FEMSA (FMX) Posts Solid Q3 Earnings On Segmental Efficacy

Fomento Economico Mexicano S.A.B. de C.V. (NYSE:FMX) , alias FEMSA, posted third-quarter 2016 net majority income of 97 cents per ADS (Ps. 1.87 per FEMSA Unit) compared with 82 cents per ADS (Ps. 1.39 per FEMSA Unit) reported in the year-ago quarter.

Quarterly net consolidated income of the largest franchise bottler for The Coca-Cola Company (NYSE:KO) surged 30.9% to Ps. 7,930 million (US$423.6 million) from Ps. 6,060 million (US$369.4 million) in the year-ago quarter. The increase was backed by higher income from operations and increase in Heineken’s (OTC:HEINY) results, in which FEMSA holds a 20% participation stake. This was partly neutralized by higher interest and non-operating costs as well as currency headwinds.

Quarter in Detail

Total revenue rose 27.4% year over year to Ps. 100,325 million (US$5,350.8 million), fueled by solid performance across its segments as well as Grupo Socofar’s integration into FEMSA Comercio’s Health division. On an organic basis, total revenue increased 14% year over year. Further, the company’s total revenue in dollar terms surpassed the Zacks Consensus Estimate of $5,035.6 million.

FEMSA’s gross profit grew 18.7% to Ps. 36,631 million (US$1,956.5 million). Gross margin contracted 270 basis points (bps) to 36.5% owing to the incorporation and growth of lower-margin businesses in FEMSA Comercio’s Health and Fuel divisions, along with a decline in Coca-Cola FEMSA’s gross margin.

FEMSA’s operating income increased 9.3% to Ps. 9,303 million (US$496.9 million). On an organic basis, operating income inched up 3.8% year over year. However, consolidated operating margin contracted 150 bps to 9.3% due to lower gross margins at its core businesses as well as the incorporation of the lower-margin Socofar in FEMSA Comercio’s Health division.

Segmental Discussion

Total revenue at Coca-Cola FEMSA S.A.B. de C.V. (NYSE:KO) was up 12.5% year over year to Ps. 42,351 million (US$2,262 million). On a comparable basis, revenues improved 5.6% on the back of a rise in average price per unit case in almost all operations and higher volume growth in Mexico and Central America.

Coca-Cola FEMSA’s operating income climbed 3.2% to Ps. 5,644 million (US$301.5 million) in the quarter. However, the segment’s operating margin contracted 120 bps to 13.3%. Comparable operating income increased 6.6% and the margin expanded 10 bps.

FEMSA Comercio – Retail Division: Total revenue at this segment surged 12.3% year over year to Ps. 35,997 million (US$1,922.7 million). The rise can be mainly attributed to the opening of 234 net new OXXO stores in the quarter, which took the total net new store count for the past 12 months to 1,154. FEMSA Comercio’s Retail division had a total of 14,695 OXXO stores as of Sep 30, 2016. Same-store sales at OXXO jumped 5.7% on a 6.4% increase in average customer ticket offset by a marginal 0.6% fall in store traffic.

Operating income rose 6.4% year over year to Ps. 3,064 million (US$163.7 million). The segment’s operating margin declined 50 bps to 8.5%.

FEMSA Comercio – Health Division: This segment reported total revenue of Ps. 11,194 million (US$597.9 million) compared with Ps. 1,580 million (US$96.3 million) in the year-ago quarter. Organic revenue grew 10.7%. The segment had a total of 2,101 point of sales across all regions, of which about 67 net new stores were added in the third quarter, including a small acquisition in Colombia. Same-store sales in Mexico rose 1.1%.

Operating income amounted to Ps. 396 million (US$21.2 million). Operating margin expanded 80 bps to 3.5% owing to higher margins at Socofar, neutralized by higher operating expenses in Mexico. The rise in operating expenses is attributable to the company’s efforts to build infrastructure and integrate its four legacy drugstore operations into a single operating platform. Organic operating income plunged 86.3% due to progress on the aforementioned growth initiatives.

FEMSA Comercio – Fuel Division: Total revenue was up 34.9% to Ps. 7,548 million (US$403.2 million) on the back of the addition of 13 net new OXXO GAS stations. Same-station sales rose 10.3% year over year, driven by a 7.3% increase in same-station volumes and a 2.8% rise in average revenue per liter, displaying the national price increases that took place in the quarter. The company had 348 OXXO GAS service stations as of Sep 30.

Operating income rose 57.3% to Ps. 91 million (US$4.9 million), while operating margin expanded 20 bps to 1.2% driven by the national price increases that took effect in the quarter.

Financial Position

FEMSA had cash balance of Ps. 57,912 million (US$2,995 million) as of Sep 30, 2016. Long and short-term debts were Ps. 110,833 million (US$5,732 million) and Ps. 5,965 million (US$308 million), respectively. Moreover, the company incurred capital expenditure of Ps. 5,704 million (US$304.7 million) in the third quarter due to increased investments across all segments.

Currently, FEMSA carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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