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Digital & Expansion Efforts Drive FEMSA (FMX): What's Ahead?

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Fomento Economico Mexicano S.A.B. de C.V. (FMX - Free Report) , alias FEMSA, is displaying solid momentum on strong gross margins and growth strategies. In fourth-quarter 2020, consolidated gross margin gained from a rise in commercial income related to the December holiday season as well as a robust services category.

Additionally, the company’s digital initiatives and business-expansion endeavors have been on track. It is on track to expand in the U.S. specialized distribution industry through the acquisitions of two new businesses.

Driven by these factors, shares of FEMSA have risen 1.1% year to date against the industry’s decline of 2%. Moreover, the Zacks Rank #3 (Hold) has comfortably outpaced the Consumer Staples sector’s growth of 0.2% during the said period. Overall, the stock has rallied as much as 24.5% in a year’s time.



Factors Driving the Stock

FEMSA has been witnessing a positive gross margin trend over the past few quarters. The company has been exercising tight control over expenses and supply-chain operations to boost margins. We note that FEMSA’s consolidated gross margin expanded 60 bps, 90 bps and 60 bps, respectively, in the fourth, third and second quarters of 2020.

Further, FEMSA continues to focus on offering customers more options to make contactless purchases by intensifying digital and technology-driven initiatives across operations. The company’s Coca-Cola FEMSA is leading the way with its omni-channel business, while FEMSA Comercio is progressing with the adoption of digital initiatives.

Within its OXXO store chains, the company is on track with investing in digital offerings, loyalty programs and fintech platforms to evolve stronger after the pandemic and over the long term.

It is also benefiting from its acquisition strategy. FEMSA Comercio’s agreement with SMU, S.A. in October 2020 to acquire the latter’s OK Market store chain is likely to help FEMSA bolster its market footprint in Chile. The OK Market is a renowned small-format store chain in Chile, with its operations spread in more than 120 locations. Its earlier acquisitions of a minority stake in Jetro Restaurant Depot (“JRD”), AGV; a 40% stake in Grupo Socofar; and the joint venture with Raízen reveal its commitment to invest in the expansion of core businesses.

Additionally, the company has expanded its presence in the specialized distribution industry in the United States. It recently acquired two independent specialized distribution businesses in the United States. The two acquired companies are — Spartanburg, SC-based Southeastern Paper Group, Inc. and Wichita, Kansas-based Southwest Paper Company, Inc. These companies generated annual revenues of nearly $380 million as of September 2020.

FEMSA’s acquisition transaction with these companies is in sync with its strategy of creating a national distribution platform. The company’s venture in the specialized distribution industry relates to its plan of investing in adjacent businesses, which can leverage capabilities across different markets, providing an opportunity for attractive growth and risk-adjusted returns.

With the presence of its OXXO business and other retail operations, the company has become an expert in the organization and management of supply chains and distribution systems. Notably, FEMSA serves large numbers of businesses and retail customers through millions of interactions in different industries.

Further, the latest transaction is likely to complement its investment in WAXIE Sanitary Supply (“WAXIE”) and North American Corporation in March 2020. This marked the company’s entry into the U.S. specialized distribution industry, which covers a wide variety of sectors, including fresh and frozen products, decoration, DIY, office supplies, furniture, and stock clearance.

Possible Headwinds

Despite the growth initiatives, the company’s results continue to be marred by the coronavirus outbreak that affected operations across most of its segments. In fourth-quarter 2020, it 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.

In fact, FEMSA Comercio’s Fuel Division was most impacted by the pandemic-led challenges. The current coronavirus situation has resulted in reduced mobility and social distancing, which led to lesser vehicle utilization. The effects of these were visible on the segment’s results in the fourth quarter, wherein total revenues declined 30.7% year over year. Further, same-station sales decreased 31.1%, driven by a 25.6% fall in the average volume, reflecting reduced mobility due to the pandemic, as well as a 7.4% decrease in the average price per liter.

Additionally, higher operating expenses, resulting from the ongoing initiatives to strengthen the compensation structure for store personnel, lower-than-usual revenues from its largely fixed cost base, and higher investments in IT programs and infrastructure have been headwinds.

Want Better-Ranked Beverage Stock? Check These

Diageo plc (DEO - Free Report) has an expected long-term earnings growth rate of 8.3%. It carries a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Constellation Brands Inc. (STZ - Free Report) , also a Zacks Rank #2 stock, has an impressive long-term earnings growth rate of 7.4%.

Compania Cervecerias Unidas, S.A. (CCU - Free Report) presently has a Zacks Rank #2 and a long-term earnings growth rate of 10.2%.

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