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FEMSA (FMX) Q4 Earnings Miss Estimates, Revenues Up Y/Y

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Fomento Economico Mexicano S.A.B. de C.V’s FMX, alias FEMSA, reported net majority income per ADS of 71 cents (Ps. 1.34 cents per FEMSA unit) in fourth-quarter 2019, which missed the Zacks Consensus Estimate of $1.18. The earnings lag can be attributed to a decline in operating income at the FEMSA Comercio Health Division and Coca-Cola FEMSA.

Net consolidated income of the largest franchise bottler for The Coca-Cola Company KO was Ps. 6,075 million (US$315 million), reflecting a decline of 56.7% from the year-ago quarter. The decline resulted from higher operating expenses at Coca-Cola FEMSA as well as non-cash foreign exchange loss related to FEMSA’s U.S. dollar-denominated cash position that was impacted by the appreciation of the Mexican peso.

Total revenues grew 5.7% year over year to Ps. 132,289 million (US$6,861.5 million), fueled by robust growth across all operations, except for the FEMSA Comercio Fuel Division. On an organic basis, total revenues improved 3.9%.

Driven by the soft bottom-line results, shares of FEMSA declined 3.3% yesterday. The Zacks Rank #4 (Sell) stock dipped 7.6% in the past three months against the industry’s growth of 5%.


FEMSA’s gross profit grew 6.1% to Ps. 51,989 million (US$2,696.5 million). Gross margin expanded 10 basis points (bps) to 39.3%, owing to gross margin expansion of 40 bps at FEMSA Comercio’s Proximity Division. This was partly negated by declines of 160 bps, 10 bps and 90 bps, respectively, at Coca-Cola FEMSA, and FEMSA Comercio’s Health and Fuel Divisions.

The company’s operating income (income from operations) dipped 0.5% to Ps. 13,617 million (US$706.3 million). On an organic basis, operating income declined 1.2%. Consolidated operating margin contracted 60 bps to 10.3%, driven by operating margin expansion at Coca-Cola FEMSA and FEMSA Comercio’s Health Division, offset by flat margin at FEMSA Comercio’s Proximity Division and margin expansion at FEMSA Comercio’s Fuel Division.

Segmental Discussion

FEMSA Comercio — Proximity Division: Total revenues for the segment grew 10.6% year over year to Ps. 47,941 million (US$2,486.6 million). The rise can primarily be attributed to the opening of 490 net new OXXO stores in the reported quarter, which has taken net new store openings to 1,331 in the past 12 months. The Proximity Division benefited from steady growth of OXXO stores in Mexico and strong international operations.

FEMSA Comercio’s Proximity division had 19,330 OXXO stores as of Dec 31, 2019. Same-store sales at OXXO grew 5.5%, backed by a 7.8% rise in average customer ticket, offset by a 1.2% decline in store traffic.

Operating income rose 10.1% year over year, while operating margin remained flat at 12.3%. Revenue gains were partly offset by higher operating expenses. The increase in operating expenses mainly resulted from the ongoing initiatives to strengthen compensation structure for store personnel,     higher investments in IT programs and increase in secure cash handling costs due to higher volume and operational costs. This was partly compensated by lower electricity costs as about 70% of the company’s stores in Mexico operate on wind energy.

FEMSA Comercio — Health Division: The segment reported total revenues of Ps. 15,009 million (US$778.5 million), up 12.5% year over year. Organic revenues declined 4.8%, driven by operational disruptions in Chile and negative currency translation related to the appreciation of the Mexican peso compared with the Chilean and Colombian pesos. This was offset by stable trends in Mexico and positive results in Colombia.

The segment had 3,161 points of sales across all regions, of which about 31 net new stores were added in the fourth quarter. Same-store sales for drugstores declined 12.2% due to the aforementioned factors.

Operating income declined 7.8% year over year, while operating margin contracted 90 bps to 4.4%. Organic operating income for the segment declined 19.9%. The decline in operating margin was attributed to operating expense deleverage due to reduced sales in Chile.

FEMSA Comercio — Fuel Division: Total revenues dipped 3.2% to Ps. 12,235 million (US$634.6 million). Same-station sales dipped 5.5% as a decline in average volume more than offset gains from pricing. The company had 545 OXXO GAS service stations as of Dec 31, reflecting the addition of four OXXO GAS stations in the fourth quarter. Operating income rose 5.2%, with 10-bps expansion in operating margin to 2.1%.

Total revenues at Coca-Cola FEMSA S.A.B. de C.V. KOF improved 3.1% year over year to Ps. 51,735 million (US$2,683.4 million). On a comparable basis, revenues improved 10%. The top line for the segment benefited from robust price increases, revenue-management initiatives across regions, and volume growth in Brazil, Central America and Colombia as well as flat volume in Mexico. This was partially offset by a negative currency translation into Mexican Peso.

Driven by a resilient consumer environment in Mexico and solid growth in South America, the segment delivered strong operating results. Coca-Cola FEMSA’s operating income declined 13.2%, while comparable operating income was down 5.1%. The segment’s operating margin contracted 230 bps to 12.3% on higher labor, maintenance and freight expenses, offset by operating expense efficiencies.

Financial Position

FEMSA had cash and cash equivalents of Ps. 65,562 million (US$3,478.1 million) as of Dec 31, 2019. Long-term debt was Ps. 95,714 million (US$5,077.7 million). Moreover, the company incurred capital expenditure of Ps. 8,617 million (US$446.9 million) in the fourth quarter, reflecting increased investments in most businesses.

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