Grupo Comercial Chedraui (CHDRAUIB-MX, $5.72) Reports for Q2, 2023.

All figures reported in USD at the exchange rate of $.0585 US per Peso.

Forex has served to obscure the US dollar revenue growth rate of Chedraui in Q2.

Grupo Chedraui, a fast growing operator of supermarkets and warehouse clubs, reported a net sales increase of 1.2%, an EBITDA increase of 8.8% and a net profit increase of 23.3%, in Mexican pesos, for the quarter ended June 30th, 2023. More than 53.8% of total revenues were generated in USD during Q2, which were then converted to MX pesos in order tp produce an MX peso financial statement. The company noted that the USD relative decline to the peso represented a more than 12% headwind year over year.

Nevertheless, despite the currency headwind for Mexican investors, net income grew, in MX pesos, by 23.3% year over year.

This currency movement masked very strong year over year metrics on a USD basis. After converting peso figures back into USD for Q2, 2023 vs Q2, 2022, an entirely different picture is revealed. For the 2nd fiscal quarter of 2023, Chedraui generated $3.78 billion USD in consolidated revenue vs $3.17 billion US for the same period of 2022, an increase of 19.2%.

EBITDA of $340.2 million US was earned in Q2 2023 as compared to EBITDA of $265 million US generated in Q2, 2022, a net gain of 28.3%.

Finally, net earnings of $108.9 million US were reported in Q2, 2023 vs $75.1 US million in 2022, a percentage gain of 45% year over year. On a per share basis, net earnings were 1.87 MX pesos per share in Q2, 2023, vs 1.52 MX pesos per share in Q2, 2022. Expressed in USD, that net profit works out to $.109 per share as compared to $.076 US during the same quarter ended 2022.

EBITDA margins rose to 9% in Q2, 2023.

Mexico retail sales EBITDA margins were 8.4%, US retail EBITDA margins were 9% and Mexican real estate leasing margins came in at 66.1%. In retail banners, the top performer for EBITDA margins was produced by the Smart & Final chain, with EBITDA earned of $106.5 million US, a margin of 9.2%.

Management is sounding increasingly confident on the earnings capabilities within the Smart & Final retail chain.

The strength of Grupo Chedraui lies within their perishable food offerings and the US division is clearly benefiting from the best in class operational oversight, directed by Mexican management:

“In the United States, our business demonstrated continued resilience which allowed us to expand EBITDA margin through effective division integration”.

Net financial indebtedness has fallen to a level that is, more or less, a rounding error.

Net long term debts of just $152.5 million US were reported, consisting of long term debts totaling $558.8 million USD – cash and short term investments totaling $406.3 million. Capex was reported at $180.8 million in the first half of 2023.

The absolutely low level of financial leverage, coupled with the high EBITDA margins, suggests that Grupo Chedraui has several options to maintain growth for 2023 and beyond.

A total of 7 new retail locations in Mexico were opened in Q2, with no new location openings reported during the quarter in the United States. 12 new stores were opened in the first half of 2023, all in Mexico. New store openings in both Mexico as well as the USA are largely back-ended to Q3 and Q4 2023, with more than 53 additional locations proposed to be opened in the coming two fiscal quarters.

Subsequent to the end of the quarter, the newest grand opening of the El Super chain, the 4th location in Las Vegas, took place on July 26th.

Providing that new locations may be found for grocery stores and club format warehouses, Chedraui has the financial ability to grow organically as quickly as they choose, unconstrained by the high cost of financing that presently plagues many lower margin retail peers. Presently, the US strategy looks to be an infilling of new locations in existing markets to capitalize on brand awareness. Alternatively, management can choose to be opportunistic, assuming a western US regional chain or package of stores might be found that meets internal hurdles.

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