Fomento Economico Mexicano SAB de CV Q3 FY2026 earnings call

• OXXO Mexico Strategy & Traffic: The company is executing a four-pillar strategy (Impulse, Food Service, Daily/Replenishment, Services) centered on customer relevance. Q3 saw significant traffic growth (+3.5%) despite a soft consumer environment, driven by successful execution in core impulse categories and early traction in food service (coffee) and services.
• Profitability Management: OXXO manages value proposition holistically, balancing price, margin, and assortment. While reported gross margin contracted 120 bps, this was impacted by a high comparison base (commercial income timing). Normalized margin contraction was ~70 bps. Gross profit grew 7.4%, demonstrating that volume growth offsets margin investments.
• Store Pruning & Expansion: OXXO closed 140 underperforming stores in Q3 (impacting results by ~20 bps), part of a broader pruning of ~250 stores. Despite this, the company remains committed to a net expansion target of 1,000 stores annually in Mexico long-term.
• Operational Discipline & Labor Costs: With wages rising well above inflation and upcoming labor reforms (reduced workweek), expense efficiency is critical. SG&A reductions from corporate restructuring are providing tailwinds, but labor costs will likely rise as a percentage of revenue next year.
• Coca-Cola FEMSA Resilience: Volumes remained resilient in Mexico post-excise tax hikes due to disciplined pricing and execution. South America delivered double-digit operating income growth.
• M&A and Capital Allocation: The company prioritizes organic growth. In the U.S., they face high acquisition multiples and prefer organic development or opportunistic acquisitions only if they bring unique capabilities. Leverage (Net Debt/EBITDA ex-CFE) is expected to be ~1.5-1.6x by year-end, allowing for flexibility in dividends/buybacks.

Total revenues increased 9.8% year-over-year, with operating income growing 9.9%. Net consolidated income amounted to 10.6 billion pesos, an 81% increase. Key segment highlights include:

• OXXO Mexico: Total revenues grew 10.3%; operating income increased 5.8% (contracting margin by 40 bps). Excluding store closures, operating income would have grown 8%. Gross profit grew 7.4%.
• Americas in Mobility: Revenues reached 29.5 billion pesos (up 18.1%). Operating income was 170 million pesos (margin 0.6%), reflecting losses from OXO Brazil consolidation and fuel price commitments in Mexico, partially offset by strong performance at OXO Latam (especially Colombia) and OXO Gas.
• Europe: Revenues were 14.1 billion pesos (down 5.2% YoY, up 4% currency-neutral). Operating income was 531 million pesos (margin 3.8%), down 24.8%, driven by weaker German retail/food service and Valora’s B2B US business.
• Health Division: Revenues grew 7% to 22.9 billion pesos. Operating income fell 63.2% to 319 million pesos (margin 1.4%) due to a 430 million peso credit risk provision in Colombia and profitability pressure in Chile.
• Mbara: Same-store sales grew 10.3% with 112 net new stores.
• Coca-Cola FEMSA: Revenue growth of 10.9%; operating income increased 15.4% (including a one-time insurance benefit; underlying growth was 7.4%). Strong volume growth in Mexico and South America.

• OXXO Mexico Store Count: Maintained annual net new store target of 1,000 for the long term, though Q3 net additions may fall slightly short of the run rate due to pruning activities.
• Labor Costs: Expect labor expenses to increase as a percentage of revenues in the near term due to government-mandated minimum wage increases and reduced workweek legislation.
• Capital Returns: No specific dividend amount guidance provided, but management indicated that by early next year, they will have visibility to announce extraordinary dividends or buybacks once leverage targets are approached.
• Q4 Outlook: Cautious outlook due to potentially unfavorable weather (rainier/colder) and a demanding comparison base, though momentum remains positive across most units.

• Consumer Environment: Soft consumer sentiment in Mexico poses a headwind to sustained traffic and sales growth.
• Regulatory/Labor Reform: Upcoming labor reforms (reduced workweek) and significant minimum wage hikes will increase operational costs and require careful balance with affordability strategies.
• Colombia Healthcare Uncertainty: Continued uncertainty in Colombia’s healthcare system led to a non-cash credit risk provision and the decision not to renew agreements with major counterparties like EPS Sanitas.
• Brazil Operational Constraints: Navigating the 40-hour workweek in Brazil adds operational complexity and slows expansion pace compared to other markets.
• FX Volatility: Non-cash foreign exchange gains/losses can impact net income significantly, as seen with the valuation of Imperial Brady and USD-denominated debt positions.

Q: Analyst asked about the structural drivers of OXXO Mexico's traffic recovery amidst a soft consumer environment and how it compares to competitors.

A: CEO stated that traffic growth is broad-based across all regions and strategic pillars, not just impulse. The recovery is driven by improved execution in core categories (energy drinks, beer) and early success in food service (coffee) and services. They are gaining market share against all relevant trade channels, indicating their value proposition resonates even in a weak economy.

Q: Analyst asked about medium-term structural traffic opportunities for OXXO Mexico after asset pruning and normalization.

A: CEO expressed dissatisfaction with current results, aiming for more growth. Key levers include bold improvements in food service execution and tripling the percentage of food service dependency relative to total sales, similar to Peru/Chile/Colombia levels. Daily replenishment ('Canasta Oxxo') is also being tested to save customers time and money, offering significant traffic accretion potential.

Q: Analyst asked about SG&A trends and future labor cost impacts given recent restructuring.

A: CFO noted that corporate overhead restructuring savings are flowing through, with 1-2 quarters of remaining tailwinds. However, next year will see higher selling expenses due to a 13% minimum wage hike and reduced workweek. While not all wage increases translate point-for-point to costs, labor as a % of revenue will likely rise, requiring continued efficiency efforts and potential automation exploration.

Q: Analyst asked about capital allocation priorities, specifically divestitures vs. M&A vs. shareholder returns.

A: CFO clarified that they expect Net Debt/EBITDA to reach ~1.5-1.6x by year-end, creating flexibility for extraordinary dividends or buybacks announced in early next year. IR Director added that M&A appetite is low due to high multiples in fragmented US/European markets; they prioritize organic growth and will only pursue acquisitions if they offer unique capabilities at attractive valuations.

Q: Analyst asked about the rapid acceleration of Mbara (discount format) store openings beyond initial plans.

A: CEO explained that while unlearning convenience store habits takes time, the discount model pays its cost of capital quickly with low standard deviation in store performance. The focus is on lean operations, private label innovation, and supply chain efficiency. Mbara complements OXXO by selling different items (household goods vs. impulse), creating a multi-format synergy with high growth potential (30%+ expansion).