EUR 850.00 For Business Accounts Only

Morningstar | Femsa's Proximity Business Supports Sales Growth and Profitability in 1Q; Shares Fairly Valued

Narrow-moat Femsa had a solid start to the year, with strength in the Proximity division (36% of sales) driving 5.6% comparable revenue growth and 70 basis points of gross margin expansion (to roughly 37%) on a consolidated basis. Within the Proximity division, organic sales were up nearly 9%, including an 8% increase in OXXO store count over the prior-year period and 3.2% lift in same-store sales (on approximately 1% store traffic growth). We expect store growth to average around 7% over the next five years, as the firm continues to expand its operations into underpenetrated regions like Southern Mexico (management estimates nearly 10,000 people per store in regions like the Valley of Mexico, versus roughly 2,000 people per store in Tijuana), while traffic expands by a low-single-digit clip. Further, we expect OXXO's financial services offerings will continue to benefit both store traffic (as it should enhance the value proposition of its stores) and profitability, as evidenced by segment gross margin expanding 270 basis points to more than 38% (comparable to our full-year estimate).

Results in the Health (11% of sales) and Fuel (9% of sales) segments were comparatively softer, with sales growing just 2% to 3%, respectively, in each business. While the Health segment was hampered by unfavorable currency effects from its operations in South America, we were encouraged by a 1.3% increase in same-store sales for its drugstores as well as operating margin holding steady around 2.5% despite gross margin pressures from new pricing regulations in Colombia and increased promotional activity in Chile, thanks to the firm's ongoing efforts to extract cost efficiencies from its operations. We aren't anticipating a large change to our $92 per ADR fair value estimate or longer-term outlook, which calls for high-single-digit revenue growth and gross margin around 36% on average over our forecast, as we incorporate these results.