FEMSA

Femsa grew comparable sales by 10% in the second quarter, led by 11.8% growth in Oxxo Mexico and 11.6% growth in Americas & Mobility (fuel operations and ex-Mexico Oxxo stores). Adjusted EBITDA margin expanded 40 basis points to 14.4%, driven by operating leverage and lower overhead costs.

Why it matters: As we had expected, Femsa's initiatives helped Oxxo Mexico (its largest segment at 38% of revenue) land well with consumers, resulting in 9.5% same-store sales growth. Importantly, 2% of that growth came from an increase in traffic, the first positive increase in eight quarters. Management estimated that 60% of traffic growth stemmed from the World Cup. Still, Femsa's focus on price pack architecture and growth in key categories (beer, tobacco, soft drinks, and coffee) also propped up traffic and helped increase average ticket. Firmwide results were also buoyed by strong performance at Coca-Cola Femsa, as the World Cup, Coca-Cola Zero expansion, a focus on core brands across price points and consumption occasions, and innovation blunted the excise tax increase in Mexico.

The bottom line: We don't plan a significant change to our $111 per share fair value estimate for narrow-moat Femsa. While first-half top-line growth of 8% exceeds our full-year preprint forecast of 6%, a more challenging second half is likely to leave our outlook largely intact. As World Cup tailwinds end and the consumer environment remains challenging, management expects same-store sales growth to fade to midsingle digits and gross margin to contract. While we expected gross margin to increase slightly, the difference is immaterial to our valuation. Shares were down 3% on the results, as the market reacted negatively to the subdued outlook for the second half. Still, we think shares are slightly overvalued after a 27% year-to-date rise. We surmise the market is underestimating the impact of challenging economic conditions.

We have trimmed our fair value estimate for Femsa to $111 per ADR from $112. The decrease stems from a 30-basis-point increase to our WACC. We now use a WACC of 9.4% (prior 9.1%), primarily reflecting our updated assessment of Femsa's exposure to Central and South America. This is partially offset by currency changes, as we assign a $1/MXN 17.4 exchange rate as of July 14 (prior: 17.8). Our fair value estimate implies a 2026 enterprise value/adjusted EBITDA multiple of about 6 times.

Femsa grew comparable sales by 8.5% in the first quarter, led by 8.3% growth in Oxxo Mexico and 10.5% growth in Americas & Mobility. Operating margin was flat at 6.9%, as wider margins in Oxxo Mexico, Americas & Mobility, and Europe were offset by contraction in Health and Coca-Cola Femsa.

Over the next 10 years, our estimated 7% compound annual sales growth rate is based on our expectations for solid growth at Coke Femsa (6% CAGR), the convenience store business in the Americas (8%), while we anticipate lagging performance from proximity Europe (up 4%), gas stations (5%) and drugstores (5%). We expect Coke Femsa (35% of 2025 Femsa sales) to increase its top line by a healthy mix of volume expansion, better pricing with product innovation and point-of-sale execution, and incremental revenue from distributing non-Coke beverages and snacks. For the convenience store business in the Americas (39% of 2025 Femsa sales), we expect the Oxxo chain to grow through 6% comparable store sales growth largely led by higher average ticket and 2% store base expansion (2%). Growth in the Valora business (7% of sales) will likely stem from store revamps and new offerings. As we believe gas station services (8% of 2025 Femsa sales) are commoditized, we expect this format can expand sales primarily by tapping into traffic from Oxxo (through co-location of gas stations) and due to rising car ownership in Mexico. For the drugstore operation (10.5% of 2025 Femsa sales), despite execution improvement, we still view the format as not yet ready for widespread adoption across Latin America, given regulatory constraints and the higher price points for wellness and beauty products. As such, we expect sales growth for this format to be capped at a mid-single-digit pace over the forecast period.

We model operating margins to widen 50 basis points to 9.2% at the end of our 10-year forecast period, compared with 8.7% in 2025. We forecast gross margins to remain flat over the period as we expect suboptimal utilization of retail and warehouse space amid Femsa's continued retail expansion to offset better capacity utilization at Coke Femsa. We model better leverage in payroll, marketing, and distribution spending (31.5% of sales by 2035 versus 32.0% in 2025) as we expect Femsa to use loyalty programs, digital platforms, and data analytics to enhance efficiencies in the beverage and retail operations.

We assign Femsa a narrow economic moat based on intangible assets and cost advantages at major subsidiaries Coca-Cola Femsa and the Oxxo small-format retail chains, which jointly make up over 70% of revenue and over 90% of operating profits. The remaining businesses, including pharmacies and gas stations, do not exhibit any durable competitive advantages, in our view. We expect Femsa to generate returns on invested capital above our estimated 9% weighted average cost of capital over the next 10 years, though we are skeptical that such excess returns can extend over a 20-year horizon, given the complexities of managing sprawling retail businesses across disparate markets.

The intangible assets of Coke Femsa rest on brand strength and close retail relationships thanks to the association with Coca-Cola (Coke Femsa is the beverage giant’s largest bottler with 11% volume share). Coke brands’ unrivaled influence in Latin America (56% volume share in carbonated soft drinks in Latin America versus 10% for PepsiCo, per Euromonitor), coupled with the exclusive distribution rights, has enabled Coca-Cola Femsa to withstand severe recessions in Argentina and Venezuela and the covid-19 pandemic to deliver top-line growth at 10% compounded annually over the past five years. We expect continued growth from Coke’s innovation pipeline around low- and no-sugar cola recipes and noncola categories and accelerating multipack offerings.

Coca-Cola Femsa’s tight retail relationships are underpinned by Coke’s brand appeal and manufacturing and distribution footprint spanning 10 countries. With an assortment of in-demand beverage products and reliable delivery, the bottler has gained and maintained access to prime shelf space and privileges in in-store promotions. Cooler placements in stores and dedicated mobile applications and websites developed to facilitate more efficient inventory planning and delivery scheduling have created value for retail partners and should help open more doors as the bottler adds non-Coke products, including beer, spirits, and snacks.

Intangible assets in the Oxxo business are evidenced by the loyalty the convenience store chain has cultivated with consumers in Mexico through a differentiated shopping experience and, to a lesser extent, close ties with suppliers given the growing importance of the convenience channel. With a convenience-centered value proposition and strong store execution, Oxxo has set itself apart from supermarket chains (Walmart, Soriana, and Chedraui) and mom-and-pop stores, establishing the largest network of small-format neighborhood stores in Latin America. It has over 25,000 locations spanning Mexico, Brazil, Chile, Colombia, and Peru. The main appeal of an Oxxo store is location (close to residential areas, office buildings, higher education institutes, and transportation hubs) and a straightforward shopping experience. A typical Oxxo store averages about 1,100 square feet in selling space and carries 3,300 SKUs in about 30 categories (mostly beverages, snacks, household and personal-care products, and cigarettes), both a fraction of what’s common at major supermarkets. For shoppers pressed for time and not very price-sensitive, the Oxxo chain becomes their go-to place by offering an alternative shopping venue to efficiently purchase refreshments and daily necessities, in addition to an occasional impulse purchase. Over the years, Oxxo has added essential services including utility bill payments, bank deposits, remittance, and telecom service prepayments, further integrating into daily life.

Serving on average 1.3 million people (1% of Mexico’s population) every day, Oxxo has grown average by 8.0% on average in the past five years, ahead of mid-single-digit inflation, while traffic was flat. The growth in spending over the years attests to the affinity and trust built with its customers, which should help Oxxo maintain an advantageous position in a retail market with little switching costs.

Moreover, given the increasing importance of convenience stores as a channel for consumer brands to test new products and packaging, and for exposure to younger consumers, Oxxo has been nurturing a closer relationship with suppliers by facilitating in-store test launches and sharing consumer insights. This has given Oxxo valuable access to the consumer product innovation pipeline and enabled it to identify the next bestselling products ahead of competition, reinforcing its position with convenience store customers.

Cost advantages resulting from scale form the second pillar of Femsa’s economic moat rating. With a 2025 revenue base of MXN 292 billion and unit case volume of 4.2 billion, Coca-Cola Femsa maintains high utilization of manufacturing and logistics capacity and implements time and fuel-efficient delivery routes—advantages difficult for smaller rivals to match. For Oxxo, the retail chain dominates the convenience store market in Mexico with over 80% revenue share, versus number-two player Seven & i at under 10% and has 10 times the number of stores. Store density allows it to utilize its truck fleet efficiently while replenishing store inventory more frequently, thus achieving a cost advantage while responding faster to shopper preference shifts. As the second-largest retailer in Mexico by revenue (only behind Walmart), Oxxo also enjoys strong bargaining power in negotiating leasing agreements with landlords and in procuring equipment. That said, we see limited scope for cost savings in sourcing from suppliers, as the total scale is offset by the high cost of shipping to Oxxo’s vast store fleet and small order size per store.

The remaining operations comprise convenience retail chains in developed Europe and US, pharmacies across Chile, Colombia, Ecuador, and Mexico, and gas stations in Mexico. Collectively, this mix makes up about 26% of 2025 revenue but less than 10% of profits. We think none of these have carved out an economic moat.

Oxxo dominates the convenience store market in Mexico, with an attractive return profile and plenty of room to expand the store base.

As Coke’s most important bottling partner in Latin America, Coca-Cola Femsa is poised to expand manufacturing scale and distribution clout through organic expansion and acquisitions.

Investments in digital capabilities should enable Femsa to gather and leverage up-to-date consumer and market insights that drive better go-to-market strategies and unlock efficiency gains.

Femsa will face stringent business regulations and higher costs of labor and real estate in developed Europe and US as it looks to drive sales growth in those markets.

Lower discretionary spending and less developed transportation infrastructure in Latin America will remain hurdles to Femsa’s growth ambitions.

Femsa will continue to wrestle with macroeconomic volatility and political instability in the region, which makes it challenging to maintain stable margins and returns.