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FEMSA Q2 Earnings Decline Y/Y Despite Revenue Surge

Zacks Equity Research

Fomento Economico Mexicano, S.A.B. de C.V. (FMX), also known as FEMSA, posted lower-than-expected bottom-line results for the second quarter of 2014. This world’s largest franchise bottler for The Coca-Cola Company (KO) reported net majority income of 65 cents per share, which was way below than the year-ago comparable quarter earnings as well as the Zacks Consensus Estimate of 78 cents.

Moreover, quarterly net consolidated income of the company declined nearly 12.1% to Ps. 4,463 million (US$343.2 million) from Ps. 5,078 million (US$407.3 million) in the year-ago quarter. The decrease was primarily due to a fall in Heineken’s second-quarter 2014 net income in which FEMSA has a 20% participation interest, increased financing expenses resulting from the recently issued bonds by Coca-Cola FEMSA S.A.B. de C.V. (KOF) and unfavorable foreign exchange rates.

Quarter in Detail

Total revenue rose 14.4% year over year to Ps. 70,956 million (US$5,456.9 million), mainly aided by improvement in revenues at Coca-Cola FEMSA and FEMSA Comercio divisions. On an organic basis, total revenue climbed 7.3% from the prior-year comparable quarter.

FEMSA’s gross profit rose 13.1% year over year to Ps. 29,764 million (US$2,289.0 million). However, gross margin contracted 50 basis points (bps) to 41.9% primarily due to margin contraction at the Coca-Cola FEMSA division.

FEMSA’s operating income increased 9.0% to Ps. 7,953 million (US$611.6 million) from Ps. 7,294 million (US$580.3 million) in the year-ago period. On an organic basis, operating income grew 5.5% year over year. However, consolidated operating margin fell 60 bps to 11.2% due to margin contraction at Coca-Cola FEMSA and FEMSA Comercio.

Segmental Discussion

Total revenue at Coca-cola FEMSA increased 14.3% year over year to Ps. 41,434 million (US$3,186.5 million). The year-over-year revenue growth at the segment was primarily due to integration of Yoli in Mexico, along with Fluminense and Spaipa in Brazil. However, on a currency neutral basis and excluding the non-comparable effect of Yoli, Fluminense and Spaipa, total revenue rose 20.5% due to increase in average price per unit case in almost every region and volume growth in Columbia, Brazil, Central America and Venezuela.

The segment’s operating income for the quarter increased 11.7% to Ps. 5,742 million (US$441.6 million) from the year-ago quarter. However, Coca-Cola FEMSA’s operating margin contracted 30 bps to 13.9% in the quarter due to higher operating expenses as a percentage of sales and lower gross margin.

FEMSA Comercio registered 12.4% year-over-year-revenue growth to Ps. 27,896 million (US$2,145.4 million). The rise was mainly attributable to the opening of 348 new stores in the quarter and a 3.6% upside in same-store sales. The growth in same-store sales was led by an increase of 4.3% in average customer ticket partially offset by a 0.7% decline in store traffic. The company opened 1,189 new stores in the last 12 months, bringing the total store count to 12,204 as of Jun 30, 2014.

Operating income for the quarter rose 8.9% year over year to Ps. 2,126 million (US$163.5 million). However, the segment’s operating margin contracted 30 bps to 7.6% primarily due to higher operating expenses resulting from the incorporation of drugstore and restaurant operations as well as expenses for new initiatives.

Financial Position

FEMSA had cash balance of Ps. 36,785 million (US$2,836 million) as on Jun 30, 2014. Long and short-term debts were Ps. 73,787 million (US$5,689 million) and Ps. 2,205 million (US$170.0 million), respectively. Moreover, during the quarter, FEMSA incurred capital expenditure of Ps. 3,951 million (US$303.9 million).

Currently, FEMSA carries a Zacks Rank #3 (Hold). However, a better-ranked stock worth a look in the same industry is Dr Pepper Snapple Group, Inc. (DPS), which has a Zacks Rank #2 (Buy).

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