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FEMSA (FMX) Posts Solid Q3 Earnings, Revenues Improve Y/Y

Zacks Equity Research

Fomento Economico Mexicano S.A.B. de C.V’s FMX, alias FEMSA, reported net majority income per ADS of $1.03 (Ps. 2.03 cents per FEMSA unit) in third-quarter 2019, driven by strong operating performance across all businesses.

Net consolidated income of the largest franchise bottler for The Coca-Cola Co. KO was Ps. 9,613 million (US$495 million), up 52.9% from the year-ago quarter. Theincrease was driven by rise in income from operations as well as non-cash foreign exchange gain related to FEMSA’s U.S. dollar-denominated cash position in third-quarter 2018,which was impacted by the depreciation of the Mexican peso.

Total revenues grew 10.2% year over year to Ps. 130,470 million (US$6,718.3 million), fueled by robust growth across all operations. On an organic basis, total revenues improved 8.1%.

Despite the robust results, shares of FEMSA declined nearly 2% yesterday. The Zacks Rank #3 (Hold) stock has gained 5.3% in the past year compared with the industry’s growth of 12%.

 


FEMSA’s gross profit grew 12.8% to Ps. 48,883 million (US$2,517 million). Gross margin expanded 90 basis points (bps) to 37.5%, owing to gross margin expansion of 120 bps and 130 bps, respectively, at FEMSA Comercio’s Proximity and Fuel Divisions. This was partly negated by declines of 130 bps and 90 bps, respectively, at Coca-Cola FEMSA and FEMSA Comercio’s Health Division.

FEMSA’s operating income (income from operations) improved 18.1% to Ps. 12,632 million (US$650.5 million). On an organic basis, operating income rose 17.7%. Consolidated operating margin expanded70 bps to 9.7%,driven by operating margin expansion at Coca-Cola FEMSA and FEMSA Comercio’s Fuel Division, offset by declines at FEMSA Comercio’s Proximity and Health Divisions.

Segmental Discussion

FEMSA Comercio — Proximity Division: Total revenues for the segment grew 10.1% year over year to Ps. 48,429 million (US$2,493.8 million). This rise can primarily be attributed to the opening of 232 net new OXXO stores in the reported quarter, which has taken net new store openings to 1,362 in the past 12 months. The Proximity Division benefited from steady growth in Mexico and strong international operations.

FEMSA Comercio’s Proximity division had 18,840 OXXO stores as of Sep 30, 2019. Same-store sales at OXXO grew 5%, backed by 6.5% rise in average customer ticket, offset by a 1.4% decline in store traffic.

Operating income rose 9.4% year over year while operating margin contracted 10 bps to 9.1%. Revenue gains were partly offset by higher operating expenses. The increase in operating expenses mainly resulted from the gradual shift to employee-based store teams, higher secure cash handling costs, consolidation of Caffenio and continued efforts to strengthen the compensation structure of in-store personnel. This was partly compensated by lower electricity costs as more than 50% of the company’s stores in Mexico operate with wind energy.

FEMSA Comercio — Health Division: The segment reported total revenues of Ps. 15,909 million (US$819.24 million), up 26.6% year over year. Though the segment witnessed soft results in Chile, it benefited from strong progress in the integration of Corporación GPF in Ecuador. Organic revenues for the segment were up 6.2%. The increase was backed by steady trends in Mexico and positive trends in Colombia, offset by trading-related softness in Chile and effects of negative currency translations.

The segment had 3,130 points of sales across all regions, of which, about 69 net new stores were added in the third quarter. Same-store sales for drugstores dropped 0.7% due to the aforementioned factors.

Operating income grew9.4% year over year, while operating margin contracted60 bps to 4.1%. Organic operating income for the segment improved 3.7%.The decline in operating margin was attributed to operating expense deleverage, stemming from the consolidation of Corporación GPF, which has a relatively higher operating expense structure. This was partly negated by cost efficiencies and stringent expense management across regions.

FEMSA Comercio — Fuel Division: Total revenues grew 1.2% to Ps. 12,348 million (US$635.8 million). Same-station sales dipped 3.9% as pricing gains were offset by a decline in average volume. The company had 541 OXXO GAS service stations as of Sep 30, reflecting no additions of OXXO GAS stations in the third quarter. Operating income rose 23.7%, with 50-bps expansion in operating margin to 2.7%.

Total revenues at Coca-Cola FEMSA S.A.B. de C.V. KOF improved 10.3% year over year to Ps. 48,699 million (US$2,507.7 million). On a comparable basis, revenues improved 11.6%. The top line for the segment benefited from robust price increases, revenue management initiatives across regions, volume growth in Brazil and Central America, and rise in other operating revenues related to tax reclaims in Brazil. This was partially offset by negative currency translation, particularly the Argentine and Colombian Peso.

Driven by a resilient consumer environment in Mexico and solid growth in South America, the segment delivered strong operating results. Coca-Cola FEMSA’s operating income grew 21.4% while comparable operating income rose 22.8%. The segment’s operating margin expanded130 bps to 14.4%, owing to operating expense leverages and tax reclaims in Brazil, offset by restructuring severance related to the company’s efficiency program and other tax-related provisions.

Financial Position

FEMSA had cash and cash equivalents of Ps. 97,851 million (US$4,956 million) as of Sep 30, 2019. Long-term debt was Ps. 96,310 million (US$4,878 million). Moreover, the company incurred capital expenditure of Ps. 6,776 million (US$348.9 million) in the third quarter, reflecting increased investments in most businesses.

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