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FEMSA Ventures into Restaurant Business

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Moving ahead with its strategy of business expansion, Fomento Economico Mexicano SAB de CV (FMX - Free Report) or FEMSA’s retail subsidiary – FEMSA Comercio – has agreed to buy a majority stake in the fast-food restaurant chain Dona Tota. FEMSA will acquire 80% stake while the other 20% holdings will remain with Dona Tota’s founding shareholders.

The transaction is still in its early stage and awaits certain customary regulatory approvals. Details about the transaction have not been provided. The Mexico-based restaurant chain operator currently has 204 units across Mexico and 11 units in Texas, U.S.

The co-owner of Coca-Cola FEMSA S.A.B de C.V. (KOF - Free Report) , which is the world’s largest franchise bottler of The Coca-Cola Company (KO - Free Report) products, is taking prudent steps to diversify its product portfolio while expanding its small-box retail segment, which augurs well for future operating performance.

We observe that FEMSA has been diversifying its retail chain format operations and acquiring businesses across Latin America. In May 2013, the company forayed into the drugstore retail chain business by fully acquiring Mexico-based Farmacias FM Moderna and buying 75% stake in Farmacias YZA. We believe that FEMSA’s venture into the drugstore business strategically fits its store chain business, which will be accretive to its top and bottom lines in the long term.

FEMSA, which competes with Coca-Cola Enterprises Inc. (CCE - Free Report) , has a healthy balance sheet with cash and cash equivalents of Ps. 46.572 billion ($3.585 billion) at the end of second-quarter fiscal 2013. This huge cash balance was primarily an outcome of the sale of its beer business to Heineken NV in 2010 in exchange of 20% stake in the latter.

We believe that FEMSA is aptly utilizing its available funds to focus on the core bottling and convenience store operations as well as to implement organic and inorganic expansion plans. In the second quarter of fiscal 2013, FEMSA incurred a capital expenditure of Ps. 3.581 billion ($0.288 billion) toward incremental investments at Coca-Cola FEMSA and FEMSA Comercio.

However, we noticed that FEMSA’s comparable-store sales registered only a meager 0.9% growth in the second quarter of fiscal 2013, which is the slowest since 2009. Moreover, the company has witnessed a fall in customer traffic during the quarter, for the first time since 2003. Therefore, we remain cautious over the stocks future performance based on the aforementioned factors. Currently, FEMSA holds a Zacks Rank #5 (Sell).

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