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Fomento Economico Mexicano S.A. (FMX - Analyst Report) – also known as FEMSA – reported lower-than-expected bottom-line results for the first quarter of 2013. This largest franchise bottler for The Coca-Cola Company (KO - Analyst Report) posted net majority income of 59 cents (Ps. 0.73) per share, lagging the Zacks Consensus Estimate of 95 cents.

However, quarterly earnings of this Zacks Rank #3 (Hold) company jumped nearly 15.7% from the comparable year-ago quarter’s earnings of 51 cents per share, primarily driven by robust performance at its FEMSA Comercio segment.

Quarter in Detail

Total revenue grew 4.6% year over year to Ps. 56.203 billion ($4.440 billion), mainly aided by improvements in revenue at FEMSA Comercio. On an organic basis, total revenue climbed 3.2% from the prior-year comparable quarter. Moreover, it surpassed the Zacks Consensus Estimate of $3.994 billion.

FEMSA’s gross profit rose 6.0% year over year to Ps. 23.255 billion ($1.837 billion), and gross margin expanded 60 basis points (bps) to 41.4%. The increase was primarily driven by gross profit improvements at Coca-Cola FEMSA and FEMSA Comercio segments.

FEMSA’s operating income dropped 1.8% to Ps. 5.119 billion ($0.404 billion) from Ps. 5.215 billion ($0.401 billion) in the year-ago period as increased operating income at FEMSA Comercio was offset by higher operating expenses at Coca-Cola FEMSA. On an organic basis, operating income declined 3.4% year over year. Consequently, consolidated operating margin contracted 60 bps to 9.1%.

Segmental Discussion

Total revenue at Coca-cola FEMSA was almost flat year over year at Ps. 33.561 billion ($2.651 billion) in the quarter, as the high single-digit revenue growth in Mexico & Central America division was offset by the negative impact from currency devaluation in Venezuela, Argentina and Brazil. However, on a currency neutral basis, total revenue escalated 10.8%.

The segment’s operating income for the quarter declined 5.6% to Ps. 4.074 billion ($0.322 billion) from the year-ago quarter, primarily due to increased labor and freight expenses in Venezuela, Argentina and Brazil. Consequently, Coca-Cola FEMSA’s operating margin contracted 80 bps to 12.1%.

FEMSA Comercio registered revenue growth of 14.0% year over year to Ps. 21.703 million ($1.714 billion), mainly attributable to the opening of 135 net new stores in the quarter along with a 4.8% upside in same-store sales. The growth in same-store sales was primarily driven by an increase of 6.1% in average customer ticket, partially offset by a 1.2% decline in customer traffic. The company opened 1,037 net new stores in the last 12 months, bringing the total store count to 10,736.

Operating income for the quarter under review jumped 21.5% year over year to Ps. 971.0 million ($76.702 million). The segment’s operating margin expanded 30 bps to 4.5%, primarily aided by an improved gross margin, partially offset by increased expenses on new store openings, organizational and IT structure and development of specialized distribution channels.

Financial Position

Dollar Tree, which competes with Coca-Cola Enterprises Inc. (CCE - Analyst Report), had cash and cash equivalents of Ps. 28.855 billion ($2.336 billion) at the end of the first quarter. Long-term debt at the end of the quarter was Ps. 26.610 billion ($2.154 billion). During the quarter, FEMSA incurred capital expenditure of Ps. 3.213 billion ($0.260 billion), mainly toward incremental investments at Coca-Cola FEMSA to increase capacity in Columbia.

Other Stocks to Consider

Apart from FEMSA, the other stock in the Beverages-Brewers industry worth considering includes Pepsico, Inc. (PEP - Analyst Report), which currently carries a Zacks Rank #2 (Buy).

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