Femsa Drops Most in Three Years After Profit Trails Estimates

Fomento Economico Mexicano SAB, owner of Latin America’s largest convenience-store chain, fell the most in three years after first-quarter sales and profit fell short of analysts’ forecasts and its South American soft-drinks unit’s revenue declined.

Shares of Femsa, as the Monterrey-based company is known, dropped 6.1 percent to 141.76 pesos at the close of trading in Mexico City, the biggest decline since Jan. 11, 2010. Bottling unit Coca-Cola Femsa SAB slid 7.1 percent to 204.10 pesos, the second-largest decrease on Mexico’s benchmark IPC index of 35 stocks after homebuilder Desarrolladora Homex SAB.

The company’s bottling business and its Oxxo convenience store chain may be heading for slower growth in the coming years, according to Citigroup Inc. analysts Alexander Robarts and Sergio Matsumoto.

“Femsa is at a strategic crossroads, since its Latin American drinks segment and Oxxo in Mexico probably won’t be able to sustain their growth rates in five years,” Robarts and Matsumoto wrote in a report dated yesterday in which they maintained their neutral recommendation. Reduced growth will pressure Femsa “to sow the seeds that will help it maintain its sales and profit growth in the future.”

The company will meet with bond investors beginning next week to explore an international debt sale as interest rates remain low and it seeks to move ahead with a “good pipeline” of potential deals, Chief Corporate Officer Javier Astaburuaga said today on a conference call discussing first-quarter results.

Falling Traffic

Femsa’s operating profit slid 1.8 percent to 5.12 billion pesos ($420.5 million), missing analysts’ average estimate of 5.96 billion pesos. Sales of 56.2 billion pesos also fell short of expectations of 58.8 billion pesos. Net income climbed 13 percent to 2.61 billion pesos.

The company recorded a pretax profit of 4.5 billion pesos from its 20 percent stake in Heineken NV, which bought Femsa’s beer unit in 2010. The Amsterdam-based brewer fell 5.1 percent, the most in 20 months, after reporting an unexpected decline in first-quarter sales today.

While revenue at the Oxxo unit climbed 14 percent, store traffic fell 1.2 percent. Same-store sales rose 4.8 percent, bolstered by a 6.1 percent increase in the average receipt. The company opened 135 net new stores in the first quarter, bringing its total store count to 10,736.

“The report was below what we expected due to the weakness reported in the soft-drinks unit’s volumes and the currency conversion effects in that business unit,” Invex analyst Montserrat Anton Honorato wrote in a note to clients. She has a “hold” recommendation on the company.

“We also found negative surprises in the Oxxo chain, such as a fall in store traffic, something we hadn’t seen in the time we’ve been covering this company (since 2007),” Anton Honorato wrote.

Strong Peso

Coca-Cola Femsa’s first-quarter sales were little changed at 33.6 billion pesos, less than the average estimate of 35.5 billion pesos among eight analysts surveyed by Bloomberg. While revenue in Mexico and Central America rose 8.5 percent, sales in South America slid 6.3 percent as the Mexican peso strengthened against the Venezuelan, Brazilian and Argentine currencies over the past year.

Profit fell 7.7 percent to 2.43 billion pesos, while operating income dropped 5.6 percent to 4.07 billion pesos compared with an average estimate of 4.87 billion pesos by analysts surveyed by Bloomberg. Femsa owns 49 percent of the bottler, with Atlanta-based Coca-Cola Co. owning 29 percent and 22 percent in the hands of the public.

Shares of Coca-Cola Femsa, the largest Coke bottler in Latin America, closed at a record high in Mexico City yesterday after climbing 15 percent this year before today. Femsa climbed 17 percent through yesterday’s close.

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