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FEMSA (FMX) Earnings Miss, Revenues Beat Estimates in Q3

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Fomento Economico Mexicano S.A.B. de C.V’s (FMX - Free Report) , alias FEMSA reported mixed results in third-quarter 2018, wherein earnings missed estimates, while revenues surpassed the same. This marked the company’s third earnings miss in the trailing four quarters. Meanwhile, the top line beat estimates for the second straight quarter.

Shares of FEMSA did not exhibit significant movement, following the third-quarter earnings release on Oct 26. However, the stock outperformed the broader industry in the past three months, reflecting a positive momentum. Notably, this Zacks Rank #4 (Sell) stock declined 5.9% in the past three months, compared with the industry's fall of 10.3%.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Q3 Insight

Net majority income per ADS of 70 cents per share (Ps. 1.31 per FEMSA unit) in the third quarter significantly lagged the Zacks Consensus Estimate of $1.02.

Net consolidated income of the largest franchise bottler for The Coca-Cola Co. (KO - Free Report) was Ps. 6,598 million (US$350.8 million), reflecting a decline of 80.4% from the year-ago quarter. The wide disparity in the comparable quarters was mainly the result of an extraordinary non???operating income generated in the third quarter of 2017 from the sale of 5.24% of the combined interest in the Heineken (HEINY - Free Report) . Additionally, negative foreign exchange as the U.S. dollar-denominated cash position at FEMSA was impacted by the appreciation of the Mexican peso. However, results slightly gained from the lower interest expenses.

Total revenues increased 7.9% year over year to Ps. 118,371 million (US$6,246 million), mainly fueled by solid growth at FEMSA Comercio’s three divisions. On an organic basis, total revenues witnessed year-over-year increase of 8.9%. The company’s total revenues, in dollar terms, surpassed the Zacks Consensus Estimate of $6,164 million.

FEMSA’s gross profit grew 9.3% to Ps. 43,305 million (US$2,302.2 million). Gross margin expanded 50 basis points (bps) to 36.6%, owing to gross margin expansion across all business segments.

FEMSA’s operating income improved 8.1% to Ps. 9,992 million (US$531.2 million). On an organic basis, operating income fell 1.2% primarily owing to decline at Coca-Cola FEMSA. Consolidated operating margin remained flat at 8.4%, mainly due to margin expansion at Coca???Cola FEMSA reflecting a non???cash operating foreign exchange gain in Mexico, and operating expense efficiencies in South America. However, this was partly negated by humble margin contraction at FEMSA Comercio’s Proximity Division, driven by higher operating expenses.  

Segmental Discussion

Starting the third-quarter 2018, FEMSA altered disclosures related to the FEMSA Comercio’s Retail Division, removing those operations that are not directly linked to proximity store business – namely restaurants and discount retail units. Consequently, the company renamed this segment as – “Proximity Division.” This division now includes only proximity and proximity-related operations – mostly comprising the ‘OXXO brand’ operations across markets.

FEMSA Comercio — Proximity Division: Total revenues for this segment grew 12.1% year over year to Ps. 43,967 million (US$2,337.4 million). The rise can primarily be attributed to the opening of 182 net new OXXO stores in the reported quarter, which took the net new store count in the past 12 months to 1,430.

FEMSA Comercio’s Proximity division had 17,478 OXXO stores as of Sep 30, 2018. Same-store sales at OXXO increased 6.2%, driven by strong consumer demand and weak year over year comparisons, which were impacted by the natural disasters in central and southern Mexico during September 2017. Average customer ticket increased 3.6% while store traffic rose 2.5%.

Operating income rose 8.7% year over year to Ps. 3,610 million (US$191.9 million) while operating margin contracted 30 bps to 8.2%, due to higher operating expenses stemming from gradual shift of store teams to employee-based, higher transportation costs, higher electricity tariffs last month and organic growth of OXXO’s international operations.

FEMSA Comercio — Health Division: This segment reported total revenues of Ps. 12,562 million (US$667.8 million), up 10.2% year over year. The increase was backed by growth in South American business and the gradual improvement in Mexico. The segment had 2,303 points of sales across all regions, of which, about 52 net new stores were added in the third quarter, including a small acquisition in Colombia. Same-store sales for the drug stores rose 6.3%.

Operating income amounted to Ps. 540 million (US$28.7 million), up 29.5% year over year. Operating margin expanded 60 bps to 4.3% driven by solid top-line growth and gross margin expansion. Further, operating margins gained from the strength in Chilean and Colombian pesos compared with Mexican peso alongside operating leverage from stringent efficiencies and tight expense control.

FEMSA Comercio — Fuel Division: Total revenues were up 26.7% to Ps. 12,196 (US$648.4 million). Same-station sales rose 7.1% year over year, driven by 19.5% rise in average price per liter, offset by 10.4% decline in average volumes. The company had 519 OXXO GAS service stations as of Sep 30, including 20 new OXXO GAS service stations that were added in the third quarter. Operating income rose 41.5% to Ps. 133 million (US$7.1 million) while operating margin expanded 10 bps to 1.1%.

Total revenues at Coca-Cola FEMSA S.A.B. de C.V. (KOF - Free Report) declined 0.7% year over year to Ps. 44,148 million (US$2,347 million). On a comparable basis, revenues improved 6.5% on the back of rise in the average price-per-unit case ahead of inflations in Mexico and Central America, higher volumes in Brazil and Central America, and a flat performance in Mexico. This was accompanied by volume growth in Brazil, Colombia, Central America, and Mexico.

Coca-Cola FEMSA’s operating income rose 8.2% to Ps. 5,777 million (US$307.1 million) while comparable operating income improved 5.5%. The segment’s reported operating margin expanded 110 bps to 13.1%.

Financial Position

FEMSA had a cash balance of Ps. 54,166 million (US$2,896 million) as of Sep 30, 2018. Long-term debt was Ps. 117,071 million (US$6,259 million). Moreover, the company incurred capital expenditure of Ps. 16,533 million (US$868.3 million) for the nine months of 2018, reflecting higher investments in all businesses.

Other Developments

The company remains committed to expanding its small-box business across Latin America. This was further evident from its recent entry in Ecuador through the Health Division. Further, the company announced the entry in Peru with the opening of its first OXXO store in the city of Lima.

Though the company continues to expect macroeconomic uncertainty to prevail in many of its markets, including Mexico and Brazil, through the rest of 2018 and in 2019, it remains optimistic about the strategic path for 2019 and beyond.

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