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FEMSA Expands Drugstore Chain

Zacks Equity Research

In an effort to expand its convenience store chain business, Fomento Economico Mexicano SAB de CV (FMX) or FEMSA announced that its retail subsidiary – FEMSA Comercio – has acquired Farmacias FM Moderna on Monday.  Farmacias FM Moderna is a leading drugstore operator in the western state of Sinaloa, Mexico and currently operates over 100 stores in the region. Details about the transaction have not been provided by the company.

The owner of Coca-Cola FEMSA (KOF), which is the world’s largest franchise bottler of The Coca-Cola Company (KO) products, is taking prudent steps to diversify its product portfolio while expanding its convenience store chain, which augurs well for future operating performance.

This Zacks Rank #3 (Hold) company is aggressively seeking to capitalize on the growing opportunities for the drugstore business in Mexico. Earlier this month, the company acquired a 75% stake in a leading drugstore operator in Southeast Mexico – Farmacias YZA. We believe that the company’s foray into the drugstore business strategically fits its store chain business, which will be accretive to its top and bottom lines in the long term.

FEMSA, which competes with Coca-Cola Enterprises Inc. (CCE), has a healthy balance sheet with cash and cash equivalents of Ps. 28.855 billion ($2.336 billion) at the end of first-quarter fiscal 2013. This huge cash balance was primarily an outcome of the sale of its beer business to Heineken NV in 2010 in exchange for a 20% stake in Heineken.

We believe that FEMSA is aptly utilizing its available funds to focus on the core bottling and convenience store operations as well as to implement organic and inorganic expansion plans. In the first quarter of fiscal 2013, FEMSA incurred capital expenditure of Ps.3.213 billion ($0.260 billion), mainly toward incremental investments at Coca-Cola FEMSA to increase the capacity in Columbia.

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