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Will Business Expansion Plans Aid FEMSA's (FMX) Stock Growth?

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Fomento Economico Mexicano S.A.B. de C.V. (FMX - Free Report) , alias FEMSA, has been on track with its strategy of creating a national distribution platform in the United States through the expansion of its footprint in the specialized distribution industry. It is also poised for growth through investments in digital and technology-driven initiatives.

Driven by improved trends across segments, resulting from effective growth strategies and robust demand across most markets, FEMSA posted the fourth straight quarter of top-line beat in first-quarter 2022. Total revenues improved 18.6% year over year and 15.2% on an organic basis. FEMSA witnessed revenue growth across all segments in the first quarter.

The Zacks Consensus Estimate for the Zacks Rank #2 (Buy) company’s current financial year’s sales suggests growth of 7.2% from the year-ago period’s reported number, while earnings indicate a decline of 5.6%.

Progress on Expansion Plans

In February 2022, FEMSA completed the acquisition of the previously announced OK Market. The small-format proximity store chain in Chile added 131 locations to FEMSA’s proximity business, reaching 258 locations. In March 2022, the company acquired ATRA Janitorial Supply Co., Inc. in the United States through its Envoy Solutions subsidiary. ATRA Janitorial recorded $16 million in sales every year prior to the acquisition.

In April 2022, an Envoy Solutions subsidiary agreed to acquire Sigma Supply of North America Inc., an independent specialized distribution company based in Hot Springs, AR. This marks another step in FEMSA’s strategy of building a national distribution platform in the United States. Sigma operates 18 distribution centers, which will expand Envoy’s distribution network to include almost 70 facilities in 34 states. Sigma generated sales of $370 million in 2021. The transaction is subject to customary closing conditions and is anticipated to be completed in second-quarter 2022.

Prior to this, FEMSA acquired Next-Gen Supply Group Inc., Penn Jersey Paper Co., Daycon Products Co., Southeastern Paper Group, Inc., and Southwest Paper Company, Inc. to expand its presence in the specialized distribution industry. 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. The recent transactions are likely to complement its investment in WAXIE Sanitary Supply 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.


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Digital Initiatives

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 (KOF - Free Report) division 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. Its OXXO digital wallet, OXXO Premia and loyalty program have been performing well.

Headwinds on the Path

FEMSA has been witnessing the impacts of supply-chain disruptions and higher raw material costs. The inflation in steel and aluminum prices has increased troubles for beverage companies, leading to an increase in packaging costs. Escalating industry-wide freight costs and a rise in other input costs are other headwinds impacting the company.

The company continued to witness gross margin pressures in first-quarter 2022. Consolidated gross margin in the first quarter contracted 50 basis points (bps) to 36.9%, owing to the gross margin contraction of 40 bps at FEMSA Comercio’s Fuel Division and 50 bps at Coca-Cola FEMSA.

Driven by these factors, the company’s shares have lost 11.8% year to date compared with the industry’s decline of 5.3%.

Looking for More Stocks? Check These

We have highlighted two other top-ranked companies in the beverage industry, namely The Coca-Cola Company (KO - Free Report) and The Duckhorn Portfolio (NAPA - Free Report) .

Coca-Cola, the Atlanta, GA-based global beverage giant, presently carries a Zacks Rank #2. The KO stock has declined 0.2% year to date. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for Coca-Cola’s sales and EPS for the current financial year suggests growth of 8.9% and 6.5%, respectively, from the year-ago reported levels. KO has a trailing four-quarter earnings surprise of 13.6%, on average. It has an expected long-term earnings growth rate of 7%.

Duckhorn Portfolio currently has a Zacks Rank #2. The company has an expected long-term earnings growth rate of 12.2%. Shares of NAPA have declined 15.5% year to date.

The Zacks Consensus Estimate for Duckhorn Portfolio's current financial year’s earnings per share has moved up 3.3% in the past 30 days. The Zacks Consensus Estimate for NAPA’s sales and EPS for the current financial year suggests growth of 10.8% and 6.9%, respectively, from the year-ago reported levels. NAPA has a trailing four-quarter earnings surprise of 94.4%, on average.

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