RETAIL SALES ARE BOUNCING BACK

MARK TOSH

NEW YORK -- The retail sector in Mexico has begun to show signs of shaking off its recent slowdown.

The pickup in retail sales, which first became noticeable in the second quarter of this year, is mainly due to the Mexican government's economic stimulation measures, according to Alberto Montagne, a securities analyst at Lehman Bros., New York.

Montagne, in a recent report on the Mexican economy and four Mexican retail companies, said he expects the sales growth "to expand more positively in the third and fourth quarters due to easy comparisons and our expectation of a healthier economy for 1994."

Mexico's medium-term and long-term fundamentals look better than ever and gross domestic product could grow at between 2% and 5% through the year 2000, he said in the report.

"Inflation is below 10%, the budget is balanced, long-term investment is entering the country at record levels and free-trade agreements, including the North American Free Trade Agreement, G3 [an agreement among Colombia, Mexico and Venezuela] and bilateral agreements with other countries have been signed," Montagne said.

This economic climate and a changing consumer bode well for the leading Mexican retailers, which, he said, should continue to dominate Mexico's self-service retail sector in the years to come.

"Excellent demographic trends should create great opportunities for retailers to reach an ever-growing number of new consumers," he said. "We believe that the Mexican retail sector has not yet been saturated and that, as competition increases, the self-service retail sector can continue to grow at an accelerated pace for years to come."

Cifra, which represents "the benchmark of the Mexican retail sector," is well positioned to take advantage of these economic conditions. Last month Montagne raised his rating on Cifra shares to "buy" from "outperform."

Following are some of the comments he made about the four companies in his report.

Cifra

Best known outside of Mexico for its partnership with U.S. retail giant Wal-Mart Stores, Bentonville, Ark., Cifra will continue its aggressive expansion in 1995 with the scheduled construction of 45 new stores, about the same number it will open this year, Montagne said.

The company operates 166 stores -- including 47 Bodegas Aurrera discount stores and 34 Almacenes Aurrera supercenters -- and 114 restaurants. It has the highest sales per square foot in the Mexican retail sector, about 70% higher than its closest competitor, and runs the most efficient operations.

In conjunction with Wal-Mart, Cifra will concentrate new-store growth outside the Mexico City area and expand its national coverage to almost every state in the country, Montagne said.

Controladora Comercial Mexicana

Mexico's third-largest food and general merchandise retailer, Controladora Comercial Mexicana has a solid nationwide presence, competitive margins, good management and a strategic joint-venture partner in Price/Costco, Kirkland, Wash., Montagne said.

"Management's focus will be to increase penetration by dominating existing markets and entering new cities through an aggressive expansion plan," he said. Total selling area, which totaled 7.7 million square feet as of the end of this year's second quarter, should increase more than 20% in 1994 and between 25% and 30% in 1995 through 1996.

Controladora Comercial operates 131 retail stores and 26 restaurants. Its banners include Bodegas Comercial Mexicana, Mega Mercado hypermarkets and the Price Club Mexico warehouse.

Estimated sales growth of between 20% and 25% in 1994 and 1995 should "translate into 13% and 40% bottom-line growth in 1994 and 1995, respectively," Montagne said.

Soriana-Sorimex

Formed by the merger of Organizacion Soriana and Grupo Sorimex earlier this year, Soriana-Sorimex has the leading market share in Mexico's fast-growing North/Northeast region with 41 stores and estimated 1994 sales of $1.2 billion U.S., Montagne said.

At the time of the merger, Soriana was the fourth-largest supermarket retail chain in Mexico, with 26 hypermarkets, and Sorimex was the dominant retailer in northeast Mexico, with 15 hypermarkets.

The new company plans "relatively aggressive store expansion," with seven new outlets in 1994 and eight in 1995, he said.

"Increased efficiencies in inventory control and distribution should allow Soriana-Sorimex to compete realistically against new entrants in the Northeast and efficiently enter Central Mexico, specifically Guadalajara and the Bajio," Montagne said. "Strategic real estate acquisitions, a potential joint venture or strategic alliance with a foreign partner, a strong balance sheet and positive cash flow are some of Soriana-Sorimex's strengths for future growth."

Grupo Gigante

Grupo Gigante, the second-largest food and general merchandise retailer in Mexico, is still consolidating its 1992 acquisition of Blanes, which operated 89 stores located primarily outside of Mexico City.

"Grupo Gigante's focus has been and continues to be the consolidation of its operations via store closings, the reduction of operating expenses and the opening of new formats," Montagne said. Among the company's 258 stores are 144 Gigante combination superstores and three SuperMart stores, which were developed in a joint-venture arrangement with Fleming Cos., Oklahoma City.

"Poor short-term performance for 1994 is expected, due to increased competition, delayed technology implementation and ongoing store renovations," he said. Bottom-line growth of 25% to 35% should begin after 1995.