"The (insert popular U.S. brand) of (insert emerging market)." By now you have surely heard this formulaic phrase countless times to describe any number of investment opportunities in the emerging markets. Often these phrases can mean very little, but occasionally they can mean everything. Case in point: Wal-Mart de Mexico y Centroamerica (NASDAQOTH:WMMVY) literally translates to "Wal-Mart of Mexico and Central America."
The Wal-Mart of Mexico and Central America
Wal-Mart de Mexico y Centroamerica traces its origins back to 1958, but in its present form it began as a 1991 joint venture to open Wal-Mart and Sam's Clubs stores in Mexico. Today this Mexican Stock Exchange-traded company is 70% owned by Wal-Mart (NYSE:WMT), and its operations now include the Central American nations of Guatemala, El Salvador, Honduras, Nicaragua, and Costa Rica. All together, Wal-Mart de Mexico has 2,768 stores in a region that encompasses more than 155 million people.
Of the 2,786 store locations in these six countries, 251 are Wal-Mart stores and 167 are Sam's Clubs. The remaining 2,350 stores are comprised of various brands of discount department stores, discount warehouses, membership warehouse clubs, supermarkets, pharmacies, and clothing apparel stores. Wal-Mart de Mexico's operations also include Banco Wal-Mart with its over one million Mexican bank accounts, as well as its major e-commerce presence with Walmart.com.mx and Mexico's leading online grocery sales site Superama.com.mx.
The Mexican division of Wal-Mart de Mexico y Centroamerica is the much larger of the two, making up about 86% of total company revenue and 76% of the company's store count. The Mexican division is also the largest retailer in Mexico, far larger than its nearest Mexican competitor. This past quarter the Mexican division contributed 87.2 billion pesos ($6.76 billion USD) in revenue, while Mexico's No. 2 retailer -- Organizacion Soriana -- did just 799 million pesos ($62 million USD) during its most recently reported quarter.
Despite this dominance over Mexican retail, Mexico has been a recent challenge for Wal-Mart de Mexico due to the slowdown in that country's economy. In the first and second quarters of this year, the Mexican economy grew just 0.6% and 1.5%, respectively, compared to the first quarter 2012 and second quarter 2012 growth of 4.6% and 4.2%, respectively. This low Mexican GDP growth can similarly be observed in Wal-Mart de Mexico's third quarter earnings released last week; the Mexican division's revenue increased only 1.7% over its third quarter 2012 revenue.
While the Mexican side of Wal-Mart de Mexico y Centroamerica has been a challenge as of late, Central America remains an attractive market with great growth potential. The company expanded into Central America in 2010, and this region of nearly 40 million people currently has just 19 Wal-Mart stores and exactly zero Sam's Club locations. As a point of comparison, Texas, New Mexico, and Arizona with their combined population of 34.7 million people have 549 Wal-Mart stores and 97 Sam's Clubs locations (as well as two Supermercados).
Much of Central America's retail sector can be described as informal. These are small, local, independent retailers with no real size, scale, or widespread distribution. In other words, this is a rather inefficient retail market ready and waiting for some company to come in, disrupt, and consolidate. Wal-Mart de Mexico is the single best positioned company to be that disruptor.
That potential can be seen in the company's third quarter earnings with its Central American sales improving thanks to the company's pricing power. In this past quarter, the company's Central American division reported revenue of 14 billion pesos ($1.09 billion USD), a 6.4% increase in constant currency compared to the third quarter of 2012. The Central American division's gross margin similarly rose to 22.4%, up from 20.5 last year.
Foolish bottom line
Investing in Latin America is not without its risks. That has been particularly true this year, with many Latin American economies slowing down and falling out of investor favor. With shares down over 20% year to date, Wal-Mart de Mexico y Centroamerica is no exception. Despite this, there are still great opportunities to be had in Latin America. For those investors able to think long term, the future rewards of Wal-Mart de Mexico could very well be worth the risks of today.
Matthew Luke owns shares of Wal-Mart de Mexico y Centroamerica. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.