Shares of Fomento Economico Mexicano, S.A.B. de C.V. FMX, also known as FEMSA, jumped about 2.9% on Friday after the company reported better-than-expected bottom-line results for the first quarter of 2015. The largest franchise bottler of The Coca-Cola Company KO reported net majority income of 57 cents per ADS (Ps. 0.88 per FEMSA Unit), which was above the Zacks Consensus Estimate of 48 cents but declined significantly from the year-ago quarter figure of 85 cents.
Quarterly net consolidated income rose nearly 15.1% to Ps. 4,349 million (US$616.8 million) from Ps. 3,778 million (US$518.4 million) in the year-ago quarter. The increase was primarily due to rise in Heineken’s first-quarter results in which FEMSA holds 20% participation interest backed by a significant gain from the sale of Heineken’s Mexican packaging business. This was partly offset by slightly lower operating income as well as a marginal rise in net financing expenses.
Quarter in Detail
Total revenue rose 1.5% year over year to Ps. 65,199 million (US$4,367.1 million), mainly on account of strong results in FEMSA Comercio. On an organic basis, total revenue fell 1% from the prior-year quarter.
FEMSA’s gross profit dipped 3.1% year over year to Ps. 25,689 million (US$1,720.7 million). However, gross margin contracted 190 basis points to 39.4% owing to weaker margins at both Coca-Cola FEMSA and FEMSA Comercio’s OXXO Gas that generates lower margins than retail business.
FEMSA’s operating income declined 1.5% to Ps. 5,858 million (US$392.4 million) from Ps. 5,946 million (US$449.2 million) in the year-ago period. On an organic basis, operating income fell 1.9% year over year. Moreover, consolidated operating margin contracted 30 bps to 9% because of the swift growth of low-margin FEMSA Comercio business, which is shrinking the company’s consolidated operating income.
Segmental Discussion
Total revenue at Coca-Cola FEMSA S.A.B. de C.V. KOF dropped 11.2% year over year to Ps. 34,374 million (US$2,302.4 million) mainly due to the negative impact of using SIMADI exchange rate to convert the results for its Venezuela operations coupled with the devaluation of the Brazilian real and the Colombian peso. However, on a currency neutral basis and excluding Venezuela, total revenue grew 5.5% driven by an increase of average price per unit case in almost every region along with volume growth in Colombia, Argentina and Central America.
Coca-Cola FEMSA’s operating income for the quarter declined 6.3% to Ps. 4,504 million (US$301.7 million) from the year-ago quarter. However, the segment’s operating margin expanded 70 bps to 13.1% in the quarter. On a currency neutral basis and excluding Venezuela, operating income was up 10.6%.
FEMSA Comercio’s revenue increased 18.9% year-over-year to Ps. 28,987 million (US$1,941.6 million), while organic revenue growth was of 12.5%. The rise was mainly attributable to the opening of 154 new stores in the quarter and a 4.3% rise in same-store sales of OXXO stores. Growth in same-store sales was led by an increase of 4.2% in average customer ticket and a marginal rise in store traffic. The company opened 1,151 new stores in the last 12 months. As of Mar 31, 2015, the company operated 13,007 OXXO stores and 232 OXXO Gas stations.
Operating income for the quarter rose 26% year over year to Ps. 1,304 million (US$87.3 million). The segment’s operating margin expanded 30 bps to 4.5% driven by lower operating expenses, including lower electricity rates. Moreover, organic operating income was up 25.3%.
Financial Position
FEMSA had cash balance of Ps. 34,525 million (US$2,312.5 million) as on Mar 31, 2015. Long and short-term debts were Ps. 81,802 million (US$5,479.2 million) and Ps. 1,452 million (US$97.3 million), respectively. Moreover, the company incurred capital expenditure of Ps. 3,256 million (US$218.1 million) related to increased investments in Coca-Cola FEMSA and FEMSA Comercio.
Currently, FEMSA carries a Zacks Rank #3 (Hold). A better-ranked stock in the same industry is Monster Beverage Corporation MNST, which has a Zacks Rank #2 (Buy).
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