FEMSA (FMX) Q1 Earnings Beat, Splits Reporting Divisions

Fomento Economico Mexicano S.A.B. de C.V.FMX , alias FEMSA's first-quarter 2016 net majority income came in at 49 cents per ADS (Ps. 0.84 per FEMSA Unit), in line with the Zacks Consensus Estimate.

Quarterly net consolidated income of the largest franchise bottler for The Coca-Cola Company KO rose 0.2% to Ps. 4,356 million (US$241.6 million) from Ps. 4,349 million (US$291.3 million) in the year-ago quarter. The increase was backed by higher income from operations that nullified the weakness noted in Heineken's performance, in which FEMSA holds 20% participation interest, as well as increased non-operating and financial costs.

Considering the importance of its drugstore operations, which currently contributes about 10% of FEMSA's total revenue, management has split the reporting divisions of FEMSA Comercio into three - Fuel, Health and Retail. The company has started reporting per the new segment classification effective first-quarter 2016.

Quarter in Detail

Total revenue rose 31.7% year over year to Ps. 85,856 million (US$4,763 million), fueled by solid performance across segments as well as Grupo Socofar's integration into FEMSA Comercio's Health division. On an organic basis, total revenue jumped 12% year over year. Also, the company's total revenue in dollar terms surpassed the Zacks Consensus Estimate of $4,504 million.

FEMSA's gross profit rose 21.4% year over year to Ps. 31,183 million (US$1,729.9 million). Gross margin contracted 310 basis points to 36.3% owing to the incorporation and growth of lower margin businesses in FEMSA Comercio's Health and Fuel divisions.

FEMSA's operating income jumped 16.4% to Ps. 6,818 million (US$378.2 million) from the year-ago period. On an organic basis, operating income went up 12.2% year over year. However, consolidated operating margin contracted 110 bps to 7.9% due to the rapid growth of the lower-margin businesses at all three divisions of FEMSA Comercio.

Segmental Discussion

Total revenue at Coca-Cola FEMSA S.A.B. de C.V.KOF rose 7.9% year over year to Ps. 37,097 million (US$2,058 million), even after sales were negatively impacted by the depreciation of the Brazilian real, Argentina peso and the Colombian peso compared with the Mexican peso. Further, comparable revenue jumped 9.1% on the back of an increase in average price per unit case in almost all operations, along with volume growth in Mexico, Central America and Colombia.

Coca-Cola FEMSA's operating income advanced 9% to Ps. 4,908 million (US$272.3 million) in the quarter. Also, the segment's operating margin expanded 10 bps to 13.2%. Comparable operating income increased 10.1% and the margin expanded 10 bps.

FEMSA Comercio - Retail Division: Total revenue at this segment rose 15.6% year over year to Ps. 30,451 million (US$1,689.3 million). The rise can be mainly attributed to the opening of 137 net new stores in the quarter, which took the total net new stores count for the past 12 months to 1,191. FEMSA Comercio's Retail division had a total of 14,194 OXXO stores as of Mar 31, 2016. Same-store sales at OXXO jumped 8.8% on an 8.3% increase in average customer ticket and a marginal rise in store traffic.

Operating income rose 27.8% year over year to Ps. 1,574 million (US$87.3 million). The segment's operating margin expanded 50 bps to 5.2% due to higher operating expenses.

FEMSA Comercio - Health Division: This segment reported total revenue of Ps. 9,512 million (US$527.7 million), while organic revenue growth was of 20.6%. Operating income amounted to Ps. 249 million (US$13.8 million). Operating margin contracted 170 bps to 2.6% owing to higher operating expenses related to Socofar.

Organic operating income was down 6.6% due to operating deleverage that stemmed from stepped-up unit growth, along with increased expenses to build infrastructure and position itself for growth as it remains on track to strengthen its Mexican drugstore operations and integrate them into a single platform.

FEMSA Comercio - Fuel Division: Total revenue came in at Ps. 6,078 million (US$337.2 million). Same-station sales for March were flat year over year, driven by a 2% rise in same-station volumes offset by a 2.5% decline in average revenue per liter. The company had 319 OXXO Gas service stations as of Mar 31.

Operating income amounted to Ps. 29 million (US$1.6 million), while operating margin contracted 130 bps to 0.5% owing to a fall in prices and an increased growth rate in new service stations that will take some time to ramp up. Additionally, operating margin bore the impact of the company's ongoing efforts to speed up growth across more territories and higher regulation costs.

Financial Position

FEMSA had cash balance of Ps. 50,407 million (US$2,896.7 million) as of Mar 31, 2016. Long and short-term debts were Ps. 102,460 million (US$5,888 million) and Ps. 5,925 million (US$340.5 million), respectively. Moreover, the company incurred capital expenditure of Ps. 3,141 million (US$174.3 million) in the first quarter.

On Mar 8, the company's board approved of paying cash dividends worth Ps. 8,355 million (US$463.5 million) in 2016. The company plans to distribute this dividend to each class of shareholders in two equal payments, payable on May 5 and Nov 3. Additionally, the company's shareholders set a ceiling of Ps. 7,000 million (US$388.3 million) on the maximum amount that can be used for share repurchase during the year.

Zacks Rank

Currently, FEMSA carries a Zacks Rank #4 (Sell). A better-ranked stock in the same industry is Primo Water Corp. PRMW , which has a Zacks Rank #1 (Strong Buy).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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