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FEMSA (FMX) Q1 Earnings Beat Estimates, Revenues Rise Y/Y

Zacks Equity Research

Fomento Economico Mexicano S.A.B. de C.V’s FMX, alias FEMSA, reported net majority income per ADS of $1.09 per share (Ps. 2.55 per FEMSA unit) in first-quarter 2020, which beat the Zacks Consensus Estimate of a loss of 5 cents. The better-than-expected earnings can be attributed to the robust top line and operating income growth despite the impacts of the coronavirus pandemic.

Net consolidated income of the largest franchise bottler for The Coca-Cola Company KO was Ps. 9,112 million (US$458.8 million), reflecting significant growth of 136.7% from the year-ago quarter. The increase resulted from higher operating income across most of its business units as well as the realization of a non-cash foreign exchange gain linked to FEMSA’s U.S. dollar-denominated cash position, which benefited from the depreciation of the Mexican peso. This was, however, offset by higher interest expenses and a decline in the contribution from Heineken’s HEINY results.

Total revenues grew 5.5% year over year to Ps. 122,284 million (US$6,157.3 million), fueled by growth across almost all operations. Notably, the FEMSA Comercio Fuel Division reported flat revenues. On an organic basis, total revenues improved 2.7%.

Fomento Economico Mexicano S.A.B. de C.V. Price, Consensus and EPS Surprise

 

Fomento Economico Mexicano S.A.B. de C.V. Price, Consensus and EPS Surprise

Fomento Economico Mexicano S.A.B. de C.V. price-consensus-eps-surprise-chart | Fomento Economico Mexicano S.A.B. de C.V. Quote

Despite the strong results, the company noted that the Coronavirus outbreak began to impact it in late March. While most of the company’s operations are deemed as essential, with drugstores and fuel services being operational, the effects of the restrictions are showing on reduced traffic trends. While its Coca-Cola FEMSA S.A.B. de C.V. KOF business is leveraging its large off-premise customers and flexible commercial platforms, the effects of a negative mix and increasing complexities to connect with physical customers might hurt performance.

Apart from making necessary adjustments to all business units to protect customers and employees, the company adopted aggressive cost-reduction and efficiency measures, citing the uncertain nature of the pandemic. Further, the company is prepared to adjust CAPEX when needed.

Despite the strong first quarter, shares of FEMSA declined 3.1% yesterday mostly due to the uncertainty surrounding the timing of COVID-19 and related impacts. The Zacks Rank #3 (Hold) stock slumped 31.9% year to date compared with the industry’s decline of 12.3%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

 


 

FEMSA’s gross profit grew 7.1% to Ps. 45,843 million (US$2,308.3 million). Consolidated gross margin expanded 60 basis points (bps) to 37.5%, owing to gross margin expansion of 50 bps at Coca-Cola FEMSA, 160 bps at FEMSA Comercio’s Proximity and 40 bps at Fuel Divisions, partially offset by a 60 bps contraction at FEMSA Comercio’s Health Division.

The company’s operating income (income from operations) grew 6% to Ps. 9,518 million (US$479.3 million). On an organic basis, operating income was up 4.4%. Consolidated operating margin contracted 10 bps to 7.8%, driven by operating margin expansion at Coca-Cola FEMSA and FEMSA Comercio’s Proximity Division, offset by a decline at FEMSA Comercio’s Fuel Division. Meanwhile, operating margin remained flat at FEMSA Comercio’s Health Division.

Segmental Discussion

FEMSA Comercio — Proximity Division: Total revenues for the segment grew 10.6% year over year to Ps. 45,620 million (US$2,297.1 million). The rise can primarily be attributed to the opening of 268 net new OXXO stores in the reported quarter, which has taken net new store openings to 1,365 in the past 12 months. The Proximity Division benefited from steady growth of OXXO stores in Mexico. FEMSA Comercio’s Proximity division had 19,598 OXXO stores as of Mar 31, 2020. Same-store sales at OXXO grew 5.5%, backed by a 9.1% rise in average customer ticket, offset by a 3.3% decline in store traffic.

Operating income rose 6.7% year over year, while operating margin expanded 30 bps to 6.7%. Revenue gains were partly offset by higher operating expenses. The increase in operating expenses mainly resulted from the ongoing initiatives to strengthen compensation structure for store personnel, higher investments in IT programs, and increase in secure cash handling costs due to higher volume and operational costs. This was partly compensated by lower electricity costs, as about 70% of the company’s stores in Mexico operate on wind energy.

FEMSA Comercio — Health Division: The segment reported total revenues of Ps. 15,296 million (US$770.2 million), up 19.9% year over year. Organic revenues declined 0.9%, driven by negative currency translations related to the appreciation of the Mexican peso compared with the Chilean and Colombian pesos. This was offset by positive trends across operations. Further, same-store sales for drugstores declined 6.8%. On a currency-neutral basis, total revenues increased 35.9%, while same-store sales increased by 3.1%. The segment had 3,196 points of sales across all regions, of which about 35 net new stores were added in the first quarter.

Operating income rose 21.8% year over year, while operating margin was flat. Organic operating income for the segment inched up 0.3%. The flat operating margin resulted from operating expense deleverage due to cost efficiencies and tight expense control across operations.

FEMSA Comercio — Fuel Division: Total revenues were flat with the year-ago quarter at Ps. 10,858 million (US$546.7 million). Same-station sales dipped 1.5% as a decline in average price per liter was more than offset by lower average volume. The company had 550 OXXO GAS service stations as of Mar 31, reflecting the addition of five stations in the first quarter. Operating income declined 24.3%, with 60-bps contraction in the operating margin to 2.2%.

Coca-Cola FEMSA: Total revenues for the segment declined 1.9% year over year to Ps. 45,348 million (US$2,283.4 million). On a comparable basis, revenues improved 3.6%. Coca-Cola FEMSA’s operating income was flat, while comparable operating income was up 6.3%. The segment’s operating margin rose 20 bps to 12.6% on operating expense efficiencies and tax reclaims in Brazil.

Financial Position

FEMSA had cash and cash equivalents of Ps. 133,470 million (US$5,677.2 million) as of Mar 31, 2020. Long-term debt was Ps. 163,054 million (US$6,934.5 million). Moreover, the company incurred capital expenditure of Ps. 5,309 million (US$297.3 million) in the first quarter, reflecting increased investments in most businesses.

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