Third Quarter 2008 BMV: GFAMSA Monterrey, México. October 23, 2008. Grupo Famsa S.A.B. de C.V. (BMV: GFAMSA) As of January 1, 2008, the effect of inflation is no longer recognized for financial reporting purposes under new Mexican Financial Reporting Standards. However, it is required that financial results of previous periods be presented considering the effects of inflation up to December 31, 2007. This means that for periods prior to January 1, 2008, figures must be shown in constant pesos of December 31, 2007. In order to ease the transition to nominal accounting, the Letter from the CEO refers to 3Q07 figures as they were presented in September 2007 (constant pesos of September 30, 2007). Mr. Humberto Garza Valdéz, Chief Executive Officer, Grupo Famsa S.A.B. de C.V., reports on the company s third quarter 2008 results. Summary of Consolidated Financial Results (millions of Mexican pesos) Third Quarter January - September 2008 2007 (1) % Var (2) 2008 2007 (1) % Var (2) Net sales 3,505 3,322 5.5 10,553 9,761 8.1 Cost of Sales -1,756-1,822-3.6-5,392-5,305 1.6 Gross Income 1,749 1,500 16.6 5,161 4,455 15.8 Operating Expenses -1,498-1,244 20.4-4,302-3,583 20.0 Operating Income 251 256-1.8 860 872-1.4 EBITDA 359 333 7.9 1,148 1,093 5.0 Net Income 42 97-56.5 261 354-26.2 Gross Margin (%) 49.9% 45.2% 48.9% 45.6% EBITDA Margin (%) 10.2% 10.0% 10.9% 11.2% Net Margin (%) 1.2% 2.9% 2.5% 3.6% (1) Millions of constant Mexican pesos of September 30, 2007 (2) Variance calculated in thousands of Mexican Pesos, as in financial statements Letter from the CEO Mr. Humberto Garza Valdéz, Grupo Famsa s Chief Executive Officer, stated: Grupo Famsa s operating results have been pressured by an unfavorable environment for more than a year. Since then, we have undertaken different initiatives to strengthen the company s position and overcome the effects of a generalized consumption slowdown in both our markets. Recently, the environment has deteriorated even further. However, the hard work carried out in the past has proven to be extremely valuable as we face today s adverse market conditions. The successful roll-out of Banco Ahorro Famsa has been one of the most significant achievements given the current situation in the credit markets. One year ago, only 63 of our stores were equipped with a bank. Today, our 271 banking branches make up one of the top ten financial networks in Mexico through which we have been able to finance more than P$2,300 million in credits to 421 thousand Famsa Mexico customers. Additionally, despite the challenges, we have been able to expand our footprint by opening 33 new stores in Mexico and the United States during the last twelve months. Furthermore, we have continued the implementation of specific initiatives focused at: improving the shopping experience at our stores, attract new customers through striking promotions and the work of our Gran Crédito team, achieve greater operating efficiencies, and diversify our exposure to the current slowdown in demand for durable goods. Relación con Inversionistas: 1 de 10
We maintain a firm commitment with our shareholders to continue the sustainable growth of our business platform. Therefore, in light of the latest economic developments, we consider it appropriate to adopt a more cautious perspective regarding market conditions in the short term in order to ensure Grupo Famsa s financial health. Consequently, besides reinforcing the efforts mentioned above, some store openings scheduled for 2008/2009 will be postponed. Operating Results by Business Unit Store and Banking Branch Openings 1. Stores Third Quarter Year-to-Date (2008) Last 12 Months Total Stores 5 25 33 415 Famsa Mexico 4 12 20 363 Famsa USA 1 13 13 52 Banking branches 4 95 208 271 2. Retail Area (square meters) Third Year-to-Date Last 12 Quarter (2008) Months Total Stores 10,267 42,906 55,753 537,231 Famsa Mexico 7,570 19,053 31,900 414,394 Famsa USA 2,697 23,853 23,853 122,837 Famsa Mexico Famsa Mexico has opened 20 new stores during the last twelve months, 4 of which started operations throughout the third quarter in the states of Nuevo Leon, Chihuahua and Morelos. The new stores reinforce Grupo Famsa s position in each of those markets and leverage existing operating infrastructure in order to minimize additional fixed expenses. Famsa Mexico continues focusing all efforts on the implementation of specific initiatives directed at compensating the effects of the current slowdown in consumption. The uncertainty created by the financial crisis unleashed in the US and elevated inflation have pressured Mexican consumer confidence down to historical levels. Similarly, the latest unemployment indicators tend to increase. For this reason, Famsa Mexico continues reinforcing/differentiating the shopping experience in its stores by emphasizing on customer service. Other efforts such as the continued work on the streets by our Gran Crédito team and the constant release of striking promotions are intended to boost store traffic. The exposure to current weakness in durable good demand has also been effectively diversified by enhancing our personal loan offering. One of the most significant results related to the personal loan initiatives has been the reactivation of liquidated credit accounts. Finally, we maintain strict working capital optimization and expense control programs in order to achieve greater operating efficiency. At the same time, extraordinary progress is being made in terms of the transition currently underway so that Banco Ahorro Famsa takes over Famsa Mexico s credit accounts and processes. For instance, bank promoters at the stores are now in charge of the customers credit application process, freeing up valuable time from the sales team. In addition, through the Banco Ahorro Famsa platform, customers are able to make use of their credit much more conveniently in any Famsa Mexico store using the private label credit card issued by the bank. Lastly, the transition phase has also served to revisit and reinforce the current credit granting and collection processes. Relación con Inversionistas: 2 de 10
Given the uncertainty caused by the US crisis, we consider it prudent to take on a more cautious outlook regarding short term market conditions. We will continue focusing on initiatives that further differentiate Famsa Mexico s value offer in order to offset the effects of the current consumption slowdown. In addition, efforts towards reinforcing our credit granting and collection processes will be sustained to ensure the quality of our receivables. Similarly, consistent with a more cautious perspective, we estimate ending 2008 with 368 total stores, and plan on opening approximately 10 stores throughout 2009. Famsa USA Famsa USA opened its first store in Austin, TX on August 30, 2008. The great customer response in this new market resulted in a widely successful store-opening event. Similarly, Chicago s second store started operations on October 1 with an outstanding inaugural event. The operating infrastructure installed in Illinois is expected to be leveraged quickly with the incremental sales volume from the new store. The two newly opened locations in Austin and Chicago conclude Famsa USA s store expansion for 2008. Despite the growing number of stores over the last twelve months, Famsa USA s third quarter sales were pressured by three main factors: 1) a challenging environment for consumption, 2) the effects of hurricane IKE over our strongest market, and 3) an exceptionally high comparable base from 2007. The US financial crisis has pressured employment and caused consumer confidence to reach historically low levels. Under these circumstances, Furniture and White Goods continue to be the categories with the greatest impact. On the other hand, demand for digital TVs has remained strong as we approach the digital signal migration date (February 2009). For this reason, we would expect solid results from this category throughout the fourth quarter. In Texas, our strongest market, September sales were significantly affected by hurricane IKE. The storm caused power outages in large portions of Houston for an extended period of time. Even though material damages were minimum, the city s 5 Famsa USA stores had no power for 7 to 18 days. It is estimated that third quarter same store sales would have decreased 8.6% if we isolate the storm s effect. Nevertheless, lost sales in September are being rapidly recovered during October. Under the current economic situation in the United States, Famsa USA will focus all efforts on differentiating even further its value proposition to the Hispanic market, reinforce credit granting and collection processes, achieve greater operating efficiencies through a detailed expense reduction plan. Additionally, consistent with a more conservative perspective regarding market conditions going forward, Famsa USA plans on opening approximately 4 stores throughout 2009 in markets where it currently has presence. Banco Ahorro Famsa Banco Ahorro Famsa s network increased during the third quarter with each of the 4 new stores opened by Famsa Mexico, reaching 271 banking branches The bank s current implementation stage involves the accomplishment of two main objectives: 1) increase available funds, and 2) increase loans, emphasizing on Famsa Mexico customer credits. Extraordinary growth in available funds has been achieved through coordinated efforts on three simultaneous fronts. First, the bank s core deposit base has increased. By the end of the third quarter, Banco Ahorro Famsa s deposit accounts increased by 36% to 297 thousand with almost P$1,340 million in funds. Second, more than P$700 million bank payables (pagaré bancario) have been issued through financial intermediaries. Lastly, Banco Ahorro Famsa received more than P$440 million through interbank loans. The total sum of available funds reached P$2,487 million, more than twice the amount at the end of the previous quarter. These solid results have been achieved through the effective execution of the multiple financing options Banco Ahorro Famsa can access. On the other hand, through the successful implementation of credit migration and credit origination processes of both existing and new customers, the bank s loan portfolio has increased exponentially. By the end of the third quarter, Banco Ahorro Famsa had almost 20% of the consolidated Grupo Famsa Accounts Receivable. The number of credit accounts grew 271% to 421 thousand when compared to 3Q08. As part of this comprehensive effort, more than 141 thousand private label credit cards have been emitted in Nuevo Leon, Coahuila and Tamaulipas. This new platform allows customers to make use of their available credit line in a safer and more convenient way in any Famsa Mexico store. Relación con Inversionistas: 3 de 10
Also, as a result of Banco Ahorro Famsa s integration process, valuable time from Famsa Mexico s sales team has been freed. In addition, the current credit granting and collection processes are being revisited and reinforced. Financial Results by Business Unit Net Sales (millions of Mexican pesos) (1) Includes sales of other non-retail businesses (2) Includes Banco Ahorro Famsa (3) Millions of constant Mexican pesos of September 30, 2007 (4) Variance calculated in thousands of Mexican Pesos, as in financial statements Same Store Sales (percentage) Net Sales Grupo Famsa s consolidated net sales reached P$3,505 million during the third quarter, increasing 5.5% versus 3Q07. Quarterly sales at Famsa Mexico totaled P$2,598 million, remaining virtually unchanged when compared to 2007. On the other hand, Famsa USA s sales increased 25.6%, reaching P$901 million at the end of 3Q08. Consolidated net sales at our stores with more than twelve months of operation (Same Store Sales) decreased 5.6% during 3Q08. Famsa Mexico s same store sales declined 3.1%. Similarly, Famsa USA experienced a contraction of 11.2%. A challenging consumption environment and the effects of hurricane IKE over Texas (especially Houston) were the main drivers behind the weak results of our US subsidiary. It is estimated that 3Q08 same store sales would have decreased 8.6% if we isolated the storm s effect. It is important to note that lost sales in September are being rapidly recovered during October. Cost of Sales Third Quarter January - September 2008 2007 (3) % Var (4) 2008 2007 (3) % Var (4) Grupo Famsa (1) 3,505 3,322 5.5 10,553 9,761 8.1 Famsa Mexico (2) 2,598 2,597 0.0 8,049 7,778 3.5 Famsa USA 901 717 25.6 2,484 1,951 27.3 Other 160 213-24.8 634 702-9.7 Intercompany -154-205 -25.0-614 -670-8.4 Third Quarter Jan - Sep 2008 2007 2008 2007 Grupo Famsa -5.6 0.4-0.4 3.4 Famsa Mexico -3.1-3.6-0.4 1.5 Famsa USA -11.2 16.5 0.0 16.4 The Cost of Sales reached P$1,756 million during the third quarter. However, it decreased from 54.8% to 50.1% as a percentage of net sales. The increase in credit sales, including personal loans, as well as Famsa USA s growth, continue contributing significantly to reduce the cost-to-sales relationship. Relación con Inversionistas: 4 de 10
Operating Income before Depreciation and Amortization (EBITDA) (millions of Mexican Pesos) EBITDA Margin (percentage) (1) Includes EBITDA from other non-retail businesses (2) Includes Banco Ahorro Famsa (3) Millions of constant Mexican pesos of September 30, 2007 (4) Variance calculated in thousands of Mexican Pesos, as in financial statements Operating Expenses Operating Expenses reached P$1,498 million at the end of 3Q08. Over the last 12 months, expenses increased 20.4% mainly due to the implementation of 208 Banco Ahorro Famsa branches, as well as the 11.6% consolidated retail area growth which includes our incursion to the Chicago market. On the other hand, given the credit account transition from Famsa Mexico to Banco Ahorro Famsa currently underway, the expense estimated for uncollectible accounts is comparable on a consolidated basis. Comprehensive Financing Expense The Comprehensive Financing Expense decreased 22.4% when compared to 3Q07, reaching P$144 million. The decline is driven mainly by an P$85.7 million exchange-rate profit recorded during this quarter due to the net long US dollar position Grupo Famsa maintains from Famsa USA s operations. In addition, we did not record any gains or losses related to inflation accounting, as opposed to a P$42.6 million loss recorded during 3Q07. However, interest expense increased 48.4%. As mentioned in a recent press release, Grupo Famsa has no exposure to derivatives. Furthermore, the Treasury maintains a disciplined and conservative investment policy that involves exclusively fixed income securities. Net Income Third Quarter January - September 2008 2007 (3) % Var (4) 2008 2007 (3) % Var (4) Grupo Famsa (1) 359 333 7.9 1,148 1,093 5.0 Famsa Mexico (2) 317 245 29.5 930 857 8.5 Famsa USA 36 73-51.1 169 178-5.1 Other -6 0-1,386.1 5 11-53.1 Intercompany 12 15-15.7 44 47-6.2 Third Quarter Jan Sep 2008 2007 2008 2007 Grupo Famsa (1) 10.2 10.0 10.9 11.2 Famsa Mexico (2) 12.2 9.4 11.6 11.0 Famsa USA 3.9 10.1 6.8 9.1 Net Income reached P$42.2 million during the third quarter, decreasing 56.5% versus 3Q07. An increase in Income Tax due to the massive credit account migration from Famsa Mexico to Banco Ahorro Famsa was the main cause for the decline Relación con Inversionistas: 5 de 10
Main Balance Sheet Accounts (millions of Mexican pesos) January - September 2008 2007 (1) % Var (2) Trade Accounts Receivable 11,687 8,708 34.2 Inventories 2,445 2,417 1.2 Net Debt 6,575 5,175 27.1 Stockholder s Equity 6,735 6,275 7.3. (1) Millions of constant Mexican pesos of September 30, 2007 (2) Variance calculated in thousands of Mexican Pesos, as in financial statements Trade Accounts Receivable The Trade Accounts Receivable balance reached P$11,687 million, increasing 34.2% over the last twelve months. Most of the increase is driven by credit sales growth. However, other elements such as the Edelstein s transaction, personal loans, and Banco Ahorro Famsa s growth have an effect on the balance without having the same impact on sales. In addition, write-offs represented 5.1% of credit sales, reflecting Famsa USA s growing share of total sales and increasing pressure on employment in the United States and recently in Mexico. Inventories Inventories increased only 1.2% when compared to 2007 despite our retail area growing significantly. We have implemented initiatives focused at optimizing inventory levels without affecting our service standards. Net Debt Net Debt reached $6,575 million pesos by the end of 3Q08. The funds from the additional debt have been used mainly to finance the working capital (mainly receivables, inventory and capital expenditures for new stores) that our growth plan requires. Up to date, Grupo Famsa has been successful at financing its capital needs by maintaining a close relationship with multiple sources of credit. Banking debt for almost P$1,000 million has been renewed during October. Furthermore, all obligations have been met in a timely manner. Stockholder s Equity Stockholder s Equity increased 7.3% to P$6,735 million. Relación con Inversionistas: 6 de 10
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