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FEMSA (FMX) Declines on Q4 Loss, Higher Operating Expenses

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Fomento Economico Mexicano S.A.B. de C.V’s (FMX - Free Report) , alias FEMSA, reported a net majority loss per ADS of 17 cents per share (Ps. 0.35 per FEMSA unit) in fourth-quarter 2020. Results were primarily marred by the impacts of the coronavirus outbreak across most of its segments.

In fourth-quarter 2020, the company witnessed soft sales trends at its OXXO and OXXO Gas operations, owing to the second wave of COVID-19 cases and the virus variant, which resulted in stricter operating restrictions and reduced consumer mobility. However, the Health Division and Coca-Cola FEMSA S.A.B. de C.V. (KOF - Free Report) segments continued to hold up strong performances.

Net consolidated income for the largest franchise bottler for The Coca-Cola Company (KO - Free Report) was Ps. 730 million (US$35.4 million) compared with Ps. 6,075 million (US$315.1 million) reported in the year-ago quarter, reflecting a decline of 88%. The decline can primarily be attributed to lower income from operations, a negative impact due to FEMSA’s participation in Heineken’s results, higher interest expenses and a non-cash foreign exchange loss linked to FEMSA’s U.S. dollar-denominated cash position, which was hurt by the appreciation of the Mexican peso.

Total revenues were $6,349 million (Ps. 130,329 million), which declined 1.5% year over year in the local currency, owing to the coronavirus outbreak’s impacts across all operations. However, the top line beat the Zacks Consensus Estimate of $6,324 million. On an organic basis, total revenues declined 5.3%.

Shares of the company declined 1.5% on Mar 1 on dismal bottom-line performance in fourth-quarter 2020. Shares of the Zacks Rank #5 (Strong Sell) company has declined 8.3% in the past three months compared with the industry’s fall of 6.5%.

 


 

FEMSA’s gross profit was almost flat at Ps. 52,017 million (US$2,195.2 million). Consolidated gross margin expanded 60 basis points (bps) to 39.9%, owing to gross margin expansion of 40 bps at Coca-Cola FEMSA as well as 60 bps at FEMSA Comercio’s Proximity and 340 bps at Fuel Divisions, partially offset by a 90-bps contraction at FEMSA Comercio’s Health Division.

FEMSA’s operating income (income from operations) declined 3.5% to Ps. 13,145 million (US$513.6 million). On an organic basis, operating income was down 3.8%. Consolidated operating margin contracted 20 bps to 10.1%, driven by operating margin contraction at FEMSA Comercio’s Proximity Division, partly negated by margin expansion at Coca-Cola FEMSA and FEMSA Comercio’s Health and Fuel Divisions. The decline in the operating margin at FEMSA Comercio’s Proximity Division is attributed to operating deleverage due to the pandemic.

Segmental Discussion

FEMSA Comercio — Proximity Division: Total revenues for the segment declined 2.4% year over year to Ps. 46,769 million (US$2,267 million). The decline can primarily be attributed to a 4.3% fall in same-store sales on a 16.9% decline in store traffic due to reduced customer mobility and continued restrictions. However, a 15.1% increase in average ticket, driven by the shift in sales mix toward home consumption categories and SKUs due to the pandemic, partly offset the decline.

In the reported quarter, the company’s OXXO store base declined by 67 stores, including temporary closures. Consequently, FEMSA Comercio’s Proximity division had 19,566 OXXO stores as of Dec 31, 2020.

Operating income declined 16.5% year over year, while operating margin contracted 180 bps to 10.5%, owing to operating deleverage. Higher operating expenses mainly resulted from the ongoing initiatives to strengthen the compensation structure for store personnel, lower revenues than usual from its largely fixed cost base, as well as higher investments in IT programs and infrastructure.

FEMSA Comercio — Health Division: The segment reported total revenues of Ps. 17,319 million (US$839.5 million), up 15.4% year over year. Revenues benefited from positive trends in Mexico and Chile operations along with favorable currency translations. The Chile operations benefited from an undemanding comparison base. This was partially offset by strict mobility restrictions in the Ecuador and Colombia operations. Further, same-store sales for drugstores increased 15.3%. On a currency-neutral basis, total revenues increased 9.6%, while same-store sales increased 13.6%. The segment had 3,368 points of sales across all regions, which included temporary closures due to the pandemic.

Operating income improved 28.1% year over year, while operating margin expanded 50 bps to 4.9%. The increase in operating income resulted from the Health Division’s organic growth in Colombia and Mexico, offset by higher operating expenses.

FEMSA Comercio — Fuel Division: Total revenues declined 30.7% to Ps. 8,485 million (US$411.3 million). Same-station sales declined 31.1%, driven by a 25.6% fall in the average volume due to the pandemic-led reduced mobility as well as a 7.4% decrease in the average price per liter. The company had 558 OXXO GAS service stations as of Dec 31, reflecting the addition of 13 stations in the last 12 months. Operating income declined 19.1%, while operating margin expanded 40 bps to 2.5%, driven by tight expense control and increased expense efficiencies.

Coca-Cola FEMSA: Total revenues for the segment declined 5.1% year over year to Ps. 49,116 million (US$2,380.8 million). On a comparable basis, revenues improved 1.9%. Coca-Cola FEMSA’s operating income rose 13.4%, while comparable operating income was up 21.9%. The segment’s operating margin expanded 130 bps to 14.7% on efficiencies in labor, maintenance and marketing expense across the operations.

Financial Position

FEMSA had cash and cash equivalents of Ps. 107,233 million (US$5,391 million) as of Dec 31, 2020. Long-term debt was Ps. 174,706 million (US$8,783 million). Moreover, the company incurred a capital expenditure of Ps. 6,377 million (US$309.1 million) in the fourth quarter, reflecting lower investments in most businesses.

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