the biggest impact in the Magalu channel, which had the proposal to participate in more tournaments. Magalu had the proposal to participate in categories where we were not leaders, for example, in car accessories, hospital materials, and fashion. Now we're going to focus on categories that are our traditional focus, where we're leaders. All of these segments, we want to focus to establish our leadership on and offline. Strong focus there, choosing the tournaments we're going to compete in with more, always with this combination of 1P, 3P, and physical stores. And this quarter, we started to see this film developing. The film tells us more than the snapshot, but this quarter, we released a material fact.
We are at 62 quarters published since we became listed, and it's the second time in the 72 quarters where we break down the company's monthly sales, the first time in the first quarter of 2020. I don't know if you remember at that time, the pandemic happened, and during the pandemic, there was the closing of stores in March of that year. There was huge concerns from the market of what would happen with Magalu because the stores represented 50% of sales at that time, and we knew when we released in the first quarter in May that year that April had been very good. March had actually been good. Even after the stores closed, the growth in e-commerce more than offset physical store sales.
We disclosed that quarter, both the quarterly and the monthly disclosure of April, bringing confidence that there was a structural change, and we were well-prepared to deal with that difficult context of closed stores. It ended up being a very positive year for the company, confirming the expectations in the next quarters as well, which were record results for the company. The second time we are breaking down this monthly results is now in the month of October. We opened also September as well, proving this historical opportunity that we have to gain share, showing concrete numbers. I will talk first about physical stores. In physical stores, we have already been growing this year. We published an average growth from January to August, 8%, the same stores. This growth jumped to 12% in September, and in October, it moved to 16%. In the quarter overall, it was 10%.
We see clear acceleration in the months of September and October. We are in the beginning of November now, November 10th, but the month of November has been confirming this good growth perspective for our physical stores, which are benefiting from this market, the physical, and Fabrício can talk more about that, as an opportunity for same-store sales growth.
The good thing about the same-stores growth and this range of 16% that retailers are reporting same-store sales growth on that level is that when you grow same-store sales, you can capture sales and market share without the need for additional CapEx. It is not like we need to open more stores to grow volume of physical stores. We do not need to make any investments renovating stores. We are simply capturing the opportunities that came up in the market within the CapEx already invested, and this is a trend that tends to remain.
It is an opportunity that came to us in the third quarter. It is a structural opportunity, an opportunity, in our opinion, that is here to stay. It is not a one-off. October growing 16%, there has been an additional challenge because October was a cold month, so categories related to cooling, air conditioners, fans did not perform well, and last year, it was very hot. Also in October, we had two election days that compromised two Sundays that we did not operate with open stores, and Saturdays and Mondays before and after the election day are also hindered in terms of sales. That would hinder the month of October, which should have been a lot more difficult than what actually happened. The 16% growth is even more remarkable considering the weather and the elections.
In terms of online now, that I like to go over, this decision we made of removing priority from categories where we are not leaders and put our focus on categories where we are leaders, it is even more significantly for our online channel, and it represented a series of changes in terms of website usability, mix of marketing investments, and our decision of being in the 1P, in platforms that are not our own platforms, and that all represent a result of a strategy we made in the beginning of the year, focusing on the verticals where we are strong.
Technology, telephony, computers, games, tablets, wearables, audio, home utilities, home and garden, sports equipment, tools, and the categories that are a combination of both, home and technology, screens, white goods, small appliances, air conditioning, smart home. All these categories we are either the undisputed leaders, or we are very close to being leaders. We decided to have our full focus in these categories, removing priority from the other categories. There will be a big impact in our business going forward. By making that decision, it became natural to see a possibility. If we want to be leaders in these categories, and we want to be undisputed leaders, we must seek the possibilities for growth in these categories, listing our 1P, that is where we are the biggest sellers in these categories, in platforms that used to be seen as competitors.
We already had made a move in 2024 by listing products at AliExpress. This year, we formed three strategic partnerships that were very important: Amazon in June, Mercado Livre, that we implemented at the end of August, but the first month of sales was September, and Shopee in October. All partnerships that started within our objectives, but still with a lot of room to mature and grow, but which obviously expand our sales possibilities because the audience of Brazilian e-commerce is dispersed. It is today dispersed in different websites. The CAC is more expensive, so it was a smart decision for us to sell not only in our own channel, but also through those channels. We talked about this in the last quarter, about the rationale, these partnerships, and the positive contribution margin, at least higher than the paid channels, smaller than organic, but higher than the direct paid channels.
There must be some reciprocity. We must use our Magalog logistics. These partnerships that are not fully matured yet, combined to the same opportunities in the durable goods segments with physical stores, because this opportunity of the market with gain of share in physical stores is not only for physical stores, but also online market, made the reversion of that trend on e-commerce to be even stronger than in physical stores. Physical stores were going well. We continue to go very well. In e-commerce, we were going down 12% from January to August. You know why? We were saying that the industry had lower margins. We were focusing on operating in sales where the contribution margin was positive, a strong focus on profitability. So we were letting go some growth, even in market share, in order to be able to do that.
We knew that being present in the marketplaces, in the other marketplaces, and this opportunity, the microeconomic competitive opportunity, would give us the opportunity to grow. So we went from -12%, this drop from January to August, to +14% in October, 26 percentage points of a difference. Again, just as in physical stores, in November, we are seeing a confirmation of this trend in the 1P channel. It is true that the 3P has a slightly different trend because by not prioritizing the non-core or extended core categories, the 3P categories that fall into or that represented part of our GMV last year are no longer a priority now, as the categories that I mentioned.
We continue to do very well in 3P for Netshoes, Época, and at Magalu, we go well in 3P in our home technology and home and technology categories, but we are clearly going down in those deprioritized categories such as fashion and car accessories, auto parts, and so on. These categories, for some time, we're going to clean the base in that sense, but we see that the core and extended core categories will leverage 3P going forward. Not in the next couple of quarters, but looking forward, it is part of the company's strategy. Going on with the presentation, I'd like to highlight the reason why we have the ability to capture this opportunity in the market, this opportunity that presented. This is closely related to our logistics. We have a complete logistics operator in this cycle of the ecosystem. We launched Magalog.
Magalog today serves not only all of Magalu's companies, but also a lot of external customers. More than 30% of Magalog's volume is external customers. Renner, Boticário, Samsung, even when they don't sell in Magalu. Now we're closing agreements to deliver for Amazon, because everything we sell on Amazon, Shopee, we deliver via Magalog, but we may close some agreements with these players, for example, Amazon, to sell outside of Magalu's ecosystem via Magalog. In addition to this omni-channel capacity to store pickup and a very high service level, Magalog's service level is above 95%. The big competitive edge here is the highway, the road logistics for heavy products. The average cost to deliver a product like a refrigerator in São Paulo is 50% lower than the market operators have who deliver. Magalog has the capillarity. We have hundreds of transporting carriers that work with us in the country.
We have partnerships. We have systems for that, distribution centers prepared to do that, even for fulfillment as well for these categories. It is a unique competitive advantage that no other player in the market has to this extent. With that, an important part of this growth from September to end October, this growth started in September, not only October, comes from heavy products, where we have our unique exclusive logistics with a large share of the market. I would also like to highlight that in this strategic cycle, we've been talking a lot about the importance of AI. We believe that the future of e-commerce, the experience will be mostly agentic. We have been pioneers in Brazil launching agentic e-commerce with Lu's WhatsApp. We launched it in December last year. We're now sharing with you significant evolution of this channel.
We captured more than BRL 180 million via Lu's WhatsApp, service level with NPS of 86, conversion 3x larger than the app. Lu's WhatsApp, you can do the entire purchasing process there, the search, recommendation, checkout, post-sales. You don't need to go to the app to buy. We generated more than 18 million conversations with Lu, a multi-agentic architecture behind it, and more than 20% of the customers who made a purchase there go back for purchases. It's a successful experience. It's a global case for Meta with WhatsApp, and we're now bringing that to our app as well. We're turning our 20 million customers who have the app, our 20 million installed apps, migrating to a new app format. In this format, we brought all of the experience, all of the lessons we learned with Lu's WhatsApp for this experience, the purchasing journey.
There's different points of the journey where you can talk to Lu, and there's a very natural transition from talking, a more conversational e-commerce, to a high-service e-commerce that you're more used to, of searches and recommendations, with Lu present throughout the process, with predefined prompts for Lu for each type of product. It's an experience that has been generating more conversions than the previous experience, and customers are complimenting this process a lot. Everything we took to Lu's WhatsApp, we're bringing to the app. We have 20% of the base already migrated, and by the end of the year, we want to migrate 100% of the base. We also, with this change of the app, we also took the opportunity to prioritize the categories that I mentioned at the beginning.
The app will focus a lot more on those categories that we want to dominate and have an overshare. That's something I wanted to highlight. To conclude, before turning to Beto to give you more details of our results of the third quarter, I would like to talk about Magalu Cloud, which had a quarter with a lot of accomplishments. We've reached more than 2,300 customers, including startups and large corporates like Serasa that we announced here, in addition to Globo, Poder360, NeoFeed. All these customers are now Magalu Cloud's customers. Our revenue grew 10 x with external customers since the beginning of 2025, so very significant growth of revenues with those customers. We also had a major product launch that Magalu Cloud was basically AI's infrastructure, computing, networking, and storage. Now we launched some AI services.
We launched an AI hub called MGC AI Hub, the most recent AI model that's already in use by 60 of our more than 2,000 clients. We launched it last month. These models include the model of Alibaba Cloud, both the simpler free-of-charge models as the paid as well, as the first partnership that Ali Cloud made with a Brazilian cloud. It's been growing. Magalu Cloud's been growing and gaining relevance, and now there's a series of new regulations, AI data, and the public calling for the sovereign cloud tend to open more or broader horizons for clouds. We're getting to a moment now that will open a lot of opportunities to increase sales, including service provision for public bodies and regulated sectors, which will probably require this level of sovereignty in these services.
That opens a very good outlook, and Magalu Cloud comes in with the best-positioned sovereign AI in the market. I'll turn the floor to Beto, and we'll come back for the questions.
Thank you very much, Fred. Good morning, everyone. Thank you very much for being with us for this third quarter earnings call. Let's start going over the main financial highlights here. In addition to the total GMV of almost BRL 15 billion, we had gross revenue of over BRL 11 billion, stable vis-a-vis the third quarter of last year. We highlight again the physical store sales growth, almost 10%. Gross margin, very healthy, also improving and reaching 31.6%. Over BRL 700 million in EBITDA, margin of almost 8%. A highlight in this quarter, which was the adjusted net result, the recurring one, with a reduction of financial expenses in this quarter as well. We closed with a position of total cash of BRL 5.7 billion and net cash of BRL 500 million. For the next slide, once again, we prove the consistency of our EBITDA margin and our EBITDA.
This quarter, we have delivered the same EBITDA margin than we had in the same quarter of last year. Also, in despite of a scenario for retail that is quite adverse, we have been able to deliver the same operating result with, again, a highlight, a gross margin, the increase in services revenue with the effect here of interest revenue coming from MagaluPay. If you can go back, yes, that slide's okay. Market share and profitability gains in physical stores. Once again, a quarter where we had a strict expenses control. The third quarter in a row this year where we had a reduction of operating expenses nominally and percentage-wise as well. Also, LuizaCred and MagaluPay's results, which have been strong once again. Now, turning to the EBITDA margin variation from last year to this year.
On this slide, it's clear to see the evolution of the gross margin, the effect of the dilution of SG&A expenses, also the result of LuizaCred here in the equity income. All of that has offset an increase in provisions, and provisions regarding retail specifically. A portfolio, as we have mentioned in the prior quarter, is in the runoff process. Today, we have a portfolio that is very much provisioned for the next 12 months. This portfolio, while we had BRL 2 billion in the beginning of the year, it's already around BRL 1 billion now. With a high provision in the next 12 months, this portfolio should be reverted, the provision should be reverted over time.
Now, we have here gross margin for merchandise slightly lower because of the migration of the interest revenue to our financial services. Also services contribution to margin increasing, also helping to improve the total gross margin. On the next slide, we have our working capital. It is our adjusted working capital because, once again, these are operating liabilities minus operating assets, so the highest, the best. We have improved in BRL 100 million from June to September and BRL 400 million year-on-year. A special highlight here on the bottom chart to show inventory and suppliers balance and the consistency. The inventory balance is lower than suppliers balance, consistently showing that we are able to turn inventories faster than the average payment term for suppliers. This is an important message.
Now, analyzing September against September, we have BRL 7.4 billion in inventory, BRL 100 million less than last year in September, and growing in October in two digits here. Basically, 15% growth from 1P with a lower level of end inventory. The message here is that, especially in the fourth quarter, we are turning inventories much better than what we were doing in September of last year, and that tends to improve our working capital. In the fourth quarter, we already have the seasonality effect, but here, we have a major effect of productivity. The trend here for the fourth quarter is a great expansion of our working capital and an improvement. Another significant message is that suppliers balance September over September was basically the same, BRL 10 billion-BRL 9.8 billion.
Our average period of purchasing is basically the same, and we have been able to reduce the balance for agreements with suppliers of financing operations for suppliers with the banks. This is a highlight. We were able to reduce that in BRL 1.5 billion in the quarter, and if we compare that to last year, we have been able to reduce it in BRL 2 billion. In a way, we reduced our bank exposure, which is very interesting. At the same time, as we have always mentioned, the average time for suppliers here was basically the same. There was an exchange in the lines for the agreement suppliers to direct suppliers, showing that the average term of purchase does not depend on the prepayment that happens by banks.
Also talking on suppliers, talking about suppliers, the inventory for this quarter improved in BRL 400 million, and the suppliers' balance has just increased BRL 100 million from BRL 9.7 billion to BRL 9.8 billion. It could have gone to BRL 400 million, but we prepaid supplier with our own cash and BRL 300 million in this quarter, also to help partner suppliers.
Now, in this liquidity moment. We have been able to reduce the balance of suppliers using our own cash, helping our partner suppliers. To the right, we talk about net financial expenses, and we do have great news here, a nice trend. We have been able to reduce financial expenses in this quarter vis-a-vis the prior quarters, as well as last year. In the trend reversal here, we see a positive result, and this is the trend for financial expenses up to the end of the year as well.
We reduce expenses with interests coming from loans, as we are also reducing the balance of gross indebtedness of the company, and we have been able to reduce expenses with receivables prepayment, improving sales mix, also selling new platforms, reducing the average term for sales, and the future rates as well are reducing the expenses of receivables prepayment as a whole. Once again, this is a trend for the next quarters. On the next slide, we have our cash flow. In this quarter, we were able to maintain our total cash position stable. We had a cash flow in around BRL 300 million, and once again, if we had not paid suppliers with our own cash, our revenue here would have been BRL 600 million, and our cash position would be BRL 6 billion at the end.
Just a highlight, we had in this quarter the first funding coming from BNDES, and that's for Magalu, and for Magalu Cloud, that was an operation of BRL 100 million to finance the development focused on specifically Magalu Cloud here. Talking about capital structure, we still have a net position, a total cash position of BRL 5.7 billion, a net cash position of BRL 500 million. Our gross debt, here I highlight, three years ago, it was BRL 7.5 billion. A year ago, we had reduced it to BRL 5.9 billion. In September of this year, gross debt, it was already at BRL 5.2 billion, and now in October, we have just paid another billion in debt, now bringing this gross debt level to BRL 4 billion.
We have been able to reduce our gross debt almost by half in the past three years, and this remaining balance is distributed over the next four or five years. Now, talking about MagaluPay, our fintech, and here we have a highlight to the fact that we have four financial companies. All of them are regulated by the central bank with all the licenses, and they are capitalized, and they are profitable. The first one is LuizaCred, our joint venture with Itaú, with BRL 20 billion in portfolio, over BRL 500 million in the last 12 months. A special highlight, and what's new this year is MagaluPay IF, with our direct consumer credit portfolio, or CDC, very profitable.
Our payment institution with digital account, acquiring insurance, with net income of BRL 86 million in the last 12 months, and our consortium also in a very special moment, growing 34%, very profitable, with net income of BRL 78 million in the last 12 months. On the next slide, we focus on LuizaCred. Once again, delinquency coming down, once again, both in the long term as well as in the short term. A base of 5.6 million of active credit cards, a portfolio of almost BRL 20 billion.
LuizaCred improved, has grown profit in 14% compared to the same quarter of last year. It has reached in the year BRL 288 million in this quarter. Also, after a number of quarters, it has paid BRL 90 million in dividends to shareholders, and it ended the quarter at a Basel ratio higher than our shareholders' agreement, almost at 15% of a Basel ratio.
Finally, a special highlight to MagaluPay, our baby, BRL 32 million of net income in the quarter, growing in the process of becoming mature. We have reached a gross credit portfolio of BRL 838 million. By the end of the year, it should go over BRL 1 billion. We have already funded in terms of CDBs and now also financial securities issuance in this quarter, BRL 464 million to finance our credit portfolio. We have our own capital that is very high, and this financial branch with a Basel ratio of 32%, and also return on equity that is very high. If we analyze profits in the quarter, ROE over 50% annualized. These were the main financial messages. Once again, thank you very much. Now we are going to start our Q&A session. Thank you. We will now start our Q&A session.
To ask a question, please click on the Q&A icon on the bottom of your screen. Write your name, the name of your company, and the language of your question. Upon being announced, a request to open your microphone will pop up, and then enable your microphone and move on with your question. Our first question is from Bob Ford from Bank of America. Bob, please.
Thank you very much. Good morning, Fred and Beto, and congratulations on the results. I have one question. Why did you have an overshare, and why do you believe that you can replicate that now? Thank you.
Good morning, Bob. Thank you very much for your question. I will talk about Máquina de Vendas because this is a past case, and I will not comment on the current fact so that I don't go over any competitor.
About Máquina de Vendas, studies show that we have captured 70%-80% of that volume. The reason for that was the overlapping of stores, Bob. We have a number of stores in the Northeast, and Máquina de Vendas, or Máquina de Vendas, it looks like this is the name of the store. They had a combination of stores, so there is an overlapping of stores that were very close to their stores, our stores and their stores. There was an overlapping there, not only there in the Northeast, but also in other places of Minas Gerais where Magalu was very strong and where Ricardo Eletro was strong, which was part of the Máquina de Vendas stores. We had a positioning issue, which is to have the inventory at the right place at the right time.
With the market intelligence, we were able to identify in which DCs I need to place inventories. Also, there is something that is very important regarding logistics, the road logistics, what type of products that we have, what type of carriers we have, our penetration and physical presence. All of that helps us to tap into this market because not everyone has logistics to deliver products. So at that time, there was credit available, which was important with a credit operation. We were at a very aggressive moment in credit assignment. Now we are more restricted because that's what the moment requires. So at the time, we had a moment in tapping into credit, and I believe that we are not at that place right now. Also a different relationship with suppliers.
That is a phenomenon that the top of mind of the category, not considering those that leave the market, they take up the sales of those that left. So consumers end up going to the first or second options that they have, and now they're a leader machine that are a leader brand reference in these categories of products. So I rather talk about what happened there than to talk about it now in this specific situation.
Thank you, Fred.
Thank you.
Thank you, Bob, for your question. Next question, Rodrigo Gastim, Itaú. Gastim, please, you may go ahead.
Good morning. I have two questions here. Fred, I would like you to talk a little bit more about this strategy of focusing on fewer categories, fewer SKUs. I would like to understand what this deprioritization process of some categories we are already going to see reflected in this management of fewer SKUs, if you actually see a change or a more streamlined dynamic in terms of SKUs, and how much it makes your lives easier, and whether or not it is already happening. My second question, something that we hear a lot when we see your growth accelerating, is the working capital dynamics. A lot of people asking, "Oh, but this acceleration, won't it bring a negative impact in working capital consumption while the company is growing more?" So if you could discuss that, it would be great for us to clarify that. Thank you.
Good morning. I will start answering, and then I will turn to Fabrício to talk about your first question, and then I will come back and turn to Beto for working capital as well. But about having more categories than anything, it is a matter of focusing. As I said, it is playing a tournament where we have a chance to win and leave tournaments where we do not stand a chance. So what we are saying here are categories where we do not have the ideal combination, between 1P, 3P, and stores. We want to maintain 3P where we have 1P in stores, where we can operate 1P in stores.
That is a little bit of the focus. We are opening stores actually for Netshoes and Época, and KaBuM! as well. Magalu, we tend to open because there are places we think we can play with the conditions to compete and even win from larger platforms or global platforms. That means leaving categories where we were only on 3P exclusively, for example, fashion or auto parts or accessories. The impact of that on the operational, turn to Fabrício, and maybe Garrido has something to add as well.
Good morning, everyone. Rodrigo, thank you for your question. This is Fabrício. As for the complexity, as Fred said, the biggest impact in the number of SKUs is on 3P. So we are removing focus from categories that do not represent so much. In terms of SKUs, it is going to reduce maybe 15% and 1P focused on market. As Fred said, the majority is fashion, beauty. 3P will probably reduce around 25% or 30%, the number of SKUs on 3P, especially with lower tickets. So that is going to be the impact we are going to see.
But as we are discussing, in the categories that are not as representative, the impact is not going to be that great. Noting that these categories are all categories with contribution margins close to zero or even negative, so they have more impact on the GMV of 3P than in the contribution margin itself. About what you ask in working capital, I think we have been saying that for quite some time, but I will let Beto explain it. But just to say that we always have that rationale that the supplier must finance the inventory. We do not finance the supplier.
If you have 60 days of inventory, we need at least 60 days of TMP. We do not have to buy everything from everybody. We want to buy from those who have that. We need to have that balance between TMP and the average duration of the inventory, and Beto can add to that.
Good morning, Gastim. Thank you. We can actually have the turnover of inventories faster than we pay the suppliers. As we accelerate the sales growth, we are not going to increase the inventory balance in the same proportion. The example we gave in September is significant. We have an inventory balance even lower than last year, selling 15% more while maintaining the same average duration of purchases. This relationship of inventory versus suppliers, we expect to generate more cash as we accelerate growth.
This is very positive, and that is what is most relevant for us in terms of working capital. In addition to this relationship between inventories and suppliers, I want to talk about receivables as well. As we created the new financial company, part of the strategy was to transform retail into a lighter company in terms of working capital. On retail today, we practically receive everything on spot. If we sell via Pix, we are paid right on, and CDC as well. The financial company pays the retail, and then they are paid in installments, and they fund themselves. If we sell on credit cards, Luiza or third-party cards, we can discount it at any time. In terms of receivables, we do not have any change due to the growth that we are seeing.
The only potential impact would be on the financial company as it grows a little bit more. But noting, and I think it is important to note, that CDC, the direct consumer credit, this business is pretty much 10% of sales at physical stores, which are slightly more than 30% of total sales. We are talking at the end of the day about 3% of the sales, of total sales, and the growth on top of 3%. It is not relevant, and the profit it is turning absorbs this growth of the CDC portfolio that we will naturally experience. I would also like to talk about another highlight in terms of taxes. This past quarter, the third quarter, we did not monetize taxes. We monetized judicial deposits because we purchased a lot. We increased inventory a lot, especially in September.
Although we ended September with an inventory level lower than last year, it is a quarter where we increase inventories compared to June. We bought a lot, especially in September, which generates a buildup of taxes initially. But later, in the fourth quarter, we tend to monetize both taxes and judicial deposits. We expect that working capital this quarter will be even better with all of these effects, and that will contribute to our cash generation and the reduction of our financial expenses this quarter as well. Thank you, Rodrigo Gastim.
Excellent. The answers are very clear. Thank you.
Thank you, Gastim, for your questions. Next question, Vinícius Strano, UBS. Vinícius, please, you may go ahead.
Thank you, Vanessa. Good morning, everyone. My first question here is about the operational leverage. How you see this operating leverage and contribution margin coming from these incremental sales? If you could comment a little bit about the economics within these sales in the physical stores, as well as sales on online channel as well. Linking that with SG&A, SG&A has been very much under control for some time, and in the third quarter, there's still a slight decrease there. If you can talk about the drivers, if there's a reduction of paid media, and what else you have in SG&A. How can we think about the expenses going forward? Just to give us an idea about margins going forward. Thank you.
Thank you for your question. We don't disclose contribution margin offline and online, but I will talk in qualitative terms that I think you can get a good understanding. Contribution margin of stores is higher than the contribution margin of the online channel. It is higher, and the mix we have is the mix that gives us our EBITDA that you know, paying fixed expenses. In terms of contribution margin, what we have is an opportunity of growth, and you see that it is materializing both on physical stores and online sales. We have the opportunity to gain share with everything that's happening in the durable goods retail sector, both in physical stores and online, because there is an opportunity to gain share in these categories, and we've been gaining share in these two categories in recent months.
But on the online channel, in addition to that specific opportunity, this competition scenario, we also have the listing of our products in third-party platforms, which allows us to gain share from smaller sellers in those platforms. I see that the whole bulk of durable goods is not going to increase because we are at a moment where interest rates are high and there's pressures and increase of indebtedness of population, so we're being vocal saying that we're not going to accelerate our credit operation in addition to what has a probability of return. I see that this whole bulk is not going to increase, but we're going to take a bigger slice, and the online slice is going to be as big as or bigger than the slice of the physical store.
The mix of profitability tends to be more towards online than to physical stores, subtly, when compared to the current mix. That is what we need to measure. Maybe with the operating leverage, we are going to see a significant volume of sales, but with more of an online mix of this delta. That is what we need to look at. Obviously, in addition to all of the operating leverage opportunities, simply by capturing sales and market share, we also have opportunities to have better negotiation, to improve margins, to have less price wars, and we are all slicing all of that. It is the first months. We are evaluating it. The initial focus is to take that volume without losing margin. The focus is to take volume without losing margin, but if we find opportunities of taking volume and having margin gains, we will explore that as well.
We are not going to leave a lot of volume on the table because that is the opportunity for us to consolidate our leadership in these categories where we have 20%-25% of share. Hypothetically, okay, this is not a guidance, but we can get to 30% or 40%. Once we have a dominant share position, we take a position that is more comfortable in this sector, and it is important to have that happen going forward. About fixed expenses, what I can say, and I talked a lot about that in the second call, I said we were working very strongly on that with a consulting firm in all of the company's fixed expenses. We did a very broad work. I mentioned, I detailed it a little bit in the second quarter. We implemented that in the second quarter, and we are reaping results, and we will continue to.
Being able to bring it down in nominal terms, even with the growth and inflation, was very good work. As we increase contribution margin of the business with this additional share volume that we are capturing, we will be in conditions to reduce it even further. Of course, there is other challenges, and we will talk about that going forward, in fixed expenses, like the change of the journey with the work week, and there is a lot of new things, but I will discuss that going forward. This is a challenge we will need to work on starting in December.
Excellent. Thank you, Fred.
Thank you for your questions, Vinícius. Our next question is from Andrew Ruben from Morgan Stanley. It is going to be asked in English, and the answer is going to be in Portuguese. Andrew, please, the floor is yours.
Hi. Thanks very much for the question. I am curious a bit more the dynamic on 1P, particularly the evolution in recent months. I am curious how you would attribute the improvement between the opening up of new marketplace channels when compared to some perhaps additional organic traffic that you could be receiving given the competitive situation in the industry. Thanks very much.
Hello, Andrew. Thank you very much for your question. Well, here we have both things happening, two things. We have sales and the third-party platforms, but remember, Meli started just in September, so it is still scaling, and Shopee just in October. Amazon was more mature, but even at Amazon, the main mode of delivery, which is FBA Onsite, is going to start now in November. None of these channels is still in their full potential. I am assigning a major of the growth here in September, and because of the direct channel, it was coming down. It was dropping in the first half of the year because we were very selective in terms of CAC investments and going into auctions of social media and paid search, because it was very expensive, so we were selective.
Because of the competition, a lot of people talk about stores, but this opportunity of share gain in the durable goods is also happening in the online channel. I am not going to go into the details here because that involves a specific competitor, but there is a major opportunity of an online share gain in the direct channel, and this is surprising us in the past months.
Very helpful. Thank you.
Thank you for your question, Andrew. Next question is from Lucas Esteves from Santander. Lucas, please, the floor is yours.
Thank you, Vanessa. Good morning, Fred, Beto, and congratulations on the results. Thank you for this opportunity. I have just one question. I would like to understand your expectation of cash conversion in the fourth quarter in terms of EBITDA percentage to understand your working capital in this peak season. Still talking about working capital, how do you see the improvement potential in terms of inventories for 2027, considering days and the current position? Beto talked about the current position, that you see an improvement, but I would like to hear how this selling in the marketplaces can accelerate the inventory turnover, and how many days are we going to see that for the next year, and how that cash flow can increase for the next year as well?
Good morning, Lucas, and thank you for your question as well. I will start talking about the conversion of working capital into cash. In fact, I did mention that before, the expectations for this quarter is very positive. We are growing again double digits in 1P with inventory levels that are lower than last year's. So the expectation for inventory turnover is positive, and we believe we are going to maintain that average term for purchasing. We should have a working capital variation that's very interesting, not to mention other factors that I already commented about, receivables, taxes. So we expect to have operating cash generation in this quarter that is higher than EBITDA.
Usually, EBITDA in the fourth quarter is already the best of the year because of the seasonality, but with all of the cash generation coming from working capital, we believe that when we look at the year as a whole, we tend to have a cash flow from operations that is closer to the whole year's EBITDA. If we do very well, it might even be higher than the whole year's EBITDA. This is our objective. It's not a guidance, but we are working so that by the end of the year, we have the cash flow of operations much higher to what we have had in the first nine months of the year. We are confident here because, as you know, in retail, sales importance to move working capital is crucial.
Now, talking about next year in terms of inventory turnover, what I can tell you is that in the last quarters and even in the last years, we have been able to reduce the nominal balance of inventories from a level that was at BRL 9 billion, and in the middle of the year, it was already BRL 7 billion. We were able to reduce that with efficiency, with improvement in processes, purchasing process, logistics, and also flow. All the logistics process involved, as I mentioned. But it comes to a time when it is difficult to reduce inventory without losing sales because we have stores' inventories, we have showrooms, we have the DCs' inventory, we have the minimum inventory, we have the suppliers' lead time. So it's difficult to improve the turnover reducing inventory.
But we have already mentioned a few times in this call that it was difficult to reduce nominally, but we did not need to increase as soon as sales would pick up. This is what is happening right now. I believe that the improvement in the inventory levels that we are going to see happening next year, it will be related to the sales performance or growth and all the growth drivers we already mentioned today, with inventory levels similar to the current level nominally. We will be working to try to maintain inventories at a similar level, therefore having an improvement in the turnover for the next year, once again maintaining that average period of purchasing. So the improvement in working capital that we will see in this quarter also should be extended or to be improved for next year as well. Thank you very much, Lucas.
Perfect. Very clear. Good morning.
Thank you, Lucas, for your question. Next question is from João Soares from Citi. João, please, the floor is yours.
Good morning, everyone. I will double-click on one of your comments, Fred, on the trade-off of gaining volume now and the situation that is favorable for you now, a competitive scenario, and also profitability. Also, remembering that we should look at the mix of the online profitability that is gaining traction here. So I would like to understand what we should have in mind as we want to grow EBITDA. So, well, I'm not asking you for a guidance, but how should we analysts model this evolution considering the high growth that should keep on happening in the next quarters, considering what happened in the last cycle, and when we had something similar to what we are seeing now?
Also, I think it's very clear, the working capital topic, but there is We do the math here. When we analyze the last 12 months EBITDA, [IFRS], and how much you were paying for receivables discounting, still you have over 50% of this EBITDA. I might not be doing the right math here, and correct me if I'm wrong. But how are you aiming this metric, considering that your cash flow has to reduce this need of receivables prepayment? So what do you have in terms of goals for the company? Thank you very much.
Well, it is, like you said, I cannot give you any guidance, but I will go over our directions here, our tactics. What we have here for the company, we want to seize this opportunity to gain share because the market is difficult and we cannot miss this opportunity to gain share. This is historical. It will change the level of our operation and our level of market share, so we are going to seize this opportunity. We want to do that without letting go profitability. We have not been able to grow in the online before, because if we were to grow, we would be losing margin. That was happening in the market.
But now, we see that we can grow in the online with a positive contribution margin. So that's why we are growing 1P again in September and October, and this should be happening in the future as well because we have competitive advantages that allows us to tap into this share opportunity from now on without letting go profitability. So we were already growing in the stores, physical stores, and we'll keep on growing with the same contribution level.
In the online, we had not been able to find an opportunity to grow with a positive contribution margin, but we are going back to this possibility to grow with positive contribution margin, both in the direct channel, because the competitive situation now is better, as well as through the partnerships with the marketplaces. The partnerships with the marketplaces have a special dynamics, and as well as the stores, they have a different dynamic. They generate less receivables discount because the marketplace, you have your receivables in less time. In the stores, we have the direct consumer credit cards, and we can better price the costs. We also charge the client part of the sales.
We might have a better dynamic here in terms of EBITDA on the financial expenses, considering that approach of that mix and the perspective that you see in the new planning. We have a strategic planning, considering that we were going to have a more difficult scenario regarding interest rates for a longer period of time.
Very clear. Thank you very much.
Thank you, João. Our next question, Irma at Goldman Sachs. Irma, please go ahead.
Good morning. Thank you for the opportunity. Most of my questions have already been asked, but I think what we have still to ask was about the change for the workweek, a five-day workweek, and also the tax reform, since we are now less than two months to go before the implementation or the potential date for the implementation of both. So, I'd like to hear your perspective both on the Magazine Luiza's view and the perspective for the market overall. Thank you.
Irma, I'm going to open here and turn to Fabrício because, again, this is recent with a very short deadline for us to adapt. I think everywhere around the world where they changed the workweek, there was no place where the market had less than two months to adapt. I say that we're working seven days a week with zero days off to help us prepare for this scenario of the five-day workweek with two days off. We still have the hopes that there will be common sense from the government and the authorities so that we can increase this deadline. But that said, we're working with the assumption of trying not to have any financial impact in this process. But I'll turn to Fabrício to give you more details.
Good morning, Irma. Thank you for the question. As Fred said, this is a law that gave us a very short period to implement it. 60 days is very short. Now we're working with a consultancy firm helping us to build the designs, and as Fred said, to mitigate as much as possible the impacts, both operational and finance, cost impacts that we may have in our different fronts. The fronts that may be affected are stores, logistics, and call center.
Our assumption with the consulting firm is to mitigate as much as possible the impacts without losing our service levels, without compromising service levels. We started now in November pilot programs both at the stores and our DCs to be able to understand the impacts and size the teams, the schedules, the hours, and then start to implement it 100% on December 14th. That's the deadline we have. We don't have the calculation of the impact, but we're working so that the impact is as low as possible. That's the main point. We believe that with the stores, smaller stores and smaller DCs, we won't have an impact. On the others, the medium and large ones, we're working to calculate, and we'll see how we can mitigate that. I think that's it.
About the tax reform?
Good morning, Irma. Thank you for your question. About the tax reform, what we can say for now is that as long as it is relatively neutral in terms of total tax burden, it does have very positive aspects for our operation, starting with the simplification of the tax system, which is highly complex today. This simplification tends to reduce significantly our accumulation process of taxes to recover. So, in terms of working capital, we believe it will be very positive as we stop accumulating taxes with the tax replacement, for example, ICMS, ST, and all that. We have a very positive expectation.
The balance of PIS and COFINS taxes that we have in our balance sheet at the turn of the year, starting next year with the beginning of CBS, it will become a credit that we'll be able to use to discount from the CBS tax payments. We expect the PIS and COFINS balance to be amortized, be transformed into cash faster, especially starting next year. ICMS, once the transition of ICMS starts, we should probably see the end of the tax substitution and all of the complexity of ICMS, which is a state tax, and each state has its own regulation and a very complex structure, product by product. We see as very positive this process of simplification. Also, even the split payment, as it may reduce informality of the Brazilian economy and somewhat favor those who abide by all of the country's tax regulations.
There's still a lot of uncertainty in terms of the tax burden and the regulation, but again, if the tax burden is relatively neutral. We have the potential to monetize more than BRL 5 billion in taxes to recover and judicial deposits. It's a trend that, for us, shall be very positive. Thank you, Irma.
Very clear. Thank you.
Thank you for the questions, Irma. Next question, Pedro Caravina, XP Investimentos. Pedro, please go ahead.
Good morning, Vanessa, Fred, Beto. I have two points to explore, please. First about suppliers. You had that dynamics of the prepayment of BRL 300 million with your own cash, paying suppliers, and the dynamic of the agreements, suppliers with agreements. I'd like to understand the rationale behind this decision. Why to use the cash, and maybe detailing how you see the financial health of suppliers.
In these lines, what opportunities do you see to maybe improve commercial conditions and term and price and negotiations with the industry since you are becoming more and more relevant to them? That is the first point. The second point, I think it is clear that you talked about how the partnerships are above expectations, going very well, accelerating 1P growth, but it would be good to understand when you expect that to reach full potential. Should it be already this quarter? Are you close to reaching full potential, or do you still see a lot of opportunities? Also, I think one of the points you mentioned was Magalog. Today, you operate 100% on Magalog, but what is the perspective of operating with Magalog with partners for the sales of those players, if there is a potential for that as well? Those are my points. Thank you.
Good morning, Pedro. Thank you for your questions. I will start talking about suppliers, and then Fabrício can add to my answer. As regards the agreements, just to clarify this, what happened this quarter specifically is that there has been somewhat of a reduction of the supply of that product from banks. Whenever there is an event on retail that causes some insecurity to banks, it is natural. There is often a process of accommodation and transition. Afterwards, things tend to go back to normal. But initially, there is always a certain caution, and until it becomes clear, or all the trends become clear, some credit areas or some banks reduce their limits somewhat. So there has been a reduction in the banking limits for that specific product, and the increase of costs of that product that we pass through to our suppliers.
That is why we always explain that it is a benefit that they give us the duration, at some point, they decide to advance it or prepay it or not. We have a policy since it occupies or it takes some of the bank limits, so we kind of manage this benefit to our suppliers, but always passing this through to suppliers. Since the costs have indeed increased, the demand from our suppliers has also gone down, and it went down in a moment where maybe they needed it the most due to this lack of liquidity.
Some suppliers came to us, and we, having that liquidity, we decided, it was a tactical decision, we decided to anticipate or prepay about BRL 300 million to some suppliers, they are great partners, have been for a long time, charging interest, also turning that into a financial revenue, but a smaller or lower interest than the banks were charging at that time. So that was as simple as that. It is a win-win, good for the supplier, good for us. It was good to reduce bank exposure as well, reduce the credit risk in the bank's view. For us, we always stress that. It is not a bank debt, it is not our debt, and there is no impact in our financial expenses. But it is a benefit to our suppliers. Now, about the negotiations, Fabrício is going to talk about them. Thank you, Pedro.
Good morning, Pedro. Thank you for your question. This is Fabrício. About the bargaining power, Magalu is already quite large and quite representative to all suppliers. Of course, with the in-court reorganization of our competitor, we will end up increasing our share with those suppliers, and our bargaining power increases. We are working so that that turn reflects into competitiveness and profitability, and with that happening, and we have been working well, as we always have, on this. About the platforms, we should be operating this month. It is a learning process, but we are already operating well with them. We should have a very strong level of November. Tomorrow, that is the double-digit date, is very important.
I think this quarter, when we look at the results, we are already going to see a number close to full potential, and then next year is going to be a year where we will be stable and we will be working at a full potential with all of them, with the three different platforms. About the contribution margin of the platforms, as we already said, their contribution margin, a basic assumption here is that it has to be higher than our production margin of physical and paid media, and has been confirming. This trend has been confirming, and we are quite pleased with the results. I think that is it. About Magalog, Márcio will answer to you.
Good morning, Pedro. This is Márcio Chammas. Thank you for the question. Magalog, as Fred already said, is a very robust structure, especially in the heavy product profile. We are present today in more than 4,000 municipalities with between distribution centers and bases. We have more than 220. We had been operating heavy products for those three platforms already. A very good case in this last quarter was with Amazon at the FBA Onsite. We operate Amazon sales with Magalog, with a Prime stamp, with ultra-fast deliveries for Amazon.
This last quarter, we have been developing our systems, especially for pricing and contribution margin of those tables to operate directly with those platforms, and other customers who show interest in operating heavy products with Magalog. We are ready now in this last quarter, strongly focused on this growing sales with the group, especially as you saw in 1P and stores. Next year, this is not a guidance, but next year, we will release this product more robustly to serve the market and the platforms that have interest in operating with us.
Great. Thank you.
Thank you for the questions, Caravina. Next question, Guilherme Domingues from HSBC. Guilherme, please, you may go ahead.
Good morning. Thank you for this opportunity. Most of my questions have been answered, but I would like to understand, considering the changing scenario of higher inflation and perspective of higher interest rates, how is the company seeing consumption for 2027? Especially, what is your focus in terms of capital allocation? Now, with the prohibition of betting that the company has always been talking about, this topic in the call, do you believe or do you see any redirectioning of demand towards consumption? Those are my questions.
Good morning, Pedro. Thank you for the question. Guilherme, thank you for your question. As I said, the scenario that for me was already contracted, and it was already the company's expectation for next year especially, was a scenario of an economic slowdown, maintenance of high interest rates, or at least a smaller reduction on interest rates. That is the scenario we had been working on. And the whole year, we had this hiatus of three weeks between the first and the second turns of the election. But in the real economy, the scenario does not change that fast. We have been preparing for that, and as I said, the micro will protect us to a large extent from the macro. The opportunity of gaining share here will allow us to attenuate the effects of the reduction in the market.
We have been focusing on those opportunities to gain market share, and that is what we are going to be pursuing next year. It is too soon to talk about the bets. I talked to a lot of people yesterday about this. This decision apparently, initially, is affecting more the food sector, the supermarket. My colleagues who are in this segment are saying that the sales in October have already improved.
For us, I think it tends to arrive later. They are larger purchases, they are more planned purchases, and I see a potential for a positive effect in delinquency looking forward. I am optimistic. I think we are working here and hoping that this measure is enforced and we are able to eliminate this huge problem that is gambling addiction, online betting addiction, and hopefully Brazil will not fall into this trap and we are able to confirm this decision.
Thank you, Fred.
Thank you for your question, Guilherme. Next question is from Nicolás from JPMorgan. Nicolás, please, the floor is yours.
Good morning, Fred and Beto and the whole team. Thank you very much for having. My question, I had two questions. The first one is about physical stores. I would like to understand if maybe it would make sense to you to accelerate or to open strategic stores to take advantage of this favorable scenario, in terms of the competitive scenario, the first question. And the second question is just to understand, because you have been talking a lot about Magalog, that it is supporting your retail, and now also through some partners. And what is the idle capacity for Magalu today? Do you think this BU will need investment to strengthen its capacity now that you have a more positive perspective for 2027? I also would like to understand this topic on Magalog. Thank you.
Nicolás. Thank you very much for your questions, Nicolás. I believe that in terms of investments in physical assets, stores, and DCs, those are part of our strategy. And in terms of opening stores, we want to go back to opening new stores. This is our strategic pillar. We believe that we are better as we have more channels. We have prioritized for the past few years the online growth, and for the upcoming years, we want to balance that out, to go back to opening physical stores, especially in the formats where we do not have physical stores, Netshoes, KaBuM!, and Época. And also to open new Magalu stores. For us, this is part of our strategic cycle.
The speed of these openings will depend on interest rates, because the investments in physical assets are capital-intensive, and capital right now in Brazil is scarce. We need to have a safe source of financing, because returns in physical stores do not happen in short term. With Galeria Magalu, we were able to change that because we were able to anticipate its return, and also thanks to the ads. This is usually a more midterm return. We are going to be more conservative on this topic, and we need to have a better visibility of interest and interest rates. Yes, we are already opening new branches, and we will be talking about this as we open these stores. I am avoiding guidance here, of course. We do not want to have problems there.
About DCs, right now, we are operating with the expansion of areas of storages. We had an idle capacity because 1P was coming down, and I believe that for next year, we will have a detailed analysis to see the additional need for storage area. Again, we are going to work with both feet on the ground to avoid increasing our fixed base of leasings and rentals without having all the needed stores. What is happening that we are very happy about is the turnover. The merchandise is coming in and leaving the warehouses faster. I would like to highlight this, because people ask us, the opportunity that we have right now in terms of share gain does not require investments, significant CapEx investments. These are marginal. The installed base already tap into this.
I have been asked that 10 times, and I always answer the same thing. Not even physical assets and also working capital, because of what Beto already said, and he commented. If you ask this 10 times the same thing, and we will give you 10 times the same answer. This is a very special opportunity because it does not require additional investments. We can tap into this opportunity with installed base we already have.
Very clear, Fred. Thank you, and good morning to all of you.
Thank you for your questions, Nicolás. We now end the Q&A session. I would like to turn the floor to Frederico Trajano to his final remarks. Please, Fred, the floor is yours.
I would like to thank you all very much for being here with us in this earnings call, and I wish you all a great month of November.
The conference call of Magalu has ended. The investor relations team is available to take any other questions you might have. We thank you all very much for your participation. Have a nice day.