Earnings Report /

Organizacion Soriana SAB de CV: SORIANA, Quarterly Report 1Q21: Margin gains despite lower revenues

  • Soriana reported a double-digit sales decline due to tough comps, exacerbated by additional market share losses

  • Leverage rose to 2.4x ND/EBITDA after an increase in net debt, due to a deterioration in working capital

  • Valuation became more expensive to 5.2x FV/EBITDA LTM. Certainly, said valuation still looks very attractive vs. peers

Valentin III Mendoza Balderas
Valentin III Mendoza Balderas

Senior Equity Research Analyst, Consumer & Telecoms

Juan Barbier
Juan Barbier

Equity Research Analyst

5 May 2021
Published byBanorte
  • Soriana reported a double-digit drop in sales, exacerbated by additional losses in market share. However, a better gross margin coupled with expense reductions boosted profitability

  • Leverage rose to 2.4x ND/EBITDA after an increase of MXN 6.746 billion q/q in net debt, due to a deterioration in working capital of MXN -7.642 billion, following a decrease in payables

Remarkable profitability expansion. Soriana's sales fell 10.3% y/y to MXN 34.749 billion, not only due to tough comps in face of panic purchases from a year ago, when then pandemic started, but also reflecting greater losses in its market share and the closure of 13 stores in the LTM, due to its strategy to streamline the unit base. In the quarter, SSS fell -9.0% y/y, being 2.4x worse than the 3.7% drop reported by ANTAD food retailers, confirming a further deterioration of its competitive position within the sector. However, better commercial and shrinkage management led to a 30bps expansion in the gross margin to 22.2%, regardless of the impact coming from lower real estate revenues, due to reliefs granted. Moreover, additional expense cuts (-6.0% y/y) contributed to the company's EBITDA margin expansion of 40bps to 8.1%, a remarkable performance in light of the sharp drop in sales, in our view. As a result, EBITDA fell at a slower pace than revenues (-6.5% y / y) to MXN 2.805 billion. Finally, net income soared 38.6% y/y to MXN 957 million, driven by a 47.2% reduction in the CFC, due to lower interest payments and lower exchange losses. Valuation became more expensive. The higher leverage put pressure on Sorina’s FV/EBITDA. Now the stock trades at 5.2x LTM vs 4.6x prior. Certainly, said valuation looks extremely attractive, relative to the median of the retail sector in Mexico and against international peers. However, the difficult competitive environment faced by the company and the continuous loss in market share, support this discount, in our view. Consequently, we continue to see no catalysts for a re-rating in the stock, for the time being.