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Fomento Economico Mexicano, S.A.B. de C.V. (FMX - Analyst Report) – also known as FEMSA – reported better-than-expected bottom-line results for the third quarter of 2013. This largest franchise bottler for The Coca-Cola Company (KO - Analyst Report) posted net majority income of US$1.10 per share that came a penny ahead of the Zacks Consensus Estimate of US$1.09.

However, quarterly net consolidated income of this Zacks Rank #3 (Hold) company fell nearly 8.2% to Ps. 6,106 million (US$472.8 million) from the comparable year-ago quarter income of Ps. 6,654 million (US$504.4 million). The decrease was primarily due to a decline in operating income, fall in Heineken’s third-quarter 2013 net income in which FEMSA has a 20% participation interest and increased financing expenses resulting from the recently issued bonds by Coca-Cola FEMSA and FEMSA Comercio.

Quarter in Detail

Total revenue rose 7.2% year over year to Ps. 63,977 million (US$4,954.0 million), mainly aided by improvement in revenue at Coca-Cola FEMSA S.A.B. de C.V. (KOF - Snapshot Report) and FEMSA Comercio divisions. On an organic basis, total revenue climbed 3.7% from the prior-year comparable quarter.

FEMSA’s gross profit rose 6.4% year over year to Ps. 27,037 million (US$2,093.6 million). However, gross margin contracted 30 basis points (bps) to 42.3% primarily due to increase in the lower-margin FEMSA Comercio sales.

FEMSA’s operating income decreased 2.7% to Ps. 7,187 million (US$556.5 million) from Ps. 7,383 million (US$559.6 million) in the year-ago period. Consolidated operating margin contracted 120 bps to 11.2%, primarily due to margin contraction at Coca-Cola FEMSA resulting from the South American currency devaluation and increased operating expenses. On an organic basis, operating income decreased 4.0% year over year.

Segmental Discussion

Total revenue at Coca-cola FEMSA increased 3.6% year over year at Ps. 37,494 million (US$2,903.3 million). The year-over-year revenue growth at the segment was primarily due to robust performance at Mexico & Central America and South American divisions including the benefit of integration of Yoli in Mexico and Fluminense in Brazil. However, on a currency neutral basis and excluding the non-comparable effect of Yoli and Fluminense, total revenue surged 14.8% due to a rise in average price per unit case at every region and volume growth in Venezuela, Argentina, Columbia and Central America.

The segment’s operating income for the quarter declined 7.7% to Ps. 5,063 million (US$392.1 million) from the year-ago quarter. Consequently, Coca-Cola FEMSA’s operating margin contracted 170 bps to 13.5% in the quarter.

FEMSA Comercio registered revenue growth of 12.5% year over year to Ps. 25,337 million (US$1,962.0 million), mainly attributable to the opening of 195 net new stores in the quarter and a 1.6% upside in same-store sales. The growth in same-store sales was primarily driven by an increase of 2.5% in average customer ticket, partially offset by a 0.9% drop in customer traffic. The company opened 1,043 net new stores in the last 12 months, bringing the total store count to 11,210.

Operating income for the said quarter rose 13.1% year over year to Ps. 1,989 million (US$154.0 million). Moreover, the segment’s operating margin expanded 10 bps to 7.9%, primarily due to increased revenue partially offset by higher operating expenses on new store openings, development of organizational and IT structure as well as specialized distribution channels.

Financial Position

FEMSA had cash balance of Ps. 50,322 million (US$3,825 3illion) at the end of the third quarter. Long and short-term debts were Ps. 51,023 million (US$3,879 million) and Ps. 12,294 million (US$934.5 million), respectively. Moreover, FEMSA incurred capital expenditure of Ps. 5,360 million (US$415.1 million) toward incremental investments at Coca-Cola FEMSA and FEMSA Comercio.

Other Stocks to Consider

Coca-Cola Enterprises Inc. (CCE - Analyst Report) with a Zacks Rank #2 (Buy) is the stock that is worth considering in the Beverages-Brewers industry.

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