FEMSA (FMX) Q2 Earnings & Sales Down Y/Y on Coronavirus Woes

Fomento Economico Mexicano S.A.B. de C.V’s FMX, alias FEMSA, reported a net majority loss per ADS of $1.42 per share (Ps. 3.27 per FEMSA unit) in second-quarter 2020. Results were primarily marred by the coronavirus outbreak that affected operations across most of its segments.

Net consolidated loss of the largest franchise bottler for The Coca-Cola Company KO was Ps. 1,669 million (US$72.7 million) against an income of Ps. 12,366 million (US$645.1 million) reported in the year-ago quarter. The loss can primarily be attributed to lower income from operations, higher taxes and other non-operating expenses, impairments charges for some of Coca-Cola FEMSA assets and the closure of Specialty’s Café and Bakery operation, higher interest expenses, and lower contribution from Heineken’s HEINY results. This was partly offset by non-cash foreign exchange gain linked to FEMSA’s U.S. dollar-denominated cash position, which benefited from the depreciation of the Mexican peso.

Total revenues of $4,915 million (Ps. 114,514 million) declined 10.7% year over year in the local currency, owing to the coronavirus outbreak-led impacts across all operations. On an organic basis, total revenues declined 14.3%.

Fomento Economico Mexicano S.A.B. de C.V. Price, Consensus and EPS Surprise


Fomento Economico Mexicano S.A.B. de C.V. Price, Consensus and EPS Surprise

Fomento Economico Mexicano S.A.B. de C.V. price-consensus-eps-surprise-chart | Fomento Economico Mexicano S.A.B. de C.V. Quote

Shares of the company remained steady on Jul 24 despite the soft second-quarter 2020 results. However, the Zacks Rank #4 (Sell) company has declined 3% in the past three months against the industry’s growth of 3.6%.

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FEMSA’s gross profit declined 9.1% to Ps. 43,544 million (US$1,895.7 million). However, consolidated gross margin expanded 60 basis points (bps) to 38%, owing to gross margin expansion of 80 bps at FEMSA Comercio’s Health and 350 bps at Fuel Divisions, partially offset by a 10-bps contraction at FEMSA Comercio’s Proximity Division and 180 bps at Coca-Cola FEMSA S.A.B. de C.V. KOF.

The company’s operating income (income from operations) declined 37.5% to Ps. 7,456 million (US$324.6 million). On an organic basis, operating income was down 40.4%. Consolidated operating margin contracted 280 bps to 6.5%, driven by operating margin contraction at all businesses.

Segmental Discussion

FEMSA Comercio — Proximity Division: Total revenues for the segment declined 8% year over year to Ps. 43,409 million (US$1,889.8 million). The decline can primarily be attributed to a 12.4% fall in same-store sales on a 24.1% decline in store traffic due to reduced customer mobility and significant beer shortages caused by the pandemic related restrictions. These were partly negated by a 15.4% rise in average customer ticket, owing to the shift of sales mix toward home consumption categories and SKUs related to the pandemic. In the reported quarter, the company’s base reduced by 40 stores, including temporary closures. Consequently, FEMSA Comercio’s Proximity division had 19,558 OXXO stores as of Jun 30, 2020.

Operating income declined 65.8% year over year, while operating margin contracted 620 bps to 3.6%, owing to operating deleverage as well as higher operating expenses. The increase in operating expenses mainly resulted from the ongoing initiatives to strengthen compensation structure for store personnel as well as higher investments in IT programs and infrastructure.

FEMSA Comercio — Health Division: The segment reported total revenues of Ps. 15,624 million (US$680.2 million), up 2.5% year over year. Organic revenues declined 9.1%, driven by strict mobility restrictions across South America operations, partially offset by positive trends in Mexico operations as well as favorable currency translations. Further, same-store sales for drugstores declined 9.8%. On a currency-neutral basis, total revenues increased 1.2%, while same-store sales increased 11.1%. The segment had 3,189 points of sales across all regions, which included 7 temporary closures due to the pandemic.

Operating income fell 23.9% year over year, while operating margin contracted 120 bps to 3.2%. Organic operating income for the segment declined 32.8%. The decline in operating margin resulted from higher operating expenses driven by the Health Division’s organic growth in South America.

FEMSA Comercio — Fuel Division: Total revenues declined 48.6% to Ps. 6,382 million (US$227.8 million). Same-station sales declined 49.3%, driven by a 40.6% fall in the average volume, reflecting reduced mobility due to the pandemic, as well as a 14.7% decrease in the average price per liter. The company had 551 OXXO GAS service stations as of Jun 30, reflecting the addition of one station in the second quarter. Operating income declined 82%, with 150-bps contraction in the operating margin to 0.8%.

Coca-Cola FEMSA: Total revenues for the segment declined 10.2% year over year to Ps. 45,348 million (US$1,974.24 million). On a comparable basis, revenues fell 8.6%. Coca-Cola FEMSA’s operating income declined 19.1%, while comparable operating income was down 17.6%. The segment’s operating margin contracted 130 bps to 11.9% on unfavorable price-mix effects, higher concentrate costs and the depreciation of most of the operating currencies as applied to its U.S. dollar-denominated costs. This was partly offset by lower PET costs, favorable hedging initiatives and operating expense efficiencies.

Financial Position

FEMSA had cash and cash equivalents of Ps. 140,240 million (US$5,965.1 million) as of Jun 30, 2020. Long-term debt was Ps. 174,014 million (US$7,401.7 million). Moreover, the company incurred capital expenditure of Ps. 4,384 million (US$190.9 million) in the second quarter, reflecting lower investments in most businesses.

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CocaCola Company The (KO): Free Stock Analysis Report
Fomento Economico Mexicano S.A.B. de C.V. (FMX): Free Stock Analysis Report
Coca Cola Femsa S.A.B. de C.V. (KOF): Free Stock Analysis Report
Heineken NV (HEINY): Free Stock Analysis Report
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