Fomento Economico Mexicano S.A.B. de C.V. (FMX Quick QuoteFMX - Free Report) , alias FEMSA, posted fourth-quarter 2016 net majority income of 90 cents per ADS (Ps. 1.86 per FEMSA Unit) lagging the Zacks Consensus Estimate of $1.02.

Quarterly net consolidated income of the largest franchise bottler for The Coca-Cola Company (KO Quick QuoteKO - Free Report) jumped 20.9% to Ps. 8,828 million (US$427.2 million) from Ps. 7,304 million (US$424.5 million) in the year-ago quarter. The increase was driven by higher income from operations and a foreign exchange gain related to FEMSA’s US dollar-denominated cash position.

Quarter in Detail

Total revenue rose 22.8% year over year to Ps. 109,907 million (US$5,318.8 million), fueled by solid performance across its segments. On an organic basis, total revenue increased 20.1% year over year. Further, the company’s total revenue in dollar terms surpassed the Zacks Consensus Estimate of $4,915 million.

FEMSA’s gross profit grew 17.7% to Ps. 41,999 million (US$2,032.5 million). Gross margin contracted 170 basis points (bps) to 38.2% owing to decline in Coca-Cola FEMSA’s gross margins and growth of lower-margin businesses in FEMSA Comercio.

FEMSA’s operating income increased 9.8% to Ps. 11,678 million (US$565.1 million). On an organic basis, operating income improved 5.9% year over year. However, consolidated operating margin contracted 130 bps to 10.6% due to lower gross margins across businesses as well as the incorporation and growth of the lower-margin businesses in the FEMSA Comercio division, which is expected to squeeze the company’s overall margins going forward.

Segmental Discussion

Total revenue at Coca-Cola FEMSA S.A.B. de C.V. (KOF Quick QuoteKOF - Free Report) was up 21.6% year over year to Ps. 49,533 million (US$2,397 million). On a comparable basis, revenues improved 3.7% on the back of a rise in average price per unit case in majority of the company’s operations along with higher volumes in Mexico and Central America.

Coca-Cola FEMSA’s operating income climbed 7.8% to Ps. 7,167 million (US$346.8 million) in the quarter, while comparable operating income dipped 8.3%. The segment’s comparable operating margin contracted 190 bps to 14.1%.

FEMSA Comercio – Retail Division: Total revenue at this segment surged 17.3% year over year to Ps. 36,493 million (US$1,766 million). The rise can be mainly attributed to the opening of 530 net new OXXO stores in the quarter, which took the total net new store count for the past 12 months to 1,164. FEMSA Comercio’s Retail division had a total of 15,225 OXXO stores as of Dec 31, 2016. Same-store sales at OXXO increased 8.6% on a 7% increase in average customer ticket and 1.5% rise in store traffic.

Operating income rose 10.2% year over year to Ps. 4,083 million (US$197.6 million). The segment’s operating margin declined 70 bps to 11.2%.

FEMSA Comercio – Health Division: This segment reported total revenue of Ps. 12,293 million (US$594.9 million), up 32.1% year over year. The increase was backed by strong growth in South American business and persistent store expansion in various regions, along with a currency translation gain from the appreciation of the Chilean and Colombian pesos. Organic revenue grew 10.7%. The segment had a total of 2,120 point of sales across all regions, of which about 19 net new stores were added in the fourth quarter. Same-store sales for the drugstores rose 22.5% driven by strong growth in South America that nullified the impact of soft trends in Mexico.

Operating income amounted to Ps. 599 million (US$29 million), an increase of 19.8% year over year. Operating margin contracted 50 bps to 4.9% owing to higher operating expenses in Mexico, increase in incentives for in-store personnel and one-time expenses in South America.

FEMSA Comercio – Fuel Division: Total revenue was up 31.6% to Ps. 8,054 million (US$389.6 million) on the back of the addition of 34 net new OXXO GAS stations in the quarter. Same-station sales rose 12.2% year over year, driven by a 7.8% increase in same-station volumes and a 4.1% rise in average revenue per liter, displaying the national price increases that took place in second-half 2016. The company had 382 OXXO GAS service stations as of Dec 31.

Operating income rose 57.389.7% to Ps. 74 million (US$3.6 million), while operating margin expanded 30 bps to 0.9% driven by the gains of the aforementioned national price increases and higher operating leverage.

Financial Position

FEMSA had cash balance of Ps. 43,757 million (US$2,122 million) as of Sep 30, 2016. Long and short-term debts were Ps. 123,494 million (US$5,990 million) and Ps. 7,281 million (US$353 million), respectively. Moreover, the company incurred capital expenditure of Ps. 8,378 million (US$405.4 million) in the fourth quarter due to increased investments across all segments.

Currently, FEMSA carries a Zacks Rank #4 (Sell). A better-ranked stock in the same industry is Primo Water Corporation (PRMW Quick QuotePRMW - Free Report) , with a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

FEMSA's stock performance reveals that the company has underperformed the broader industry in the last six months. The stock has declined 10.5% in the past six months, way below the Zacks Categorized Beverages - Soft Drinks industry's fall of 2.5% in the same period.

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