20-F 1 d526164d20f.htm FORM 20-F Form 20-F
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 20-F

 

 

 

¨ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

x ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED ON DECEMBER 31, 2012

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM                      TO                     

OR

 

¨ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report                     

COMMISSION FILE NUMBER: 001-35575

 

 

Cencosud S.A.

(Exact name of Registrant as specified in its charter)

 

 

N/A

(Translation of Registrant’s name into English)

Republic of Chile

(Jurisdiction of incorporation or organization)

Av. Kennedy 9001, Piso 6

Las Condes, Santiago, Chile

+56 (2) 959-0000

(Address of principal executive offices)

Maria Soledad Fernandez / Natalia Nacif

Av. Kennedy 9001 6th Floor

Email: IR@cencosud.cl / Mariasoledad.fernandez@cencosud.cl

Tel: +56229590545 / +56229590368

(Name, Telephone, E-Mail and/or Facsimile number and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

 

Name of Each Exchange on Which Registered

American Depositary Shares   New York Stock Exchange
Common Shares, no par value   New York Stock Exchange

Securities registered or to be registered pursuant to Section 12(g) of the Act:

None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

None

 

 

The number of outstanding shares of each of the issuer’s classes of capital stock as of December 31, 2012: 2,806,792,161 Common Shares, no par value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act    Yes  ¨    No  x

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934    Yes  ¨    No  x

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  ¨                Accelerated filer  ¨                Non-accelerated filer  x

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP  ¨

  

International Financial Reporting Standards as issued

by the International Accounting Standards Board  x

   Other  ¨

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the Registrant has elected to follow:    Item 17  ¨    Item 18  ¨

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

 

 

 


Table of Contents

TABLE OF CONTENTS

 

                 Page  

Forward-Looking Statements

     i   

Presentation of Financial and Other Information

     ii   

Item 1.

  

 

Identity of Directors, Senior Management and Advisers

     1   

Item 2.

  

 

Offer Statistics and Expected Timetable

     1   

Item 3.

  

 

Key Information

     1   
     A.      

Selected financial data

     1   
     B.      

Capitalization and indebtedness

     13   
     C.      

Reasons for the offer and use of proceeds

     13   
     D.      

Risk factors

     13   

Item 4.

  

 

Information on the Company

     43   
     A.      

History and development of the company

     43   
     B.      

Business overview

     48   
     C.      

Organizational structure

     98   
     D.      

Property, plants and equipment

     100   

Item 4A.

  

 

Unresolved Staff Comments

     100   

Item 5.

  

 

Operating and Financial Review and Prospects

     100   
     A.      

Operating results

     100   
     B.      

Liquidity and capital resources

     123   
     C.      

Research and development, patents and licenses, etc.

     130   
     D.      

Trend information

     130   
     E.      

Off-balance sheet arrangements

     130   
     F.      

Tabular disclosure of contractual obligations

     131   
     G.      

Safe harbor

     131   

Item 6.

  

 

Directors, Senior Management and Employees

     132   
     A.      

Directors and senior management

     132   
     B.      

Compensation

     134   
     C.      

Board practices

     135   
     D.      

Employees

     136   
     E.      

Share ownership

     138   

Item 7.

  

 

Major Shareholders and Related Party Transactions

     138   
     A.      

Major shareholders

     138   
     B.      

Related party transactions

     140   
     C.      

Interests of experts and counsel

     141   

Item 8.

  

 

Financial Information

     141   
     A.      

Consolidated statements and other financial information

     141   
     B.      

Significant changes

     142   

Item 9.

  

 

The Offer and Listing

     142   
     A.      

Offer and listing details

     142   
     B.      

Plan of distribution

     143   
     C.      

Markets

     143   
     D.      

Selling shareholders

     146   
     E.      

Dilution

     146   


Table of Contents
   F.   

Expenses of the issue

     146   

Item 10.

  

Additional Information

     147   
   A.   

Share capital

     147   
   B.   

Memorandum and articles of association

     147   
   C.   

Material contracts

     153   
   D.   

Exchange controls

     153   
   E.   

Taxation

     160   
   F.   

Dividends and paying agents

     166   
   G.   

Statement by experts

     166   
   H.   

Documents on display

     166   
   I.   

Subsidiary information

     166   

Item 11.

  

Quantitative and Qualitative Disclosures About Market Risk

     166   

Item 12.

  

Description of Securities Other than Equity Securities

     167   
   A.   

Debt Securities

     167   
   B.   

Warrants and Rights

     167   
   C.   

Other Securities

     167   
   D.   

American Depositary Shares

     167   

Item 13.

  

Defaults, Dividend Arrearages and Delinquencies

     175   

Item 14.

  

Material Modifications to the Rights of Security Holders and Use of Proceeds

     175   

Item 15.

  

Controls and Procedures

     175   
   A.   

Disclosure Controls and Procedures

     175   
   B.   

Management’s Annual Report on Internal Control Over Financial Reporting

     176   
   C.   

Attestation Report of the Registered Public Accounting Firm

     176   
   D.   

Changes in Internal Control Over Financial Reporting

     176   

Item 16A.

  

Audit Committee Financial Expert

     176   

Item 16B.

  

Code of Ethics

     176   

Item 16C.

  

Principal Accountant Fees and Services

     176   

Item 16D.

  

Exemptions from the Listing Standards for Audit Committees

     177   

Item 16E.

  

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

     177   

Item 16F.

  

Change in Registrant’s Certifying Accountant

     177   

Item 16G.

  

Corporate Governance

     177   

Item 16H.

  

Mine Safety Disclosure

     179   

Item 17.

  

Financial Statements

     180   

Item 18.

  

Financial Statements.

     180   

Item 19.

  

Exhibits

     180   


Table of Contents

FORWARD-LOOKING STATEMENTS

This annual report contains forward-looking statements that are based on our current expectations, assumptions, estimates and projections about us and our industry. These forward-looking statements can be identified by words or phrases such as “anticipate,” “believe,” “continue,” “estimate,” “expect,” “intend,” “is/are likely to,” “may,” “plan,” “should,” “would,” or other similar expressions. The forward-looking statements included in this annual report relate to, among others:

 

   

changes in general economic, business or political or other conditions in Chile, Argentina, Brazil, Peru, Colombia or elsewhere in Latin America or the global markets;

 

   

changes in capital markets in general that may affect policies or attitudes towards investing in Chile, Argentina, Brazil, Peru, Colombia or securities issued by companies in such countries;

 

   

the monetary and interest rate policies of the Central Banks of Chile, Argentina, Brazil, Peru and Colombia; or elsewhere in Latin American or global markets.

 

   

high levels of inflation or deflation;

 

   

unanticipated increases in financing and other costs or our inability to obtain additional debt or equity financing on attractive terms;

 

   

movements in interest and/or foreign exchange rates, and movements in equity prices or other rates or prices;

 

   

changes in, or failure to comply with, applicable regulations, or changes in taxes;

 

   

loss of market share or changes in competition and pricing environments in the industries in which the company operates;

 

   

difficulties in successfully integrating recent and future acquisitions into the company’s operations;

 

   

the Company’s inability to hedge certain risks economically;

 

   

changes in consumer spending and saving habits;

 

   

implementation of new technologies;

 

   

limitations on our ability to open new stores and operate them profitably;

 

   

difficulties in completing proposed store openings, expansions or remodelings;

 

   

difficulties in acquiring and developing land in Chile, Argentina, Brazil, Peru or Colombia, and restrictions on opening new large stores in any such countries; and

 

   

the factors discussed under the section entitled “Risk Factors” in this annual report as well as risks included in the Company’s other filings and submissions with the United States Securities and Exchange Commission.

These forward-looking statements involve various risks and uncertainties. Although we believe that our expectations expressed in these forward-looking statements are reasonable, our expectations may turn out to be incorrect. Our actual results could be materially different from our expectations. In light of the risks and uncertainties described above, the estimates and forward-looking statements discussed in this annual report might not occur, and our future results and our performance may differ materially from those expressed in these forward-looking statements due to, inclusive, but not limited to, the factors mentioned above. Because of these uncertainties, you should not make any investment decision based on these estimates and forward-looking statements.

 

i


Table of Contents

The forward-looking statements made in this annual report relate only to events or information as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date on which the statements are made or to reflect the occurrence of unanticipated events.

PRESENTATION OF FINANCIAL AND OTHER INFORMATION

Certain Defined Terms

In this annual report, unless otherwise specified or if the context so requires:

 

   

References to the terms “Cencosud S.A.,” “we,” “us,” “our” and “our company” refer to the registrant, Cencosud S.A., a corporation organized under the form of a sociedad anónima under the laws of Chile, and its consolidated subsidiaries, unless otherwise indicated.

 

   

References to “$,” “U.S.$,” “U.S. dollars,” “dollars” and “USD” are to U.S. dollars.

 

   

References to “Chilean pesos” or “Ch$” are to Chilean pesos, the official currency of Chile.

 

   

References to “Argentine pesos” or “Ar$” are to Argentine Pesos, the official currency of Argentina.

 

   

References to “Brazilian Real,” “Real,” “Reais” or “R$” are to the Brazilian real, the official currency of Brazil.

 

   

References to “Nuevo Sol,” “Nuevos Soles” or “S/.” are to Peruvian nuevos soles, the official currency of Peru.

 

   

References to “Colombian pesos” or “Col$” are to Colombian pesos, the official currency of Colombia.

 

   

References to “Carrefour” refer to Carrefour Société Anonyme

 

   

References to “Acquired Companies” refer to the companies we acquired on November 30, 2012 from Carrefour in connection with our purchase of Carrefour’s operations in Colombia.

References to “UF” are to Unidades de Fomento. The UF is an inflation-indexed Chilean monetary unit with a value in Chilean pesos that is adjusted daily to reflect changes in the official Consumer Price Index (“CPI”) of the Instituto Nacional de Estadísticas (the Chilean National Institute of Statistics). The UF is adjusted in monthly cycles. Each day in the period beginning on the tenth day of the current month through the ninth day of the succeeding month, the nominal peso value of the UF is indexed up (or down in the event of deflation) in order to reflect a proportionate amount of the change in the Chilean consumer price index during the prior calendar month. As of December 31, 2012, UF1.00 was equivalent to U.S.$47.59 and Ch$22,840.75, in each case based on the observed exchange rates reported by the Central Bank of Chile.

This annual report contains translations of certain Chilean peso amounts into U.S. dollars at specified rates solely for the convenience of the reader. These translations should not be construed as representations that the Chilean peso amounts actually represent such U.S. dollar amounts or could be converted into U.S. dollars at the rates indicated, at any particular rate or at all. Unless otherwise indicated, the exchange rate used in converting Chilean pesos into U.S. dollars for amounts presented is based on the observed exchange rate (dólar observado) reported by the Central Bank of Chile (the “Chilean Central Bank”) for December 31, 2012 , which was Ch$479.96 per U.S.$1.00. The rates reported by the Chilean Central Bank for December 30, 2011 (the latest available date for the month of December 2011 as December 31, 2011 was not a business days in Chile) and December 31st 2010 are based upon the observed exchange rate published by the Chilean Central Bank on the first business day following the respective period. The Federal Reserve Bank of New York does not report a noon buying rate for Chilean pesos.

 

ii


Table of Contents

Financial Statements

The financial information contained in this annual report includes our audited consolidated financial statements as of December 31, 2012 and 2011 and for the years ended December 31, 2012, 2011 and 2010, together with the notes thereto, prepared in accordance with International Financial Reporting Standards (“IFRS”) issued by the International Accounting Standards Board (the “IASB”), which we refer to in this annual report as our “Audited Consolidated Financial Statements.” Our date of adoption of IFRS was January 1, 2010.

Our Audited Consolidated Financial Statements have been audited by PricewaterhouseCoopers Consultores, Auditores y Compañia Limitada, an independent registered public accounting firm, whose report on our Audited Consolidated Financial Statements appears elsewhere in this annual report. We maintain our books and records in Chilean pesos and prepare consolidated financial statements in accordance with IFRS.

Unless otherwise noted, the financial data presented herein as of and for the years ended December 31, 2012, 2011, and 2010 is stated in Chilean pesos, our functional and reporting currency.

Our Audited Consolidated Financial Statements have been prepared on the accrual basis of accounting, except for those items accounted for at fair value (for example, investment properties and certain financial assets, such as options and derivative financial instruments), and include the accounts of the Company and its subsidiaries, including Banco Paris. Our historical consolidated financial statements previously available do not consolidate the operations of Banco Paris. All significant inter-company balances and transactions have been eliminated in consolidation.

The financial statements as of and for the year ended December 31, 2012 presented in this Form 20-F differ from the local financial statements as of and for the year ended December 31, 2012 published in Chile on March 1, 2013, and furnished to the SEC on Form 6K on March 5, 2013, due to the inclusion in this report of a Ch$ 20,000 million lawsuit provision related to the April 24, 2013 ruling from the Chilean Supreme Court on the class action suit filed by the Servicio Nacional del Consumidor (the National Consumer Service) against Cencosud Administradora de Tarjetas S.A. (“CAT”). For further information on this matter, please see “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Legal and Administrative Proceedings” in this report.

Special Note Regarding Non-IFRS Financial Measures

This annual report makes reference to certain non-IFRS measures, namely EBIT, EBITDA and Adjusted EBITDA. These non-IFRS measures are not recognized measures under IFRS, do not have a standardized meaning prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other companies. Rather, these measures are provided as additional information to complement IFRS measures by providing further understanding of the Company’s results of operations from management’s perspective. Accordingly, they should not be considered in isolation nor as a substitute for analysis of our financial information reported under IFRS.

EBIT represents profit attributable to controlling shareholders before net interest expense and income taxes. EBITDA represents EBIT plus depreciation and amortization expense. Adjusted EBITDA represents EBITDA as further adjusted to reflect items set forth in the table below. We have included EBIT, EBITDA and Adjusted EBITDA to provide investors with a supplemental measure of our operating performance.

We believe EBIT, EBITDA and Adjusted EBITDA are an important supplemental measure of operating performance because they eliminate items that have less bearing on our operating performance and thus highlight trends in our core business that may not otherwise be apparent when relying solely on IFRS financial measures. We also believe that securities analysts, investors and other interested parties frequently use EBITDA in the evaluation of issuers, many of which present EBITDA when reporting their results.

Our management also uses EBITDA and Adjusted EBITDA in order to facilitate operating performance comparisons from period to period, prepare annual operating budgets, assess our ability to meet our future debt service, capital expenditure and working capital requirements and assess our ability to pay dividends on our capital stock.

EBIT, EBITDA and Adjusted EBITDA have important limitations as analytical tools. For example, neither EBIT, EBITDA nor Adjusted EBITDA reflect (a) our cash expenditures, or future requirements for capital expenditures or contractual commitments; (b) changes in, or cash requirements for, our working capital needs; (c) the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debt; and (d) tax payments or distributions to our parent to make payments with respect to taxes attributable to us that represent a reduction in cash available to us. Although we consider the items excluded in the calculation of non-IFRS measures to be less relevant to evaluate our performance, some of these items may continue to take place and accordingly may reduce the cash available to us.

 

iii


Table of Contents

We believe that the presentation of the non-IFRS measures described above is appropriate. However, these non-IFRS measures have important limitations as analytical tools, and you should not consider them in isolation, or as substitutes for analysis of our results as reported under IFRS. Because of these limitations, we primarily rely on our results as reported in accordance with IFRS and use EBIT, EBITDA and Adjusted EBITDA only supplementally. In addition, because other companies may calculate EBITDA and Adjusted EBITDA differently than we do, EBITDA may not be, and Adjusted EBITDA as presented in this report is not, comparable to similarly titled measures reported by other companies.

 

iv


Table of Contents

A reconciliation of our profit (loss) attributable to controlling shareholders, the most directly comparable IFRS financial measure, to EBITDA and to Adjusted EBITDA is set forth below:

 

     Year ended December 31,  
     2012     2012     2011     2010  
     (in millions of U.S.$)     (in millions of Ch$)  

Profit attributable to controlling shareholders

     521        249,959        274,333        296,261   

Profit attributable to non-controlling shareholders

     6        2,850        10,559        10,220   

Net Income

     527        252,809        284,892        306,481   

Financial expense (net)

     (423     (202,912     (133,152     (69,807

Income tax charge

     (227     (109,190     (119,556     (76,830

EBIT

     1,177        564,911        537,599        453,119   

Depreciation and amortization

     (295     (141,450     (120,174     (102,310

EBITDA

     1,472        706,361        657,774        555,429   

Exchange differences

     (6     (2,680     (9,876     (2,053

Increase on revaluation of investment properties(1)

     206        98,633        72,798        37,573   

Losses from indexation

     (54     (25,915     (31,289     (15,657

Adjusted EBITDA

     1,326        636,323        626,141        535,565   

As a % of revenues

        

Profit (loss)

     2.76     2.76     3.7     4.9

Financial income (expenses)

     (2.2 %)      (2.2 %)      (1.8 %)      (1.1 %) 

Income tax charge

     (1.2 %)      (1.2 %)      (1.6 %)      (1.2 %) 

EBIT

     6.2     6.2     7.1     7.3

Depreciation and amortization

     (1.5 %)      (1.5 %)      (1.6 %)      (1.6 %) 

EBITDA

     7.7     7.7     8.6     8.9

Exchange differences

     0.0     0.0     (0.1 %)      0.0

Increase on revaluation of investment properties(1)

     1.1     1.1     1.0     0.6

Losses from indexation

     (0.3 %)      (0.3 %)      (0.4 %)      (0.3 %) 

Adjusted EBITDA

     7.0     7.0     8.2     8.6

 

(1) Represents a fair value adjustment of investment properties, through the application of discounted cash flows.

 

v


Table of Contents

A reconciliation of our profit (loss) attributable to controlling shareholders, the most directly comparable IFRS financial measure, to EBITDA and to Adjusted EBITDA per business segment is included below:

 

Information by segment

   Supermarkets     Shopping
centers
    Home
improvement
    Department
stores
    Financial
services
    Other     Consolidated
total
 
     Year ended December 31, 2012 (in millions of Ch$)  

Profit (loss) attributable to controlling shareholders

     310,320        215,927        73,646        20,231        55,808        (425,973     249,959   

Profit attributable to non-controlling shareholders

     —          —          —          —          —          2,850        2,850   

Net Income

     310,320        215,927        73,646        20,231        55,808        (423,122     252,809   

Financial Expense (net)

     —          —          —          —          —          (202,912     (202,912

Income tax charge

     —          —          —          —          —          (109,190     (109,190

EBIT

     310,320        215,927        73,646        20,231        55,808        (111,020     564,911   

Depreciation and amortization

     (89,454     (2,606     (17,740     (22,896     (3,464     (5,290     (141,450

EBITDA

     399,774        218,533        91,386        43,127        59,272        (105,731     706,361   

Exchange differences

     —          —          —          —          —          (2,680     (2,680

Increase on revaluation of investment properties(1)

     —          98,633        —          —          —          —          98,633   

Losses from indexation

     —          —          —          —          —          (25,915     (25,915

Adjusted EBITDA

     399,774        119,900        91,386        43,127        59,272        (77,136     636,323   

As a % of revenues

     5.9     72.5     8.6     4.9     21.0     (549.8 %)      7.0

 

(1) Represents a fair value adjustment of investment properties, through the application of discounted cash flows.

 

Information by segment

   Supermarkets     Shopping
centers
    Home
improvement
    Department
stores
    Financial
services
    Other     Consolidated
total
 
     Year ended December 31, 2011 (in millions of Ch$)  

Profit (loss) attributable to controlling shareholders

     299,605        170,391        67,291        29,698        91,418        (384,070     274,333   

Profit attributable to non-controlling shareholders

     —          —          —          —          —          10,559        10,559   

Net Income

     299,605        170,391        67,291        29,698        91,418        (373,511     284,892   

Financial Expense (net)

     —          —          —          —          —          (133,152     (133,152

Income tax charge

     —          —          —          —          —          (119,556     (119,556

EBIT

     299,605        170,391        67,291        29,698        91,418        (120,804     537,599   

Depreciation and amortization

     (76,559     (2,344     (16,501     (17,292     (2,937     (4,541     (120,174

EBITDA

     376,164        172,735        83,792        46,990        94,355        (116,263     657,774   

Exchange differences

     —          —          —          —          —          (9,876     (9,876

Increase on revaluation of investment properties(1)

     —          72,798        —          —          —          —          72,798   

Losses from indexation

     —          —          —          —          —          (31,289     (31,289

Adjusted EBITDA

     376,164        99,937        83,792        46,990        94,355        (75,097     626,141   

As a % of revenues

     6.8     77.0     8.8     6.8     35.2     (651.9 %)      8.2

 

(1) Represents a fair value adjustment of investment properties, through the application of discounted cash flows.

 

Information by segment

   Supermarkets     Shopping
centers
    Home
improvement
    Department
stores
    Financial
services
    Other     Consolidated
total
 
     Year ended December 31, 2010 (in millions of Ch$)  

Profit (loss) attributable to controlling shareholders

     249,364        122,349        53,352        24,584        74,039        (227,427     296,261   

Profit attributable to non-controlling shareholders

     —          —          —          —          —          10,220        10,220   

Net Income

     249,364        122,349        53,352        24,584        74,039        (217,207     306,481   

Financial Expense (net)

     —          —          —          —          —          (69,807     (69,807

Income tax charge

     —          —          —          —          —          (76,830     (76,830

EBIT

     249,364        122,349        53,352        24,584        74,039        (70,570     453,119   

Depreciation and amortization

     (58,347     (4,300     (16,435     (16,211     (3,231     (3,786     (102,310

 

vi


Table of Contents
Information by segment    Supermarkets    

Shopping

centers

    Home
improvement
    Department
stores
    Financial
services
    Other     Consolidated
total
 

EBITDA

     307,711        126,649        69,787        40,795        77,271        (66,784     555,429   

Exchange differences

     —          —          —          —          —          (2,053     (2,053

Increase on revaluation of investment properties(1)

     —          37,573        —          —          —          —          37,573   

Losses from indexation

     —          —          —          —          —          (15,657     (15,657

Adjusted EBITDA

     307,711        89,076        69,787        40,795        77,271        (49,075     535,565   

As a % of revenues

     6.9     76.1     8.5     6.6     35.0     (1,342.0 %)      8.6

 

(1) Represents a fair value adjustment of investment properties, through the application of discounted cash flows.

 

vii


Table of Contents

Rounding

Certain figures included in this annual report and in our financial statements have been rounded for ease of presentation. Percentage figures included in this annual report have not in all cases been calculated on the basis of such rounded figures but on the basis of such amounts prior to rounding. For this reason, percentage amounts in this annual report may vary from those obtained by performing the same calculations using the figures in our financial statements. Certain other amounts that appear in this annual report may not sum due to rounding.

Operating Data

Calculations of revenues from ordinary activities for our shopping centers presented in this annual report exclude inter-company lease payments to our shopping centers from stores owned by us. Unless otherwise noted, calculations of gross leasable area for our shopping centers do not include the square meters occupied by our stores.

As used herein, the term “same-store sales” reflects the sales of our stores operating throughout the same months of both financial periods being compared. If a store did not operate for a full month of either of the financial periods being compared, we exclude its sales for such month from both financial periods. For example, if a new store was opened on July 1, 2010 and operated throughout the last six months of 2010, (i) our “same-store sales” data would include the sales of that store for the last six months of 2010 and the last six months of 2011 and (ii) we would account for the sales of the new store during the first six months of 2011 as sales from a newly opened store. Our calculations of same-store sales data may differ from same-store sales calculations of other retailers. Unless otherwise noted, we have presented calculations of same-store sales in nominal local currency.

Industry and Market Data

None of the Argentine, Brazilian, Chilean, Peruvian or Colombian governments publish definitive data regarding the supermarket, home improvement store, department store, shopping center or financial services industries.

General

This annual report contains data related to the economic conditions in the markets in which we operate. Unless otherwise indicated, information in this annual report concerning economic conditions is based on publicly available information from third-party sources which we believe to be reasonable. The economic conditions in the markets in which we operate may deteriorate, and those economies may not grow at the rates projected by market data, or at all. The deterioration of the economic conditions in the markets in which we operate may have a material adverse effect on our business, results of operations, financial condition and the market price of our shares of common stock and American Depositary Shares (“ADSs”).

Chile

Market data and other statistical information (other than with respect to our financial results and performance) used throughout this annual report are based on independent industry publications, government publications, reports by market research firms or other published independent sources, such as the Instituto National de Estadísticas (the Chilean National Institute of Statistics, or “INE”), a governmental agency that publishes information based on its independent data, the Asociación Gremial de Supermercados de Chile (the Chilean Supermarkets Association, or “ASACH”), which publishes certain data with respect to supermarkets in Chile, and A.C. Nielsen Chile S.A., which publishes data with respect to the supermarket industry in Chile. Certain other shopping center statistics for Chile are published by the International Council for Shopping Centers.

Argentina

Market data and other statistical information (other than with respect to our financial results and performance) used throughout this annual report are based on independent industry publications, government publications, reports by market research firms or other published independent sources, such as the Instituto Nacional de Estadísticas y Censos (the Argentine National Institute of Statistics and Census, or “INDEC”), a governmental agency that publishes information based on its independent data, and A.C. Nielsen Argentina, which publishes market share data

 

viii


Table of Contents

with respect to the supermarket industry in Argentina. In addition, the Camara Argentina de Shopping Centers (the Argentine Chamber of Shopping Centers, or “CASC”) currently publishes market share data with respect to shopping centers in Argentina. Certain other shopping center statistics for Argentina are published by the International Council for Shopping Centers.

Brazil

We have included certain information with respect to Brazil based on reports prepared by established public sources, such as the Central Bank of Brazil, the Instituto Brasileiro de Geografia e Estatística (the Brazilian Institute of Geography and Statistics, or “IBGE”), the Instituto de Pesquisa Econômica Aplicada (the Institute of Applied Economic Research, or “IPEA”), the Associação Brasileira de Supermercados (the Brazilian Association of Supermarkets, or “ABRAS”), and the Fundação Getúlio Vargas (the Getúlio Vargas Foundation). Unless otherwise indicated, all macroeconomic information relating to Brazil was obtained from the Central Bank of Brazil, IBGE and the Getúlio Vargas Foundation.

Peru

Macroeconomic data from Peru included in this annual report is derived from public entities, such as the Central Bank of Peru, the Instituto Nacional de Estadísitcas e Informática (the National Institute of Statistics and Computing, or “INEI”), Corporación de Compañías de Research (Research Companies Corporation, or “CCR”) or by Apoyo Consulting. Some data are also based on our estimates, which are derived from our review of internal surveys, as well as independent sources. Although we believe these sources are reliable, we have not independently verified the information provided by third parties. In addition, these sources may use different definitions of the relevant markets than those we present. Data regarding our industry are intended to provide general guidance but are inherently imprecise.

Colombia

Market and certain other data relating to Colombia used in this annual report was obtained from our own research, surveys or studies conducted by third parties and industry or general publications and other publicly available sources. Industry and general publications and surveys generally state that they have obtained information from sources believed to be reliable, but do not guarantee the accuracy and completeness of such information. Certain data is based on published information made available by the Colombian government and its agencies, such as the Departamento Administrativo Nacional de Estadística (the National Administrative Department of Statistics, or “DANE”) and the Banco de la Republica (“Colombian Central Bank”). Although we believe these sources to be reliable, we do not guarantee the accuracy of the information.

Information Regarding the Acquired Companies

This annual report uses publicly available information regarding the Acquired Companies (as defined below), such as its number of stores and lines of business. The operating information of the Acquired Companies should not be relied upon for any purpose related to an investment in the common stock or ADSs. In addition, we describe in this annual report the main terms of the acquisition of the Acquired Companies. Investors should also bear in mind, before making an investment decision, the risk factors related to the acquisition of the Acquired Companies, such as the likelihood of undisclosed liabilities, the fact that the audited and unaudited financial information of the Acquired Companies was not subject to our review and the risk that we may incur a substantial increase in our indebtedness, which could cause us to breach certain financial covenants. For further information on the risks involved in the acquisition of the Acquired Companies, see “Item 3. Key Information—D. Risk Factors.”

Other Information

We conduct our supermarket operations primarily through the following trade names: Bretas, Jumbo, Santa Isabel, Disco, Vea, Wong, Metro, GBarbosa, Perini and Prezunic.

According to the ASACH, “hypermarkets” are defined as retail stores with more than 10,000 square meters of selling space, offering more than 25,000 products and having more than 40 cashiers. ASACH defines “supermarkets” as retail stores having up to 6,000 square meters of selling space, between 400 and 10,000 products

 

ix


Table of Contents

and ten to 25 cashiers. Although some of our Jumbo hypermarkets have less than 10,000 square meters, we refer to all of our Jumbo stores as hypermarkets. We consolidate the results of our supermarkets and hypermarkets under our “supermarkets” segment. Therefore, unless otherwise noted, our discussions of “supermarkets” in this annual report include our Santa Isabel supermarkets and Jumbo hypermarkets and supermarkets in Chile; Disco and Super Vea supermarkets and Jumbo hypermarkets and supermarkets in Argentina; Bretas, GBarbosa, Mercantil Rodrigues, Perini and Prezunic supermarkets in Brazil; and Wong and Metro supermarkets and hypermarkets in Peru. In Colombia most our supermarkets are still operating under the Carrefour brand while we expect to complete their migration to Jumbo and Prezunic during 2013 in accordance to our agreement with Carrefour.

In addition, we conduct our home improvement operations through the Easy and Blaisten trade names and our department store operations through the Paris and Johnson trade names. By “home improvement” stores we mean retail establishments that sell a wide assortment of building materials and home improvement and lawn and garden products and provide certain related services. Our “home improvement stores” refer to our home improvement stores operated under the Easy and Blaisten brand names, including our Easy stores in Chile, Argentina and Colombia.

References to “stores” refer collectively to our hypermarkets, supermarkets, department stores and home improvement stores.

One meter equals approximately 3.3 feet or 1.1 yards and one square meter equals approximately 10.8 square feet.

We own or have rights to use the trademarks, service marks and trade names that we use in conjunction with the operation of our business. Some of the more important trademarks that we own or have rights to use that appear in this annual report include: Jumbo®, Jumbo Más®, Easy®, Más Easy®, Santa Isabel®, Disco®, Vea®, Super Vea®, Blaisten®, Johnson®, Paris®, Más Paris®, Paris Corredores de Seguros®, Banco Paris®, Circulo Más®, Wong®, Metro®, GBarbosa®, Perini®, Bretas®, Nectar®, Tarjeta Cencosud®, Banco Cencosud®, Costaner Center®, Vive Chevere® and Prezunic®, each of which may be registered or trademarked in any of Argentina, Brazil, Chile, Colombia, Peru or other jurisdictions. Solely for convenience, we may refer to our trademarks, service marks and trade names in this annual report without the ™ and ® symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent permitted under applicable law, our rights to our trademarks, service marks and trade names. Each trademark, trade name or service mark of any other company appearing in this annual report is, to our knowledge, owned by such other company.

 

x


Table of Contents

PART I

 

Item 1. Identity of Directors, Senior Management and Advisers

Not applicable.

 

Item 2. Offer Statistics and Expected Timetable

Not applicable.

 

Item 3. Key Information

 

A. SELECTED FINANCIAL DATA

Selected Financial and Operating Data

The following tables set forth our summary consolidated financial information under IFRS. You should read the information contained in these tables in conjunction with “Item 5. Operating and Financial Review and Prospects,” “Item 8. Financial Information,” “Item 18. Financial Statements.” and the consolidated financial statements and the accompanying notes included elsewhere in this annual report.

The financial information as of December 31, 2012 and 2011 and for the years ended December 31, 2012, 2011 and 2010 has been derived from our Audited Consolidated Financial Statements included elsewhere in this annual report, which have been audited by PricewaterhouseCoopers Consultores, Auditores y Compañia Limitada, an independent registered public accounting firm. We maintain our books and records in Chilean pesos and prepare consolidated financial statements in accordance with IFRS. Our date of adoption of IFRS was January 1, 2010. The following financial and operating information should be read in conjunction with, and is qualified in its entirety by reference to, our Audited Consolidated Financial Statements included elsewhere in this annual report.

Unless otherwise noted, U.S. dollar amounts have been translated from Chilean pesos based on the dólar observado, or observed exchange rate of Ch$479.96 per U.S.$1.00 as of December 31, 2012, as reported by the Chilean Central Bank. We make no representation that the Chilean peso or the U.S. dollar amounts referred to herein actually represent, could have been or could be converted into U.S. dollars or Chilean pesos, as the case may be, at the rates indicated, at any particular rate or at all.

In our opinion, the summary consolidated financial data presented in the tables below includes all adjustments necessary to present fairly in all material respects our financial condition and results of operations at the dates and the periods presented. The results of operations for the years ended December 31, 2012, 2011 and 2010 are not necessarily indicative of future performance.

 

     Year ended December 31,  

Income statement data:

   2012      2012      2011      2010  
     (in millions of
U.S.$)
     (in millions of Ch$)  

Revenues from ordinary activities:

           

Supermarkets

     14,039.0         6,738,171         5,556,271         4,452,759   

Home improvement stores

     2,214.9         1,063,086         948,641         819,838   

Department stores

     1,846.1         886,075         690,772         622,719   

Shopping Centers

     344.7         165,462         129,727         116,991   

Financial Services

     588.1         282,254         267,874         221,010   

Other(1)

     29.2         14,030         11,521         3,657   

Total revenues from ordinary activities

     19,062.2         9,149,077         7,604,806         6,236,974   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

1


Table of Contents
     Year ended December 31,  
Income statement data:    2012     2012     2011     2010  
     (in millions of
U.S.$)
    (in millions of Ch$)  

Cost of sales:

        

Supermarkets

     (10,543.4     (5,060,408     (4,177,664     (3,355,796

Home improvement stores

     (1,482.4     (711,500     (647,337     (561,006

Department stores

     (1,343.2     (644,668     (499,413     (446,769

Shopping Centers

     (49.5     (23,772     (19,449     (17,858

Financial Services

     (218.6     (104,901     (85,632     (70,458

Other(1)

     (5.4     (2,583     (5,421     (5,343

Total cost of sales

     (13,642.5     (6,547,832     (5,434,917     (4,457,229

Gross margin:

        

Supermarkets

     3, 495.6        1,677,762        1,378,607        1,096,963   

Home improvement stores

     732.5        351,586        301,303        258,832   

Department stores

     503.0        241,407        191,359        175,950   

Shopping Centers

     295.2        141,691        110,278        99,133   

Financial Services

     369.5        177,353        182,242        150,552   

Other(1)

     23.8        11,447        6,099        (1,686

Total gross margin

     5, 419.7        2,601,245        2,169,890        1,779,745   

Administrative expenses, distribution costs and other expenses

     (4,420.8     (2,121,821     (1,669,374     (1,371,074

Other revenues by function

     223.2        107,110        85,128        43,871   

Participation in earnings of associates

     11.8        5,640        5,779        7,514   

Financial income

     16.9        8,110        10,984        16,922   

Financial expenses

     (439.7     (211,022     (144,136     (86,730

Other earnings

     2.8        1,332        (12,659     10,772   

Exchange differences

     (5.6     (2,680     (9,876     (2,053

Losses from indexation

     (54.0     (25,915     (31,289     (15,657

Income (loss) before taxes

     754.2        361,999        404,448        383,311   

Income tax charge

     (227.5     (109,190     (119,556     (76,830

Net income

     526.7        252,809        284,892        306,481   

Profit attributable to non-controlling shareholders

     5.9        2,851        10,559        10,220   

Profit attributable to controlling shareholders

     520.8        249,959        274,333        296,261   

Net earnings attributable to shareholders per share:

        

Basic(2)

     0.22        107.39        121.2        130.9   

Diluted(2)

     0.22        106.36        120.0        129.6   

Capital Stock

        
     1,551,811,762        1,551,811,762        927,804,431        927,804,431   

Number of Shares

        

Total number of Shares

     2,507,103,215        2,507,103,215        2,264,103,215        2,264,103,215   

Dividends per share:

        

Basic(2)

     0.0478        22.88        34.66        24.26   

Diluted(2)

     0.0472        22.66        34.32        24.02   

 

(1) Includes the results of our Aventura entertainment centers, our loyalty programs and corporate back-office operations. See “Item 4. Information on the Company—B. Business Overview—Our Company.”
(2) In U.S. dollars U.S. dollars and Chilean pesos.

In November 2012, we completed the acquisition of Carrefour’s supermarket operations in Colombia See “Item 4. Information on the Company—A. History and Development of the Company—History.”

 

     As of December 31,  

Balance sheet data:

   2012      2012      2011      2010  
     (in millions
of U.S.$)
     (in millions of Ch$)  

Total current assets

     4864.1         2,334,567         2,085,636         1,582,309   

Property, plant, equipment and investment property net

     9,269.9         4,449,182         3,538,672         2,913,644   

Other assets

     6,021.9         2,890,251         22,019,780         1,839,516   

Total assets

     20,155.8         9,674,000         7,644,088         6,335,469   

Total current liabilities

     6,936.1         3,329,041         2,331,280         1,919,094   

 

2


Table of Contents
     As of December 31,  
Balance sheet data:    2012      2012      2011      2010  

Total non-current liabilities

     6,139.6         2,946,747         2,362,201         1,726,781   

Total liabilities

     13,075.6         6,275,788         4,693,482         3,645,876   

Non-controlling interest

     1.4         678         87,750         74,886   

Net equity attributable to controlling shareholders

     7,078.8         3,397,534         2,862,856         2,614,707   

Total net equity and liabilities

     20,155.8         9,674,000         7,644,088         6,335,469   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Year ended December 31,  

Other financial data:

   2012     2012     2011     2010  
     (in millions of
U.S.$)
    (in millions of Ch$)(1)  

Cash Flow Data

        

Net cash provided by (used in):

        

Operating activities

     1,497.4        718,715        567,739        407,174   

Investing activities

     (4,409.2     (2,116,249     (623,753     (413,676

Financing activities

     3,101.9        1,488,759        89,607        5,086   

Other Financial Information

        

Capital expenditures

     (1,218.5     (575,228     (616,336     (349,793

Depreciation and amortization

     (294.7     (141,450     (120,174     (102,310

Adjusted EBITDA(2)

     1,325.8        636,323        626,141        535,565   

Financial Ratios

        

Gross margin(3)

     28.4     28.4     28.5     28.5

Net margin(4)

     2.8     2.8     3.7     4.9

Current ratio(5)

     0.70x        0.70x        0.90x        0.82x   

 

(1) Except financial ratios.
(2) See “Presentation of Financial and Other Information” for the definition of Adjusted EBITDA and the reconciliation of Adjusted EBITDA to IFRS measures.
(3) Consolidated gross margin divided by consolidated revenues from ordinary activities.
(4) Consolidated net income divided by consolidated revenues from ordinary activities.
(5) Consolidated current assets divided by consolidated current liabilities.

 

     Year ended December 31,  

Comprehensive income:

   2012     2012     2011      2010  
     (in millions of
U.S.$)
    (in millions of Ch$)  

Comprehensive income attributable to controlling shareholders

     70.8        34,002        357,049         201,686   

Comprehensive (loss) income attributable to non-controlling shareholders

     (11.2     (5,354     12,865         253   

Total comprehensive income

     56.7        28,648        369,913         201,939   
  

 

 

   

 

 

   

 

 

    

 

 

 

 

3


Table of Contents
     Year ended December 31,  

Operating data:

   2012      2011      2010  
            (unaudited)         

Number of Stores

        

Supermarkets:

        

Chile

     214         189         163   

Argentina

     288         269         256   

Brazil

     205         152         130   

Peru

     86         74         64   

Colombia

     100         

Supermarkets subtotal

     893         684         613   

Home Improvement Stores:

  

Chile

     31         29         29   

Argentina

     47         48         49   

Colombia

     4         4         4   

Home improvement stores subtotal

     82         81         82   

Department Stores:

        

Chile

     78         35         34   

Department stores subtotal

     78         35         34   

Shopping Centers:

        

Chile

     11         9         9   

Argentina

     15         14         14   

Peru

     3         2         2   

Shopping centers subtotal

     29         25         25   

Total

     1,082         825         754   
Total Selling Space(1)    (in square meters)  

Supermarkets:

        

Chile

     524,677         463,834         406,555   

Argentina

     522,416         502,682         455,808   

Brazil

     505,898         391,485         332,626   

Peru

     258,762         233,331         209,642   

Colombia

     454,980         

Supermarkets subtotal

     2,266,733         1,591,332         1,404,631   

 

4


Table of Contents
     Year ended December 31,  

Operating data:

   2012      2011      2010  
       (unaudited)         

Home Improvement Stores:

        

Chile

     299,806         276,325         273,625   

Argentina

     388, 878         391,485         392,645   

Colombia

     34,309         35,360         34,309   

Home improvement stores subtotal

     722,993         703,170         700,579   

Department Stores:

        

Chile

     377,190         272,388         234,489   

Department stores subtotal

     377,190         272,388         234,489   

Shopping Centers:(2)

        

Chile

     430,621         282,693         273,983   

Argentina

     236,414         227,369         214,002   

Peru

     50,348         54,750         54,750   

Shopping centers subtotal

     717,383         564,839         542,735   

Total

     4,102,283         3,131,729         2,882,434   
Average Selling Space per Store(3)    (in square meters)  

Supermarkets:

        

Chile

     2,452         22,454         2,494   

Argentina

     1,814         1,869         1,781   

Brazil

     2,556         2,576         2,559   

Peru

     3,009         3,153         3,276   

Colombia

     4,505         

Supermarkets subtotal

     2,307         2,327         2,291   

Home Improvement Stores:

        

Chile

     9,671         9,528         9,435   

Argentina

     8,274         8,156         7,435   

Colombia

     9,265         8,840         8,577   

Home improvement stores subtotal

     8,851         8,681         8,198   

Department Stores:

        

Chile

     4,836         7,783         6,897   

Department stores subtotal

     4,836         7,783         6,897   

Shopping Centers:

        

Chile

     39,147         31,410         30,443   

Argentina

     15,761         16,243         15,286   

Peru

     16,783         27,375         27,375   

Shopping centers subtotal

     24,737         22,594         21,709   
Average Sales per Store(4)    (in millions of Ch$)  

Supermarkets:

        

Chile

     9,617         9,662         10,371   

Argentina

     6,083         5,776         5,352   

Brazil

     10,220         10,211         6,484   

Peru

     8,333         8,439         8,744   

Colombia

     1,154         

Supermarkets subtotal

     7,537         8,123         7,276   

 

5


Table of Contents
     Year ended December 31,  

Operating data:

   2012     2011     2010  
           (unaudited)        
     (in millions of Ch$)  

Home Improvement Stores:

      

Chile

     12,915        12,672        11,577   

Argentina

     13,191        11,287        9,205   

Colombia

     10,682        9,845        8,272   

Home improvement stores subtotal

     12,964        11,712        9,998   

Department Stores:

      

Chile

     11,360        19,736        18,315   

Department stores subtotal

     11,360        19,736        18,315   

Shopping Centers:

      

Chile

     8,463        7,167        6,095   

Argentina

     4,365        4,262        3,810   

Peru

     2,301        2,783        4,401   

Shopping centers subtotal

     5,706        5,189        4,680   
Increase (Decrease) in Same-Store Sales(5)    (%)  

Supermarkets:

      

Chile

     4.8     4.8     5.9

Argentina

     18.5     22.5     25.2

Brazil

     0.5     1.4     7.1

Peru

     4.2     6.5     (2.3 %) 

Home Improvement Stores:

      

Chile

     6.3     4.9     23.7

Argentina

     26.6     31.1     27.8

Colombia

     4.1     11.8     (3.6 %) 

Department Stores:

      

Chile

     5.3     5.2     19.7
Sales per Square Meter(6)    (in millions of Ch$)  

Supermarkets:

      

Chile

     3.92        3.94        4.13   

Argentina

     3.35        3.09        3.01   

Brazil

     4.00        4.08        2.53   

Peru

     2.77        2.68        2.67   

Colombia

     0.26       

Supermarkets subtotal

     2.97        3.52        3.17   

Home Improvement Stores:

      

Chile

     1.34        1.33        1.23   

Argentina

     1.34        1.38        1.24   

Colombia

     1.59        1.11        0.96   

Home improvement stores subtotal

     1.25        1.35        1.22   

Department Stores:

      

Chile

     2.35        2.54        2.66   

Department stores subtotal

     2.35        2.54        2.66   

Shopping Centers:

      

Chile

     0.22        0.23        0.20   

Argentina

     0.28        0.26        0.25   

Peru

     0.14        0.10        0.16   

Shopping centers subtotal

     0.23        0.23        0.22   

Total number of store employees(7)

     157,967        131,505        126,485   

 

6


Table of Contents
(1) In square meters at period end.
(2) Total leasable space for shopping centers does not include selling space occupied by our Jumbo, Paris and Easy stores in our shopping centers.
(3) Total square meters of selling space or leasable space, as applicable, at period end divided by the total number of stores or shopping centers, as applicable, at period end.
(4) Sales for the period divided by the number of stores or shopping centers, as applicable, at the end of the period.
(5) Reflects the sales of our stores operating throughout the same months of both financial periods being compared. If a store did not operate for a full month of either of the financial periods being compared, we exclude its sales for such month from both financial periods. For example, if a new store was opened on July 1, 2010 and operated throughout the last six months of 2010, (i) “same-store sales” would include the sales of that store for the last six months of 2010 and the last six months of 2011 and (ii) we would consider the sales of the new store during the first six months of 2011 as sales from a newly opened store. Calculated in local currency.
(6) Sales for the period divided by the square meters of selling space or leasable space, as applicable, at the end of each month during the period.
(7) Number of full-time employee equivalents at period end.
* Data for sales in Colombia only reflect the operational result for the month of December 2012 as the former operations of Carrefour in the country were consolidated onto Cencosud’s financial statements as of November 30, 2012.

 

7


Table of Contents

Exchange Rates

Chile

Chile has two currency markets, the Mercado Cambiario Formal (the “Formal Exchange Market”) and the Mercado Cambiario Informal (the “Informal Exchange Market”). The Formal Exchange Market is comprised of banks and other entities authorized by the Chilean Central Bank. The Informal Exchange Market is comprised of entities that are not expressly authorized to operate in the Formal Exchange Market, such as certain foreign exchange houses and travel agencies, among others. The Chilean Central Bank is empowered to require that certain purchases and sales of foreign currencies be carried out on the Formal Exchange Market. See also “Item 10. Additional Information—D. Exchange Controls—Foreign Exchange Controls—Chile.”

Both the Formal and Informal Exchange Markets are driven by free market forces. Current regulations require that the Chilean Central Bank be informed of certain transactions and that they be effected through the Formal Exchange Market.

The U.S. dollar observed exchange rate (dólar observado), which is reported by the Chilean Central Bank and published daily in the Official Gazette (Diario Oficial), is the weighted average exchange rate of the previous business day’s transactions in the Formal Exchange Market. The Chilean Central Bank has the power to intervene by buying or selling foreign currency on the Formal Exchange Market to attempt to maintain the observed exchange rate within a desired range. During the past few years the Chilean Central Bank has attempted to keep the observed exchange rate within a certain range only under special circumstances. Although the Chilean Central Bank is not required to purchase or sell dollars at any specific exchange rate, it generally uses spot rates for its transactions. Other banks generally carry out authorized transactions at spot rates as well.

The Informal Exchange Market reflects transactions carried out at an informal exchange rate (the “informal exchange rate”). There are no limits imposed on the extent to which the rate of exchange in the Informal Exchange Market can fluctuate above or below the observed exchange rate. In recent years, the variation between the observed exchange rate and the informal exchange rate has not been significant.

The following table sets forth the annual low, high, average and period end observed exchange rate for U.S. dollars for the periods presented, as reported by the Chilean Central Bank. The Federal Reserve Bank of New York does not report a noon buying rate for Chilean pesos.

 

     Daily observed exchange rate Ch$ per U.S.$  
     High(1)      Low(1)      Average(2)      Period end(3)  

Year ended December 31,

           

2008

     676.75         431.22         522.25         636.45   

2009

     643.87         491.09         559.15         507.10   

2010

     549.17         468.01         510.20         468.01   

2011

     533.74         455.91         483.57         519.20   

2012

     519.60         469.65         486.58         479.96   

Month end

           

October 31, 2012

     481.980         471.540         475.673         480.590   

November 30, 2012

     484.480         476.200         480.561         480.390   

December 31, 2012

     481.280         470.670         473.629         479.960   

January 31, 2013

     475.470         470.670         472.281         471.440   

February 28, 2013

     473.600         470.670         472.421         472.960   

March 31, 2013

     474.820         471.100         472.438         472.030   

April 30, 2013

     477.740         466.500         472.105         471.310   

May 2013 (through May 6, 2013)

     472.440         469.730         471.085         469.730   

Source: Chilean Central Bank.

(1) Exchange rates are the actual low and high, on a daily basis for each period.
(2) The yearly average rate is calculated as the average of the exchange rates on the last day of each month during the period.
(3) Each year period ends on December 31, and the respective period-end exchange rate is published by the Chilean Central Bank on the first business day of the following year. Each month period ends on the last calendar day of such month, and the respective period end exchange rate is published by the Chilean Central Bank on the first business day of the following month.

 

8


Table of Contents

Argentina

From April 1, 1991 until the end of 2001, the Convertibility Law No. 23,928 and Regulatory Decree No. 529/91 (together, the “Convertibility Law”) established a fixed exchange rate under which the Central Bank of Argentina was obliged to sell U.S. dollars at a fixed rate of one Argentine peso per U.S. dollar. On January 6, 2002, the Argentine Congress enacted the Public Emergency Law, which suspended certain provisions of the Convertibility Law, including the fixed exchange rate of Ar$1.00 to U.S.$1.00, and granted the executive branch of the Argentine government the power to set the exchange rate between the Argentine peso and foreign currencies and to issue regulations related to the foreign exchange market. Following a brief period during which the Argentine government established a temporary dual exchange rate system, pursuant to the Public Emergency Law, the Argentine peso has been allowed to float freely against other currencies since February 2002. The Argentine government has intervened occasionally to control unstable fluctuations in foreign exchange rates. See also “Item 10. Additional Information—D. Exchange Controls—Foreign Exchange Controls—Argentina.”

The following table sets forth the annual high, low, average and period-end exchange rates for the periods indicated, expressed in Argentine pesos per U.S. dollar and not adjusted for inflation. The Federal Reserve Bank of New York does not report a noon buying rate for Argentine pesos.

 

     Daily observed exchange rate Ar$ per U.S.$  
     High      Low      Average(1)      Period end  

Year ended December 31,

           

2008

     3.468         3.014         3.163         3.453   

2009

     3.854         3.449         3.731         3.800   

2010

     3.988         3.794         3.913         3.976   

2011

     4.304         3.972         4.131         4.304   

2012

     4.917         4.304         4.552         4.917   

Month end

           

October 31, 2012

     4.766         4.699         4.730         4.766   

November 30, 2012

     4.834         4.770         4.797         4.834   

December 31, 2012

     4.917         4.840         4.880         4.917   

January 31, 2013

     4.977         4.923         4.949         4.977   

February 28, 2013

     5.045         4.983         5.011         5.045   

March 31, 2013

     5.122         5.048         5.084         5.122   

April 30, 2013

     5.184         5.048         5.121         5.184   

May 2013 (through May 3, 2013)

     5.197         5.190         5.193         5.197   

Source: Central Bank of Argentina.

(1) Represents the daily average exchange rate during each of the relevant periods.

 

9


Table of Contents

Brazil

The Central Bank of Brazil allows the real/U.S. dollar exchange rate to float freely and has intervened occasionally to control unstable fluctuations in foreign exchange rates. We cannot predict whether the Central Bank of Brazil or the Brazilian government will continue to let the real float freely or will intervene in the exchange rate market through a currency band system or otherwise. The Brazilian real may depreciate or appreciate substantially against the U.S. dollar in the future. Exchange rate fluctuations may adversely affect our financial condition. See also “Item 10. Additional Information—D. Exchange Controls—Foreign Exchange Controls—Brazil.”

Prior to March 14, 2005, under Brazilian regulations, foreign exchange transactions were carried out on either the commercial rate exchange market or the floating rate exchange market. Rates in the two markets were generally the same. On March 14, 2005, the National Monetary Council of Brazil (Conselho Monetário Nacional) unified the two markets.

The following table sets forth the exchange selling rates expressed in Brazilian reais per U.S. dollar for the periods indicated, as reported by the Central Bank of Brazil through the Central Bank System (Sistema do Banco Central) using PTAX 800, option 5.

 

     Daily observed exchange rate R$ per U.S.$  
     High      Low      Average      Period end  

Year ended December 31,

           

2008

     2.5004         1.5593         1.8375         2.3370   

2009

     2.4218         1.7024         1.9935         1.7412   

2010

     1.8811         1.6554         1.7607         1.6662   

2011

     1.9016         1.5345         1.6746         1.8758   

2012

     2.1121         1.7054         1.9550         2.0435   

Month end

           

October 31, 2012

     2.03820         2.02240         2.02985         2.03130   

November 30, 2012

     2.10740         2.03120         2.06775         2.10740   

December 31, 2012

     2.11210         2.04350         2.07784         2.04350   

January 31, 2013

     2.04710         1.98830         2.03108         1.98830   

February 28, 2013

     1.98930         1.95700         1.97325         1.97540   

March 31, 2013

     2.01850         1.95280         1.98284         2.01380   

April 30, 2013

     2.02440         1.97360         2.00210         2.00170   

May 2013 (through May 3, 2013)

     2.00950         2.00930         2.00940         2.00930   

Source: Central Bank of Brazil.

(1) Represents the daily average exchange rate during each of the relevant periods.

 

10


Table of Contents

Peru

Currently, Peruvian law does not impose any restrictions on the ability of companies having operations in Peru to transfer foreign currencies from Peru to other countries, to convert nuevos soles into any foreign currency or to convert any foreign currency into nuevos soles. Companies may freely remit interest and principal payments abroad and investors may repatriate capital from liquidated investments. We cannot assure you, however, that Peruvian law will continue to permit such payments, transfers, conversions or remittances without restrictions. Exchange rates for the Peruvian nuevo sol have been relatively stable in recent years. See also “Item 10. Additional Information—D. Exchange Controls—Foreign Exchange Controls—Peru.”

The following table sets forth the Central Bank of Peru’s period-average and period-end buying rates for U.S. dollars for the periods indicated.

 

     Daily observed exchange rate S/. per U.S.$  
     High      Low      Average(1)      Period end  

Year ended December 31,

           

2008

     3.1540         2.6920         2.9238         3.1370   

2009

     3.2580         2.8510         3.0108         2.8880   

2010

     2.8800         2.7860         2.8244         2.8080   

2011

     2.8320         2.6930         2.7537         2.6950   

2012

     2.7090         2.5490         2.6384         2.5490   

Month end

           

October 31, 2012

     2.601         2.577         2.587         2.592   

November 30, 2012

     2.614         2.578         2.598         2.578   

December 31, 2012

     2.579         2.549         2.566         2.549   

January 31, 2013

     2.579         2.539         2.551         2.579   

February 28, 2013

     2.587         2.567         2.578         2.587   

March 31, 2013

     2.603         2.584         2.593         2.589   

April 30, 2013

     2.645         2.576         2.597         2.643   

May 2013 (through May 3, 2013)

     2.647         2.626         2.637         2.626   

Source: Central Bank of Peru.

(1) Calculated as the average of the month-end exchange rates during the relevant period.

 

11


Table of Contents

Colombia

Since September 1999, the Central Bank of Colombia has allowed the Colombian peso to float freely, intervening only when there are steep variations in the Colombian peso’s value relative to the U.S. dollar (referred to as the “representative market rate”) to control volatility. Different mechanisms have been used for this purpose. Currently, the Central Bank is intervening by directly purchasing up to USD$30 million daily, having been approved to do so until the end of May 2013, although it is expected that these purchases may be extended until August 2013.

This intervention mechanism is only used to control the international reserves of Colombia or in case the average of a specified rate (referred to as the “representative market rate”) for the preceding twenty days exceeds 5% of that day’s representative market rate. Upon the occurrence of such an event, the Central Bank of Colombia sells call options, whereby the purchaser is entitled to buy from the Central Bank of Colombia, on a future date, a specified amount of U.S. dollars at a pre-established exchange rate, thus reducing the volatility of the exchange rate. As of October 28, 2009, the call option mechanism can only be used to control the international reserves of Colombia. See also “Item 10. Additional Information—D. Exchange Controls—Foreign Exchange Controls—Colombia.”

During 2004, 2005, 2006 and 2007, the Colombian peso appreciated against the U.S. dollar by 14%, 4%, 2%, 9.9%, respectively, depreciated by 11.4% in 2008 and appreciated by 9.1% in 2009. Although the foreign exchange market is allowed to float freely, there are no guarantees that the Central Bank of Colombia or the Colombian government will not intervene in the exchange market in the future. The Federal Reserve Bank of New York does not report a rate for Colombian pesos. The Superintendencia Financiera de Colombia calculates the representative market rate based on the weighted averages of the buy/sell foreign exchange rates quoted daily by certain financial institutions for the purchase and sale of foreign currency.

The following table sets forth the average Colombian peso/U.S. dollar representative market rate for the periods indicated, calculated by using the average of the exchange rates on the last day of each month during the period.

 

     Daily observed exchange rate Col$ per U.S.$  
     High      Low      Average(1)      Period end  

Year ended December 31,

           

2008

     2,392.28         1,652.41         1,967.11         2,243.59   

2009

     2,596.37         1,825.68         2,153.30         2,044.23   

2010

     2,044.23         1,786.20         1,902.50         1,913.98   

2011

     1,972.76         1,748.41         1,846.97         1,942.70   

2012

     1,942.70         1,754.89         1,797.65         1,768.23   

Month end

           

October 31, 2012

     1,830.45         1,795.40         1,804.40         1,829.89   

November 30, 2012

     1,831.25         1,814.21         1,821.01         1,817.93   

December 31, 2012

     1,813.73         1,768.23         1,792.49         1,768.23   

January 31, 2013

     1,779.84         1,758.45         1,769.67         1,773.24   

February 28, 2013

     1,818.54         1,775.65         1,790.55         1,816.42   

March 31, 2013

     1,832.20         1,797.28         1,813.75         1,832.20   

April 30, 2013

     1,847.02         1,813.11         1,830.23         1,828.79   

May 2013 (through May 6, 2013)

     1,836.34         1,825.83         1,832.61         1,835.88   

Source: Central Bank of Colombia.

(1) Calculated as the average of the month-end exchange rates during the relevant period.

 

12


Table of Contents
B. CAPITALIZATION AND INDEBTEDNESS

Not Applicable.

 

C. REASONS FOR THE OFFER AND USE OF PROCEEDS

Not Applicable.

 

D. RISK FACTORS

You should carefully consider the risks and uncertainties described below and the other information in this annual report. The risks described below are not the only ones facing our company or investments in the countries in which we operate. Our business, financial condition or results of operations could be materially and adversely affected by any of these risks. Additional risks not presently known to us or that we currently deem immaterial may also impair our business operations. This annual report also contains forward-looking statements that involve risks and uncertainties. See “Forward-Looking Statements.” The market price of our common shares and ADSs may decrease due to any of these risks or other factors, and you may lose all or part of your investment. Our actual results could differ materially and adversely from those anticipated in these forward-looking statements as a result of certain factors, including the risks facing our company described below and elsewhere in this annual report.

Risks Related to Our Business and Our Industries

Economic conditions that impact consumer spending could materially affect us.

Ongoing economic uncertainty in the world economy could negatively affect consumer confidence and spending, including discretionary spending. We may be materially affected by changes in economic conditions in the markets or in the regions in which we operate that impact consumer confidence and spending, including discretionary spending. This risk may be exacerbated if customers choose lower-cost alternatives to our product offerings in response to economic conditions. In particular, a decrease in discretionary spending could materially and adversely impact sales of certain of our high-margin product offerings. Future economic conditions affecting disposable consumer income, such as employment levels, business conditions, changes in housing market conditions, the availability of credit, interest rates, tax rates and fuel and energy costs, could also reduce overall consumer spending or cause consumers to shift their spending to lower-priced competitors. In addition, inflation or deflation can impact our business. Deflation in food prices could reduce sales growth and earnings, while inflation in food prices, combined with reduced consumer spending, could reduce our margins. Accordingly, we cannot assure you that in the event of an increase in inflation we will be able to pass on a price increase to our customers, which could have a material adverse effect on us.

We face intense competition in each of our markets.

The retail industry in Chile, Argentina, Brazil, Peru and Colombia is characterized by intense competition and increasing pressure on profit margins. The number and type of competitors and the degree of competition experienced by individual stores varies by location. Competition occurs on the basis of price, location, quality of products and service, product variety and store conditions. We face strong competition from international and domestic operators of supermarkets, home improvement stores, department stores and shopping centers, including Carrefour, Wal-Mart, Falabella and Casino, and providers of financial services, and it is possible that in the future other large international retailers or financial services providers may enter the markets in which we compete, either through joint ventures or directly. Some of our competitors have significantly greater financial resources than we do and could use these resources to take steps that could have a material and adverse effect on us. We also compete with numerous local and regional supermarket and retail store chains, as well as with small, family-owned neighborhood stores, informal markets, and street vendors. See “Item 4. Information on the Company—B. Business Overview—Competition” and “—Industry Overview and Competition.”

 

13


Table of Contents

Increasing competition may cause us to lower our prices, increase expenditures and take other actions that could have a material adverse effect on us or compel us to reduce our planned growth, acquisitions and capital expenditures. As other retailers expand their operations in Chile, Argentina, Brazil, Peru and Colombia, and other international retailers enter these markets, competition will continue to intensify. Our inability to respond effectively to competitive pressures and changes in the retail markets could have a material adverse effect on us, including as a result of our losing market share.

Our traditional retail stores, supermarkets and shopping centers face increasing competition from internet sales which may negatively affect sales of traditional channels.

In recent years, retail sales of food, clothing and home improvement products over the internet have increased significantly in each of the countries in which we operate. Internet retailers are able to sell directly to consumers, diminishing the importance of traditional distribution channels such as supermarkets and retail stores. Certain internet food retailers have significantly lower operating costs than traditional hypermarkets and supermarkets because they do not rely on an expensive network of retail points of sale or a large sales force. As a result, such internet food retailers are able to offer their products at lower costs than we do and in certain cases are able to bypass retailing intermediaries and deliver particularly high quality, fresh products to consumers. We believe that our consumers are increasingly using the internet to shop electronically for food and other retail goods, and that this trend is likely to continue. If internet sales continue to grow, consumers’ reliance on traditional distribution channels such as our supermarkets, home improvement stores, department stores and shopping centers could be materially diminished, which could have a material adverse effect on us.

Our markets are undergoing rapid consolidation.

Over the last several years, the food, department store and home improvement retail sectors in Chile, Argentina, Brazil, Peru and Colombia have been undergoing consolidation as large retail chains have gained market share at the expense of small, independently owned and operated stores, and large local and international supermarket chains have consolidated. We believe that further consolidation will likely occur in all of these markets as competition intensifies and economies of scale become increasingly important. Some of our competitors are larger and better capitalized than we are and as a result are likely to be better positioned to take advantage of strategic acquisition opportunities. We cannot assure you that such market consolidation will not occur to the material detriment of our market position or that such developments will not have a material adverse effect on us.

Our growth in recent years has been due to a series of significant acquisitions which are not likely to be repeated in future periods.

We may not be able to successfully execute our growth strategy through acquisitions as done in the past. As a result of the consolidation that has occurred in the retail industry, a significant component of our growth in recent years has occurred through acquisitions. In particular, we acquired various supermarket and department store chains in recent years, including Paris in Chile in 2005, GBarbosa in Brazil in 2007, Wong in Peru in 2008, Perini, Super Familia and Bretas in Brazil in 2010, Cardoso in Brazil and Johnson in Chile in 2011, Prezunic in Brazil and most recently, on November 30, 2012 we completed the acquisition of Carrefour’s supermarket operations in Colombia. See “Item 4. Information on the Company—A. History and Development of the Company—History.” As noted above, we believe that further consolidation is likely to occur in the industries in which we operate. However, some of our principal competitors are larger than we are and are likely to be better positioned to take advantage of strategic acquisition and consolidation opportunities. We cannot assure you that in the future there will be continued availability of suitable acquisition candidates at favorable prices and upon advantageous terms and conditions or that we will be able to compete with our competitors for any future acquisitions. As a result, our growth rate is likely to be significantly lower than it has been in recent years, which may have a material adverse effect on us.

A failure to successfully integrate acquired businesses may have a material adverse effect on us.

Over the past several years, we have completed a number of important acquisitions and may continue to make acquisitions in the future. We believe that these acquisitions provide strategic growth opportunities for us. Achieving the anticipated benefits of these acquisitions will depend in part upon our ability to integrate these businesses in an efficient and effective manner. The challenges involved in successfully integrating acquisitions include: we may find that the acquired company or assets do not further our business strategy, that we overestimated the expected

 

14


Table of Contents

benefits to be derived from the acquisitions, we discover new contingencies not identified through the due diligence process, or that economic conditions have changed, all of which may result in a future impairment charge; we may have difficulty integrating the operations and personnel of the acquired business and may have difficulty retaining the customers and/or the key personnel of the acquired business; we may have difficulty incorporating and integrating acquired technologies into our business; our ongoing business and management’s attention may be disrupted or diverted by transition or integration issues and the complexity of managing diverse locations; we may have difficulty maintaining uniform standards, controls, procedures and policies across locations; an acquisition may result in litigation from terminated employees of the acquired business or third parties; and we may experience significant problems or liabilities associated with technology and legal contingencies of the acquired business. These factors could have a material adverse effect on us, particularly in the case of a larger acquisition or multiple acquisitions in a short period of time. Our inability to successfully integrate our acquisitions could have a material adverse effect on us.

The expansion of our business through acquisitions poses risks that may reduce the benefits we anticipate from these transactions.

As part of our business strategy, we have grown significantly through acquisitions. Our decision to pursue an acquisition is based on our belief that such acquisition will complement our business strategy and grow our business. However, our management is unable to predict whether or when any prospective acquisitions will occur, or the likelihood of a certain transaction being completed on favorable terms and conditions. Our ability to continue to expand our business successfully through acquisitions depends on many factors, including our ability to identify acquisitions, the ability to negotiate favorable transaction terms and our ability to finance any such acquisition from internal or external sources. Even if we are able to identify acquisition targets and obtain the necessary financing to make these acquisitions, it is possible that the cost of doing so, taken together with possible adverse market conditions and resulting loss of revenues or net income, could financially overextend us.

Acquisitions also expose us to the risk of successor liability relating to litigation, tax claims or other actions involving an acquired company, its management or contingent liabilities incurred before the acquisition. The due diligence we conduct in connection with an acquisition, and any contractual guarantees or indemnities that we receive from the sellers of acquired companies, may not be sufficient to protect us from, or compensate us for, actual or potential liabilities. Any material liability associated with an acquisition could have a material adverse effect on us, including our reputation, and reduce the benefits of such acquisition.

Antitrust laws in Chile, Argentina, Brazil, Peru or Colombia could limit our ability to expand our business through acquisitions or joint ventures.

Chilean, Argentine, Brazilian, and Colombian antitrust laws contain provisions that require authorization by the antitrust authorities in those countries for the acquisition of, or entering into joint venture agreements with, companies with a relevant market share. Such authorizations have been denied in some cases involving the industries in which we operate, as occurred in Chile with the denial by the Tribunal de Defensa de la Libre Competencia (the Chilean Antitrust Court) of the merger between Distribucion y Servicio D&S S.A. (“D&S”) and Falabella in January 2008. Peru does not currently apply such controls, but we cannot assure you that it will not impose them in the future. Accordingly, our ability to expand our business through acquisitions in Chile, Argentina, Brazil, Peru and Colombia may be limited.

Currently, Cencosud is restricted from acquiring any supermarkets in Chile, as a consequence of a settlement it reached in 2008 with the antitrust authorities. As part of the settlement, Cencosud needs prior authorization from the Chilean Antitrust Court before engaging in any supermarket acquisition. This restriction can only be lifted by means of a consultation before the Chilean Antitrust Court.

Moreover, on December 14, 2011, the Chilean antitrust authority (Fiscalía Nacional Económica, or “FNE”) announced an investigation into anti-competitive practices in the food retail industry. The investigation includes several local operators, including Cencosud, Wal-Mart Chile, SMU and Tottus. In accordance with Chilean regulations, FNE has not disclosed the details of the investigation to the public, but it appears to be focused on private label groceries, fresh poultry and beef. Without additional detail it is difficult to determine the full impact of this investigation. If the FNE concludes that we engaged in anti-competitive practices we could face a maximum sanction of up to U.S.$30 million. We cannot assure you that this investigation, or future investigations, will not result in a material adverse effect on us, including financial and reputational harm.

 

15


Table of Contents

We may not be able to generate or obtain the capital we need for further expansion.

We expect to continue to have substantial liquidity and capital resource requirements to finance our business. We intend to rely upon internally generated cash from our operations and, if necessary, the proceeds of debt and/or equity offerings in the domestic and international capital markets and bank debt. We cannot assure you, however, that we will be able to generate sufficient cash flows from operations or obtain sufficient funds from external sources to fund our capital expenditure requirements.

Our future ability to access financial markets in sufficient amounts and at acceptable costs and terms to finance our operations, fund our proposed capital expenditures and pay dividends will depend to a large degree on prevailing capital and financial market conditions over which we have no control, and accordingly we cannot assure you that we will be able to do so. The Eurozone crisis and general market volatility has had a negative impact on the liquidity of financial markets in recent months, as was the case in the 2008-2009 financial crisis. Our failure to generate sufficient cash flows from operations or to be able to obtain third-party financing could cause us to delay or abandon some or all of our planned expansion, including capital expenditures, which, in turn, could have a material adverse effect on us.

Our controlling shareholders are able to exercise significant control over our company, and also own a significant minority interest in many of our international subsidiaries which could result in conflicts of interest.

We are currently controlled by our founder, Mr. Horst Paulmann, and his family, who together have a 60.8% ownership stake in us, through Inversiones Quinchamali Ltda., Inversiones Latadía Ltda. and Inversiones Tano Ltda, as of March 31, 2013. Our controlling shareholders are in a position to direct our management and to determine the result of substantially all matters to be decided by majority vote of our shareholders, including the election of a majority of the members of our board of directors, determining the amount of dividends distributed by us (subject to the legally mandated minimum of 30% of net income set forth in Article 79 of the Chilean Corporations Law), adopting certain amendments to our Bylaws, enforcing or waiving our rights under existing agreements, leases and contractual arrangements and entering into certain agreements with entities affiliated with us. As a result, circumstances may occur in which our controlling shareholders’ interests could be in conflict with your interests as noteholders.

Our operating income is sensitive to conditions that affect the cost of the products we sell in our stores.

Our business is characterized by relatively high inventory turnover with relatively low profit margins. We make a significant portion of our sales at prices that are based on the cost of products we sell plus a percentage markup. As a result, our profit levels may be materially affected during periods of decreasing prices. In addition, our business could be materially and adversely affected by other factors, including inventory control, competitive price pressures, severe weather conditions and unexpected increases in fuel or other transportation related costs which increase the cost of the products we sell in our stores. If we are unable to pass along these cost increases to our customers, our profit margin will decrease resulting in a material adverse effect on us.

Our retail results are highly seasonal and therefore any circumstance that negatively impacts our retail business during our seasons of high demand may materially and adversely affect us.

We have historically experienced seasonality in our retail sales in Chile, Argentina, Brazil, Peru and Colombia, principally due to stronger sales during the Christmas and New Year holiday season and during the beginning of each school year in March, and reduced sales during the months of January and February due to the summer holidays. For example, in 2012, 2011 and 2010, 28.5%, 29.3% and 29.8% of our consolidated revenues (excluding the revenues from Banco Paris) were generated during the fourth quarter, respectively. Any economic slowdown, interruption to our business or to the business of our suppliers, or the occurrence of any other circumstance that may impact our business during the first or last quarter of any fiscal year may therefore have a material adverse effect on us.

In addition, in preparation for our seasons of high demand, we must increase inventory to levels substantially higher than those maintained during the rest of the year, and hire temporary staff for our stores. Any unforeseen reduction in demand, mistake in our demand forecasts or product selection, or delay by our suppliers in meeting our demand during these seasons could force us to sell inventory at significantly lower prices, which would also materially and adversely affect us.

 

16


Table of Contents

The clothing retail industry is negatively affected by decreases in the purchasing power of middle- and low-income consumers resulting from unfavorable economic cycles.

The success of our department stores operations depends largely on factors relating to the stability or increase of consumer spending, especially by members of middle- and low-income socioeconomic groups. Historically, the purchasing power of such groups has been significantly correlated with factors that affect income, such as interest rates, inflation, availability of consumer credit, taxation, employment levels, consumer confidence and salary levels. Therefore, in times of economic downturns, the purchasing power of such group decreases as their income decreases. In addition, our middle- and low-income customers are likely to consider clothing purchases superfluous during periods of reduced income which would most likely lead to a decrease in demand for our clothing products from this group. Such a decrease in the demand of our middle- and low-income customers coupled with a general decrease in their purchasing power could materially and adversely affect us.

Changes in suppliers’ allowances and promotional incentives could impact profitability and have a material adverse effect on us.

We derive a significant portion of our revenues from ordinary activities from allowances and promotional incentives granted by our suppliers. For example, our revenues from ordinary activities include fees from suppliers for the sale of their products in our stores, supplier rebates and bonuses, supplier promotional allowances and fees, and fees from publicity activities carried out for third parties using our proprietary customer information. We cannot assure you that we will be able to obtain a similar level of such fees, rebates, bonuses or allowances in the future. Should any of our key suppliers reduce or otherwise eliminate these arrangements, our profit margin for the affected products could be impacted, which could in turn have a material adverse effect on us.

Our current strategy may not have the expected results on our profitability.

Our strategy aims to provide our customers with a superior shopping experience, delivering a greater variety of quality products and services than our competitors. This strategy is based on savings achieved through operational efficiencies that are transferable to the customer. We couple this strategy with a focus on expanding our position both in Chile and other markets in Latin America that we believe offer attractive prospects for growth. The long-term success of our strategy is subject to significant risks, including failure to generate the expected number of additional sales volume and to reduce selling and administrative expenses; price reductions by competitors; difficulties in obtaining additional vendor allowances from suppliers in the expected amounts and necessary timeframe; difficulties in expanding operations due to adverse economic scenarios; difficulties in finding employees and delays in implementing our strategy. Any one of these factors could have a material adverse effect on us.

We are subject to risks affecting shopping centers which may materially and adversely affect us.

Our operation of our shopping centers (which lease spaces to third parties) is subject to various factors that affect their development, administration and profitability. These factors include the accessibility and the attractiveness of the area where the shopping center is located and of the shopping center itself; the flow of people and the level of sales of each shopping center rental unit; oversupply of retail space or a reduction in demand for retail space which could result in lower rent prices and lower revenues; increases in competition from other shopping centers which drive down our prices and profits; our inability to collect rents due to bankruptcy, insolvency of tenants or otherwise; the ability of our tenants to provide adequate maintenance and insurance; and fluctuations in occupancy levels in our shopping centers.

Many of our hypermarket, supermarket, department stores and home improvement stores are located in shopping centers, and as a result a substantial portion of our revenues is sensitive to factors affecting these and other shopping centers. Also, an economic downturn in the countries or regions in which our shopping centers are located could lead to the bankruptcy of our tenants and a reduction in our shopping center sales due to a decrease in disposable income, which could have a material adverse effect on us.

 

17


Table of Contents

We are subject to risks that changing shopping trends that could materially and adversely affect us.

In developed markets consumers have begun to express a preference for small-box stores shunning away from traditional big-box outlets. This trend in markets such as the US and the UK has been more evident in fresh, on-the-go foods and the grocery channel. As a consequence retailers in these markets such as Walmart, Tesco and Target have responded by turning to small-box stores as drivers for growth, as a means to target a more urban consumer and as an engine for revenue expansion. This has led to the rolling out of new formats such as Walmart Express, Tesco Express and Fresh and Easy Express in formats of 1,400 square meters distancing themselves from the traditional big-box 10,000 square meters outlets. We have not observed this trend in the markets in which we operate. Nevertheless we are currently undertaking a strategy that includes all types of formats in order to cater to a wide range of consumers. If such trend favoring small-box stores were to materialize in the markets in which we operate, it could materially and adversely affect our results of operations and financial condition.

Our development activities depend on finding attractive real estate locations at reasonable prices.

An important part of our growth strategy rests on our ability to develop and open new stores. We face intense competition from both other retail operators and also real estate developers for new sites for our stores. Accordingly, we may be unable to find attractive real estate locations at reasonable prices to sustain our growth, which could have a material adverse effect on us.

We are subject to risks associated with development and construction activities.

The development, renovation and construction of our hypermarkets, supermarkets, department stores, home improvement stores and shopping centers involve certain risks such as failure to correctly anticipate construction costs, lower than anticipated occupancy rates and rents at newly completed projects, failure to obtain financing on favorable terms, delays in construction and lease-up, and failure to obtain necessary zoning, land use, building, occupancy and other required governmental permits and authorizations.

We are currently in the process of constructing several projects, including the towers of Costanera Center in Santiago, Chile, that we believe will be the tallest building in South America. We face certain risks associated with the large-scale nature of the project, such as occupancy rates and rents not being sufficient to make the project profitable and the fact that we may be unable to obtain or may face delays in obtaining all necessary approvals for a necessary transit mitigation program. Any such delays, or other substantial unanticipated delays or expenses related to the Costanera Center office tower or other future construction or renovation projects may reduce our net income for the relevant periods and could have a material adverse effect on us. For example, the office tower at the Costanera Center was originally scheduled to open in 2013 and is now expected to open in 2014.

Our development activities depend on our ability to obtain and maintain zoning, environmental, land-use and other governmental approvals which we may not be able to get.

Our activities are subject to national, federal, state and municipal laws, and to regulations, authorizations and licenses required with respect to construction, zoning, use of the soil, environmental protection and historical heritage, consumer protection and other requirements in Chile, Argentina, Brazil, Peru and Colombia, all of which affect our ability to acquire land, develop and build projects and negotiate with customers. In the case of non-compliance with such laws, regulations, licenses and authorizations, we may face fines, project shutdowns, cancellation of licenses and revocation of authorizations.

In addition, the regulation of matters relating to the protection of the environment is not as well developed in Argentina, Brazil, Chile, Peru and Colombia as in the United States and certain other countries. Accordingly, we anticipate that additional laws and regulations should be enacted over time in these countries with respect to environmental matters. If public authorities issue new and stricter standards, or enforce or interpret existing laws and regulations in a more restrictive manner, we may be forced to make expenditures to comply with such new rules.

Our credit card and banking operations expose us to increased credit and financial risks which may have a material adverse effect on us.

Although not a part of our core business, our credit card and consumer finance operations in Chile, Argentina, Peru and Brazil are a growing segment of our business. We currently bear all of the credit risk associated with our credit cards in Chile, Argentina and Peru. In Brazil, where we operate our credit card through a joint venture with

 

18


Table of Contents

Brazil’s Banco Bradesco, we bear 50% of the credit risk associated with our cards, including defaults in payment and losses with Banco Bradesco bearing the remaining risk. In Colombia we are currently engaged in a joint venture with Colombia´s Banco Colpatria through which we bear 50% of the credit risk associated with issued credit cards. Results of our financial business in Colombia for the year ended December 31, 2012 were included in the supermarket segment. See “Item 4. Information on the Company—B. Business Overview—Financial Services—Brazil” for additional details related to our joint venture with Banco Bradesco.

Our credit card and consumer finance business can be materially and adversely affected by delinquency on credit card accounts, defaults in payments by credit card holders, extensive judicial processes enforcing the collection of payments, doubtful accounts or losses on receivables. Furthermore, the actual rates of delinquency, collection proceedings and losses on receivables may vary and be affected by numerous factors, which among others include:

 

   

adverse changes in regional economies;

 

   

acceptance of applicants with poor credit records;

 

   

inability to predict future charge-offs;

 

   

changes in credit card use;

 

   

political instability;

 

   

increase of unemployment; and

 

   

loss of value of actual salaries.

These and other factors may have a negative effect on present rates of delinquency, collection proceedings and losses, any one or more of which could have a material adverse effect on us. In particular, our credit card business has grown significantly in recent years and in connection with such growth, our past due credit card receivables have also grown. We cannot assure you that our present rates of delinquency will not increase, and if they do, that it would not have a material adverse effect on us.

Further, to boost our retail volume sales, one of our business goals is to promote greater use of our credit cards and other financing activities in Chile, Argentina, Peru, Colombia and Brazil and introduce our own credit card in Peru (under which we would assume all credit risk). As a result, our exposure to the credit risk of our cardholders and banking customers is likely to increase in the near future. We cannot assure you that any expansion of our credit card operations (including the assumption of account approval and credit risk by us) or our other lending operations, such as the cash advances and consumer loans we offer to our credit card customers, will not result in an impairment of the credit portfolio of our credit card and banking business in Chile, Argentina and Brazil. Any such impairment would have a material adverse effect on us. See “Item 4. Information on the Company—B. Business Overview—Financial Services” for additional details related to our credit card and consumer loan operations.

Our credit card and banking activities depend on our ability to comply with current or future government regulations, as well as our ability to obtain and maintain governmental approvals.

Our credit card and banking operations are subject to substantial regulation. We must comply with national, state and municipal laws, and with regulations, authorizations and licenses required with respect to credit card and banking activities. We invest financial and managerial resources to comply with these laws and related permit requirements.

Our failure to comply with credit card and banking laws and related permit requirements could subject us to investigations, enforcement actions, fines or penalties. For Example, on April 24, 2013, the Supreme Court of Chile ruled on the class action suit filed by the Servicio Nacional del Consumidor (the National Consumer Service, or “SERNAC”), a Chilean government entity. The court ruled for the plaintiff and at this junction no further appeals are available. In the ruling, the court ordered Cencosud Administradora de Tarjetas S.A. (“CAT”) to reimburse certain cardholders for excess monthly maintenance fees charged since 2006 plus adjustments for inflation and interests. We have provisioned Ch$ 20,000 million for this ruling in our 2012 financial statements, which represents 0.2% of our 2012 consolidated net revenues and 3.1% of our 2012 adjusted EBITDA. This provision is an estimated value that still needs to be ratified by the Supreme Court of Chile after subsequent filings for interpretation, rectification and amendment are addressed by the court.

Moreover, if applicable laws and regulations, or the interpretation or enforcement thereof, become more stringent in the future, our capital or operating costs could increase beyond what we currently anticipate, and the process of obtaining or renewing licenses for our activities could be hindered or even opposed by the competent authorities. We cannot assure you that regulators will not impose more restrictive limitations on the activities of our credit card or bank operations in the future than those currently in effect. Any such change could have a material adverse effect on us.

 

19


Table of Contents

Our food retail business sources fresh products from local producers. climate changes may affect their ability to produce, and consequently may affect our capacity to offer such products.

There are indicators of a current climate change happening worldwide. Changes in temperatures and precipitation patterns may negatively affect the capacity of certain regions to produce fresh products such as fresh fruits and vegetables and dairy products. As of January 2012, Chile is suffering one of its worst droughts in decades, which has resulted in substantial loss of crops and livestock.

We have a significant focus on perishable products. Sales of perishable products accounted for approximately 36.8% and 30.0% of our total sales in 2012 and 2011, respectively. As we source part of our fresh products from local producers, such changes in climate could impair or limit our ability to source such products, thus affecting our capacity to offer the full assortment of products that we normally carry. Any such disruption could have a material adverse effect on us.

We are dependent on key personnel.

Our and our subsidiaries’ development, operation and growth have depended significantly upon the efforts and experience of our board of directors (particularly our chairman, Mr. Horst Paulmann Kemna) and our senior management. If for any reason, including retirement, the services of such persons, particularly Mr. Horst Paulmann Kemna, were to become unavailable and we fail to find and retain an adequate replacement for such persons on a timely basis, there could be a material adverse effect on our operations.

Certain of our debt instruments impose significant operating and financial restrictions and in the event of a default, all of our borrowings could become immediately due and payable.

The terms of our financial indebtedness impose, and the terms of our future financial indebtedness may impose, significant operating and other restrictions on us and many of our subsidiaries. The agreements governing our credit facilities and corporate bond issuances contain restrictive covenants and a requirement that we comply with a number of financial “maintenance” covenants, including ratios of total debt to equity, total liabilities to net worth, net financial debt to equity, net financial debt to EBITDA, and EBITDA to financial expenses, as well as minimum levels of total assets, unencumbered assets and equity. Our ability to comply with these ratios may be affected by events beyond our control. These restrictions and financial ratios could limit our ability to plan for or react to market conditions, otherwise restrict our activities or business plans and could have a material adverse effect on us, including our ability to finance ongoing operations or strategic investments or to engage in other business activities.

A significant portion of our financial indebtedness is also subject to cross default provisions. Our breach of any of these restrictive covenants or our inability to comply with the financial maintenance ratios would result in a default under other applicable debt instruments. If any such default occurs, the lenders may elect to declare all outstanding borrowings, together with accrued interest and other fees, to be immediately due and payable. If we are unable to repay outstanding borrowings when due, the lenders will have the right to exercise their rights and remedies against us, and we cannot assure you that our assets would be sufficient to repay in full our obligations. Our inability to repay our obligations could have a material adverse effect on us.

A Downgrade in our credit rating could materially and adversely affect our obligations under existing credit support commitments.

We have entered into ten credit support agreements in connection with derivative transactions with different international and local financial intuitions. Each credit support agreement provides collateral obligations between swap counterparties to mitigate the existing credit risk inherent to operation. If a credit downgrade event occurs, it could result in our having to post additional collateral in connection with a “Margin Call” and us having to pay cash or any other eligible collateral to cover the incurred liabilities at a given valuation date. As of December 31, 2012, notional amounts in cross currency swaps with different counterparties stand at approximately more than USD 1.3 billion.

 

20


Table of Contents

A downgrade in our credit rating could negatively impact our cost of and ability to access capital.

Our credit ratings are an important part of maintaining our liquidity. Any downgrade in credit ratings could potentially increase our borrowing costs, or, depending on the severity of the downgrade, substantially limit our access to capital markets, require us to make cash payments or post collateral and permit termination by counterparties of certain significant contracts. Factors that may impact our credit ratings include, among others, debt levels, planned asset purchases or sales, and near-term and long-term growth opportunities. Factors such as liquidity, asset quality, cost structure, product mix, and others are also considered by the rating agencies. A ratings downgrade could adversely impact our ability to access debt markets in the future, increase the cost of future debt, and potentially require us to post letters of credit for certain obligations.

We have a significant amount of financial indebtedness outstanding with instruments maturing every year

As part of our financial strategy we fund our assets with a combination of both equity and debt. Our portfolio of financial indebtedness has maturities and amortizations applicable every year. As we devote a significant portion of our free cash flow to finance our capital expenditures, we are required to refinance these obligations and therefore we face refinancing risk, especially in times of liquidity restrictions in the financial markets.

Furthermore, our major market for funding is Chile, including both the debt capital market and the local banks,. As we are among the largest corporations in Chile and among the largest local issuers, we have become one of the largest investments (in terms of equity and debt holdings) in the local institutional investors’ portfolio, limiting our ability for further issuances in the local market. Likewise, some local banks in Chile have large loan exposure to Cencosud, and have reached the legal limits of maximum exposure to us, limiting our ability to secure future funding from them in the future.

Although we believe we have a sound financial strategy and we have structured our maturities and amortizations in a way that reduces the refinancing needs in a single year we cannot assure you that we will be able to obtain funding in the future to fulfill our financial obligations. If we are unable to obtain such funding, we will need to reduce our capital expenditures to devote a larger portion of our free cash flow to serve our financial obligations, thus reducing our growth prospects, and possibly face a potential event of default with respect to our financial obligations.

If any such default occurs, the lenders may elect to declare all outstanding borrowings, together with accrued interest and other fees, to be immediately due and payable. If we are unable to repay outstanding borrowings when due, the lenders will have the right to exercise their rights and remedies against us, and we cannot assure you that our assets would be sufficient to repay in full our obligations. Our inability to repay our obligations could have a material adverse effect on us.

We are subject to risks associated with real estate investments.

Our real estate investments are subject to risks common to commercial and residential properties in general, many of which are not within our control. For example, the yields available from equity investments in real estate depend on the level of sales or rental income generated and expenses incurred. In addition, our ability to generate sufficient income from our properties to service our debt and cover other expenses may be materially and adversely affected by the following factors, among others, some of which we cannot control:

 

   

downturns in a national, regional and local economic climate;

 

   

changes in interest rates and availability of financing;

 

   

civil disturbances, earthquakes and other natural disasters, or terrorist acts or acts of war which may result in uninsured or underinsured losses;

 

   

changes in our ability or our tenants’ ability to provide for adequate maintenance and insurance, possibly decreasing the useful life of and revenue from property;

 

21


Table of Contents
   

law reforms and governmental regulations (such as those governing usage, zoning and real property taxes);

 

   

oversupply of retail space or a reduction in demand for retail space, which could result in lower rent prices and lower revenues for us;

 

   

increased competition from other real estate operators which might drive down our prices and profits;

 

   

increased operating costs due to inflation and other factors such as insurance expense, utilities, real estate taxes, state and local taxes and heightened security and cleaning costs;

 

   

the inability to collect rents due to bankruptcy or insolvency of tenants or otherwise;

 

   

the need to periodically renovate, repair and release space, and the higher costs thereof;

 

   

the inability to revise the commercial terms of our lease agreements to reflect high inflation or exchange rates fluctuations in markets where our leases are based on local nominal currency or in foreign currency;

 

   

bankruptcy of tenants and reduction in shopping center sales due to lower disposable income;

 

   

exercise by our tenants of their legal right to terminate their leases early; and

 

   

the inability to find new tenants as leases on our properties expire or terminate early.

The occurrence of any combination of the factors listed above could significantly decrease the income we receive from our real estate investments, which in turn could have a material adverse effect on us.

Eviction proceedings in Chile, Argentina, Colombia and Peru are difficult and time consuming, and as a result we may not be able to evict defaulting tenants from our shopping centers.

In our shopping center business, we hold several commercial leases with third party lessees. Although Chilean, Argentine and Peruvian laws allow a summary proceeding to collect unpaid rent and a special proceeding to evict tenants, eviction proceedings in these countries are difficult and time-consuming. Eviction proceedings generally take between six months and two years from the date of filing of the suit to the time of actual eviction, as the heavy workload of the courts and the numerous procedural steps required have generally delayed landlords’ efforts, including ours, to evict tenants. Historically, delinquency regarding our office rental space has been low, and we have usually attempted to negotiate the termination of lease agreements with defaulting tenants after the first few months of non-payment in order to avoid legal proceedings.

We cannot assure you, however, that delinquency rates in the future will not increase significantly, or that our negotiations with tenants will prove to be as successful as they have been in the past, which could have a material adverse effect on us.

Any disruption in the operations of our distribution centers may have a material adverse effect on us.

A substantial part of the products we sell in our stores are distributed through our distribution centers. Should any of these distribution centers experience an interruption in operations, we may not be able to effectively distribute the products we sell, which may have a material adverse effect on us.

Additionally, our growth strategy contemplates the opening of new stores in the countries where we operate, which may require an increase in the capacity of our distribution centers, the reorganization of our existing distribution centers or the establishment of new distribution centers. Should we fail to locate adequate properties on which to build new distribution centers, or fail to effectively integrate new, or expand existing, distribution centers, we may not be able to deliver inventory to our stores in a timely manner, which may have a material adverse effect on us.

 

22


Table of Contents

Certain of our stores rely heavily on sales of perishable products, and ordering errors or product supply disruptions may have a material adverse effect on us.

Our hypermarkets and supermarkets have a significant focus on perishable products. Sales of perishable products accounted for approximately 36.8% and 30.0% of our total sales in 2012 and 2011, respectively. We rely on various suppliers and vendors to provide and deliver our product inventory on a continuous basis. We could suffer significant perishable product inventory losses in the event of the loss of a major supplier or vendor, disruption of our distribution network, extended power outages, natural disasters or other catastrophic occurrences. We have implemented certain systems to ensure our ordering is in line with demand. We cannot assure you, however, that our ordering systems will always work efficiently, in particular in connection with the opening of new stores, which have no, or a limited, ordering history. If we were to over-order, we could suffer inventory losses, which could have a material adverse effect on us.

An increase in export or import duties and controls may have a material adverse effect on us.

Our future success depends on our ability to select and purchase quality merchandise at attractive prices. While we have historically been able to locate and purchase quality merchandise at good prices, such merchandise may become subject to higher import taxes than currently apply. The Argentine government requires importers to maintain a balance of payments requiring them to export equivalent amounts of merchandise. In response to that we have succeeded in placing Argentine made products throughout our stores in the markets in which we operate. Since 2002 the Argentine government has imposed duties on the exports of various primary and manufactured products, including some of those that are sold in our stores. Such duties have undergone significant increases, reaching a maximum of 35% for certain items. We cannot assure you that there will not be further increases in the export taxes or the new export or import taxes or quotas will not be imposed by the government of Argentina or that similar measure could be taken by other countries in which we operate.

In addition, foreign trade policies, tariffs and other impositions and requirements on imported goods, which may depend on the product’s place of origin or on the product’s nature and specifications, as well as other factors relating to the foreign trade of the countries in which we operate are beyond our control and could result in difficulties in obtaining quality, low-cost merchandise from these countries and consequently could have a material adverse effect on us.

Labor relations may have a material adverse effect on us.

As of December 31, 2012, approximately 32% of our retail store employees were represented by unions under several collective bargaining agreements. Although we currently enjoy good relations with our employees and their unions, we have experienced labor strikes in the past and we cannot assure you that labor relations will continue to be positive or that a deterioration in labor relations will not have a material adverse effect on us. See “Item 4. Information on the Company—B. Business Overview” and “Item 6. Directors, Senior Management and Employees—D. Employees.”

We could be harmed by a failure or interruption of our information technology or administrative systems.

We rely on our information technology and administrative systems to effectively manage our business data, communications, supply chain, pricing, order entry and fulfillment and other business processes. We use different world-class IT platforms in our retail and financial services segments in all countries in which we operate. Even advanced technology systems, however, are subject to defects, interruptions and breakdowns. The failure of our information technology or administrative systems to perform as we anticipate could disrupt our business and result in transaction errors, processing inefficiencies and the loss of sales and customers, which in turn could result in decreased revenue, increased overhead costs and excess or out-of-stock inventory levels resulting in a material adverse effect on us.

In addition, our information technology and administrative systems may be vulnerable to damage or interruption from circumstances beyond our control, including fire, natural disasters, systems failures, viruses and security breaches, including breaches of our transaction processing or other systems that could result in the compromise of confidential customer data. Any such damage or interruption could have a material adverse effect on us, including as a result of our facing significant fines, customer notice obligations or costly litigation, harming our reputation with our customers or requiring us to expend significant time and expense developing, maintaining or upgrading our information technology or administrative systems, or preventing us from paying our suppliers or employees, receiving payments from our customers or performing other information technology or administrative services on a timely basis.

 

23


Table of Contents

We are currently in the process of upgrading our IT infrastructure, during the implementation and transition period, we could face delays and unexpected challenges that could affect our operations.

Further, while we have some backup data-processing systems that could be used in the event of a catastrophe or a failure of our primary systems, we do not yet have an integrated disaster recovery plan nor a backup data center that covers all regions in which we operate. While we endeavor to prepare for failures of our network by providing backup systems and procedures, we cannot guarantee that our current backup systems and procedures will operate satisfactorily in the event of a regional emergency. Any substantial failure of our back-up systems to respond effectively or on a timely basis could have a material and adverse effect on us.

If we experience a data security breach and confidential customer information is disclosed, we may be subject to penalties and experience negative publicity, which could affect our customer relationships and have a material adverse effect on us.

We and our customers could suffer harm if customer information were accessed by third parties due to a security failure in our systems. The collection of data and processing of transactions require us to receive and store a large amount of personally identifiable data. This type of data is subject to legislation and regulation in various jurisdictions. Recently, data security breaches suffered by well-known companies and institutions have attracted a substantial amount of media attention, prompting U.S. state and federal legislative proposals addressing data privacy and security. If similar proposals are adopted in the countries in which we operate, we may be subject to more extensive requirements to protect the customer information that we process in connection with the purchases of our products. We may become exposed to potential liabilities with respect to the data that we collect, manage and process, and may incur legal costs if our information security policies and procedures are not effective or if we are required to defend our methods of collection, processing and storage of personal data. Future investigations, lawsuits or adverse publicity relating to our methods of handling personal data could have a material adverse effect on our business, results of operations, financial condition and cash flows due to the costs and negative market reaction relating to such developments.

Chile, Argentina, Peru and Colombia are located in a seismically active region.

Chile, Argentina, Peru and Colombia are prone to earthquakes due to their location in the proximity of several major fault lines. A major earthquake, like the one that struck Chile in 2010, could have significant negative consequences for our operations and for the general infrastructure in Chile or any of the other countries that were abovementioned,, such as roads, rail and access to goods. Even though we maintain insurance policies standard for this industry with earthquake coverage, we cannot assure you that a future seismic event will not have a material adverse effect on us. See “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Trends and Factors Affecting Our Results of Operations—Impact of the 2010 Earthquake and Tsunami.”

Our growth in recent years has been due to a series of significant acquisitions and strong organic CAPEX, imposing pressure on our procedures, controls and systems

In recent years we have grown our business through a series of acquisitions and strong organic CAPEX, expanding our geographical business scope and increasing the size and complexity of our operations. As a consequence, our internal controls, systems and procedures may not be appropriate to support the scope and complexity of our operations. The existence of multiple legacy systems from the acquired operations and the complexities of the business integration process may adversely affect the Company. As part of the process of integrating the operations, systems, processes and controls that are part of the acquired businesses, we are working to strengthen existing control mechanisms in accordance with the provisions of Section 404 of the Sarbanes Oxley Act, and the focus of the work has concentrated on the following:

 

   

The implementation of a new credit card sales reconciliation system that will provide support for a strong internal control environment in this area.

 

   

The improvement of the procedures for the reconciliation of accounts.

 

   

A deep review of the role definitions and segregation of duties included in systems, and the implementation of applications for monitoring critical users.

If we are not able to upgrade our procedures, controls and systems to properly address these control deficiencies, or if these control deficiencies result in our non compliance with Section 404 of the Sarbanes Oxley Act, there could be a negative reaction in the financial markets due to a loss of investor confidence in us and in the reliability of our financial statements, and we may have to incur increased costs in connection with hiring additional staff or implementing controls to remediate these control deficiencies. Additionally, if the aforementioned control deficiencies cause us to become unable to report our financial data on a timely basis, we may be subject to adverse regulatory consequences, including sanctions by the SEC, or violations of applicable stock exchange listing rules.

Risks Related to Chile

Our growth and profitability depend on the level of economic activity in Chile and other markets.

        40.0% and 41.7% of our revenues from ordinary activities in the years ended December 31, 2012 and 2011, respectively, were derived from revenues in Chile. Accordingly, our results of operations and financial condition are dependent to a significant extent on the level of economic activity in Chile. The Chilean economy has been influenced, to varying degrees, by economic conditions in other emerging market countries. We cannot assure you that the Chilean economy will continue to grow in the future or that future developments in or affecting the Chilean economy, including further consequences of economic difficulties in Brazil, Argentina and other emerging markets, will not have a material adverse effect on us.

In September 2008, the housing crisis in the United States sparked a series of financial institution failures throughout the globe. This resulted in a liquidity crisis and a reduction in growth of the global economy as financial institutions tightened risk policies and reduced lending to banks, corporations and individuals. Consequently, Chile

 

24


Table of Contents

was adversely affected by a strong decrease in growth during the fourth quarter of 2008 and during 2009 as its trading partners entered into recession, which affected local sales, employment levels, plans for investment and the price of exports. Lingering negative effects of the global recession may continue to adversely affect the Chilean economy and unfavorable general economic conditions could negatively affect the affordability of and demand for some of our products and services and our ability to access the capital markets. In difficult economic conditions, consumers may seek to reduce discretionary spending by forgoing purchases of some of our products, electing to use fewer higher-margin services or obtaining products and services under lower-cost programs offered by competitors. If any of these events were to occur, it could have a material adverse effect on us.

In spite of the recent growth of the Chilean economy, we cannot assure you that Chile’s economy will continue to grow in the future, nor can we assure you that future developments in or affecting the Chilean economy will not impair our ability to proceed with our business plan or have a material adverse effect on us.

Economic and political problems encountered by other countries may adversely affect the Chilean economy, and, as a result, our business and results of operations and the market value of our securities.

The prices of securities issued by Chilean companies are to varying degrees influenced by economic and market considerations in other countries. We cannot assure you that future developments in or affecting the Chilean economy, including consequences of economic difficulties in other markets, will not have a material adverse effect on us.

We are also directly exposed to risks related to the weakness and volatility of the economic and political situation in Asia, the United States, Europe, Brazil, Argentina and other nations. If these nations’ economic conditions deteriorate, the economy in Chile, as either a neighboring country or a trading partner, could also be affected and could experience slower growth than in recent years with possible adverse impact on our customers and suppliers. The crises and political uncertainties in other Latin American countries could also have an adverse effect on the Chilean economy, and, as a result, our results of operations and the market value of our securities.

Chile is also involved in an international litigation with Peru regarding maritime borders and has had other conflicts with neighboring countries in the past. We cannot assure you that crisis and political uncertainty in other Latin American countries will not have a material adverse effect on the Chilean economy, and, as a result, our results of operations and the market value of our securities.

The Chilean supermarket and department store industries show signs of saturation which could impair our ability to grow profitably in Chile.

We believe that the Chilean supermarket industry shows certain signs of saturation. As a result newly opened stores cannibalize the sales of existing stores to some extent. Our growth prospects in the Chilean food retailing sector are likely to depend to a large extent on future growth in Chilean GDP or acquisitions of other supermarket chains, and we cannot assure you that either will in fact occur. As a result, we cannot assure you that in the future we will be able to achieve real growth in same-store sales in Chile. We believe that the Chilean department store industry has also shown signs of saturation as a result of a very aggressive expansion in past years by the industry’s main participants.

In addition, good locations are increasingly difficult to find, particularly for our big-box stores. Most major retailers have locked up key mall properties and control large land banks, and as a result we have faced difficulties in finding acceptable sites because we are more likely to open mid- to large-size supermarkets. We may be vulnerable to the expansion by “small box” supermarkets, such as convenience stores, who may more readily find suitable properties.

Increases in the corporate tax rate in Chile to finance part of the reconstruction effort may be extended or further increased and such extension or further increase may have a material adverse effect on us.

As a result of the February 2010 earthquake and tsunami, the Chilean government raised the corporate income tax rate in order to pay for reconstruction following the earthquake and tsunami. Such legislation increased the general corporate tax rate from its historic rate of 17.0% to 20.0% for the income accrued in the 2011 commercial year (año comercial), which is declared and paid in the 2012 tax year (año tributario). On September 26,

 

25


Table of Contents

2012, Law No. 20,630 introduced new amendments to existing tax legislation. Among the amendments introduced, the corporate income tax was permanently maintained at 20% effective as of the 2013 tax year. For tax year 2013, this is estimated to result in approximately U.S.$10 million of additional taxes. There is no assurance that the corporate income tax rate will not be raised in the future resulting in a material adverse effect on us.

Inflation and government measures to curb inflation may adversely affect the Chilean economy and have a material adverse effect on us.

Chile has experienced high levels of inflation in the past, including increases in the Chilean consumer price index of 7.8%, 7.1%, -1.4%, and 3.0% in 2007, 2008, 2009 and 2010, respectively. Chile experienced deflation of 1.4% during 2009, inflation of 3.0% during 2010 and inflation of 4.4% during 2011 and 1.58% in 2012 according to the Central Bank of Chile. We cannot assure you that this trend will continue.

The measures taken by the Chilean Central Bank to control inflation have often included maintaining a tight monetary policy with high interest rates, thereby restricting the availability of credit and retarding economic growth. Inflation, measures to combat inflation and public speculation about possible additional actions have also contributed materially to economic uncertainty in Chile and to heightened volatility in its securities markets. Periods of higher inflation may also slow the growth rate of the Chilean economy, which could lead to reduced demand for our products and services and decreased sales. Inflation is also likely to increase some of our costs and expenses, given that the majority of our supply contracts are denominated in Unidades de Fomento or are indexed to the Chilean consumer price index, and we may not be able to fully pass any such increases on to our customers, which could have a material adverse effect on us. Furthermore, at December 31, 2012, approximately 21% of our outstanding debt was UF-denominated. As a result, severe increases in inflation could affect the Chilean economy and could have a material adverse effect on us.

Currency devaluations and foreign exchange fluctuations may have a material adverse effect on us.

The Chilean peso has been subject to large devaluations and appreciations in the past and could be subject to significant fluctuations in the future. The main driver of exchange rate volatility in the past years was the significant devaluations in other Latin American countries, mainly Brazil, as well as general uncertainty and trade imbalances in the global markets. In 2007, the Chilean peso appreciation was driven by an improvement in Chilean economic indicators and record commodities prices, together with a weak performance of the U.S. dollar. More recently, the primary driver of exchange rate volatility has been the substantial appreciation of Latin American currencies, including the Chilean peso, against the U.S. dollar. The value of the Chilean peso against the U.S. dollar may continue to fluctuate significantly in the future. See “Item 10. Additional Information—D. Exchange Controls—Foreign Exchange Controls—Chile” and “Item 3. Key Information—A. Selected Financial Data—Exchange Rates—Chile.”

Historically, a significant portion of our indebtedness has been denominated in U.S. dollars, while a substantial part of our revenues and operating expenses has been denominated in Chilean pesos. If the Chilean peso’s value declines against the dollar, we will need more Chilean pesos to repay the same amount of dollar-denominated debt. As a result, fluctuations in the Chilean peso to U.S. dollar exchange rate may affect us. As of December 31, 2012, 57% of our financial debt (bank loans and bonds) was denominated in U.S. dollars, and 21% of such debt was fully hedged against exchange rate variations between the Chilean peso and the U.S. dollar through financial instruments such as forward exchange agreements and cross-currency swaps. The remainder of our interest-bearing debt is primarily UF- or Chilean peso-denominated and therefore not subject to exchange rate risk. Our hedging policy against foreign exchange fluctuations is disclosed in “Item 11. Quantitative and Qualitative Disclosure About Market Risk—Foreign Currency Risk.” We cannot assure you that our hedging policies will avoid future losses related to exchange rate variations.

Any significant currency devaluation or foreign exchange fluctuation in the future may adversely affect the performance of the Chilean economy and have a material adverse effect on us.

Chile has different corporate disclosure and accounting standards than those you may be familiar with in the United States.

Financial reporting and securities disclosure requirements in Chile differ in certain significant respects from those required in the United States. There are also material differences between IFRS and U.S. GAAP. Accordingly,

 

26


Table of Contents

the information about Cencosud S.A. available to you will not be the same as the information available to holders of shares issued by a U.S. company. In addition, the Chilean Securities Market Law, which governs open or publicly listed companies, such as us, imposes disclosure requirements that are more limited than those in the United States in certain important respects. In addition, although Chilean law imposes restrictions on insider trading and price manipulation, applicable Chilean laws are different from those in the United States, and the Chilean securities markets are not as highly regulated and supervised as the U.S. securities markets.

Risks Related to Argentina

Argentine economic and political conditions and perceptions of these conditions in international markets may have a direct impact on our business and our access to international capital markets, and could have a material and adverse effect on us.

27.2% and 28.9% of our revenues from ordinary activities in the years ended December 31, 2012 and 2011, respectively, were derived from revenues in Argentina and an important share of our land bank is located in Argentina. Accordingly, our results of operations and financial condition are affected to a significant extent by the level of economic activity in Argentina. The Argentine economy has experienced significant volatility in recent decades, characterized by periods of low or negative growth, high and variable levels of inflation and currency devaluation. Argentina’s sovereign credit default swap (CDS) spreads are currently among the highest in the world. Between 2001 and 2003 Argentina experienced a period of severe political, economic and social crisis. In 2002, enactment of Law No. 25,561 (the “Public Emergency Law”) ended more than a decade of uninterrupted Argentine peso/U.S. dollar parity and the Argentine peso has fluctuated significantly since then. See “Item 10. Additional Information—D. Exchange Controls—Foreign Exchange Controls—Argentina” and “Item 3. Key Information—A. Selected Financial Data—Exchange Rates—Argentina.”

Although general economic conditions in Argentina have recovered significantly during recent years, there is uncertainty as to whether this growth is sustainable. This is mainly because the economic growth was initially dependent on a significant devaluation of the Argentine peso and a high excess production capacity derived after a long period of deep recession, and was favored by high commodity prices. The global economic crisis of 2008 has led to a sudden deceleration of the economy, accompanied by political and social unrest, inflationary and Argentine peso depreciation pressures and lack of consumer and investor confidence. According to the Instituto National de Estadísticas y Censos (the Argentine National Institute of Statistics and Census, or “INDEC”), Argentina’s gross domestic product, in real terms, grew by 8.7% in 2007, 6.8% in 2008, 0.9% in 2009, 9.2% in 2010 and is estimated to have grown 9.3% and 2.1% in 2011 and 2012 respectively. We cannot assure you that GDP will increase or remain stable in the future. Even though during 2010 and the first three quarters of 2011, the Argentine economy had begun to overcome the economic slowdown, showing strong growth levels of 9.3% (annualized) during 2012, the aforementioned economic slowdown has become more evident with the INDEC estimating GDP growth at 2.1%, there is uncertainty as to whether Argentina may sustain prolonged economic growth. The recent economic crisis in Europe and the uncertainties of the political future in Argentina, among other factors, may affect the development of the Argentine economy and have a material adverse effect on us.

Argentina’s limited ability to obtain financing from international markets and limited economic growth could have a material adverse effect on us.

Argentina’s 2001 default and its failure to fully restructure its sovereign debt and fully negotiate with the holdout creditors may limit Argentina’s ability to reenter the international capital markets. Litigation initiated by holdout creditors as well as claims with the International Centre for Settlement of Investment Disputes (ICSID) have resulted and may continue to result in judgments against the Argentine government which, if not paid, could prevent Argentina from obtaining credit from multilateral organizations. Judgment creditors have sought and may continue to seek attachment orders or injunctions relating to assets of Argentina that the government intended for other uses. As a result, the government may not have the financial resources necessary to implement reforms and foster economic growth, which, in turn, could have a material adverse effect on Argentina’s economy and, consequently, on us. Furthermore, Argentina’s inability to obtain credit could have a material adverse effect on our Argentine subsidiaries, including their ability to access international credit markets, either for working capital requirements or to repay their debt at maturity.

 

27


Table of Contents

Adverse court rulings in the United States could have a material and adverse impact in the Argentine economy and us.

In 2012, holdouts from the 2001 Argentine debt-swap commenced legal proceedings against the Argentine Republic demanding full repayment of the principal amount owed under the issued notes and have made attempts to seize assets of Argentina held offshore. These holdouts were given a favorable court ruling on November 22, 2012 from the United States District Court for the Southern District of New York, who ordered Argentina to make repayments at the same pace it is repaying those who agreed to enter the 2001 debt-swap by enforcing the pari passu provision under the issued notes. Argentina and holders who participated in the debt-swap are appealing the ruling. We cannot predict when or in what form a final decision will be granted. Accordingly, a resolution of this dispute in a manner adverse to Argentina may further increase its borrowing cost and have a negative effect on the Argentine economy and us.

Inflation may continue to increase, causing adverse effects on the Argentine long-term credit markets as well as the Argentine economy, its growth and our activities in Argentina.

After several years of price stability, the devaluation of the Argentine peso in January 2002 created pressures on the domestic price system that generated high inflation in 2002 before substantially stabilizing in 2003. However, consumer prices increased by 9.8% in 2006, 8.5% in 2007, 7.2% in 2008, 7.7% in 2009, 10.9% in 2010 and 9.5% in 2011 and 10.8% in 2012 according to the INDEC, and private institutes estimate that consumer prices have increased significantly more than official estimates. A return to a high inflation environment would also undermine Argentina’s foreign competitiveness in international trade by diluting the effects of the Argentine peso devaluation and could have a material adverse effect on us.

Significant devaluation or appreciation of the Argentine peso against the U.S. dollar and other foreign currencies may adversely affect the Argentine economy, its growth and our activities in Argentina.

The depreciation of the Argentine peso in 2002 had positive effects on the competitiveness of certain sectors of the Argentine economy, but it also had a negative impact on the financial condition of Argentine businesses and individuals. The devaluation adversely affected the Chilean peso and the U.S. dollar value of our assets and earnings in Argentina and, thus, has had a negative effect on our financial condition. Moreover, the devaluation of the Argentine peso had a negative impact on the ability of Argentine businesses to honor their foreign currency-denominated debt, led to very high inflation initially, significantly reduced real wages, had a negative impact on businesses whose success is dependent on domestic market demand, and adversely affected the federal and provincial governments’ ability to honor their foreign debt obligations. If the Argentine peso experiences another significant devaluation, it may have a materially adverse effect on the local economy and on our business.

Furthermore, a substantial increase in the value of the Argentine peso against foreign currencies would adversely affect exports and could have a negative effect on the Argentine economy, with material and adverse consequences on us.

There are concerns about the accuracy of the Argentine INDEC’s measurements and thus its impact on us.

In January 2007, the INDEC modified its methodology used in calculating the consumer price index. At the same time, the Argentine government also replaced several key personnel at the INDEC, prompting complaints of government interference from the technical staff at the INDEC. In addition, the IMF requested that the government clarify its inflation rates. In June 2008, the INDEC published a new consumer price index that eliminated nearly half of the items included in previous surveys and introduced adjustable weightings for fruit, vegetables and clothing, which have seasonal cost variations.

The new index has been criticized by economists and investors after its initial report found prices rising well below expectations. These events have affected the credibility of the consumer price index published by INDEC, as well as other index published by INDEC that use the consumer price index in their calculation, including the poverty index, the unemployment index and real GDP. If it is determined that it is necessary to correct the consumer price index and other INDEC index, there could be a significant decrease in confidence in the Argentine economy, which could, in turn, have a material adverse effect on us. On February 1, 2013 Argentina became the first member nation

 

28


Table of Contents

of the IMF to be censured due to concerns that it may be underreporting inflation and GDP figures. The IMF gave Argentina a deadline of September 29, 2013 to take “remedial measures” to boost the accuracy of the data provided. If this deadline is not met, Argentina could face further sanctions such as suspended voting rights, the impossibility of accessing IMF special drawing rights or even a compulsory withdrawal of its membership.

Intervention by the Argentine government in the Argentine economy has increased and may have a direct impact on our prices and sales.

The Argentine government has in the past set certain industry market conditions and prices. In March 2002, the Argentine Government fixed the price for milk after a conflict among producers. Further government intervention in the economy could have an adverse effect on the levels of foreign investment in Argentina, Argentine companies’ access to international capital markets and trade and diplomatic relations between Argentina and other countries, which in turn could result in a material adverse effect on Argentina’s economy and, therefore, our business, financing capabilities, results of operations and financial condition. We cannot assure you that the Argentine government will not interfere in other areas in the retail industry in which we operate by setting prices or regulating other market conditions. Accordingly, we cannot assure you that the prices or other market conditions that the Argentine government might impose will allow us to freely negotiate the prices of our products, all of which could have a material adverse effect on us.

On February 1, 2013, the Argentine government required retailers to impose price limits on certain staple products for a period of 60 days. On March 29, 2013 the government of Argentina announced that retailers would have to continue to abide by agreed upon price limits for an additional 60-day period.

Government measures to address economic and social unrest may adversely affect the Argentine economy and thereby have a material adverse effect on us.

Despite the economic recovery and relative stabilization since 2003, social and political tensions and high levels of poverty and unemployment continue. Future government policies to preempt, or respond to, social unrest may include expropriation, nationalization, forced renegotiation or modification of existing contracts, suspension of the enforcement of creditors’ rights and shareholders’ rights, increase in export taxes, new taxation policies, including royalty and tax increases and retroactive tax claims, and changes in laws, regulations and policies affecting foreign trade and investment. For example, on April 16, 2012, the Argentine government announced its intention to expropriate YPF S.A. (“YPF”), the largest oil and gas company in Argentina, which is controlled by Repsol YPF S.A., a Spanish integrated oil and gas company. On May 4, 2012 the Argentine Congress approved the expropriation of 51% of YPF’s capital stock. The nationalized capital stock was distributed as follows: 49% to certain Argentine provinces and the remaining 51% to the national government. These policies could destabilize the country, both socially and politically, and have a material adverse effect on the Argentine economy and other Latin American economies and, consequently, on us.

The Argentine government may order salary increases to be paid to employees in the private sector, which would increase our operating costs.

In the past, the Argentine government has passed laws, regulations and decrees requiring companies in the private sector to maintain minimum wage levels and provide specified benefits to employees and may do so again in the future. In the aftermath of the Argentine economic crisis, employers both in the public and private sectors have experienced significant pressure from their employees, unions and labor organizations to increase wages and to provide additional employee benefits. Due to the high levels of inflation, the employees and labor organizations have begun again demanding significant wage increases. It is possible that the Argentine government could adopt measures mandating salary increases and/or the provision of additional employee benefits, including mandatory profit sharing, in the future. Any such measures could have a material adverse effect on us.

Argentine lease laws impose restrictions that limit our flexibility.

Argentine laws governing leases impose certain restrictions, including prohibition of inflation adjustment clauses, mandatory minimum and maximum duration, and statutory tenants’ rights to rescind commercial lease agreements after the initial six months. These restrictions could have a material adverse effect on our Argentine operations.

 

29


Table of Contents

In the past, in response to housing shortages, high rates of inflation and difficulties in obtaining credit, the Argentine government imposed more strict and burdensome regulations regarding leases. Such regulations limited or prohibited increases on rental prices and prohibited eviction of tenants, even for failure to pay rent. We cannot assure you that the Argentine government will not impose similar or more stringent regulations in the future, any of which could have a material and adverse effect on us.

Exchange controls could restrict the inflow and outflow of funds in Argentina and may have a material adverse effect on us.

In 2001 and 2002, the Argentine government implemented a number of monetary and currency exchange control measures that included restrictions on the withdrawal of funds deposited with banks and stringent restrictions on the outflow of foreign currency from Argentina, including funds for purposes of paying principal and interest on debt and distributing dividends.

Although many of these restrictions have been eased in some respects, some restrictions on the transfer of funds from Argentina (e.g., to make payments of principal and interest) still remain in effect and other controls on capital inflows have been established. Further, similar or new restrictions relating to the purchase of foreign currency and its transfer abroad for the payment of dividends, which were significantly eased in 2003, could be reinstated in the future. If that were to occur, we may default in the payment of external debt obligations from Argentina, we may not be able to fund and/or finance our operations in Argentina, and/or we may not be able to distribute dividends from Argentina, which could have a material adverse effect on us. These existing controls and restrcitions on the foreign exchange market in Argentina, as well as any additional restrictions that may be imposed in the future, could impair our ability to transfer funds generated by our Argentine operations in U.S. dollars outside Argentina to fund the payment of dividends or other amounts, including payments required to be made by our Argentine subsidiaries to foreign creditors in respect of the guarantee of outstanding obligations denominated in U.S. dollars.

In addition, pursuant to Resolutions AFIP N° 3210/2011 and N° 3212/2011 and Communication “A” 5245, enacted in late 2011, prior to authorizing the sale of foreign currency to make portfolio investments abroad or similar investments, the local bank must obtain prior clearance from an online database run by the Argentina federal tax authority (Administración Federal de Ingresos Públicos, or “AFIP”). This database must confirm whether an individual or entity has sufficient declared assets or funds to make the purchase of foreign currency. In the event that such declared assets or funds are not sufficient, the bank may not sell foreign currency to such individual or entity. However, the regulations fail to explain how this calculation is carried out. This requirement may affect the ability of our Argentine subsidiaries to make or manage their foreign currency investments or to transfer funds abroad. Our Argentine subsidiaries represented 28.9% of our revenues for 2011 and 27.2% of our revenues for 2012. See also “Item 10. Additional Information—D. Exchange Controls—Foreign Exchange Controls—Argentina” and “Item 3. Key Information—A. Selected Financial Data—Exchange Rates—Argentina.”

We may experience significant adverse effects from delays or restrictions on our ability to receive imported products imports.

The National Industry Ministry recently issued several resolutions implementing various governmental measures to restrict imports, including the application of non-tariff barriers to imports, such as non-automatic licenses (which are not subject to an obligation of being granted) introducing the obligation to file import products certificates.

Pursuant to General Resolution 3252, the Administración Federal de Ingresos Públicos (AFIP) implemented (effective from February 1, 2012) a system whereby, prior to issuing purchase orders (or any similar document), importers must complete a Declaración Jurada Anticipada de Importación (“Advanced Sworn Import Affidavit”), so that information is available in a registry of imports in order to comply with import requirements for companies and foreign trade operators. As a result of these and other measures, certain sectors have experienced difficulties or delays in importing products into Argentina. Such restrictions or delays could have a material adverse effect on the domestic Argentine market, production, consumption levels and the Argentine economy.

 

30


Table of Contents

Risks Related to Brazil

Brazilian economic and political conditions and perceptions of these conditions in international markets have a direct impact on our business and our access to international capital and debt markets and could have a material adverse effect on us.

In the years ended December 31, 2012 and 2011, our operations in Brazil represented 22.9% and 20.5% of our consolidated revenues from ordinary activities for such periods, respectively. These percentages, however, will increase in future periods when our Prezunic operations are fully integrated. Accordingly, our financial condition and results of operations are dependent on economic conditions in Brazil. The Brazilian economy has experienced significant volatility in recent decades, characterized by periods of low or negative growth, high and variable levels of inflation and currency devaluation. Brazil’s gross domestic product, in real terms, grew by 6.1% in 2007, 5.2% in 2008, decreased 0.3% in 2009, grew 7.5% in 2010 and 2.9% in 2011, according to the Central Bank of Brazil. The Brazilian central bank currently estimates 2012 gross domestic product expansion of approximately 1.0%. We cannot assure you that GDP will increase or remain stable in the future. Future developments in the Brazilian economy may affect Brazil’s growth rates and, consequently, the consumption of our products. As a result, these developments could have a material adverse effect on us.

Historically, Brazil’s political situation has influenced the performance of the Brazilian economy, and political crises have affected the confidence of investors and the general public, which resulted in economic deceleration and heightened volatility in the securities issued abroad by Brazilian companies. Future developments in policies of the Brazilian government and/or the uncertainty of whether and when such policies and regulations may be implemented, all of which are beyond our control, could have a material adverse effect on us.

Changes in Brazilian tax laws may increase our tax burden.

The Brazilian government frequently implements changes to tax regimes that may affect us and our customers. These changes include changes in prevailing tax rates and, occasionally, enactment of temporary taxes, the proceeds of which are earmarked for designated governmental purposes. Some of these changes may result in increases in our tax payments, which could adversely affect industry profitability and increase the prices of our products, restrict our ability to do business in our existing and target markets and have a material adverse effect on us. We cannot assure you that we will be able to maintain our projected cash flow and profitability following any increases in Brazilian taxes applicable to us.

The Brazilian government has exercised, and continues to exercise, significant influence over the Brazilian economy.

The Brazilian government frequently intervenes in the Brazilian economy and occasionally makes significant changes in policies and regulations. The Brazilian government’s actions to control inflation and other policies and regulations have often involved, among other measures, increases in interest rates, changes in tax policies, price controls, currency devaluations, capital controls and limits on export and imports. We may be materially and adversely affected by changes in policies or regulations involving or affecting factors such as:

 

   

interest rates;

 

   

monetary policy;

 

   

exchange controls and restrictions on remittances abroad;

 

   

currency fluctuations;

 

   

inflation;

 

   

liquidity of domestic capital and financial markets;

 

   

tax policy; and

 

   

other political, social and economic policies or developments in or affecting Brazil.

 

31


Table of Contents

Uncertainty over whether the Brazilian government will implement changes in policies or regulations affecting these or other factors in the future may contribute to economic uncertainty in Brazil. As a result, these uncertainties and other future developments in the Brazilian economy may have a material adverse effect on us.

Inflation, and the Brazilian government’s measures to combat inflation, may generate economic uncertainty in Brazil.

Brazil has historically experienced high rates of inflation. In the recent past, inflation, as well as government efforts to combat inflation, have had significant negative effects on the Brazilian economy and contributed to heightened volatility in the Brazilian securities market. The Brazilian government’s measures to control inflation have often included maintaining a tight monetary policy with high interest rates, thereby restricting the availability of credit and reducing economic growth. As a result, interest rates have fluctuated significantly. The Special System for Settlement and Custody (Sistema Especial de Liquidação e Custódia, or “SELIC”) interest rate in Brazil at December 31 was 8.75% in 2009, 10.75% in 2010, 11.0% in 2011 and 7.25% in 2012, as determined by the Central Bank of Brazil’s Monetary Policy Committee (Comitê de Política Monetária do Banco Central).

Brazilian government actions, including interest rate changes, intervention in the foreign exchange market, fiscal policy expansion and actions to adjust or fix the value of the Real, may trigger increases in inflation. If Brazil experiences substantial inflation in the future, the consequences may include greater economic uncertainty and increased costs for us, which may have a material adverse effect on us.

Furthermore, we currently owe an aggregate amount of R$250 million in connection with our acquisition of Bretas that is indexed to inflation in Brazil. In addition, we also owe an aggregate amount of R$215 million in connection with our acquisition of Prezunic that is indexed to inflation in Brazil. If our cash generation in local currency does not grow in line with inflation, our capacity to pay for these obligations may be negatively affected.

Exchange rate instability may adversely affect the Brazilian economy and us.

The Brazilian currency has historically suffered frequent fluctuations. In the past, the Brazilian government has implemented various economic plans and adopted a number of exchange rate policies, including sudden devaluations, periodic mini-devaluations (during which the frequency of adjustments has ranged from daily to monthly), floating exchange rate systems, exchange controls and dual exchange rate markets. There have often been significant fluctuations in the exchange rate between the Brazilian currency, the U.S. dollar, the euro and other currencies. However, in the last four years, the Real depreciated (against the U.S. dollar) by 15.26%, from R$1.77 per U.S. dollar at December 31, 2007 to R$2.05 per U.S. dollar at December 31, 2012, except in 2008 when it reached R$2.34 per U.S. dollar. This volatility may affect our consolidated financial statements, due to the growing importance of our Brazilian operations in our business portfolio, which could have a material adverse effect on us. See “Item 10. Additional Information—D. Exchange Controls—Foreign Exchange Controls—Brazil” and “Item 3. Key Information—A. Selected Financial Data—Exchange Rates—Brazil.”

Our business in Brazil is subject to governmental regulation.

Our Brazilian operations are subject to a variety of national, state, and local laws and regulations, including environmental, agricultural, health and safety and labor laws. We invest financial and managerial resources to comply with these laws and related permit requirements. Our failure to do so could subject us to fines or penalties, enforcement actions, claims for personal injury or property damages, or obligations to investigate and/or remediate damage or injury. Moreover, if applicable laws and regulations, or the interpretation or enforcement thereof, become more stringent in the future, our capital or operating costs could increase beyond what we currently anticipate, and the process of obtaining or renewing licenses for our activities could be hindered or even opposed by the competent authorities.

 

32


Table of Contents

Risks Related to Peru

Economic, social and political developments in Peru, including political instability, inflation and unemployment, could have a material adverse effect on us.

During 2012, operations in Peru generated revenues from ordinary activities representing 8.0% of our consolidated revenues from ordinary activities. Our results of operations and financial condition may be affected by changes in economic and other policies of the Peruvian government, which has exercised and continues to exercise substantial influence over many aspects of the private sector, and by other economic, social and political developments in Peru, including devaluation, currency exchange controls and economic growth. Previous Peruvian governments have imposed controls on prices, exchange rates, local and foreign investment and international trade, restricted the ability of companies to dismiss employees, expropriated private sector assets and prohibited the remittance of profits to foreign investors.

In the past, Peru has suffered through periods of high inflation, which materially undermined the Peruvian economy and the government’s ability to create conditions that would support economic growth. A return to a high inflation environment would also undermine Peru’s foreign competitiveness, with negative effects on the level of economic activity and employment and on us.

In addition, President Humala’s political party does not have a majority of the congressional seats which may potentially lead to a gridlock in the Peruvian Congress and create further political uncertainty.

A devaluation of the Peru’s currency or unexpected changes in exchange controls could have a material adverse effect on us.

The Peruvian currency has historically experienced a significant number of devaluations and, as a result, the Peruvian government has adopted and operated under various exchange rate control practices and determination policies, ranging from strict control to market determination of exchange rates. The Nuevo Sol depreciated against the U.S. dollar by 4.8% in 2008, appreciated against the U.S. dollar by 8.0% in 2009, appreciated against the U.S. dollar by 2.8% in 2010, appreciated against the U.S. dollar by 4.1% in 2011 and appreciated against the U.S. dollar by 5.72% in 2012. As the Peruvian economy is partially dollarized, devaluation of the Nuevo Sol against the U.S. dollar could have a negative impact on the economy. Therefore, any significant devaluation of the Nuevo Sol against the U.S. dollar could have a material adverse effect on us.

Risks Related to Colombia

We are highly dependent on economic and political conditions in Colombia in connection with our supermarket and retail operations in Colombia.

As a result of our acquisition of Carrefour’s supermarket operation in Colombia, the Colombian market has become a significant part of our supermarket business and related results of operations. Colombia has suffered periods of significant economic and political instability in the past.

Our revenues earned from our operations in Colombia depend to a significant extent on macroeconomic and political conditions in Colombia. Decreases in the growth rate, periods of negative growth, changes in law, increases in inflation, changes in regulation or policy, or future judicial rulings and interpretations of policies involving exchange controls and other matters, such as (but not limited to) currency depreciation, interest rates, inflation, taxation, banking laws and regulations and other political or economic developments, in or affecting Colombia may affect the overall business environment and could, in turn, impact our financial condition and results of operations.

Colombia’s fiscal deficit and growing public debt could adversely affect the Colombian economy. The Colombian fiscal deficit was 0.1% of GDP in 2008, 2.7% of GDP in 2009, 3.2% of GDP in 2010 and 2.0% of GDP in 2011.

Despite the recovery of Colombia’s economy over the past several years, we cannot assure you that such growth and relative stability will be sustained. If the condition of the Colombian economy were to deteriorate, we would likely be adversely affected.

The Colombian government frequently intervenes in Colombia’s economy and from time to time makes significant changes in monetary, fiscal and regulatory policy. Our business and results of operations and financial

 

33


Table of Contents

condition may be adversely affected by changes in government or fiscal policies, and other political, diplomatic, social and economic policies that may affect Colombia. We cannot predict what policies will be adopted by the Colombian government and whether those policies would have a negative impact on the Colombian economy or our business and financial performance.

The Colombian government and the Colombian Central Bank may seek to implement new policies aimed at controlling further fluctuation of the Colombian peso against the U.S. Dollar and fostering domestic price stability. The Colombian Central Bank may impose certain mandatory deposit requirements in connection with foreign-currency denominated loans obtained by Colombian residents, including us. Although no mandatory deposit requirement is currently in effect, a mandatory deposit requirement was set at 40% in 2008 after the Colombian peso appreciated against foreign currencies. We cannot predict or control future actions by the Colombian Central Bank in respect of such deposit requirements, which may involve the establishment of a different mandatory deposit percentage. The use of such measures by the Colombian Central Bank may be a disincentive for us to obtain loans denominated in a foreign currency. We cannot predict the effects that such policies will have on the Colombian economy. In addition, we cannot assure you that the Colombian peso will not depreciate or appreciate relative to other currencies in the future.

Our assets located in Colombia are subject to various risks associated with emerging market countries, such as Colombia.

Asset ownership in Colombia, as is the case in other emerging market countries, is subject to political, economic and other uncertainties, including expropriation, nationalization, renegotiation or nullification of existing contracts, currency exchange restrictions and international monetary fluctuations. We cannot assure you that our operating results will not be affected by the occurrence of any such events.

Colombian government policies will likely significantly affect the economy and, as a result, our business and operations in Colombia.

The Colombian government has historically exercised substantial influence over the Colombian economy, and its policies are likely to continue to have an important effect on our operations in Colombia. Our business in Colombia could be adversely affected by changes in policy, or future judicial interpretations of such policies, involving exchange controls and other matters such as currency devaluation, inflation, interest rates, taxation, regulations and other political or economic developments in or affecting Colombia.

Although Colombia has maintained stable economic growth since 2003 and an inflation rate below 8% during the last 10 years, in the past, economic growth has been negatively affected by lower foreign direct investment and high inflation rates and the perception of political instability. We cannot assure you that growth achieved in recent years by the Colombian economy will continue in future periods. If the perception of improved overall stability in Colombia deteriorates or if foreign direct investment declines, the Colombian economy may face a downturn, which could negatively affect our results of operations.

Colombia’s economy remains vulnerable to external shocks that could be caused by its major regional trading partners experiencing significant economic difficulties or by more general “contagion” effects, which could have a material adverse effect on Colombia’s economic growth and its ability to service its debt.

Colombia has recently experienced slower growth and other adverse economic and financial effects as a result of the global financial crisis. The Colombian government has indicated that tightening credit conditions in financial markets could have a potential, although limited, negative impact on Colombian economy mainly through lower foreign direct investment flows. A significant decline in the economic growth of any of Colombia’s major trading partners, such as the United States and Venezuela, could have a material adverse impact on Colombia’s balance of trade and adversely affect Colombia’s economic growth. According to the Colombian Ministry of Commerce, the United States is Colombia’s largest export market. In 2010, the United States accounted for 42% of Colombia’s total exports. Accordingly, a new decline in U.S. demand could have a material adverse effect on Colombian exports and Colombia’s economic growth, which could, in turn, likely have detrimental results on our business activities. Colombia’s recent diplomatic crisis with Venezuela, Colombia’s major trading partner of non-traditional products, may adversely affect the levels of Colombian exports to Venezuela.

 

34


Table of Contents

Colombia has experienced several periods of violence and instability and such violence instability could affect the economy and our operations.

Colombia has experienced several periods of severe criminal violence over the past four decades, primarily due to the activities of guerilla, paramilitary groups and drug cartels. In remote regions of the country, where governmental presence is minimal, these groups have exerted influence over the local population and funded their activities by protecting and rendering services to drug traffickers. In response, the Colombian government has implemented various security measures and has strengthened its military and police forces, including the creation of specialized units. Despite these efforts, drug-related crime and guerrilla and paramilitary activity continue to exist in Colombia. Any possible escalation in the violence associated with these activities may have a negative impact on the Colombian economy in the future. In the context of any political instability, allegations have been made against members of the Colombian government concerning possible ties with paramilitary groups. These allegations may have a negative impact on the Colombian government’s credibility, which could in turn have a negative impact on the Colombian economy or our operations there in the future.

Colombia’s diplomatic relations with Venezuela and Ecuador may affect the Colombian economy and, consequently, our results of operations and financial condition.

Diplomatic relations with Venezuela and Ecuador, two of Colombia’s main trading partners, have from time to time been tense, and have been affected by events surrounding the armed conflict with the Revolutionary Armed Forces of Colombia, or the FARC (Fuerzas Armadas Revolucionarias de Colombia), particularly on Colombia’s borders with Venezuela and Ecuador. Any further deterioration in relations of Colombia with Venezuela and Ecuador may result in the closing of borders, the imposition of trade barriers or a breakdown of diplomatic ties, any of which could have a negative effect on Colombia’s trade balance, economy and national security, which may adversely affect our results of operations.

Natural disasters in Colombia could disrupt our business and affect our results of operations in Colombia.

We are exposed to natural disasters in Colombia, such as earthquakes, volcanic eruptions, floods, tropical storms and hurricanes. In the event of a natural disaster, our disaster recovery plans may prove to be ineffective, which could have a material adverse effect on our ability to conduct our business in Colombia, particularly if such an occurrence affects computer-based data processing, transmission, storage and retrieval systems or destroys customer or other data. In addition, if a significant number of our employees and senior managers were unavailable because of a natural disaster, our ability to conduct our business could be compromised. Natural disasters or similar events could also result in substantial volatility in our results of our Colombian operations for any fiscal quarter or year.

Our Colombian operations are subject to regulation.

The supermarket business in Colombia is mainly regulated by the Colombian Consumer Protection Bureau and the free market. Nevertheless, the Colombian Superintendence of Industry and Commerce (the “ Superintendencia de Industry y Comercio”) acts as the supervisory agency for the enforcement of regulations issued by the Colombian Consumer Protection Bureau. The Colombian Ministry of Industry and Tourism also plays an import role in the industry as it has within its reach ability to take any required measure to ensure the protection of the local market for domestic industry. In the past the ministry has relied on a wide array of measures to achieve this goal which have included the creation of product specific duties or price controls.

Furthermore, all corporations are regulated by the Colombia Superintendence of Corporations (“Superintendencia de Sociedades”). This government body oversees and approves corporate events such as mergers, acquisitions and bankruptcies. All corporations under the scope of this body in Colombia must file annual financial statements therewith.

 

35


Table of Contents

New or higher taxes resulting from changes in tax laws and regulations in Colombia or the interpretation thereof could adversely affect our results of operations in Colombia.

The enactment of new tax laws and regulations, and uncertainties with respect to the application or interpretation of future tax policies, pose risks to us. In recent years, Colombian tax authorities have imposed additional taxes in a variety of areas, such as taxes on financial transactions and other taxes on net worth, have modified income tax withholding rates and have eliminated certain tax benefits.

The Colombian government could seize or expropriate our assets under certain circumstances.

Pursuant to Article 58 of the Colombian constitution, the Colombian government may exercise its eminent domain powers in respect of our assets in the event such action is required in order to protect the public interest. According to Law 388 of 1997, the eminent domain power may be exercised through: (i) an ordinary expropriation proceeding (expropiación ordinaria), (ii) an administrative expropriation proceedings (expropriación administrativa) or (iii) an expropriation for war reasons (expropiación en caso de guerra). In all cases, we would be entitled to a fair indemnification for the expropriated assets as described below. Also, as a general rule, indemnification must be paid before the asset is effectively expropriated.

Under an ordinary expropriation proceeding, the Colombian government may expropriate any asset. Before expropriating, the Colombian government must offer to purchase the asset from its owner at market value as determined by an independent appraiser. If no agreement is reached by the parties after 30 days of such offering, the Colombian government may initiate a judicial procedure. Under the procedure, the relevant court would decide on the validity of the expropriation and the amount of the indemnification.

An administrative expropriation proceedings may occur when the factors supporting the expropriation represent an imminent risk affecting public interest. Before conducting an administrative expropriation, the Colombian government must offer to purchase the asset from its owner at market value as determined by an independent appraiser. If no agreement is reached by the parties after 30 days of such offering, the Colombian government may expropriate the asset directly (i.e., without having to conduct a judicial proceeding) and establish the indemnification amount based on the asset’s market value. After the expropriation, the parties may challenge the validity of the expropriation and the amount of the indemnification granted through a judicial process.

In an expropriation by reason of war, the Colombian government may expropriate personal property without the need to pay any indemnification prior to the expropriation and temporarily occupy real property for as long as national security matters require. Possession of real property expropriated must be returned to its original owner once the necessity for expropriation by reason of war ceases to exist.

Exchange rate fluctuations could adversely affect the Colombian economy, and therefore, us.

The Colombian peso is a highly volatile currency that has been subject to significant devaluations and appreciations in the past and may be subject to similar fluctuations in the future. A significant devaluation or appreciation of the Colombian peso in relation to the U.S. dollar could adversely affect the Colombian economy and, as a result, our operating results.

High rates of inflation may have an adverse impact us.

Rates of inflation in Colombia have been historically high, and we cannot assure you that inflation will not return to high levels. Inflation rates were 2.0%, 3.2% and 3.7% for 2009, 2010 and 2011 and 2.44% for 2012. Inflationary pressures may, among other things, reduce consumers’ purchasing power and we cannot assure you that measures taken by the Colombian government and Colombian Central Bank will suffice to curb inflation. A return to high inflation in Colombia may harm our results of operations.

 

36


Table of Contents

We may not achieve the expected strategic objectives and financial benefits from the acquisition of Carrefour’s supermarket operations in Colombia.

We expect to realize strategic and financial benefits as a result of the completed acquisition of Carrefour’s supermarket operations in Colombia, including potential synergies. Our ability to realize these benefits, however, is subject to risks and uncertainties, including, among others:

 

   

we may not be successful in retaining senior management;

 

   

we may be unable to anticipate or manage risks that are unique to the Colombian businesses; and

 

   

we may be unable to compete successfully in the Colombian market as a result of our limited familiarity with Colombia in general and its customer demographics in particular.

Our growth strategy includes expanding the supermarket business in Colombia, both in existing markets and by opening stores in new markets. Our future growth is dependent, in part, on the ability to build, buy or lease new stores. Local land use, local zoning issues, environmental and other regulations applicable to the types of stores we desire to construct may impact our ability to find suitable locations, and increase the cost of building, buying or leasing stores.

Our failure to manage these risks, or other risks related to the announced acquisition of the Colombian businesses that are not currently known to us, could prevent us from realizing the expected benefits of acquiring Carrefour’s supermarket operations in Colombia.

We have limited knowledge of the liabilities of the Acquired Companies.

As part of our acquisition of the Acquired Companies, we have carried out, and are in the process of carrying out, legal and accounting due diligence on the Acquired Companies. The purchase agreement that we have entered into with Carrefour allows us to recover only for certain breaches of representations and warranties, and we may not be able to recover from Carrefour for liabilities that we may discover following the closing of the acquisition. We may incur significant losses in connection with liabilities of the Acquired Companies, which may have a material adverse effect on us and on our ability to meet our obligations under the notes.

The operating information related to the Acquired Companies in this annual report may be imprecise and incomplete.

We describe in this annual report for informational purposes only certain operating information of the Acquired Companies, which we have obtained from Carrefour and other publicly-available sources and which represents our best understanding and our management’s expectations regarding this information. However, not all of this information has been independently verified. Therefore, you should not rely on this information as an indication of the Acquired Companies’ businesses and results of operations or of our future business and results of operations once the acquisition is completed. The operating information of the Acquired Companies included in this annual report may significantly differ from the actual operating information of the Acquired Companies.

Risks Related to our Shares and the ADSs

Our ADSs have a limited trading history.

Our ADSs began to trade on the New York Stock Exchange on June 22nd, 2012, and as a result have a limited trading history. We cannot predict the extent to which investor interest in our company will maintain an active trading market on the NYSE, or how liquid that market will be in the future. The market price of our ADSs may be volatile and may be influenced by many factors, some of which are beyond our control, including:

 

   

the failure of financial analysts to cover the ADSs or our common stock or changes in financial estimates by analysts;

 

   

actual or anticipated variations in our operating results;

 

37


Table of Contents
   

changes in financial estimates by financial analysts, or any failure by us to meet or exceed any such estimates, or changes in the recommendations of any financial analysts that elect to follow the ADSs or shares of common stock or the shares of common stock of our competitors;

 

   

announcements by us or our competitors of significant contracts or acquisitions;

 

   

future sales of the ADSs and shares of common stock; and

 

   

investor perceptions of us and the industries in which we operate.

In addition, the stock market in general has experienced substantial price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of particular companies affected. These broad market and industry factors may materially harm the market price of the ADSs and shares of common stock, regardless of our operating performance. In the past, following periods of volatility in the market price of certain companies’ securities, securities class-action litigation has been instituted against these companies. Such litigation, if instituted against us, could have a material adverse effect on us.

There may be a lack of liquidity and market for our shares of common stock and the ADSs in Chile.

Our shares of common stock are listed and traded on the Santiago Stock Exchange, the Chile Electronic Stock Exchange and the Valparaíso Stock Exchange, which we collectively refer to as the “Chilean Stock Exchanges.” Although ADS holders are entitled to withdraw shares of common stock underlying the ADSs from The Bank of New York Mellon (the “Depositary”) at any time, the Chilean Stock Exchanges are substantially smaller, less liquid and more volatile than major securities markets in the United States. Although our shares of common stock are traded on the Chilean Stock Exchanges, there can be no assurance that a liquid trading market for our shares of common stock will continue to exist. As of the date of this annual report, our non-controlling shareholders hold approximately 39% of our outstanding shares of common stock. A limited trading market in general and our concentrated ownership in particular may impair the ability of an ADS holder to sell in the Chilean market any shares of common stock obtained upon withdrawal of such shares from the ADS facility in the amount and at the price and time such holder desires, and could increase volatility of the price of the ADSs.

Holders of ADSs may find it difficult to exercise voting rights at our shareholders’ meetings.

Holders of ADSs will not be direct shareholders of our company and will be unable to enforce directly the rights of shareholders under our estatutos (“Bylaws”) and the laws of Chile. Holders of ADSs may exercise voting rights with respect to the shares of common stock represented by ADSs only in accordance with the deposit agreement governing the ADSs. Holders of ADSs will face practical limitations in exercising their voting rights because of the additional steps involved in our communications with ADS holders. Holders of our shares of common stock will be able to exercise their voting rights by attending a shareholders’ meeting in person or voting by proxy. By contrast, holders of ADSs will receive notice of a shareholders’ meeting by mail from the Depositary following our notice to the Depositary requesting the Depositary to do so. To exercise their voting rights, holders of ADSs must instruct the Depositary on a timely basis on how they wish to vote. This voting process necessarily will take longer for holders of ADSs than for holders of our common stock. If the Depositary fails to receive timely voting instructions for all or part of the ADSs, the Depositary will assume that the holders of those ADSs are instructing it to give a discretionary proxy to a person designated by us to vote with respect to their ADSs, except in limited circumstances.

Holders of ADSs also may not receive the voting materials in time to instruct the Depositary to vote the common stock underlying their ADSs. In addition, the Depositary and its agents are not responsible for failing to carry out voting instructions of the holders of ADSs or for the manner of carrying out those voting instructions. Accordingly, holders of ADSs may not be able to exercise voting rights, and they will have little, if any, recourse if the shares of common stock underlying their ADSs are not voted as requested.

The significant share ownership of our controlling shareholders may have a material adverse effect on the future market price of the ADSs and our shares of common stock.

We are currently controlled by our founder, Mr. Horst Paulmann, and his family, who together have a 60.8% ownership stake in us, through Inversiones Quinchamali Ltda., Inversiones Latadía Ltda. and Inversiones Tano Ltda, as of the date of this annual report. A disposition by our controlling shareholder of a significant number of our shares, or the perception that such a disposition might occur, could materially and adversely affect the trading price of our shares of common stock on the Santiago Stock Exchange as well as the market price of the ADSs on the New York Stock Exchange.

 

38


Table of Contents

Our controlling shareholders are able to exercise significant control over our company, and also own a significant minority interest in many of our international subsidiaries which could result in conflicts of interest.

Our controlling shareholders are in a position to direct our management and to determine the result of substantially all matters to be decided by majority vote of our shareholders, including the election of a majority of the members of our board of directors, determining the amount of dividends distributed by us (subject to the legally mandated minimum of 30% of net income), adopting certain amendments to our Bylaws, including the issuance of new shares, enforcing or waiving our rights under existing agreements, leases and contractual arrangements and entering into agreements with entities affiliated with us. As a result, circumstances may occur in which our controlling shareholders’ interests could be in conflict with your interests as holder of the ADSs. Our controlling shareholders may have interests in pursuing or preventing acquisitions, divestitures or other transactions where, in their judgment, such action would be in our best interests, even though such action may not be in the best interests of our minority shareholders.

Our status as a foreign private issuer exempts us from certain of the corporate governance standards of the NYSE, limiting the protections afforded to investors.

We are a “foreign private issuer” within the meaning of the NYSE corporate governance standards. Under the NYSE listing rules, a foreign private issuer may elect to comply with the practice of its home country and not to comply with certain NYSE corporate governance requirements, including the requirements that (1) a majority of the board of directors consist of independent directors, (2) a nominating and corporate governance committee be established that is composed entirely of independent directors and has a written charter addressing the committee’s purpose and responsibilities, (3) a compensation committee be established that is composed entirely of independent directors and has a written charter addressing the committee’s purpose and responsibilities, and (4) an annual performance evaluation of the nominating and corporate governance and compensation committees be undertaken. Therefore, you will not have the same protections afforded to shareholders of companies that are subject to all New NYSE corporate governance requirements.

For example, in reliance on the foreign private issuer exemption to the NYSE listing rules a majority of our board of directors may not consist of independent directors; our board’s approach may therefore be different from that of a board with a majority of independent directors, and as a result, the management oversight of our Company may be more limited than if we were subject to the NYSE listing rules.

U.S. securities laws do not require us to disclose as much information to investors as a U.S. issuer is required to disclose, and you may receive less information about us than you might otherwise receive from a comparable U.S. company.

The corporate disclosure requirements applicable to us may not be equivalent to the requirements applicable to a U.S. company and, as a result, you may receive less information about us than you might otherwise receive in connection with a comparable U.S. company. We are subject to the periodic reporting requirements of the Exchange Act of 1934, as amended (the “Exchange Act”) that apply to “foreign private issuers.” The periodic disclosure required of foreign private issuers under the Exchange Act is more limited than the periodic disclosure required of U.S. issuers. For example, we will be required only to file an annual report on Form 20-F, but we are not required to file any quarterly reports. A U.S. registrant must file an annual report on Form 10-K and three quarterly reports on Form 10-Q. In addition, we will be required to file current reports on Form 6-K, but the information that we must disclose in those reports is governed primarily by Chilean law disclosure requirements and may differ from Form 8-K’s current reporting requirements imposed on a U.S. issuer. Finally, we are not subject to the proxy requirements of Section 14 of the Exchange Act and our officers, directors and principal shareholders are not subject to the short swing insider trading reporting and recovery requirements under Section 16 of the Exchange Act.

Chilean law provides for fewer and less well-defined shareholders’ rights.

Our corporate affairs are governed by our Bylaws (which serve the combined function of the articles of incorporation and the bylaws of a U.S. corporation), and the laws of Chile. Under such laws and our Bylaws, our shareholders may have fewer or less well-defined rights than they might have as shareholders of a corporation incorporated in a U.S. jurisdiction. For example, our shareholders would not be entitled to redemption rights in the event of a merger or other business combination undertaken by us. Persons or entities who seek to acquire control of

 

39


Table of Contents

a publicly-held Chilean corporation through a tender offer (oferta pública de adquisición de acciones), must make an offer to any and all shareholders of such company. See “Item 10. Additional Information—B. Memorandum and Articles of Association—Right of dissenting shareholders to tender their shares” and “—Dividend and liquidation rights.”

Our recent transformation as a U.S. public company may increase our costs and disrupt the regular operations of our business.

Our recent initial public offering has had a significant transformative effect on us. We have incurred and expect to incur additional legal, accounting, reporting and other expenses as a result of having an ADS program. We will also incur costs which we have not incurred previously, including, but not limited to, increased costs and expenses for directors’ fees, increased directors and officers insurance, increased investor relations, and various other incremental costs related to having an ADS program traded in the United States.

We also anticipate that we will incur costs associated with corporate governance requirements, including requirements under the Sarbanes-Oxley Act of 2002, as amended, as well as rules implemented by the Securities and Exchange Commission (the “SEC”) and NYSE. We expect these rules and regulations to increase our legal and financial compliance costs and make some management and corporate governance activities more time-consuming and costly. These rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. This could have a material adverse impact on our ability to recruit and bring on a qualified independent board. We cannot predict or estimate the amount of additional costs we may incur as a result of these requirements or the timing of such costs.

Chile imposes controls on foreign investment and repatriation of investments that may affect your investment in, and earnings from, the ADSs, and may impose additional controls or restrictions in the future.

Equity investments into Chile from abroad are subject to the requirement that investors provide Chile’s Central Bank with information related to such equity investments and conduct any operations in connection with the repatriation of investments and earnings on them within Chile’s Mercado Cambiario Formal, or Formal Exchange Market. See “Item 10. Additional Information—D. Exchange Controls—Foreign Exchange Controls—Chile.”

Holders of ADSs are entitled to receive dividends on the underlying shares to the same extent as the holders of shares. Dividends received by holders of ADSs will be converted into U.S. dollars and distributed net of foreign currency exchange fees and expenses and fees of the Depositary and will be subject to Chilean withholding tax, currently imposed at a rate of 35% (subject to credits in certain cases as described under “Item 10. Additional Information—E. Taxation—General—Material United States Federal Income Tax Considerations”). If for any reason, including changes in Chilean laws or regulations, the Depositary were unable to convert Chilean pesos to U.S. dollars, investors may receive dividends and other distributions, if any, in Chilean pesos.

Additional Chilean restrictions applicable to the holders of the ADSs and other foreign investors in Chile could be imposed in the future. The Central Bank of Chile has the authority to impose at any time certain controls, restrictions or obligations on foreign investors in Chile. Such restrictions could include, but are not limited to, the requirement to obtain the Central Bank of Chile’s prior approval for the repatriation of the proceeds from the disposition of shares underlying the ADSs or the payment of dividends. We cannot advise you as to the duration or impact of any such restrictions if imposed.

Currency devaluations, foreign exchange fluctuations and foreign currency conversion costs may have a material adverse effect on the U.S. dollar value of any cash distributions made to ADS holders in respect of ADSs.

If the value of the Chilean peso falls relative to the U.S. dollar, the value of the ADSs and any distributions to be received from the Depositary for the ADSs could be materially and adversely affected. Cash distributions made in respect of the ADSs are received by the Depositary in Chilean pesos, are then converted by the Depositary into U.S. dollars at the then prevailing exchange rate and distributed to the holders of ADSs. In addition, the Depositary will incur foreign currency conversion costs (to be borne by the holders of the ADSs) in connection with the foreign currency conversion and subsequent distribution of dividends or other payments with respect to ADSs.

 

40


Table of Contents

ADS holders may not be able to effect service of process on, or enforce judgments or bring original actions against, us, our directors or our executive officers, which may limit the ability of holders of ADSs to seek relief against us.

We are a Chilean corporation. None of our directors are residents of the United States and most of our executive officers reside outside the United States. In addition, a substantial portion of our assets and the assets of our directors and executive officers are located outside the United States. As a result, it may be difficult for ADS holders to effect service of process outside Chile upon us or our directors and executive officers or to bring an action against us or such persons in the United States or Chile to enforce liabilities based on U.S. federal securities laws. It may also be difficult for ADS holders to enforce in the United States or in Chilean courts money judgments obtained in United States courts against us or our directors and executive officers based on civil liability provisions of the U.S. federal securities laws. If a U.S. court grants a final money judgment in an action based on the civil liability provisions of the federal securities laws of the United States, enforceability of this money judgment in Chile will be subject to the obtaining of the relevant “exequatur” (i.e., recognition and enforcement of the foreign judgment) according to Chilean civil procedure law currently in force, and consequently, subject to the satisfaction of certain factors. The most important of these factors are the existence of reciprocity, the absence of a conflicting judgment by a Chilean court relating to the same parties and arising from the same facts and circumstances and the Chilean courts’ determination that the U.S. courts had jurisdiction, that process was appropriately served on the defendant and that enforcement would not violate Chilean public policy. Failure to satisfy any of such requirements may result in non-enforcement of your rights.

Preemptive rights may be unavailable to ADS holders or U.S. holders of shares in certain circumstances and, as a result, U.S. owners of shares or ADSs would be subject to potential dilution.

The Ley sobre Sociedades Anónimas No. 18,046 and the Reglamento de Sociedades Anónimas, which we refer to in this document collectively as the “Chilean Corporations Law,” require us, whenever we issue new shares for cash and sell treasury shares, to grant preemptive rights to all of our shareholders (including shares represented by ADSs), giving them the right to purchase a sufficient number of shares to maintain their existing ownership percentage. It is possible that, in connection with any future issuances of shares, we may not be able to offer shares to U.S. holders of shares or ADSs pursuant to preemptive rights granted to our shareholders and, as a result such U.S. holders of shares or ADSs would be subject to potential dilution.

We will not be able to offer shares to ADS holders or U.S. holders of shares pursuant to preemptive rights that we grant to our shareholders in connection with any future issuance of shares or sale of treasury shares unless a registration statement under the U.S. Securities Act of 1933, as amended (the “Securities Act”), is effective with respect to such rights and shares, or an exemption from the registration requirements of the Securities Act is available.

Such a registration statement may not be filed and an exemption from the registration requirements of the Securities Act may not be available. If owners of ADSs are unable to exercise preemptive rights because a registration statement has not been filed, the Depositary will attempt to sell such owners’ preemptive rights and distribute the net proceeds of the sale (net of the depositary’s fees and expenses) to the holders of the ADSs, provided that a secondary market for such rights exists and a premium can be recognized over the cost of any such sale. It is possible that a secondary market in preemptive rights may not develop in connection with any future issuance of shares or, if such a market does develop, a premium may not be able to be realized on their sale.

If preemptive rights cannot be sold, they will expire, and holders of ADSs will not realize any value from the grant of such preemptive rights. In either case, the equity interest in us of the holders of ADSs would be diluted proportionately.

ADS holders may not be able to exercise redemption rights that are granted by the Chilean corporations Law to registered shareholders of publicly traded Chilean corporations.

Under Ley sobre Sociedades Anónimas No. 18,046, as amended (the “Chilean Corporations Law”), if any of the following resolutions is adopted by our shareholders at any extraordinary shareholders meeting, dissenting shareholders have the right of redemption and can require us to repurchase their shares, subject to the fulfillment of certain terms and conditions. A dissenting shareholder is a shareholder who either attends the shareholders meeting and votes against a resolution which results in a redemption right or, if absent from the shareholders meeting, a shareholder who notifies the company in writing within 30 days of the shareholders meeting of his opposition to the resolution and that he is exercising his redemption right.

 

41


Table of Contents

The resolutions that result in a shareholder’s redemption right are the following:

 

   

our transformation into a different type of legal entity;

 

   

our merger with or into another company;

 

   

the disposition of 50% or more of our assets, whether or not that sale includes our liabilities or the proposal or amendment of any business plan involving the transfer of more than 50% of our assets; the sale of 50% or more of the assets of an affiliate which represents at least 20% of the assets of the corporation, as well as any sale of its shares which would result in us ceasing to be in control of such subsidiary;

 

   

the granting of security interests or personal guarantees to secure or guarantee third parties’ obligations exceeding 50% of our assets, except with regard to security interests or personal guarantees are granted to secure or guarantee obligations of our subsidiaries;

 

   

the creation of preferential rights for a class of shares or an amendment to those already existing, in which case the redemption right only accrues to dissenting shareholders of the class or classes of shares adversely affected;

 

   

the amendment of our Bylaws to correct any formal defect in our incorporation, which might cause our Bylaws to be null and void, or any amendment of our Bylaws that grants a shareholder a redemption right;

 

   

the approval by our shareholders of our ceasing to be subject to the regulations applicable to publicly held corporations in the event we no longer meet the requirements under Chilean law to qualify as such a corporation; and

 

   

any other causes as may be established by Chilean law and our Bylaws (our Bylaws currently do not establish any instances).

In addition, shareholders of a publicly held corporation have a redemption right if a person acquires two-thirds or more of the outstanding voting stock of the company and does not make a tender offer for the remaining shares within 30 days of that acquisition at a price not lower than the price that would be paid shareholders exercising their redemption rights. However, the right of redemption described in the previous sentence does not apply in the event the company reduces its capital as a result of not having fully subscribed and paid an increase of capital within the statutory term.

Finally, shareholders of a publicly held corporation have the right of redemption within 30 days after the date when the controller acquires more than 95% of the shares of the company. These redemption rights must be exercised within 30 days.

ADS holders own a beneficial interest in shares held by the Depositary and, accordingly, they are not shareholders of the Company. The Depositary will not exercise redemption rights on behalf of ADS holders. Accordingly, in order to ensure a valid exercise of redemption rights, an ADS holder would have to cancel his ADSs and become a registered shareholder of the Company no later than the date which is five Chilean business days before the shareholders’ meeting at which the vote which would give rise to redemption rights is taken, or the applicable record date for redemption rights that arise other than as a result of a shareholder vote. Redemption rights must then be exercised in the manner prescribed in the notice to shareholders that is required to be sent to shareholders of Chilean public companies advising such holders of their right of redemption. If an event occurs that gives rise to redemption rights, ADS holders will have a limited time to cancel their ADSs and to become registered shareholders of the Company prior to the record date for the shareholders meeting or other event giving rise to such redemption rights. If an ADS holder does not become a registered shareholder of the Company prior to such record date he will not be able to exercise the redemption rights available to registered shareholders.

 

42


Table of Contents

Market volatility may affect our stock price and the value of your investment.

The market price of our common stock may fluctuate significantly in response to a number of factors, most of which we cannot predict or control, including:

 

   

announcements of new initiatives, commercial relationships, acquisitions or other events by us or our competitors;

 

   

failure of any of our initiatives to achieve commercial success;

 

   

fluctuations in stock market prices and trading volumes of securities of similar companies;

 

   

general market conditions and overall fluctuations in U.S. equity markets;

 

   

variations in our operating results, or the operating results of our competitors;

 

   

changes in our financial guidance to investors and analysts or our failure to achieve such expectations;

 

   

delays in, or our failure to provide, financial guidance;

 

   

changes in securities analysts’ estimates of our financial performance or our failure to achieve such estimates;

 

   

sales of large blocks of our common stock, including sales by our controlling shareholders;

 

   

additions or departures of any of our key personnel;

 

   

changes in accounting principles or methodologies;

 

   

changing legal or regulatory developments in the United States and other countries, including the companies in which we operate; and

 

   

discussion of us or our stock price by the financial press and in online investor communities.

In addition, the stock market in general has experienced substantial price and volume volatility that is often seemingly unrelated to the operating performance of particular companies. These broad market fluctuations may cause the trading price of our common stock to decline. In the past, securities class action litigation has often been brought against a company after a period of volatility in the market price of its common stock. We may become involved in this type of litigation in the future. Any securities litigation claims brought against us could result in substantial expenses and the diversion of our management’s attention from our business.

Exchange rate fluctuations may affect our stock price.

As our operations are denominated in local currencies (Chilean Peso, Brazilian Real, Peruvian Sol, Argentinian Peso and Colombian Peso), changes in the currency parities may affect our recognition of results. Furthermore, as our stocks are primarily traded at the Santiago Stock Exchange, our stock is traded and listed in Chilean pesos. Therefore, changes in the Chilean Peso versus the U.S. Dollar parity may affect the value of your investment when measured in U.S. Dollars.

 

Item 4. Information on the Company

 

  A. HISTORY AND DEVELOPMENT OF THE COMPANY

General Information

We are a publicly-held stock corporation (sociedad anónima abierta) organized under the laws of Chile and have an indefinite corporate duration. We were incorporated by a public deed dated November 10, 1978. This abstract is recorded on page 13808 No. 7412 of the Registro de Comercio de Santiago (Commercial Registry of Santiago) for the year 1978. Our legal name is “Cencosud S.A.” Our registered office is located at Av. Kennedy 9001, Piso 6, Las Condes, Santiago, Chile and our main telephone number is 56 (2) 959-0000.

 

43


Table of Contents

History

Our history has been one demonstrating organic growth as well as significant, ongoing acquisitions designed to enhance our footprint in the industries in which we operate and increase our market share and brand recognition.

1960—2001

We trace our origins to the opening in 1960 of our first supermarket, with a selling area of 160 square meters, in Temuco, Chile. In the mid-1970s, we expanded our business by opening the first Jumbo hypermarket in Chile, with a selling space of 7,000 square meters, located on Kennedy Avenue in Santiago.

In 1982, we began our operations in Argentina with the opening of Argentina’s first Jumbo hypermarket which had a selling space of 9,282 square meters. We continued to expand in Argentina with the construction of Unicenter in 1988, Argentina’s largest shopping center which today has a selling space of 91,771 square meters. In 1993, we opened Lomas Center, the first shopping center in the south of the Buenos Aires metropolitan area. In 1994, we opened San Martin Factory (an outlet shopping center). In 1996, we opened Palermo shopping center in Buenos Aires. Between 1997 and 2003, we opened Quilmes Factory (an outlet shopping center), Palmas de Pilar and El Portal de Escobar, all of which are located in Greater Buenos Aires.

In 1993, we expanded our shopping center business in Chile by opening Alto Las Condes, at that time Chile’s most modern shopping center with a selling space of 115,258 square meters. In the same year, we expanded our line of business by opening Easy home improvement stores in Chile and Argentina which offer products required to improve and maintain a home, as well as construction materials and design and decoration products. That year, we opened our first Easy home improvement stores in the Alto Las Condes shopping center in Chile and in the Parque Brown Factory shopping center in Argentina.

2002—2006

In 2002, we continued our expansion in Chile by opening three new Jumbo hypermarkets, four new Easy home improvement stores and the Portal La Reina shopping center. In November 2002, we significantly expanded our presence in the Chilean home improvement sector through the acquisition of Proterra, a small chain of do-it-yourself stores in southern Chile, and converted its seven stores to our Easy home improvement stores. In 2002, we acquired the operations of Home Depot (Argentina).

In 2003, we acquired the supermarket chain Santa Isabel making us the second-largest supermarket operator in Chile in terms of revenues according to our estimations. We also opened two new shopping centers, the Florida Center and Portal La Dehesa, both in Santiago. We also started our credit card business with the incorporation of our Cencosud Administradora de Tarjetas de Crédito S.A. subsidiary, and the launching of the Jumbo Más credit card.

In April 2004, we acquired Las Brisas supermarket chain, which enhanced our geographical coverage in several areas including Valparaíso and Concepción through the addition of 17 new stores. In May 2004, we completed our initial public offering in Chile and were listed on the Santiago Stock Exchange. At the same time, we issued ADSs in the international capital markets in a private offering pursuant to Rule 144A and Regulation S, raising over U.S.$330 million. In November 2004, through the acquisition of the supermarket chain Montecarlo, we consolidated our position as the second-largest supermarket operator in Chile. In November 2004, we also acquired the supermarket chain Disco in Argentina, one of Argentina’s largest supermarket chains, which we believe consolidated our position as the second-largest supermarket operator in that country in terms of revenues. Moreover, in October 2004, we opened a new shopping center in Argentina, Portal de Rosario, which we believe currently is the largest in the Rosario area in terms of revenues.

In March 2005, we entered into the department stores business through the acquisition of Empresas Almacenes Paris S.A., one of Chile’s most important department stores chains and which also operated a travel agency, an insurance broker, Banco Paris and Administradora de Créditos Comerciales ACC S.A. In September 2005, we rebranded our Las Brisas and Montecarlo brands under Santa Isabel brand, in order to consolidate and enhance our supermarket business.

 

44


Table of Contents

2007—Present

In June 2007, we acquired other two supermarket chains in Chile, Infante which operates in the city of Antofagasta and Economax with a significant presence in Santiago’s downtown, adding in total 16 new stores to our supermarket business. Likewise, we expanded our retail department store business by acquiring the Foster and Eurofashion clothing store chain which sells the popular clothing brands Foster, JJO and Maritimo. In November 2007, we acquired the GBarbosa supermarket and hypermarket chain which operated both formats in the northeast region of Brazil with a total of 46 stores.

In December 2007, we entered into an agreement to acquired GSW S.A., the operator of the Wong chain of supermarkets, hypermarkets and shopping centers in Peru. Pursuant to this agreement the Wong family acquired a percentage of our shares and consequently became one of our main shareholders.

In May 2007, we entered into a joint venture agreement with Casino Guichard-Perrachon S.A. (“Casino”) in order to develop the home improvement store business in Colombia. Pursuant to the joint venture, initially we had a 70% interest in the joint venture and were in charge of the operational administration of Easy Colombia S.A., with Casino owning the remaining 30%. In April 2009, we acquired Casino’s shares in the joint venture, increasing our ownership stake to 100%.

In 2008, we entered the financing business in Argentina, with the launch of the Cencosud credit card and the opening of an insurance brokerage company in Argentina. By the end of 2008, over 200,000 cards had already been issued and around 55,000 policies had been sold in Argentina. In September 2008, we acquired Blaisten, a professional do-it-yourself store in Argentina.

In 2010, we expanded our footprint in the Brazilian market through the acquisition of three supermarket chains. In March 2010, we acquired the four-store Super Familia supermarket chain which we estimate to be the third-largest in the city of Fortaleza. In April 2010, we entered the high-end retail market in Brazil with the acquisition of Perini Comercial do Alimento Ltda., operator of the four-store chain of Perini supermarkets in the city of Salvador. Perini is a well-known brand in Brazil with 46 years in the market and complements our existing operations in Brazil. In October 2010, we acquired what we estimated to be the largest supermarket chain in the Brazilian state of Minas Gerais, Bretas, with 62 stores in three Brazilian states at the time of acquisition: Minas Gerais, Goias and Bahia. With the Bretas acquisition, we consolidated our position as Brazil’s fourth-largest supermarket operator in terms of revenues, as measured by ABRAS.

At the beginning of 2011 we issued U.S.$750 million aggregate principal amount of bonds due 2021 in a 144A/Reg-S offering in the international capital market, with a fixed interest rate of 5.50%. Additionally, in June 2011 we issued a local bond in Chilean pesos, for the amount of Ch$54,000 million aggregate principal amount of bonds due 2031 in the local Chilean market, with a fixed interest rate of 7.40%. This was the first bond issued by a local company, both public and private, in Chilean pesos with a term to maturity of 20 years.

In March 2011, UBS AG London Branch (“UBS”) executed a shareholders agreement to purchase from certain investors a 38.636% stake in Cencosud’s subsidiary Jumbo Retail Argentina, which operates our supermarkets in Argentina, for U.S.$442 million.

In August 2011, Cencosud Brasil Comercial Ltda. (“Cencosud Brasil Comercial”), Irmãos Bretas, Filhos e Cia. Ltda. (“Bretas”), Mercantil Rodrigues Comercial, Ltda. (“Mercantil Rodrigues”), Perini Comercial de Alimentos Ltda. (“Perini”) and Cencosud Brasil entered into an agreement with Banco Bradesco pursuant to which Banco Bradesco agreed to render financial services in Cencosud stores in Brazil, particularly regarding the exclusive issuance and operation of the Cencosud Card credit card (Cartão Cencosud), as well as the offer, within Cencosud stores in Brazil, of consumer loans, purchase financing and insurance products. Prezunic is currently not included in this venture.

In 2011, we continued expanding into the Brazilian market through the acquisition of Cardoso. Cardoso is a three-store supermarket chain in the state of Bahia, with net sales of approximately R$60 million (U.S.$35.9 million) in 2011. Cencosud paid the purchase price of U.S.$11.3 million or Ch$5,429 million in three installments, 60% on the closing of the transaction, 20% on the 6-month anniversary of the closing date and the remaining 20% on the first year anniversary of the closing date. We have converted the acquired stores to the GBarbosa format and are now operating under this brand.

 

45


Table of Contents

In December 2011, we acquired 85.58% of the capital stock of in Johnson’s S.A. for an aggregate purchase price of Ch$32,606 million. Johnson is a department store with 39 stores throughout Chile using the Johnson brand and 13 stores using the FES brand totaling 117,569 square meters of selling space. In 2011, Johnson registered sales of Ch$118,447 million from its retail operations. Johnson’s retail financing arm has been migrated to our Cencosud format and all clients have been brought on to Tarjeta Cencosud. Clients of former Johnson’s retail financing arm are now offered the same services as all other Cencosud clients. With the acquisition of Johnson we are able to target low and middle income market segments, in a similar fashion as with the acquisition of Santa Isabel in the supermarkets division, as Johnson stores are smaller, targeted to low and mid income consumers and better located to target that market segment.

On January 2, 2012, we acquired 100% of the capital stock of Prezunic. The aggregate purchase price of the operation was R$875 million (or approximately Ch$242,690 million), payable as follows: R$580 million on the closing date of the transaction (January 2, 2012), with the balance to be paid as follows: R$80 million, R$85 million, R$80 million and R$50 million, on the first, second, third and fourth anniversary of the closing date, respectively. We estimate that Prezunic is the third-largest supermarket chain in Rio de Janeiro with 31 stores and net sales of approximately R$2.2 billion in 2011.

On June 13, 2012, we opened Costanera Center shopping mall, the largest shopping center in Chile and will include an office tower that we believe will be the tallest building in South America, a landmark development for the city of Santiago. On June 29, 2012, we repurchased 38.636% of the capital stock of Jumbo Retail Argentina from UBS. On July 3, 2012, we completed our SEC-registered initial public equity offering of 105,000,000 common shares in the form of common shares and ADSs listed on the New York Stock Exchange.

On November 30, 2012, we took over what formerly represented the operations of Carrefour in the Colombian market. With this move, we believe to have become the second largest player in Colombia’s supermarket industry. Through this acquisition, we acquired over 98 stores in different cities and regions of Colombia. In December 2012, we issued U.S.$1,200 million aggregate principal amount of bonds due 2023 in a 144A/Reg-S offering in the international capital markets, with a fixed interest rate of 4.875%.

In February 2013, we announced a preemptive rights offering in the Chilean market pursuant to a capital increase for the amount of U.S.$1,600 million. Proceeds of this offering were used for the prepayment of the outstanding bridge loan facility we incurred to finance our acquisition of Carrefour’s operations in Colombia in the amount of US$1,500 million, with the remainder to repay other short term liabilities, including debt facilities related to our Brazilian operations. This offering was completed on March 14, 2013, raising Ch$770,647 million (98.9% subscription). The remainder of the offered shares were successfully auctioned at the Santiago stock exchange.

Acquisition of Carrefour’s Operations in Colombia

On November 30, 2012, we completed the acquisition of the former operation of Carrefour Colombia for a total purchase price equal to €2 billion subject to adjustments pursuant to the stock purchase agreement related thereto. The Acquired Companies operate supermarkets under the “Carrefour” and “Maxi” brand names in Colombia.

The acquisition included the purchase of 92 total stores, including 72 hypermarket stores, 16 convenience stores, and four cash and carry stores and gas stations. The stores acquired are located in nine of the ten largest cities in Colombia. Colombia is the second most populous country in South America, with solid macroeconomic indicators and what we believe to be good growth prospects. We believe this transaction has placed Cencosud as the second largest supermarket operator in Colombia in terms of sales and consolidates the existing presence of the Company’s Easy stores in Colombia We expect to migrate all the acquired stores to a Cencosud format by the end of 2013.

To finance the acquisition of Carrefour’s Colombian operations, on October 17, 2012, the Company entered into a bridge loan agreement with a syndicate of banks in the amount of U.S.$2,500 million (the “Bridge Loan Agreement”). The Bridge Loan Agreement has a maturity date of April 15, 2014 and bears an interest rate of LIBOR plus a margin of 1.50% for the first sixth months, 1.75% for the following three months, 2.20% for the following three months, 2.25% for the following three months, and 2.75% thereafter. The full amount under the Bridge Loan Agreement was disbursed on October 17, 2012 and used by us to fund the purchase of Carrefour’s Colombian operations in escrow. On December 6, 2012, the Company issued U.S.$1,200 million aggregate principal amount of

 

46


Table of Contents

bonds due 2023 in a Rule 144A and Regulation S offering in the international capital markets. The bonds due 2023 accrue interest at a fixed rate of 4.875%. The proceeds of that offering were used to repay in part amounts outstanding under the Bridge Loan Agreement. The remaining outstanding amount of our Bridge loan facility was repaid with proceeds of the capital increase that was successfully completed on March 14, 2013.

Principal Capital Expenditures for Organic Expansion

Capital expenditures totaled Ch$575,228 million, Ch$616,336 million and Ch$349,793 million for the years ended December 31, 2012, 2011 and 2010, respectively. For a discussion of our capital expenditures and future projections, see “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Capital Expenditures and permanent investments.”

 

47


Table of Contents
  B. BUSINESS OVERVIEW

Our Company

We believe we are one of the leading multi-brand retailers in South America, based on revenues, selling space, number of stores and gross leasable area in the sectors and countries in which we operate. See “—Industry Overview and Competition” for more explanation on the methodology we use to calculate our market position in such sectors and countries. We operate through a number of formats, including supermarkets, home improvement stores, shopping centers and department stores. We are headquartered in Chile and have operations in Chile, Argentina, Brazil, Colombia and Peru. Our business consists of five segments, including four retail segments, which allows us to reach a wide range of customers offering various combinations of products, price, quality and service. We seek to increase operations through organic growth and acquisitions in Brazil, Peru and Colombia, which the Company believes are high growth and underpenetrated markets due to their favorable demographics, sustainable household consumption growth, low formal retail penetration, and strong macroeconomic environments, as described in herein and in “—Industry Overview and Competition.” As a complement to our core retailing business, we are actively involved across the region in the commercial real estate development business, particularly in Chile, Argentina and Peru, with 30 shopping malls representing 717,383 square meters of gross leasable area as of December 31, 2012, and we also offer private label credit cards, consumer loans and limited financial services to our retail customers.

For the year ended December 31, 212, we had 1,082 stores and shopping centers with an aggregate of 4,102,283 square meters selling space and had assets of Ch$ 9,674,000 million, liabilities of Ch$ 6,275,787,849 million, net earnings attributable to controlling shareholders of Ch$ 269,959 million, and shareholders’ equity of Ch$ 3,412,212 million.

Throughout our 35-year history of growth we have developed, acquired, integrated and expanded several retail businesses with strong brands in the various markets where we operate. Since January 1, 2005, we have grown our total number of stores and shopping centers from 425 to 1,082 as of December 31, 2012 and the total selling space of our retail stores and shopping centers from 1,433,838 to 4,102,283 square meters as of December 31, 2012. In addition, over the same period, we completed several strategic acquisitions that have significantly increased the size and geographic scope of our operations.

On November 30, 2012, we acquired the operations in Colombia of Carrefour, a leading French multinational retailer, including its 72 hypermarket stores, 16 convenience stores, and four cash and carry stores and gas stations in Colombia. According to the Colombian Superintendency of Companies. See “—A. History and Development of the Company—History—Acquisition of Carrefour’s Operations in Colombia.”

 

LOGO

We believe that our strategy of operating as an integrated multi-format and multi-brand retailer, combined with our broad product offering and portfolio of brands has been one of the key strategic advantages in the successful growth of our businesses. Today we operate a diversified operational and geographic footprint across South American markets with highly attractive demographics and strong macroeconomic fundamentals. We believe that our broad presence and our competitive position across key markets will continue to allow us to consolidate the retail market and to benefit from the expected strong growth in underpenetrated retail markets such as Brazil and Peru.

 

48


Table of Contents

The following table presents our total number of stores and shopping centers by country as of December 31, 2012:

 

     Chile      Argentina      Brazil      Peru      Colombia(1)      Total  

Supermarkets

     214         288         205         86         100         893   

Home improvement stores

     31         47         —           —           4         82   

Department stores

     78         —           —           —           —           78   

Shopping centers

     11         15         —           3         —           29   

Total

     334         350         205         89         104         1,082   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

In summary, highlights of our commercial activities include:

 

   

1,802 stores and shopping centers as of December 31, 2012, an increase of 155% compared to 425 stores and shopping centers as of January 1, 2005.

 

   

4.102 million square meters of selling space as of December 31, 2012, an increase of 186% compared to 1.4 million square meters as of January 1, 2005.

 

   

A total of 4.7 million credit cards issued and U.S.$ 1.8 billion in credit card operations as of December 31, 2012

The following table indicates the percentages of revenues from ordinary activities, gross margin and Adjusted EBITDA, as defined below, that each of our geographical markets represented, for the period indicated:

 

     Year Ended December 31, 2012  
     Chile      Argentina      Brazil      Peru      Colombia(1)  
     (in millions of Ch$)  

Revenues from ordinary activities

     3,662,368         2,489,148         2,098,780         739,457         159,325   

Gross margin

     1,079,769         831,629         458,988         189,288         41,572   

Adjusted EBITDA(2)

     320,083         181,763         69,438         51,379         13,660   

 

(1) Not including Carrefour
(2) See “Presentation of Financial and Other Information” for the definition of Adjusted EBITDA and the reconciliation of Adjusted EBITDA to IFRS measures.

We are organized in six business segments: supermarkets, home improvement stores, department stores, shopping centers and financial services, plus complementary activities described as “Other.”

Supermarkets. We operate 893 supermarkets throughout Chile, Argentina, Brazil, Peru and Colombia as of December 31, 2012, selling a wide variety of name brand and private label products. We believe that we are the second-largest supermarket operator in Chile, in terms of revenues, based on our comparisons against information from public filings of our main competitors as of December 31, 2011, and the largest in Argentina and Peru, based also on information provided by third-party market researcher, Planet Retail. We pioneered the hypermarket format in Chile with the opening of our first Jumbo hypermarket in 1976. Since then, we have expanded and grown our supermarkets division, and as of December 31, 2012 we owned a total of 43 Jumbo hypermarkets and supermarkets and 171 Santa Isabel supermarkets in Chile. We operate 24 Jumbo hypermarkets and supermarkets and 264 Disco and Super Vea supermarkets in Argentina, as of December 31, 2012. In Brazil, as a result of recent acquisitions, we are now the fourth-largest supermarket operator in terms of revenues, according to the ABRAS. We believe we are the largest operator in the state of Minas Gerais, the second-largest in the northeast of Brazil, and we estimate we are the third-largest in the state of Rio de Janeiro (after the acquisition of Prezunic in January 2012), all in terms of

 

49


Table of Contents

sales. In October 2011, we acquired the Cardoso supermarket chain of three stores in the state of Bahia and in January 2012 we acquired Prezunic, the operator of a supermarket chain of 31 stores in the state of Rio de Janeiro, in Brazil, thus further expanding our presence in the Brazilian market. According to Apoyo, a Peruvian Rating Agency associated with Fitch, Inc., we are the largest supermarket operator in Peru in terms of sales, with 86 stores as of December 31, 2012.

On November 30, 2012, we completed the acquisition of Carrefour’s operations in Colombia, including 72 hypermarket stores, 16 convenience stores, and four cash and carry stores and gas stations. Through this acquisition, we believe we became the second largest supermarket operator in Colombia in terms of sales. See “—A. History and Development of the Company—History.”

Home improvement stores. We believe we are the second-largest home improvement store operator in Chile and the largest in Argentina in terms of revenues based on our comparison against publically filed information from our main competitors as of December 31, 2012. We sell a wide variety of building and other materials, including name brand and private label products. As of December 31, 2012, we have 31 Easy home improvement stores and 299,806square meters of home improvement store selling space in Chile and 47 Easy and Blaisten home improvement stores and 388,878 square meters of home improvement store selling space in Argentina. In October 2008, we opened the first home improvement store in Colombia and as of December 31, 2012 we have 4 Easy home improvement stores and 34,309 square meters of selling space in Colombia.

Department stores. We believe that we are the second-largest department store operator in Chile, in terms of revenues based on our comparison against information from public filings of our main competitors as of December 31, 2012. We also believe we have the largest selling space for department stores in Chile. We operate 39 Paris and 39 Johnson department stores in Chile with 377,190 square meters of total selling space as of December 31, 2012. Our Paris stores sell a wide variety of merchandise such as apparel, home furnishings, electronics and sporting goods, including name brand and private label products. In December 2011, we acquired an 85.58% interest in Johnson, a department store with 39 stores throughout Chile under the Johnson brand and an additional 13 stores using the FES brand with a total of 117,569 square meters or an additional 43.2% of selling space over our existing Paris stores.

Shopping centers. We believe that we are the second-largest operator of shopping centers in each of Chile and Argentina, in terms of total leasable area based on our comparisons against publically filed information from our main competitors as of December 31, 2012. As of December 31, 2012, we own and manage 11 shopping centers in Chile, 15 in Argentina and 3 in Peru with a total gross leasable area of 717.382 square meters. In Chile and Argentina, each of our shopping centers contains a Jumbo hypermarket, an Easy home improvement store and, in Chile, a Paris department store as well as other third-party-owned businesses intended to attract customers and enhance their overall shopping experience.

Financial services. We established our financial services division in 2003 when we launched our “Jumbo Más” credit card to facilitate in-store purchases and, since then, have significantly increased our credit card operations in Chile, Argentina, Brazil and Peru. We have grown both through our own private-label cards and joint ventures with third party bank issuers of credit cards, primarily to finance customers’ purchases in our stores. We also own Banco Paris, a specialty retail consumer bank in Chile, which provides a wide range of consumer and financial services. In August 2010, we launched our own private label credit card in Peru and we are expanding our offerings of financial services. In 2011, we established Banco Cencosud in Peru and in June 2012 we received the operation license from the banking superintendence (Superintendencia de Bancos y Seguros), and started operations in August 2012 through our Cencosud credit card. Recently, we entered into an agreement with a major Brazilian bank, Banco Bradesco, to offer financial services for all our stores in Brazil, namely the exclusive issuance and operation of the Cencosud Card credit card (Cartão Cencosud), as well as the offer, within Cencosud stores in Brazil, of consumer loans, purchase financing and insurance products. Prezunic is currently not a participant in the abovementioned joint venture.

As of December 31, 2012, we had a total of 4.7 million credit cards and other accounts in Chile, Argentina, Brazil and Peru. As of December 31, 2012, we also had U.S.$ 1.77 billion in customer loans outstanding. Our financial services segment also includes our insurance brokerage services in Argentina, Chile, Brazil and Peru.

 

50


Table of Contents

Other. In our “Other” segment we include the results of our Chile-based Aventura entertainment centers, which offer families the ability to enjoy different entertainment activities, such as electronic games, bowling and birthday parties; our frequent purchaser loyalty programs, which provide discounts and other promotions for our customers; and our corporate back-office, treasury and other operations.

For the years ended December 31, 2012, 2011 and 2010, results from our “Other” segment represented 0.2%, 0.2% and 0.1%, respectively, of our consolidated revenues.

See also, “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Trends and Factors Affecting Our Results of Operations—Impact of Acquisitions” for additional details regarding our acquisition activities in recent years.

 

     Year Ended December 31, 2012  
     Supermarkets      Home
improvement
     Department
stores
     Shopping
centers
     Financial
services
     Other(1)  
     (in millions of Ch$)  

Revenues from ordinary activities

     6,738,171         1,063,086         886,075         165,462         282,253         14,030   

Gross margin

     1,677,762         351,586         241,407         141,691         177,353         11,447   

Adjusted EBITDA(2)

     399,774         91,386         43,127         119,900         59,272         (77,136

 

(1) See “—Our Company” for a description of our “Other” segment.
(2) See “Presentation of Financial and Other Information” for the definition of Adjusted EBITDA and the reconciliation of Adjusted EBITDA to IFRS measures.

We serve several markets through our extensive network of stores and shopping centers in South America under six diversified business segments. Our five principal segments are: supermarkets, home improvement stores, department stores, shopping centers and financial services. As of December 31, 2012, we operated 1,083 stores and shopping centers in Chile, Argentina, Brazil, Peru and Colombia with a total selling area of 4,102,283 square meters. Through our various store formats and our numerous brands, we offer a full range of products intended to appeal to all types of consumers. The merchandise we carry includes one or more of the leading manufacturers in each category complemented by our offerings of our own private label brands. We believe the diversity and strength of our brands and our varied store formats allows us to compete effectively against our competitors, which range from traditional independent grocery stores and food specialists to mass market retailers.

As of December 31, 2012, our brand portfolio includes the following principal brands:

 

   

SUPERMARKETS

 

HOME

IMPROVEMENT

   DEPARTMENT
STORES
   SHOPPING
CENTERS
   FINANCIAL
SERVICES

Argentina

  LOGO   LOGO       LOGO      LOGO  

Brazil

  LOGO            LOGO  

Chile

  LOGO   LOGO    LOGO      LOGO      LOGO  

Colombia

    LOGO         

Peru

  LOGO         LOGO      LOGO  

 

51


Table of Contents

We believe we have established a positive record in the operation of our businesses. The following table sets forth certain performance metrics related to our consolidated growth for the periods presented:

 

     Year Ended December 31,  
     2012      2011      2010  
     (in millions of Ch$)(1)  

Number of retail stores(2)

     1,051         800         729   

Total store area (square meters)(2)

     3,387,184         2,566,890         2,339,699   

Net sales(2)

     8,687,332         7,195,685         5,895,316   

Adjusted EBITDA(3)

     636,323         626,141         535,565   

 

(1) Except numbers of stores and selling space.
(2) Excluding shopping centers.
(3) See “Presentation of Financial and Other Information” for the definition of Adjusted EBITDA and the reconciliation of Adjusted EBITDA to IFRS measures.

Supermarkets

General

We pioneered the hypermarket format in Chile with the opening of our first Jumbo hypermarket in 1976. Since then, we have expanded and grown our supermarkets division, and at December 31, 2012 we owned a total of 43 Jumbo hypermarkets and 171 Santa Isabel supermarkets in Chile. We opened our first Jumbo hypermarket in Argentina in 1982 and in 2004 acquired the Disco supermarket chain, significantly enhancing our presence in Argentina and at December 31, 2012 we operated 24 Jumbo hypermarkets and 264 Disco and Super Vea supermarkets in Argentina. We estimate that we are each of Chile and Argentina’s second-largest supermarket operator in terms of sales.

In recent years, we have expanded beyond our traditional supermarket presence in Chile and Argentina and have made sizeable acquisitions in Brazil and Peru. As a result, at December 31, 2012 we operated 205 supermarket and hypermarket stores in Brazil under the brands GBarbosa, Mercantil Rodrigues, Perini,Bretas and Prezunic. With our acquisition of Prezunic in January 2012, we consolidated our position as Brazil’s fourth-largest supermarket operator, in terms of revenues, according to ABRAS. Regionally, we estimate that we are the second-largest operator in the northeast of Brazil, the largest operator in Minas Gerais in Brazil and, following the recent acquisition of Prezunic, the third-largest operator in Rio de Janeiro, in terms of sales. In Peru we operated 86 Metro and Wong hypermarkets and supermarkets at December 31, 2012. According to Apoyo, we are the largest supermarket operator in Peru in terms of sales. For the year ended December 31, 2012, our supermarkets generated revenues from ordinary activities, gross margin and Adjusted EBITDA of Ch$6,738,170 million, Ch$1,677,762 million and Ch$399,774 million, respectively.

 

52


Table of Contents

As noted under “Item 4. Information on the Company—A. History and Development of the Company—History” above, our supermarket operations have expanded through organic growth and several acquisitions over the past three years. The following table sets forth, for the periods indicated, the effect of the expansion of our supermarket operations:

 

     Year ended December 31,  
     2012      2011      2010  
     (in millions of Ch$)(1)  

Number of stores

     893