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FEMSA (FMX) Stock Dips 2% on Q2 Earnings & Revenue Miss

Zacks Equity Research

Fomento Economico Mexicano S.A.B. de C.V. FMX, alias FEMSA, posted second-quarter 2017 net majority income of 72 cents per ADS (Ps. 1.30 cents per FEMSA unit), substantially below the Zacks Consensus Estimate of 83 cents. This marked the company’s fourth consecutive bottom-line miss.

Nonetheless, quarterly net consolidated income of the largest franchise bottler for The Coca-Cola Company KO jumped 4.3% to Ps. 6,418 million (US$345.1 million) from Ps. 6,156 million (US$341.1 million) in the year-ago quarter. The increase was driven by higher operating income as well as increased Heineken NV HEINY results, in which it has 20% participation interest. This was partly offset by adverse foreign exchange translations related to FEMSA’s US dollar-denominated cash position and higher non-operating expenses at Coca-Cola FEMSA S.A.B. de C.V. KOF.

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. Quote

Shares of FEMSA dipped 2.2% following the earnings announcement. However, FEMSA outperformed the broader industry in the last three months. The stock jumped 13.6%, surpassing the industry's gain of 6%.


 Quarter in Detail

Total revenue advanced 21.4% year over year to Ps. 114,801 million (US$6,172 million), fueled by solid performance across all segments, taking into account the inclusion of Philippines and Vonpar’s incorporation at Coca-Cola FEMSA. On an organic basis, total revenue increased 10.7% year over year. However, the company’s total revenue in dollar terms fell short of the Zacks Consensus Estimate of $6,491 million, marking its second consecutive miss.

FEMSA’s gross profit grew 19.5% to Ps. 42,204 million (US$2,269 million). Gross margin contracted 60 basis points (bps) to 36.8% owing to decline in Coca-Cola FEMSA’s gross margins (primarily due to higher sugar prices in Mexico) and lower-margin businesses growth at FEMSA Comercio.

FEMSA’s operating income ascended 10.8% to Ps. 10,425 million (US$560.5 million). On an organic basis, operating income improved 1.1% year over year. However, consolidated operating margin contracted 90 bps to 9.1%, on account of lower margins at Coca???Cola FEMSA (due to higher freight and labor costs) as well as FEMSA Comercio’s Health and Fuel Divisions. Additionally, margins were hurt by the consolidation of Coca-Cola FEMSA’s results in the Philippines.

Segmental Discussion

Total revenue at Coca-Cola FEMSA was up 25.5% year over year to Ps. 50,108 million (US$2,694 million). On a comparable basis, revenues improved 1.9% on the back of a rise in average price per unit case in majority of the company’s operations along with higher volumes in Mexico, partly negated by volume declines in the company’s remaining operations.

Coca-Cola FEMSA’s operating income climbed 8.1% to Ps. 6,491 million (US$349 million) in the quarter, while comparable operating income remained flat. The segment’s reported operating margin contracted 200 bps to 13% mainly due to higher freight expenses, labor costs as well as diesel and gasoline prices.

FEMSA Comercio – Retail Division: Total revenue at this segment grew 16% year over year to Ps. 39,660 million (US$2,132.3 million). The rise can be mainly attributed to the opening of 373 net new OXXO stores in the quarter, which took the total net new store count in the past 12 months to 1,313. FEMSA Comercio’s Retail division had a total of 15,774 OXXO stores as of Jun 30, 2017. Same-store sales at OXXO increased 10.3% driven by a strong consumer environment and gains from the calendar shift of the Holy week. Same-store sales also benefited from a 5.6% increase in average customer ticket and 4.4% rise in store traffic.

Operating income rose 18.2% year over year to Ps. 3,268 million (US$175.7 million), with operating margin expanding 10 bps to 8.2%.

FEMSA Comercio – Health Division: This segment reported total revenue of Ps. 11,431 million (US$614.6 million), up 9.8% year over year. The increase was backed by strong growth in South American business. The segment had a total of 2,154 point of sales across all regions, of which about 18 net new stores were added in the second quarter. Same-store sales for the drug stores rose 6.3% driven by sturdy growth trends in South America that nullified the impact of soft trends in Mexico.

Operating income amounted to Ps. 328 million (US$17.6 million), inching up 0.3% year over year. Operating margin contracted 20 bps to 2.9% owing to higher operating expenses in Mexico, increased services at Mexican stores and the rise in incentives for in-store personnel in Chile.

FEMSA Comercio – Fuel Division: Total revenue was up 36.6% to Ps. 9,473 million (US$509.3 million) on the back of impressive comparable sales and the improved national prices established at the start of the year. Same-station sales rose 22.6% year over year, driven by a 23.3% rise in average revenue per liter, offset by a 0.5% decline in average volumes. The company had 390 OXXO GAS service stations as of Jun 30.

Operating income declined 96.6% to Ps. 2 million (US$0.1 million), while operating margin contracted 90 bps driven by gross margin contraction at the segment partly neutralized by cost-control efforts and enhanced operating efficiency at its service stations.

Financial Position

FEMSA had cash balance of Ps. 51,249 million (US$2,863.1 million) as of Jun 30, 2017. Long-term debt was Ps. 121,217 million (US$6,771.9 million). Moreover, the company incurred capital expenditure of Ps. 5,232 million (US$281.3 million) in the second quarter due to increased investments in FEMSA Comercio’s Retail Division.

Currently, FEMSA currently 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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