FEMSA Q2 Earnings Miss Estimates

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Fomento Economico Mexicano S.A. (FMX) – also known as FEMSA – reported lower-than-expected bottom-line results for the second quarter of 2013. This largest franchise bottler for The Coca-Cola Company (KO) posted net majority income of 77 cents (Ps. 1.00) per share, lagging the Zacks Consensus Estimate of US$1.22.

Moreover, quarterly net consolidated income of this Zacks Rank #4 (Sell) company fell nearly 6.6% to Ps. 5.078 billion from the comparable year-ago quarter income of Ps. 5.437 billion. The decrease was primarily due to foreign exchange losses in connection with Coca-Cola FEMSA’s U.S. dollar denominated debt position and increased interest expenses resulting from the recently issued bonds by Coca-Cola FEMSA and FEMSA Comercio.

Quarter in Detail

Total revenue grew 4.1% year over year to Ps. 62.047 billion ($4.982 billion), mainly aided by improvement in revenue at FEMSA Comercio. On an organic basis, total revenue climbed 3.1% from the prior-year comparable quarter.

FEMSA’s gross profit rose 5.3% year over year to Ps. 26.325 billion ($2.114 billion), and gross margin expanded 50 basis points (bps) to 42.4%. The increase was primarily driven by gross profit improvement at the company’s Coca-Cola FEMSA segment.

FEMSA’s operating income increased 9.1% to Ps. 7.294 billion ($0.586 billion) from Ps. 6.686 billion ($0.494 billion) in the year-ago period. Consolidated operating margin improved 60 bps to 11.8%, primarily driven by increased gross margin at Coca-Cola FEMSA due to lower raw-material costs, which were benefited by a strong Mexican currency exchange rate against the U.S. dollar. On an organic basis, operating income increased 8.0% year over year.

Segmental Discussion

Total revenue at Coca-cola FEMSA was almost flat year over year at Ps. 36.260 billion ($2.912 billion), as revenue growth of 6.3% in the Mexico & Central America division was offset by the negative impact from currency devaluation in South America. However, on a currency neutral basis and excluding the non-comparable effect of Grupo Fomento Queretano and Grupo Yoli in Mexico, total revenue rose 12.7%.

The segment’s operating income for the quarter grew 9.1% to Ps. 5.142 billion ($0.413 billion) from the year-ago quarter. Consequently, Coca-Cola FEMSA’s operating margin expanded 120 bps to 14.2% in the quarter.

FEMSA Comercio registered revenue growth of 11.7% year over year to Ps. 24.808 billion ($1.992 billion), mainly attributable to the opening of 279 net new stores in the quarter and a 0.9% upside in same-store sales. The growth in same-store sales was primarily driven by an increase of 1.1% in average customer ticket, partially offset by a 0.1% drop in customer traffic. The company opened 1,026 net new stores in the last 12 months, bringing the total store count to 11,015.

Operating income for the said quarter rose 6.7% year over year to Ps. 1.952 billion ($0.157 billion). However, the segment’s operating margin contracted 30 bps to 7.9%, primarily due to increased operating expenses on new store openings, development of organizational and IT structure as well as  specialized distribution channels.

Financial Position

FEMSA, which competes with Coca-Cola Enterprises Inc. (CCE), had cash balance of Ps. 46.572 billion ($3.585 billion) at the end of the second quarter. Long and short-term debts were Ps. 44.457 billion ($3.422 billion) and Ps. 11.686 billion ($899.4 million), respectively. Moreover, FEMSA incurred capital expenditure of Ps. 3.581 billion ($0.288 billion) toward incremental investments at Coca-Cola FEMSA and FEMSA Comercio.

Other Stocks to Consider

Apart from FEMSA, other stocks in the Beverages-Brewers industry that are worth considering include Monster Beverage Corp. (MNST), which carries a Zacks Rank #2 (Buy).

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Read the Full Research Report on MNST

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