Femsa Earnings: Merchandising and New Stores Drove Oxxo Growth; Beverage Segment Resilient

We expect to raise our $97 fair value estimate on narrow-moat Femsa FMX by a mid-single digit percentage to incorporate better-than-expected second-quarter results and Mexican peso appreciation against the U.S. dollar. Organic revenue grew 9.5% (excluding the Valora acquisition) and operating profits were up 4.5%, edging our estimates (8.7% and 4.1%, respectively). Thus, we are nudging up our pre-print 2023 estimate by a low-single-digit percentage on the bottom line. Our 10-year forecasts for annual sales growth and average operating margins both in the high-single digits remain in place. Shares trade in a range we’d consider fairly valued.

Our confidence in the Oxxo format (35% of sales) was reinforced by an impressive 15% same-store sales growth and an 18% operating profit increase. We attribute the healthy performance to Oxxo’s strong merchandising and nimble execution as the convenience operator stocked its shelves with on-trend snacks and drinks. A new loyalty program (with participants currently contributing to 24% of Oxxo sales), in-store services (such as money transfer and bill payments), and accelerating store base expansion (444 new stores added in the quarter, up 160%) further bolstered our optimism for 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 17% organic sales growth driven by strong brands, innovations, and a diversified portfolio across soda and still beverage lines. We are also encouraged by digital investments to connect traditional retail clients and expanding manufacturing and distribution footprint in the fragmented and underserved South American market. These prudent moves should help Coke Femsa further expand volume share in the Coke system across Latin America over the longer term.