FEMSA Profit Continue to Rise in 2Q

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Fomento Economico Mexicano S.A.'s (FMX) second-quarter 2012 net income from continuing operation surged 28.8% to MXN 5,437 million ($425.2 million) from MXN 4,221 million ($330.1 million) in the year-ago period. The year-over-year improvement was primarily driven by an increase in comparable income from operation.

Total revenue grew 22.9% year over year to MXN 59,586 million ($4,659.6 million), mainly aided by revenue growth at Coca-Cola FEMSA and FEMSA Comercio.

Total revenue at Coca-cola FEMSA grew 27.9% to MXN 36,295 million ($2,838.3 million) in the quarter, primarily driven by double-digit growth across all divisions coupled with the benefits from the acquisition ofGrupo Tampico, Grupo CIMSA and Grupo Fomento Queretano in Mexico. Excluding these acquisitions, total revenue rose 16.5%.

FEMSA Comercio registered a revenue growth of 17.1% to MXN 22,209 million ($1,736.7 million), mainly due to the opening of 290 new stores in the quarter along with a 7.8% upside in same-store sales. The company opened 1,026 new stores in the past twelve months.

FEMSA’s gross profit improved 24.7% year over year, and gross margin expanded 50 basis points (bps) to 41.9%. The increase was primarily driven by gross profit improvement at FEMSA Comercio coupled with the acquisition benefits in the Coca-Cola FEMSA segment.

FEMSA posted a 13% year-over-year growth in operating income to MXN 6,686 million ($522.8 million), whereas on an organic basis, operating income rose 6.9%. However, operating income, as a percentage of total revenue, decreased 100 basis points year over year to 11.2%, primarily due to higher cost incurred at Coca-Cola Femsa.

At the end of the second quarter of fiscal 2012, the company had cash and cash equivalents of MXN 27,494 million ($2,050 million) compared with MXN 31,176 million ($2,660 million) at the end of the second-quarter 2011. Long-term debt at the end of the quarter was MXN 25,574 million ($1,907 million), reflecting a capitalization ratio of 12.3%.

FEMSA, which competes with PepsiCo Inc. (PEP) retains a Zacks #3 Rank, which translates into a short-term Hold rating for the next 1-3 months. Moreover, we maintain our long-term 'Neutral' recommendation on the stock.

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