Femsa Earnings: Sharper Focus on Retail Expansion and Digital Marketing To Drive Sales Growth

We expect to maintain our $91 fair value estimate for narrow-moat Femsa FMX after absorbing its first-quarter results, with organic revenue up 12% (ahead of our 11% forecast) and operating profits up 5% (below our 6% assumption). We attribute the profit shortfall primarily to a lower-than-expected operating margin of 1% from the newly acquired Valora retail in Europe, while profitability in bottling and other retail units was stable. Our 10-year forecast for 8.5% annual sales growth and operating margins averaging 9.3% remains in place. Shares are fairly valued, and we suggest investors wait for a better entry point as operational risks in a sprawling retail footprint across Latin America call for a wider margin of safety.

Our confidence in Femsa’s retail operation was reinforced as the Oxxo format (35% of total sales) delivered 18% same-store sales growth, fueled by healthy store traffic (up 6%) and strong average shopper ticket (up 12%). Both metrics accelerated from 2022 levels of 4% and 11%, respectively, which we attribute to Oxxo’s attractive value proposition and nimble execution as the convenience operator reaped the benefit of surging snacks and beverage demand for social gatherings as consumer mobility rebounded after the pandemic. With a new loyalty program and the reinstallation of in-store services to attract and retain more shoppers, we remain optimistic about Oxxo’s growth trajectory in the coming years.

Performance was also solid at the bottling business (34% of sales) under subsidiary wide-moat Coke Femsa, with 12% top-line growth (against a tough comparison of a 15% growth a year ago) driven by brand resonance, a diversified portfolio across sparkling and still beverage lines, and agile in-market execution. We are further encouraged by the bottler’s progress in tapping digital systems to extend service coverage to small retailers and expect the initiative to help Coke Femsa expand volume share in the underserved traditional trade.