Walmex results were in line with our estimates, again confirming the company’s leadership. Sales, operating profit and EBITDA rose 12.6%, 10.4%, and 10.8%, respectively. These figures were off by 0%, -1.2%, and –1.4% compared to our forecasts. Sales growth was attributable to 4.7%, 9%, and 7% increases in same-store sales, sales floor space and number of seats, respectively. These figures are highly encouraging and confirm that Walmex is gaining market share. A pleasant surprise was that gross margin contracted only 10 bp, due to both continuous deals with suppliers (which have allowed the company to offer the lowest prices in the market), and efficiencies in distribution and inventory management. These improvements also contributed positively to the company’s operating margin, which ended at 7.1%. We believe Walmex’ margins are quite attractive. Financial income rose 5.4%, due to 5.9% higher interest income and 62.2% growth under the monetary line item. As expected, Walmex’ tax rate increased from 13% to 25.4% as a result of the implementation of Bulletin D-4. We are not expecting any surprises under this line item in 2001, and estimate a tax rate of around 35%. As a consequence of the above, net income was down 11.7% in real terms. Walmex continues to have a sound balance sheet, with strong cash flow generation and internally financed expansion. During 2000, capex totaled Ps 3.059 billion. This amount was invested in the construction of 38 units. The company is planning to invest Ps 5.0 billion in 62 units over the following 18 months, for a 14% increase in sales floor space. The outlook for 2001 remains bright, with expected 3%-3.5% growth in same-store sales, and stable margins at the gross level. However, we would not be surprised if operating margins rebounded slightly, as several Aurrera units will be transformed to the Wal*Mart Supercenter format, possibly reflecting administrative savings. At a price of Ps 23.30, the stock’s valuation, as measured by its EV/EBITDA multiple, falls from 16.85x to 14.33x in 2001E, leading to a target price of Ps 29 by February 2002, which represents a nominal yield of 24.5%. We feel that Walmex’ management is achieving significant accomplishments and that it is time for the market to recognize them. This, combined with its positive outlook, leads us to reiterate the stock as a BUY.

In 4Q00, net sales were up by a real 12.6% to Ps 23.342 billion, as a result of 4.7%, 9%, and 7% increases in same-store sales, sales floor space and number of seats, respectively. It is important to note these results were driven by the success of Walmex’ "everyday low prices" campaign, which has led to increases in the number of clients and average sales tickets. Furthermore, as a result of excellent deals with suppliers and favorable changes in sales mix, gross margin dropped only 10 bp vs. 4Q99 to 20.2%. In our view, this is highly encouraging, as conducting daily promotions can only be done at a very high cost and may only be offset via efficiencies in inventory management and distribution systems. Sales mix ended at 51/52%-49/48% for foodstuffs/general merchandise, and Walmex’ goal is to achieve a 50%-50% sales mix, a goal that, in our view, could be met soon. At the operating level, Walmex continues to reap the benefits of Wal*Mart’s direction in the form of increased efficiencies and greater operating leverage as a result of higher sales, exemplified by the 6.4% increase in sales per employee, a positive sign. Operating margin dropped from 7.2% in 4Q99 to 7.1% in 4Q00. With new unit openings performed over the past twelve months (14 restaurants and 24 stores), the company registered a 2% increase in cash expenses per square meter, which rose from Ps 1,537 in 4Q99 to Ps 1,567 in 4Q00. We believe that if the company continues to perform as it has done so far, margins could remain strong, without implying any further expansions.

Financial income rose 5.4%, due to 5.9% higher interest income and 62.2% growth under the monetary line item. Interest income increased as a result of stronger cash generation, evidenced by the 18.4% rise in cash and equivalents as compared to December 1999. We believe that as Walmex continues to gain market share and reinforcing its leadership, cash generation should tend to improve even more.

As expected, Walmex’ tax rate increased from 13% to 25.4% as a result of the implementation of Bulletin D-4. As a consequence of the above, net income was down 11.7% in real terms.

We believe that the company’s healthy financial structure will continue to be extremely sound, due mainly to strong cash flow generation and the healthy policies followed by the company throughout the years. Cash and equivalents have allowed Walmex to increase its sales floor space and number of units, a trend we believe should continue over the next few years. During 2000, capex totaled Ps 3.059 billion. This amount was invested in the construction of 38 units, which caused sales floor space and number of seats to increase by 121,700 square meters and 3,100, respectively. The company is planning to invest Ps 5.0 billion in 62 units over the following 18 months.

During 2000, the company repurchased 58,346,702 Series C shares and 61,000 Series V shares, all of which have been cancelled. It is important to note that the company did not increase the stock repurchase fund in 2001, leading us to believe that repurchases will continue at a slower pace, as the company strengthens its focus on expanding and continuing to gain market share.

Walmex’ results were highly encouraging and the outlook for 2001 remains bright, with expected 3%-3.5% growth in same-store sales, and stable margins at the gross level. However, we would not be surprised if operating margins rebounded slightly, as several Aurrera units will be transformed to the Wal*Mart Supercenter format, possibly reflecting administrative savings. The company is planning invest Ps 5.0 billion in 62 units over the following 18 months, for a 14% increase in sales floor space, and capacity expansions at its distribution center by 63.9%, given its success. At a price of Ps 23.30, the stock’s valuation, as measured by its EV/EBITDA multiple, falls from 16.85x to a forward 14.33x in 2001, leading to a target price of Ps 29 by February 2002, which represents a nominal yield of 24.5%. We feel that Walmex’ management is achieving significant accomplishments and that it is time for the market to recognize them. This, combined with its positive outlook, leads us to reiterate the stock as a BUY.

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Marcela Martínez  marcela.martinez@cbbanorte.com.mx

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