Fomento Economico Mexicano S.A.B. de C.V’s FMX, alias FEMSA, reported strong results in fourth-quarter 2018, wherein consolidated net income and revenues improved year over year. Further, the top line missed the Zacks Consensus Estimate. This marked a sales lag after two straight quarters of beat.
Shares of FEMSA did not exhibit significant movement, following the fourth-quarter earnings release on Feb 27. However, the stock outperformed the broader industry in the past three months, reflecting a positive momentum. Notably, this Zacks Rank #4 (Sell) stock has improved 6.6% in the past three months compared with the S&P 500’s growth of 1.8%.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Q4 Insight
Net majority income per ADS was $1.51 per share (Ps. 2.96 per FEMSA unit) in the fourth quarter.
Net consolidated income of the largest franchise bottler for The Coca-Cola Co. KO was Ps. 14,318 million (US$722 million) against a decline of Ps. 9,699 million in the year-ago quarter. The wide disparity in the comparable quarters was mainly the result of a change in the accounting method for Coca-Cola FEMSA’s Venezuela operation as well as higher interest income. This was partly compensated by negative foreign exchange related to the U.S. dollar-denominated cash position at FEMSA.
Total revenues increased 7.5% year over year to Ps. 125,097 million (US$6,308.5 million), mainly fueled by robust growth across all operations. On an organic basis, total revenues witnessed a year-over-year increase of 6%. The company’s total revenues, in dollar terms, lagged the Zacks Consensus Estimate of $6,793 million.
FEMSA’s gross profit grew 8.1% to Ps. 48,963 million (US$2,469.1 million). Gross margin expanded 20 basis points (bps) to 39.1%, owing to gross margin expansion at FEMSA Comercio’s Proximity and Fuel Divisions, partly negated by declines at Coca-Cola FEMSA and FEMSA Comercio’s Health Division.
FEMSA’s operating income rose 2.3% to Ps. 13,046 million (US$657.9 million). On an organic basis, operating income dipped 4.4%, primarily owing to a decline at Coca-Cola FEMSA. Consolidated operating margin contracted 60 bps to 10.4%, mainly due to margin declines at Coca-Cola FEMSA and FEMSA Comercio’s Fuel Division.
Segmental Discussion
FEMSA Comercio — Proximity Division: Total revenues for this segment grew 11% year over year to Ps. 43,357 million (US$2,186.4 million). Organic revenues for the segment improved 10%. This rise can primarily be attributed to the opening of 521 net new OXXO stores in the reported quarter, which has taken the net new store count to 1,422 in the past 12 months.
FEMSA Comercio’s Proximity division had 17,999 OXXO stores as of Dec 31, 2018. Same-store sales at OXXO increased 4.5%, driven by 4% rise in average customer ticket and 0.5% increase in-store traffic.
Operating income rose 11.1% year over year to Ps. 4,908 million (US$247.5 million). Meanwhile operating margin remained flat at 11.3% due to higher operating expenses stemming from the gradual shift of store teams to employee-based, higher secure cash handling costs, higher electricity tariffs, the consolidation of Caffenio and increased organic growth of OXXO’s international operations.
FEMSA Comercio — Health Division: This segment reported total revenues of Ps. 13,343 million (US$672.9 million), up 6.1% year over year. The increase was backed by growth in the South American business and gradual improvement in Mexico. The segment had 2,361 points of sales across all regions, of which, about 58 net new stores were added in the fourth quarter. Same-store sales for the drug stores rose 4.5%.
Operating income amounted to Ps. 661 million (US$33.3 million), up 6.1% year over year. Operating margin remained flat at 5%, driven by lower gross margin, offset by increased operating leverage due to cost efficiencies and stringent expense management across regions.
FEMSA Comercio — Fuel Division: Total revenues were up 24.2% to Ps. 12,636 (US$637.2 million). Same-station sales rose 6.7% year over year, driven by 18.5% rise in average price per liter, offset by 9.9% decline in average volume. The company had 539 OXXO GAS service stations as of Dec 31, including 20 new OXXO GAS stations added in the fourth quarter. Operating income declined 3.6% to Ps. 107 million (US$5.4 million) while operating margin contracted 30 bps to 0.8%.
Total revenues at Coca-Cola FEMSA S.A.B. de C.V. KOF increased 2% year over year to Ps. 50,166 million (US$2,529.8 million). On a comparable basis, revenues improved 7.8% on the back of average price per unit case growth, ahead of inflations in Brazil, Central America and Mexico along with higher volumes in Brazil and Colombia. This was offset by effects of currency translations from the Brazilian Real and the Colombian Peso.
Coca-Cola FEMSA’s operating income rose 0.3% to Ps. 7,342 million (US$370.2 million) while comparable operating income improved 4.3%. The segment’s reported operating margin contracted 30 bps to 14.6%.
Financial Position
FEMSA had a cash balance of Ps. 62,047 million (US$3,152.8 million) as of Dec 31, 2018. Long-term debt was Ps. 108,161 million (US$5,496 million). Moreover, the company incurred capital expenditure of Ps. 7,703 million (US$388.5 million) in the fourth quarter, reflecting lower investments at Coca-Cola FEMSA and FEMSA Comercio’s Health Division.
Other Developments
On Feb 26, FEMSA’s subsidiary Cadena Comercial OXXO S.A. de C.V. (OXXO stores) signed a new commercial pact to sell beer brands from Anheuser-Busch InBev’s BUD Grupo Modelo portfolio. Per the deal, OXXO stores will now sell Grupo Modelo’s leading beer brands, including Corona and Pacifico. This agreement is likely to be formalized in March 2019.
Notably, OXXO stores exclusively sold beer for Heineken N.V’s HEINY Mexican subsidiary — Cervezas Cuauhtemoc Moctezuma, S.A. de C.V. (“HEINEKEN Mexico”) — under the 10-year commercial agreement that dates back to 2010. Concurrent to the signing of the deal with Grupo Modelo, FEMSA extended the existing commercial pact with HEINEKEN Mexico for another five years, with some key changes. This extension marks a renegotiation well ahead of the expiry that is scheduled for 2020.
The extended deal includes provisions for the sale of beer brands from Heineken and Grupo Modelo in Mexico, beginning in April 2019, with a gradual expansion thereafter. Starting from 2019, OXXO stores will simultaneously sell both brand portfolios in Mexico’s biggest cities, including Mexico City and Guadalajara. This will be extended to stores nationwide by 2022.
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