A. Exchange Rate Risk
The Company is exposed to three types of currency risk. The first risk comes from accounts payable in a foreign currency, the second from financial debt in currencies other than the functional currency of each business, and the third from investments abroad.
Parts of the products acquired for sale are imported and, therefore, are denominated in a foreign currency. This creates an exposure to the variation between the different local currencies in the countries where the Group does business and the foreign currency, mainly the U.S. Dollar. The company hedges accounts payable and future obligations in a foreign currency, which reduces exposure to less than 2% of all foreign currency liabilities.
In order to minimize exposure to exchange rate fluctuations, most of the debt is assumed in the currency of the countries where the company does business. As of December 31, 2013, 79.0% of consolidated financial debt was expressed in Chilean pesos (including debt in UF), 10.4% in Peruvian sols, 3.3% in Colombian pesos and 3.8% in Argentine pesos, all net of hedging. There was also CLP 73,823 million in financial debt expressed in dollars as of that date, net of hedging (excluding letters of credit. The effect of letters of credit was covered in the preceding paragraph). This represents 3.1% of the consolidated financial debt of the Group. Dollar debt was assumed because of good market conditions at the time the debt was contracted and it is partially hedged by derivatives.
The Company holds business investments in Peru, Argentina, Colombia and Brazil. These foreign investments are managed in the functional currency of each country.
B. Interest Rate Risk
Most debt accrues interest at a fixed interest rate, which avoids any exposure to fluctuations that may occur in variable interest rates that could increase finance expenses. On a consolidated level as of December 31, 2013, net of derivatives, 87.5% of the company’s financial debt accrued interest at a fixed rate and 9.0% at a floating rate. 3.5% corresponded to overdraft facilities and letters of credit that, given their term, can be considered to be at a floating interest rate.
C. Risk of Investment Abroad
Investments in countries like Peru, Argentina, Colombia and Brazil that have a lower risk rating than Chile entail a weighted set of risks higher than what would exist if only domestic investments were made. In contrast, there is a probability of higher returns in each of the international markets in which Falabella has made its investments. This consideration is contained in the risk rating reports issued by the two private risk rating agencies of the company that have rated the solvency of SACI Falabella at AA.
D. General Risks of the Economy
The company is dedicated to providing commercial service to its customers and to granting convenient loans. This is correlated, via aggregate consumption, to both the real variable conditions and the expected conditions that determine that consumption. The growth rate of revenues and profits should fall when demand is restricted, and the opposite will occur when demand expands.
E. Specific Trade Risk
The company does not depend exclusively on one particular supplier and its procurement is widespread and around the world. Nor does it have few customers since it attends to millions in the different socio-economic strata. The company sells several thousands of different products, so it is not affected by any particular pricing cycle. As a result, it has no specific and distinctive risk of trade in general or of department stores in particular.
F. Asset Risk
The fixed assets comprised of buildings, infrastructure, installations and equipment are amply protected against any operating risks by the pertinent insurance policies.
