The defining event of the second quarter was not a margin story or a currency story. It was that OXXO Mexico customer traffic turned positive again after several consecutive quarters of decline, and the company says the improvement was broad based across regions rather than concentrated in a few markets. That matters because traffic, not average ticket, has been the sore point of the Mexican convenience channel for over a year. Management attributes the recovery to a combination of the World Cup, commercial initiatives in traffic driving categories such as soft drinks, beer, cigarettes and snacks, and a consumer centric strategy begun in the second half of last year. With the World Cup behind it, the persistence of the traffic print in the second half is the single most important data point in the share.
At a share price of $120.41, the stock sits in the upper half of a fifty two week range, a stretch that shows how much of the recovery the market has already paid for. The range spans $83.33 to $141.47, which frames both the upside the stock has already delivered and the room that remains. On the company's own reported earnings, the price sits near a twenty three times trailing multiple, which is rich by the company's historical standard and only justifiable if the OXXO recovery and the South American build out keep compounding. The second quarter net income print, up nearly 65% year over year, flatters the earnings line with a smaller foreign exchange loss, a swing at the associates level, and a lower prior year comparison base. Stripping those effects out, the operating business grew at a solid but unglamorous mid single digit rate, and the real question is whether the top line, not the bottom line, keeps improving.
The strongest evidence for the bull case is structural. OXXO Mexico generated double digit revenue growth with a 9.5% same store sales increase while gross margin gave back seventy basis points on deliberate price rationalization, and operating margin still expanded ten basis points to 10.0%. In Latin America, Colombia, Chile, Peru and the United States OXXO operations are moving toward unit economics that management expects to support reaccelerated expansion, and Brazil was consolidated starting February after the separation of the Raizen joint venture. Against that, the bear case is that the consolidated bottom line is being carried by one time items and that the net debt leverage has moved up from 0.93 times to 1.15 times over the last year as capital allocation to dividends and buybacks accelerated. The variable that decides the next leg of the stock is whether OXXO Mexico same store sales hold positive in the second half without the World Cup, and whether the new QED Investors stake in the Spin lending business can turn the company's enormous consumer data franchise into a credit business that actually earns its spread.