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Fomento Economico Mexicano, S.A.B. de C.V. (FMX - Analyst Report), also known as FEMSA, posted better-than-expected bottom-line results for the first quarter of 2014. This world’s largest franchise bottler for The Coca-Cola Company (KO - Analyst Report) reported net majority income of 53 cents per share, which beat the Zacks Consensus Estimate of 51 cents. However, on a year-over-year basis, the company’s net majority income fell approximately 10.2% from the year-ago comparable quarter figure of 59 cents per share.

Moreover, quarterly net consolidated income of the company declined nearly 4.1% to Ps. 3,778 million (US$285.4 million) from Ps. 3,939 million (US$311.2 million) in the year-ago quarter. The decrease was primarily due to a fall in Heineken’s first-quarter 2014 net income in which FEMSA has a 20% participation interest, and increased financing expenses resulting from the recently issued bonds by Coca-Cola FEMSA S.A.B. de C.V. (KOF - Snapshot Report) and FEMSA Comercio.

Quarter in Detail

Total revenue rose 14.3% year over year to Ps. 64,228 million (US$4,852.7 million), mainly aided by improvement in revenues at Coca-Cola FEMSA and FEMSA Comercio divisions. On an organic basis, total revenue climbed 4.2% from the prior-year comparable quarter.

FEMSA’s gross profit rose 14.0% year over year to Ps. 26,511 million (US$2,003.0 million). However, gross margin contracted 10 basis points (bps) to 41.3% primarily due to margin contraction at the Coca-Cola FEMSA and FEMSA Comercio divisions.

FEMSA’s operating income increased 16.2% to Ps. 5,946 million (US$449.2 million) from Ps. 5,119 million (US$404.2 million) in the year-ago period. Consolidated operating margin improved 20 bps to 9.3% on the back of margin expansion at Coca-Cola FEMSA. On an organic basis, operating income grew 7.2% year over year.

Segmental Discussion

Total revenue at Coca-cola FEMSA increased 15.3% year over year at Ps. 38,708 million (US$2,924.6 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 20.2% due to increase in average price per unit case at almost every region and volume growth in Columbia, Brazil, Central America, Venezuela.

The segment’s operating income for the quarter increased 18.0% to Ps. 4,809 million (US$363.3 million) from the year-ago quarter. Consequently, Coca-Cola FEMSA’s operating margin expanded 30 bps to 12.4% in the quarter. The year-over-year rise in the segment’s operating income and margin was primarily driven by higher gross profit, which resulted from lower price paid for PET and sweeteners in most of the company’s operating territories.

FEMSA Comercio registered 12.3% year over year revenue growth to Ps. 24,371 million (US$1,841.3million). The rise was mainly attributable to the opening of 135 net new stores in the quarter and a 0.4% upside in same-store sales. The growth in same-store sales was led by an increase of 0.4% in average customer traffic. The company opened 1,120 net new stores in the last twelve months, bringing the total store count to 11,856 as of Mar 31, 2014.

Operating income for the said quarter rose 6.6% year over year to Ps. 1,035 million (US$78.2 million). However, the segment’s operating margin contracted 30 bps to 4.2% primarily due to higher operating expenses resulting from new store openings and increases in electricity outlay and expenses for new initiatives.

Financial Position

FEMSA had cash balance of Ps. 32,994 million (US$2,527 million) as on Mar 31, 2014. Long and short-term debts were Ps. 74,027 million (US$5,670 million) and Ps. 2,310 million (US$176.9 million), respectively. Moreover, during the quarter, FEMSA incurred capital expenditure of Ps. 3,050 million (US$233.1 million).

Currently, FEMSA carries a Zacks Rank #3 (Hold). However, a better-ranked stock worth a look in the beverages-brewers industry is Coca-Cola Enterprises Inc. (CCE - Analyst Report), which has a Zacks Rank #2 (Buy).

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