Fomento Economico Mexicano S.A.B. de C.V’s FMX, alias FEMSA, top and bottom lines beat estimates in second-quarter 2018. This reflected a beat after two consecutive quarters of negative earnings and sales surprises. Moreover, the company’s top line improved year over year.
Shares of FEMSA did not show much movement, following the second-quarter earnings release on Jul 27. However, FEMSA outperformed the broader industry in the past month, reflecting a positive momentum on the stock. The stock has returned 14.1% compared with the industry's gain of 1.6%.
Q2 Insight
Net majority income per ADS of $1.25 (Ps. 2.46 per FEMSA unit) in the second quarter significantly beat the Zacks Consensus Estimate of 98 cents.
Fomento Economico Mexicano S.A.B. de C.V. Price, Consensus and EPS Surprise
Fomento Economico Mexicano S.A.B. de C.V. Price, Consensus and EPS Surprise | Fomento Economico Mexicano S.A.B. de C.V. Quote
Net consolidated income of the largest franchise bottler for The Coca-Cola Co. KO was Ps. 10,778 million (US$556.4 million), reflecting an increase of 67.9% from the year-ago quarter. The favorable result can be attributed to the positive foreign exchange as the U.S. dollar-denominated cash position at FEMSA benefited from the depreciation of the Mexican peso. Additionally, results gained from the lower interest expenses and higher operating income.
Total revenues increased 8.6% year over year to Ps. 124,708 million (US$6,449 million), mainly fueled by solid growth at FEMSA Comercio’s three divisions. On an organic basis, total revenues increased 8.9% year over year. The company’s total revenues, in dollar terms, surpassed the Zacks Consensus Estimate of $6,359 million.
FEMSA’s gross profit grew 8.3% to Ps. 45,717 million (US$2,360.2 million). Gross margin contracted 10 basis points (bps) to 36.7%, owing to gross margin contraction at Coca-Cola FEMSA due to the higher cost of raw materials in certain markets. However, this was partly negated by gross margin expansion in FEMSA Comercio’s three divisions.
FEMSA’s operating income improved 3% to Ps. 10,733 million (US$554.1 million). On an organic basis, operating income declined 1.2%. Consolidated operating margin contracted 50 bps to 8.6%, mainly due to soft operating margins at Coca-Cola FEMSA and FEMSA Comercio’s Retail division.
Segmental Discussion
Total revenues at Coca-Cola FEMSA S.A.B. de C.V. KOF increased 3.9% year over year to Ps. 52,086 million (US$2,689 million). On a comparable basis, revenues improved 7.8% on the back of rise in the average price-per-unit case ahead of inflations in Mexico and Argentina, along with higher volumes in Brazil and Central America, and a flat performance in Mexico. This was partly negated by volume declines in Argentina, Colombia and the Philippines.
Coca-Cola FEMSA’s operating income dropped 3.3% to Ps. 6,276 million (US$324 million) while comparable operating income declined 5.9%, attributed to non-cash operating foreign exchange loss in Mexico, incremental costs related to acquisitions and higher sweetener costs in the Philippines, partially offset by raw material tailwinds in South America as well as marketing and freight efficiencies in the Philippines. The segment’s reported operating margin contracted 100 bps to 12%.
FEMSA Comercio — Retail Division: Total revenues for this segment grew 9.7% year over year to Ps. 43,517 million (US$2,246.6 million). The rise can be mainly attributed to the opening of 483 net new OXXO stores in the reported quarter, which took the net new store count in the past 12 months to 1,472.
FEMSA Comercio’s Retail division had 17,246 OXXO stores as of Jun 30, 2018. Same-store sales at OXXO increased 3%, driven by strong consumer demand, offset by the negative impact from the Holy Week calendar shift. Average customer ticket increased 2.1% while store traffic rose 1%.
Operating income rose 7.7% year over year to Ps. 3,519 million (US$181.7 million) while operating margin contracted 10 bps to 8.18%, due to higher operating expenses that stemmed from initiatives to strengthen compensation for in-store personnel, higher transportation costs and accelerated store openings in the quarter under review.
FEMSA Comercio — Health Division: This segment reported total revenues of Ps. 13,380 million (US$690.8 million), up 17.1% year over year. The increase was backed by growth in South American business and the gradual improvement in Mexico. The segment had 2,251 points of sales across all regions, of which, about 16 net new stores were added in the second quarter. Same-store sales for the drug stores rose 11.8%.
Operating income amounted to Ps. 634 million (US$32.7 million), up 93.3% year over year. Operating margin expanded 180 bps to 4.7% driven by solid top-line growth and gross margin expansion. Further, operating margins gained from the strength in Chilean and Colombian pesos compared with Mexican peso alongside operating leverage from stringent cost management and recently integrated platform in Mexico.
FEMSA Comercio — Fuel Division: Total revenues were up 21.5% to Ps. 11,511 million (US$594.3 million). Same-station sales rose 5% year over year, driven by 13.6% rise in average price per liter, offset by 7.6% decline in average volumes. The company had 499 OXXO GAS service stations as of Jun 30, including 32 new OXXO GAS service stations that were added in the second quarter.
Operating income rose significantly to Ps. 82 million (US$4.2 million) while operating margin recovered 70 bps to 0.7%, driven by improved operating leverage that more than offset the rise in regulatory expenses, information technology upgrades and expansion-related investments.
Financial Position
FEMSA had a cash balance of Ps. 53,876 million (US$2,712.8 million) as of Jun 30, 2018. Long-term debt was Ps. 120,296 million (US$6,057.2 million). Moreover, the company incurred capital expenditure of Ps. 6,347 million (US$327.7 million) in the second quarter, reflecting higher investments in all businesses.
Currently, FEMSA carries a Zacks Rank #3 (Hold).
Meanwhile, investors can count on the soft drinks-beverage stock Primo Water Corp. PRMW. The company has a long-term earnings growth rate of 12% and it currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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