Walmart Mexico is the retailers star south of the border

Wal-Mart Stores Inc.’s U.S. chain is still mired in a sales slump, but the retailer’s Mexican business is a star south of the border.

Wal-Mart de Mexico, Latin America’s largest retail chain and a separately traded stock, reported better-than- expected sales for September, with same-store sales rising 7 percent from a year ago. Improving results have sent the shares soaring 31 percent in 2015, bouncing back from a roughly 40 percent tumble that began after a 2012 scandal in which the company was accused of bribing Mexican officials to speed up store openings. Its parent company’s stock, meanwhile, is down 22 percent this year.

The Mexican chain, known as Walmex, has refocused on its stores after selling restaurants and a bank. That’s helped fuel the recovery, according to Carlos Hermosillo, an equity analyst at Mexico City-based Actinver. A rebound in domestic spending is a providing a tailwind as well, helped by job gains and the lowest inflation rate in almost 50 years.

“Walmex revamped its strategy and set new goals,” Giselle Mojica, an analyst at Monex Casa de Bolsa, said in a phone interview. “The combo has benefited the company, and this has been reflected in its results all year long.”

Its American counterpart also is working on a comeback, but the effort hasn’t shown much of a payoff. Same-store sales grew just 1.5 percent last quarter, and the company is still cutting costs. That includes the elimination of 450 workers at headquarters earlier this month. Wal-Mart faces fierce competition from the likes of Amazon.com, and its U.S. stores have struggled to keep inventory stocked in recent years. Earnings fell short of analysts’ estimates last quarter, and the company trimmed its forecast for the year.

At Walmex, the economy has a lot to do with the retailer’s recovery. Unemployment has been steadily improving, while consumer confidence has recovered from a drop last year. The peso’s 18 percent decline versus the U.S. dollar in the past year magnified the local value of remittances — money sent home by workers outside the country. They grew 45 percent year over year in August.

“The result is that people are seeing more money coming into their wallets,” Hermosillo said. “It’s a relevant complement to purchasing power.”

Mexican mutual funds have taken notice and have cashed in on the bonanza. The five top-performing funds are all heavy on Walmex shares, and have significantly increased their positions in the last year. Citigroup Inc. holds the top three spots in Mexico’s biggest-gaining funds, and Corporativo GBM SAB has the next two. Their 15 percent average gain in 2015 is about three times the total return of the nation’s Bolsa index — thanks in part to growing stakes in Walmex.

This year, Walmex has seen sales increasing equally in all formats, Antonio Ocaranza, a spokesman, said in a phone interview.

“We’re seeing a very consistent demand in all regions and products,” he said. “The numbers reflect the solidity of our value proposition.”

The question now is whether Walmex’s winning streak has run its course, said Luis Willard, an analyst at GBM, who has a neutral rating on the stock. The company would have to improve its profitability to stay on track, he said.

“The market has already absorbed the good news in same- store sales data,” Willard said. “Any re-evaluation of the recommendation would have to be explained by an expansion in margins, which we don’t see happening in the short or medium term.”

Walmex has simplified its operations over the past two years. In May 2014, the company sold its Vips restaurant chain to Alsea SAB for 8.2 billion pesos ($633 million), and it announced in December that Carlos Slim’s Grupo Financiero Inbursa would buy its banking unit for 3.5 billion pesos. The bank sale made a big difference, according to Hermosillo.

“The company was distracted,” he said. “The sale redirected its focus to their core business, which is being a pure retailer.”

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Brendan Case contributed from Mexico City.


PVR Property Management