Digital and Expansion Efforts Are Driving FEMSA (FMX): What’s Next?

Fomento Economico Mexicano SAB de CV FMX, aka FEMSA, is showing solid momentum due to strong gross margins and growth strategies. In the fourth quarter of 2020, consolidated gross margin benefited from a surge in commercial revenue related to the December holiday season, as well as a robust service category.

In addition, the company’s digital initiatives and expansion efforts are on track. The company is well on its way to expanding into the US specialized sales industry with the acquisition of two new companies.

Due to these factors, the shares of FEMSA are 1.1% against the against in the year to date Industry2% decrease. In addition, Zacks ranked # 3 (Hold) significantly outperformed the consumer staples sector’s 0.2% growth over the period. Overall, the share has recovered by up to 24.5% within a year.

Factors That Drive The Stock

FEMSA recorded a positive gross margin trend in the last few quarters. The company exerts tight controls over spending and supply chain operations to increase margins. We find that FEMSA’s consolidated gross margin increased 60bps, 90bps and 60bps, respectively, for the fourth, third, and second quarters of 2020.

In addition, FEMSA continues to focus on providing customers with more options for contactless shopping by stepping up digital and technology-driven initiatives across all areas of operations. The company’s Coca-Cola FEMSA leads the way with its omni-channel business, while FEMSA Comercio is making strides in adopting digital initiatives.

Within its OXXO business chains, the company is on the right track to invest in digital offers, loyalty programs and fintech platforms in order to develop stronger after the pandemic and in the long term.

It also benefits from its acquisition strategy. FEMSA Comercio’s agreement with SMU, SA in October 2020 to take over their OK Market chain is likely to help FEMSA strengthen its market presence in Chile. OK Market is a renowned small-format chain of stores in Chile that operates in more than 120 locations. Its previous acquisitions of a minority stake in Jetro Restaurant Depot (“JRD”), AGV; a 40% stake in Grupo Socofar; and the joint venture with Raízen show their commitment to investing in the expansion of the core business.

In addition, the company has expanded its presence in the specialized sales industry in the United States. It recently acquired two independent specialist distribution companies in the United States. The two companies acquired are – Southeastern Paper Group, Inc., based in Spartanburg, SC, and Southwest Paper Company, Inc., based in Wichita, Kansas. These companies had annual sales of nearly $ 380 million as of September 2020.

FEMSA’s acquisition transaction with these companies is in line with its strategy of creating a national sales platform. The company’s business in the specialized distribution industry relates to its plan to invest in neighboring companies that can leverage capabilities in diverse markets and provide an opportunity for attractive growth and risk-adjusted returns.

With its OXXO store and other retail stores, the company has grown into an expert in the organization and management of supply chains and distribution systems. In particular, FEMSA serves a large number of businesses and retail customers through millions of interactions in various industries.

In addition, the latest transaction is likely to complement its investment in WAXIE Sanitary Supply (“WAXIE”) and North American Corporation in March 2020. This marked the company’s entry into the specialized distribution industry in the United States, which covers a wide variety of sectors including fresh and frozen products, decoration, home improvement, office supplies, furniture, and warehouse clearance.

Possible headwinds

Despite the growth initiatives, the company’s results continue to be negatively impacted by the coronavirus outbreak, which affected operations in most segments. In the fourth quarter of 2020, the company saw weak sales trends in its OXXO and OXXO gas operations due to the second wave of COVID-19 cases and the virus variant, leading to tighter operating restrictions and reduced consumer mobility.

In fact, FEMSA Comercio’s Fuel Division was hit hardest by the pandemic-related challenges. The current coronavirus situation has resulted in limited mobility and social distancing, which has resulted in lower vehicle utilization. Their effects were visible in the fourth quarter in the segment result, in which total sales fell by 30.7% compared to the previous year. In addition, sales at the same station decreased by 31.1% due to a 25.6% decrease in average volume due to restricted mobility due to the pandemic as well as a 7.4% decrease in the average price per liter. is due.

In addition, higher operating expenses resulting from ongoing initiatives to strengthen the remuneration structure for branch staff were negatively impacted by lower than usual income from the largely fixed cost base and higher investments in IT programs and infrastructure.

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

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