informe 2006 - investor cloud

2006 ANNUAL REPORT
INDEX
INDEX
01
Financial Highlights
02
Letter from the Chairman of the Board
of Directors AND Letter from the CEO
04
OUR HISTORY
08
FAMSA MEXICO
14
FAMSA UNITED STATES
20
BANCO AHORRO FAMSA
22
Company Officers
24
Board of Directors
25
FINANCIAL INFORMATION
27
INDEPENDENT AUDITORS’ REPORT
28
CONSOLIDATED FINANCIAL STATEMENTS
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Grupo FAMSA
Tradition and Growth
Dating back more than 37 years, Grupo FAMSA is one of Mexico’s most
important and best-known retail companies. It is a pioneer in offering consumer financing services, the Company’s most important business line.
Grupo FAMSA has grown consistently since its founding, reflecting
strategies developed to offer an extensive range of products and services
at the market’s most competitive prices and attractive credit facilities.
Close relations with the consumer and the solid positioning of its brand
name have allowed Grupo FAMSA to grow consistently in the domestic
market and successfully expand to the United States. The organization
currently has 322 stores in Mexico and 24 in the United States, all of
which operate with state-of-the-art information technology to guarantee
efficiency and integration.
Over the past ten years, Mexican consumers and the Hispanic market
in the United States have shown a growing preference for the Company’s
products and services. This is reflected in sales and profitability indices;
revenues have increased from 2,669 million pesos in 1996 to 12,393 million pesos in 2006, an annual average growth of 16.6%. Adjusted income before interest, depreciation and amortization (adjusted EBITDA) has
grown 15.8% over the past ten years.
Today, Grupo FAMSA has a portfolio of approximately 1.3 million active
accounts in Mexico and the United States. Of these, less than 3.0% turn
out to be non-collectable, reflecting the Company’s effective administrative and analytical systems for granting and managing credit.
Grupo FAMSA is more than simply a chain of stores; it is a total purchasing concept for the customer, offering under one roof flexible financing
programs that represent the best possible solutions to family needs.
1
Grupo FAMSA
Tradition and Growth
Dating back more than 37 years, Grupo FAMSA is one of Mexico’s most
important and best-known retail companies. It is a pioneer in offering consumer financing services, the Company’s most important business line.
Grupo FAMSA has grown consistently since its founding, reflecting
strategies developed to offer an extensive range of products and services
at the market’s most competitive prices and attractive credit facilities.
Close relations with the consumer and the solid positioning of its brand
name have allowed Grupo FAMSA to grow consistently in the domestic
market and successfully expand to the United States. The organization
currently has 322 stores in Mexico and 24 in the United States, all of
which operate with state-of-the-art information technology to guarantee
efficiency and integration.
Over the past ten years, Mexican consumers and the Hispanic market
in the United States have shown a growing preference for the Company’s
products and services. This is reflected in sales and profitability indices;
revenues have increased from 2,669 million pesos in 1996 to 12,393 million pesos in 2006, an annual average growth of 16.6%. Adjusted income before interest, depreciation and amortization (adjusted EBITDA) has
grown 15.8% over the past ten years.
Today, Grupo FAMSA has a portfolio of approximately 1.3 million active
accounts in Mexico and the United States. Of these, less than 3.0% turn
out to be non-collectable, reflecting the Company’s effective administrative and analytical systems for granting and managing credit.
Grupo FAMSA is more than simply a chain of stores; it is a total purchasing concept for the customer, offering under one roof flexible financing
programs that represent the best possible solutions to family needs.
415
358
332
292
314
271
242
196
151
109
86
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
STORES EXHIBITION AREA
(in thousand square meters)
Financial Highlights
(In millions of Mexican Pesos of purchasing power as of December 31, 2006, except the number of stores.)
12,393
11,041
10,068
8,921
8,506
8,052
7,315
5,926
5,496
3,690
2,669
SALES BY GEOGRAPHIC AREA
MEXICO 10,632
12,393
14.2%
NUMBER OF STORES
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
The Company currently operates 346 stores throughout Mexico
and the United States with a compound annual growth rate of
17.5% over the past 10 years.
EBITDA
NET SALES
With 2006 revenues totaling 12,393 million pesos, Grupo FAMSA
has posted a compound annual growth of 16.6% over the past
10 years.
USA 1,761
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
346
314
300
287
264
245
228
185
69
140
92
1,514
1,334
1,241
902
1,019
892
879
349
700
703
571
85.8%
2006 ANNUAL REPORT
Letter from the Chairman
of the Board of Directors
Letter from the CEO
To Our Stockholders:
Fellow Stockholders:
It gives me great pleasure to inform you that the goals and objectives we
have achieved in 2006 constitute significant progress with our Strategic
Growth Plan and a sold base for an even more promising future.
In 2006, Grupo FAMSA shares began to quote on the Mexican Stock
Market. This historical step for the Company reflects the unfailing efforts
of our people and will without doubt translate into further progress with
our development strategies and an increase in opportunities for creating
value for our investors.
Another highlight of the year was the creation of our new banking
institution: Banco Ahorro FAMSA, recently authorized by the Mexican
Ministry of Finance. This initiative will strengthen our business and allow
us to offer a greater range of financial solutions to a consumer base that
traditionally had no access to banking services.
The new challenge will give us a competitive advantage to complement our business model. It will help us to leverage our experience,
positioning and current service platform in order to offer better, more
extensive ways of satisfying the needs of our customers and their families.
Grupo FAMSA’s strength and long-term viability can also be seen in
the outstanding financial and operating results posted for 2006. They are
detailed in this report and encourage us to continue with our companywide continuous improvement initiatives.
During the year, we focused on maintaining the strategy of consolidating our presence in the Mexican cities we serve, as well as in new
regions throughout the nation, while at the same time expanding our
presence in the Hispanic market in the United States. Going forward,
we will seek to make our consumer financing operations more efficient
through the integration of Banco Ahorro FAMSA. In parallel, we will continue to monitor and increase our margins through economies of scale
and the launch of new products and financial services.
Since FAMSA began operations more than 37 years ago, the driver of
its development has been the talent, hard work and commitment of its
people, who today conform a team of more than 16 thousand collaborators. I would like to thank each and every one of them for their daily
efforts to promote the overall growth of our organization and improve its
positioning in the market.
I would also like to express my sincere thanks to our stockholders,
customers and suppliers, and to the community in general for their trust
in Grupo FAMSA, and to reiterate our commitment to continue working
with the best practices of management and corporate governance in
order to promote the sustained and profitable growth of our company.
The steps we took in 2006 to make our operations more efficient, continuously improve our resource management and expand the geographic
coverage of our network of stores, combined with other initiatives, have
translated into important achievements that have strengthened our market base and positioned us for future growth.
In an environment characterized by enhanced competition and a relatively stable economy, we continued to grow in 2006. Grupo FAMSA
posted a 12.2% year-over-year increase in total revenues to 12,393 million pesos, giving us a compound annual growth of 16.6% over the past
ten years. Of total 2006 sales, 85.8% were made in the domestic market
and 14.2% in the United States.
The best practice initiatives we have implemented in our stores, combined with innovative marketing strategies and an effective program to
win customers through our Gran Crédito financing plan, resulted in same
store sales increasing 4.3% year-over-year in Mexico and 8.2% in the
United States. Of our total consolidated revenues, sales on credit increased 13.8% and represented 78.3% of total system-wide sales.
Because of our concerted sales initiatives and institutional programs
to increase efficiency through economies of scale, our gross income
grew 14.1% in 2006 to 43.5% of revenue. Additionally, our improved
resource management, better use of the business platform in both Mexico and the United States, and ongoing discipline in reducing costs and
expenses resulted in a 13.5% year-over-year rise in EBITDA reaching a
12.2% margin.
As part of our growth strategy, we continued with our dynamic expansion plan, focusing on increasing our participation in the cities we
currently serve by leveraging the FAMSA brand name and the capacity of
our distribution network. In the future, we will begin operations in cities
where we still do not have a full support platform.
During 2006, we met our projected objective of opening 23 new
stores in Mexico and nine in the United States, raising the total number
to 346 with a combined sales area of over 4.4 million square feet, 16.2%
above the previous year.
In accordance with our strategic plan, the new stores are located in
highly profitable cities and leverage our already existing business platform and administrative support infrastructure. This has enabled us to
capitalize on important economies of scale and optimize our resources,
thereby strengthening our margins in these regions.
The results we obtained in 2006 confirm we are on the right track, but
more importantly motivate us to set new, higher goals for the coming
year. They reflect our working philosophy of focusing on the continuous
improvement of our operating efficiency, the creation of value and the
perfecting of our business model. These values will be key drivers of our
future success and, to ensure this, we have set clear, measurable objectives that are shared throughout the Company. We know that today’s
marketplace demands increased efforts and precision if we are to assure
sustained and profitable future growth.
We would like to thank all our people for their hard work and dedication, which allow us to move forward and operate with responsibility to
the communities we serve, to you, our stockholders, and to our customers and suppliers. We would like to thank each and every one of you for
your trust and support of Grupo FAMSA.
Humberto Garza González
Humberto Garza Valdéz
2006 ANNUAL REPORT
2006 ANNUAL REPORT
A Track Record of Success that has
Grown with the Mexican Family
Grupo FAMSA has been committed to the Mexican family since it opened its doors in 1970, offering top-quality products
and services combined with financing opportunities to give customers access to products and services that improve their
standard of living. The Company’s constant growth from a single store 37 years ago to more than 340 stores in Mexico and
the United States today is a clear reflection of the trust of our customers. We know that they are our reason for being and
have always given them our best in products and services.
The Company’s success story begins with the entrepreneurial and
visionary spirit of Don Humberto Garza González, who felt motivated to support Mexico’s needy families by offering them the financing they required to acquire products and services to improve their
standard of living. In 1970, he opened the doors of his first store,
selling furniture and domestic appliances in the city of Monterrey,
Nuevo León, in northern Mexico. This step marked the beginning of
what is today Grupo FAMSA.
At the end of the 1970s, the acceptance and trust of the Company’s customers in Monterrey gave rise to the first regional expansion program. Starting with Monclova, Coahuila, also in northern
Mexico, the number of stores grew to eight during FAMSA’s first
two decades.
During the 1970s, and even more so in the ’80s, the Company
sought to serve new markets and consolidate its leadership position, creating a number of different companies to complement the
offer of products that the consumers were demanding.
Mayoramsa, focusing on wholesale activities to drive new companies, was the first one to be set up. FAMSA Empresarial followed
as an entity dedicated to granting credits to employees of affiliated
companies, offering them repayment schemes through payroll
deductions. Later, Expormuebles was created to design and produce high-quality furniture, successfully moving the Company into
the furniture producing industry and complementing its business
model.
Encouraged by the results that were being achieved, during the
2006 ANNUAL REPORT
1990s the Company began an important program of expansion in
Mexico, reaching a total of 185 stores throughout the nation.
Midway through the ’90s, FAMSA’s continuous search to expand its
offer of products specifically aimed at satisfying the market needs
led it to diversify into clothing, shoes, accessories and jewelry.
Then, in order to improve customer service and strengthen the
logistics and distribution platform, Distribution Centers were set
up. These centers made the handling and control of merchandise
throughout the growing network of stores more efficient and increased product availability. Transfer Centers were also introduced
for direct delivery to end customers’ homes.
In 1999, Grupo FAMSA decided to implement a new, more aggressive expansion program, and invited two funds to invest in the
Company’s capital stock. These investment funds believed in the
Company’s future development and capacity to implement institutional standards of operation, management and corporate governance
that would ensure the reaching of proposed objectives and sustained
growth.
As part of its Strategic Growth Plan, in 2001 Grupo FAMSA began operating in the United States, opening its first store in Los Angeles, California,
in order to satisfy the needs of the Hispanic market there.
Additionally, in our efforts to maximize the Company’s profitability, we have
recently created new business concepts to complement the Company’s services and give our customers greater value, including: Garantimax (extended insurance plans), Seguro de Vida (life insurance), Seguro Automotriz (car insurance),
Auto Gran Crédito (car financing), Los Notables de FAMSA (offering nine months
credit at cash prices), Planeta Celular (cellular phones), Verochi (shoe sales by catalog) and Viajes a Bordo (vacation packages). Additionally, in the United States, the
Company has developed a successful sales channel called FAMSA to FAMSA, through
which customers there purchase products which are delivered in Mexico through the
Mexican distribution network.
The Company is successfully continuing its expansion plan and now has 322 stores in
72 Mexican cities and 24 stores in the United States.
During 2006, Grupo FAMSA’s successful development continued with the initiation of an
important new phase for the organization: Grupo FAMSA became a public company quoting in
the Mexican Stock Market. At about the same time, the Mexican Ministry of Finance authorized
Grupo FAMSA to set up a multiple banking institution: Banco Ahorro FAMSA, S.A.
Thus, the efforts, dedication and leadership of Don Humberto Garza González in setting up his
small store have led to the creation of what is today one of Mexico’s most important retail companies: Grupo FAMSA
2006 ANNUAL REPORT
Competitive Advantages
We continuously seek to come closer to our customers and win their loyalty. To this end, we have
developed differentiated products for each market niche, offering prestigious brand names and
creative promotions that consolidate their recognition and preference. These offerings are combined with state-of-the-art information systems to manage our service and sales platforms and in
other ways improve the profitability of our Company.
Brand Recognition
Grupo FAMSA offers a wide range of products and services to satisfy the specific needs of its different target
segments. In our efforts to come ever closer to our customers, we have created a range of brands for the distinct consumer niches with differentiated communication strategies to promote their image and positioning as
market leaders. These brands include: FAMSA, Colchonerías FAMSA (mattresses and box springs), Auto Gran
Crédito (car financing), Verochi (shoe sales by catalog),
Garantimax (extended guarantee services) and Viajes a
Bordo (vacation packages).
Grupo FAMSA’s growth and success over the years
is today reflected in the number of solid brands it offers
and the great and growing number of loyal customers.
In order to enhance efficiency and respond more rapidly to the dynamic promotional needs of the markets in
which we participate, we now have in-house television
production infrastructure to make more than 2,500 radio
and television spots every year. This positions us to react
immediately to industry requirements and to optimize
resources.
2006 ANNUAL REPORT
The integration and work of the team of professionals
in the marketing, publicity, graphic design and production
departments translate into precise promotional tools that
present our image to consumers on a daily basis, sharing
with them information on currently available offers and
market promotions.
For us to meet the brand recognition goals set out in
the annual strategic plan, we make an in-depth analysis
of the best ways of reaching our market objectives. We
establish diffusion plans for the different media in order
to ensure that the focus, essence and dynamism of our
brands reaches every target market niche and that they
are remembered by the consumer.
We continuously measure the impact of our publicity, so we are able to identify the real perception of consumers to our advertising campaigns. This information
then allows us to adapt the contents of our promotional
materials and, in clear, simple communication formats,
position our image and brands. As a result, the market
sees us as a reliable and market-leading company, offering top-quality products at the best prices.
State-of-the-art Systems
Effective Information Technology
Our leading-edge information systems applied efficiently and correctly
have been key drivers to leverage the scale of our distribution and sales
network and at the same time enhance our resource management and operational control.
The technological initiatives we have implemented have increased the speed
of our decision making, enhanced the service we offer to the market, and allowed
us to satisfy the needs that have been generated by our domestic growth and expansion into the Hispanic market in the United States.
Among the most important initiatives in the area of information systems was the
implementing of the SAP Management System in 2006. This system now includes modules for Inventory, Accounts payable, Accounting and Logistics in the FAMSA clothing
business unit, and modules for Organization, Compensation, Training, Work flow and Payroll for the whole of Grupo FAMSA in Human Resources.
Other highlights in the area of technology include the implementing of initiatives to modernize our infrastructure. These programs enable us to offer better service even as Grupo FAMSA
grows and give us the flexibility and response capability for future development. For example, in
2006 we increased the capacity of the Company’s central server, enhancing its response capability
by 50%. Today, our central computer system can handle 4,200 concurrent users.
We also installed a new server for FAMSA Inc. This hardware offers increased processing capacity
combined with an improved, faster response, and is tailored to the specific requirements of the U.S.
market and the projected expansion of our activities there.
In the area of support for our operating network, in 2006 we implemented a wireless processing
system with WiFi handheld barcode capabilities to manage and operate the nine Mexican Distribution
Centers more efficiently. This system has enabled us to optimize their performance, with direct benefits in
the reduction of lead times and operating costs.
Our technology is very important to support the business strategies of every area of our organization, and
in 2006 we continued our efforts to ensure we have leading-edge information and control systems in order to
improve operations and the decision-making process.
During the year, Grupo FAMSA acquired the information systems for the operation of Banco Ahorro FAMSA.
These state-of-the-art information systems will improve our existing retail sales structure and give us increased flexibility and efficiency in the handling of small deposits and accounts. We have been very
careful to make sure that we acquire and construct the more than 20 systems required to operate Banco Ahorro FAMSA with the greatest flexibility and scope in modern banking for the
benefit of all our customers and users.
2006 ANNUAL REPORT
Famsa Mexico
Solid Growth
During the year, we continued to follow our Strategic Growth
Plan in Mexico. The opening of 23 new stores, complemented
by the enhancement of operating efficiency and implementation of commercial programs to promote credit sales, resulted
in marked progress in Grupo FAMSA’s performance in its most
important marketplace.
As one of Mexico’s most important retail companies, over the past ten
years Grupo FAMSA has increased its presence in Mexico from 69 to 322
stores as of 2006, strengthening its position in this growing sector.
In order to maximize sales and optimize the floor space available in each
store, Mexican outlets have an average area of approximately 16,000 square
feet per store, resulting in a total combined sales area of 3.7 million square feet.
Each store takes strategic advantage of the available space, presenting more than
1,200 different items, including a wide range of electronic products, furniture and
domestic appliances.
We have operations in 72 different Mexican cities and, considering locations with
the demographic and socioeconomic indicators in line with Grupo FAMSA’s required
profile for opening at least one store, the Company can potentially extend its domestic
coverage by 72%.
SALES
BREAKDOWN
(% Retail Sales)
Credit
74.4%
Cash
25.6%
Grupo FAMSA’s closeness to the customer, different marketing and sales programs, and the
strength of its brand name, even in cities where
there are no FAMSA stores, means that approximately 70% of sales on credit are made to return customers, who receive a rapid response to their financing
needs.
Net sales in Mexico grew 8.3% in 2006 to10,632 million pesos, reflecting the rapid and effective application of
our strategic initiatives and the leveraging of the competitive
advantages that distinguish Grupo FAMSA in the market. Operating income before depreciation and amortization increased
9.4% year-over-year to 1,414 million pesos. Of the different product lines, the performance of furniture and domestic appliances
was particularly strong.
In 2006, retail sales through the Company’s different credit programs represented approximately 74.4% of total sales in Mexico and
approximately 1.2 million open accounts.
22.6%
21.1%
18.4%
11.7%
6.7%
4.1%
15.4%
PRODUCT SALES
MIX
(% Retail Sales)
Furniture
Electronics
Appliances
Clothing
Air Conditioning / Heaters
Cellular Phones
Other
Market Potential
The Company is motivated by a population base that is very favorable for its future growth and development, with the middle- and lower-middle-class target market comprising 64% of the total Mexican
population. Serving higher socioeconomic groups as well.
The Mexican age distribution is another factor increasing consumption potential and our prospects
for future growth. Our potential customer base from those who are currently under 20 years old is
44% of the total population. The market between the ages of 20 and 39 – with the greatest number of
newly-weds who are setting up home – represents 32% of the total population. The group that most
replaces its home equipment is that over 39 years old, which comprises 24% of Mexicans.
In addition, the offer of middle- and lower-middle-class housing in Mexico has grown without precedent over the past decade, implying an increased demand for home products and equipment.
During 2007, we will seek to consolidate our Strategic Growth Plan, capitalizing on the opportunities
in the Mexican market sectors we serve.
44%
(<20 years)
Potential
Customer Base
24%
(>39 years)
Replacement
Needs
AGE STRUCTURE
IN MEXICO
32%
(20-39 years)
Most Marriages
Source: INEGI
10
2006 ANNUAL REPORT
POPULATION SEGMENTS
BY INCOME LEVEL
>47*
20-47*
6.75-19.5*
2.4% AB
3.2%
C+
15%
C
1.25-19.5*
<1.25*
49%
30.3%
D-D+
E
*Income as a Multiple of the Minimun Wage
Source: INEGI
Other Businesses
Expormuebles
Expormuebles is a subsidiary of Grupo FAMSA that designs and manufactures quality furniture that is sold
in FAMSA stores. With a production area of more than 100,000 square feet, this business enables us to
satisfy the particular needs of our customers and offer more accessible prices.
Mayoramsa
Mayoramsa is a company dedicated to the wholesale distribution of furniture and domestic appliances for
Mexico’s small and medium-sized furniture stores.
Verochi
Verochi sells high quality shoes by catalog through a scheme of affiliation that allows Mexican housewives to set
up their own independent micro companies.
Auto Gran Crédito
Grupo FAMSA continuously offers new, innovative products and services to satisfy the needs of its customers. Auto
Gran Crédito, a scheme of self-financing which enables our customers to purchase cars through the creation of purchasing groups, is just such a product. It is also a convenient way of using our exhibition and sales space more effectively.
Viajes a Bordo FAMSA
Viajes a Bordo FAMSA is a travel agency designed to satisfy the travel and entertainment needs of the Mexican middle
and lower-middle class, offering vacation packages specifically adapted to our customers’ profile.
2006 ANNUAL REPORT
11
CURRENT
COVERAGE
28%
POTENCIAL
MARKET
72%
GEOGRAPHIC
EXPANSION
POTENTIAL
12
2006 ANNUAL REPORT
Total Service
Means Satisfied Customers
As part of our customer satisfaction strategy and seeking
to strengthen the total, integrated service we offer, we
have developed administrative procedures, information
systems and personnel training initiatives to improve our
distribution system.
Today, Grupo FAMSA operates nine large warehouses in Monterrey, Nuevo
León; Hermosillo, Sonora; Chihuahua, Chihuahua; Guadalajara, Jalisco; Tijuana,
Baja California; Mexico City; Irapuato, Guanajuato; Villahermosa, Tabasco; and
Culiacán, Sinaloa. Each Distribution Center receives products directly from our
suppliers.
We also have 28 strategically located Mexican Transfer Centers that receive
products from the Distribution Centers and then deliver them directly to the customer.
In our efforts to supply differentiated, top-quality service, we have set up state-ofthe-art, real time communication systems that link the Distribution Centers with our
stores. We also use automated processes for the consolidation of merchandise according to final destination and route in predetermined schedules.
Our leading-edge distribution and logistics system gives us competitive costs, an exact
record of existing inventories and the capacity to guarantee delivery to the end customer
in less than 48 hours.
In our search to continuously improve our operating and control processes, during 2006
we started the first phase of an initiative to use Radio-frequency Bar Codes. This system
will further enhance the efficiency and quality of our Distribution Centers and therefore our
service.
In 2007, we will focus on perfecting all of these initiatives and increasing even
further the level of service that has always distinguished Grupo FAMSA and
that has won the trust and loyalty of the consumer throughout the Company’s history.
Mexico represented 85.8%
of FAMSA’s total retail sales in 2006
FAMSA Stores
Distribution Centers
2006 ANNUAL REPORT
13
Famsa United States
Continuous Improvement
and Great Potential
Grupo FAMSA has grown continuously since it entered the Hispanic
market in the United States in 2001, offering its very prestigious brand
name and image, a deep understanding of that market and a continuously improving level of service. Today, these competitive advantages have
translated into the consolidation of our already existing U.S. stores and
great growth potential.
The opening of the first store in the city of Los Angeles, California in 2001 was the
first step in positioning Grupo FAMSA in the Hispanic market of the United States, and
our operations there continue to grow.
The demographic and socioeconomic characteristics of the Hispanic population in
the United States give Grupo FAMSA great growth potential. With more than 38 entities
with a Hispanic population in excess of 250 thousand, we will leverage our position to
constantly increase our presence in that market.
After the opening of three more stores in 2001, the performance and acceptance of our
U.S. operations gave rise to an aggressive expansion plan. Today FAMSA operates 24 stores
in the states of California, Texas and Nevada and is constantly consolidating its presence
there.
FAMSA U.S. retail stores have an average floor area of almost 27,000 square feet, making a
total of 668,400 square feet of exhibition space for the Company’s wide range of products and services in the United States.
Cash
7.3%
SALES
BREAKDOWN
(% Retail Sales)
Credit
92.7%
The growth of our existing stores and opening
of new stores were reflected in 2006 in a 44%
increase in net sales to 1,176 million pesos, with
furniture, electronic equipment and household appliances being among the best-selling lines. Operating income before depreciation and amortization grew
136.2% up to 100 million pesos for the year. During
2006, sales on credit represented approximately 92.7%
of total U.S. sales, resulting in of the order of 101,000
thousand active accounts there.
In our efforts to find innovative ways to serve the particular needs of the Hispanic population of Mexican origin, we
have begun to use our platform in Mexico to offer a service we
call FAMSA to FAMSA. This system allows customers to make
purchases in the United States and have the products or services
delivered in Mexico. It represented 12.8% of FAMSA Inc.’s total
sales in 2006.
Going forward, we intend to leverage our current position and in
2007 will seek to expand to other U.S. cities with a large Hispanic
population.
43.4%
22.1%
11.3%
2.3%
12.8%
8.1%
PRODUCT SALES
MIX
(% Retail Sales)
Furniture
Electronics
Air Conditioning / Heaters
Appliances
FAMSA to FAMSA
Market Potential
The Hispanic market in the United States represents an area of opportunity for Grupo FAMSA because of its current composition, high growth
indices and continuously rising purchasing power.
Knowing the importance of this market, we are implementing specific
actions to satisfy the different consumption needs of its different age
components. Our target groups are: the under-twenties, a segment that
represent 37% of the total population and a high-potential customer base;
the 20- to 44-year-old group that represents 43% of the total and stands out
for containing a large number of newly weds who need to set up home; and
the population group of over 45s, who represent only 20% of the Hispanic
population in the U.S. but who constitute a market that is purchasing new
furniture and home appliances to replace aging ones.
16
2006 ANNUAL REPORT
Other
Another advantage of our business model focusing on
the Hispanic market in the United States is the great
population density in a relatively small number of cities.
Thirty-eight districts have a population of 250 thousand
or more Hispanic inhabitants and the improvement in their
social status translates into increased purchasing power.
In 2007, we will continue our expansion plan in the United
States.
55,700
49,700
47.8
41.8
2005
2010
Projected Hispanic Household
Income
(US Dollars / Year)
2005
Source: US Census Bureau
2010
Projected Hispanic Population
(in Millions)
2006 ANNUAL REPORT
17
Total Service
Means Satisfied Customers
Grupo FAMSA has always endeavored to offer its customers
complete and efficient service, with timely delivery. To this end,
we have set up Distribution and Transfer Centers in the United
States, thereby enhancing operating efficiency. These centers
are located in strategic cities to facilitate the movement of merchandise throughout the country.
Grupo FAMSA currently has three Distribution Centers to serve 24 stores in 17
different regions. The Centers are located in Los Angeles, California; and San Antonio and Dallas, Texas, and have a total storage area of 754,600 square feet. The
Company also operates four Transfer Centers in the United States.
These initiatives allow Grupo FAMSA to offer the highest possible customer
service and at the same time enhance operational results.
TOTAL U.S.
SALES
18
2006 ANNUAL REPORT
12.8% FAMSA TO FAMSA
2006:
6 years of successful operations
Credit sales represented 92.7% of total U.S. sales
U.S. sales represented 14.2% of FAMSA’s total sales
Solid Platform
17 Regions
24 Stores
3 Distribution Centers
4 Transfer Centers
FAMSA Stores
Distribution Centers
2006 ANNUAL REPORT
19
Banco Ahorro Famsa
Banking Institution
A New Option for
Our Development
We constantly seek new ways to serve our large customer base, designing innovative products and services to offer greater value and
consolidate Grupo FAMSA’s growth.
In the Company’s efforts to help its customers access quality banking services,
we have constituted our own multiple banking institution. This entity will offer
the Mexican family products and services customized to their needs and give
Grupo FAMSA a more flexible and efficient financial structure.
At the beginning of 2006, we began to develop the infrastructure and information systems needed for the operating platform of Banco Ahorro FAMSA. We also
defined the management team in charge of leading this important initiative, and began a human resources training and development program focused on direct customer
service.
The main objectives of Banco Ahorro FAMSA are to supply quality financial services
tailored to the specific needs of its customers, and continuously develop financial products to serve the Mexican population that currently operates through a traditional bank.
We will initially focus on high value added products, such as personal loans, loans for
the acquisition of goods and services, and investment products with immediate liquidity or
with a predetermined maturity. Subsequently, we will increase the range of our portfolio of
financial products.
Banco Ahorro FAMSA will significantly enhance our efficiency and give us the financial flexibility to support the Company’s development plans. It will allow us to make savings in financing
costs, operate with a more flexible structure and give us the capacity to offer new and better
repayment schemes. It will also give us the opportunity to make sales that are combined with the
financial services of Banco Ahorro FAMSA.
Grupo FAMSA enters the banking sector with more than 37 years of experience offering credit
to the consumer. We operate with a very low rate of bad and non-collectable debts, reflecting our
effective risk assessment policies for the granting of credit and an extensive follow-up and collection infrastructure. These will be continued in our new banking institution, together with the policies
stipulated by the regulatory authorities.
Active Accounts
1.3M
CUSTOMER
DATABASE
FAMSA’s Recurring Customers 7.7M
(Cash & Credit)
Company Officers
Humberto Garza Valdéz
Abelardo García Lozano
Oziel Mario Garza Valdéz
Héctor Villarreal Castelazo
Luis Gerardo Villarreal Rosales
Gilberto Tellez Moya
Chief Executive Officer
Vice-president, Clothing and Real Estate
CHIEF OPERATING OFFICER
22
2006 ANNUAL REPORT
Chief Financial Officer
Vice-president, Marketing
Vice-president, Logistics and Distribution
Héctor Hugo Hernández Lee
Vice-president, Human Resources
Ignacio Ortiz Lambretón
Héctor Padilla Ramos
Manuel Rodríguez González
Francisco Patiño Leal
Humberto Loza López
Guillermo Saldívar González
Vice-president, Famsa U.S.A.
Vice-president, Information TECHNOLOGY
Legal Counsel
Vice-president, Purchasing
CHIEF EXECUTIVE OFFICER,
Banco Ahorro FAMSA
Commercial Vice-president
2006 ANNUAL REPORT
23
Board of Directors
Humberto Garza González
Chairman
Humberto Garza Valdéz
(1)
Horacio Marchand Flores
Director
Director
Hernán Javier Garza Valdéz
Director
(1)
Jorge Luis Ramos Santos
(2)
Director
Oziel Mario Garza Valdéz
Director
(1)
Luis Antonio Chico Pardo
Director
Salvador Kalifa Assad
Director
(2) (3)
(2)
Alejandro Sepúlveda Gutiérrez
(2) (3)
Director
Luis Gerardo Villarreal Rosales
Secretary
(1) Son of Humberto Garza González, controlling stockholder.
(2) Independent Director in accordance with Mexican Stock Market Law .
(3) Member of the Audit Committee.
Audit Committee
The Company has constituted an Audit Committee as a result of the Extraordinary and Ordinary Stockholders’ Assemblies of April 28, 2006. The members of the said Committee are: Alejandro Sepúlveda Gutiérrez (Committee Chairman), Salvador Llarena Arreola and Horacio Marchand Flores.
All of these members, including the Chairman, are independent Members of the Board in accordance with Mexican Securities Law and two of
them are financial experts.
Among other functions, the Audit Committee is responsible for:
• Presenting an annual report on its activities for the approval of the Board of Directors and the Stockholders’ Assembly,
• Presenting opinions to the Board of Directors on transactions with related parties that, because of their nature and relevance, deserve their consideration, and
• Presenting an opinion to the Board of Directors on the operation of the internal control systems.
24
2006 ANNUAL REPORT
CONSOLIDATED FINANCIAL STATEMENTS
GRUPO FAMSA, S. A. B. DE C. V. AND SUBSIDIARIES
(formerly Grupo Famsa, S. A. de C. V.)
27
Report of Independent Auditors
28
Consolidated Balance Sheet
29
Consolidated Statement of Income
30
Consolidated Statement of Changes in Stockholders’ equity
32
Consolidated Statement of changes in financial position
33
Notes to the Consolidated Financial Statements
REPORT OF INDEPENDENT AUDITORS
PricewaterhouseCoopers, S.C.
Avenida Rufino Tamayo No. 100
Col. Valle Oriente
66269 Garza Garcia, N.L.
Telefono: (81) 8152 2000
Fax:
(81) 8152 2075
www.pwc.com
To the Stockholders of Grupo Famsa, S. A. B. de C. V.
(formerly Grupo Famsa, S. A. de C. V.)
Monterrey, N. L., March 9, 2007
We have audited the consolidated balance sheets of Grupo Famsa, S. A. B. de C. V. and subsidiaries (formerly
Grupo Famsa, S. A. de C. V.) as of December 31, 2006 and 2005, and the related consolidated statements
of income, of changes in stockholders’ equity and of changes in financial position for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in Mexico. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement and that they were prepared in accordance with Mexican Financial Reporting Standards. An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes assessing the financial reporting standards
used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the aforementioned consolidated financial statements present fairly, in all material respects,
the financial position of Grupo Famsa, S. A. B. de C. V. and subsidiaries (formerly Grupo Famsa, S. A. de C. V.)
at December 31, 2006 and 2005, and the results of their operations, the changes in their stockholders’ equity
and the changes in their financial position for the years then ended, in conformity with Mexican Financial
Reporting Standards.
PricewaterhouseCoopers
Alejandro Moreno Anaya
Audit Partner
2006 ANNUAL REPORT
27
GRUPO FAMSA, S. A. B. DE C. V. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(NOTE 1)
AT DECEMBER 31, 2005 WITH COMPARATIVE FIGURES FOR 2006
Thousands of Mexican Pesos of December 31, 2006 Purchasing Power
2005
Assets
CURRENT ASSETS:
Cash and temporary investments (Note 2.c)
Trade accounts receivable (Note 3)
Taxes recoverable
Other accounts receivable
Inventories (Notes 2.f and 4)
Ps
Total current assets
254,735
6,475,942
318,856
385,483
1,964,002
2006
Ps
521,839
7,580,547
317,748
520,724
2,254,998
9,399,018
11,195,856
PROPERTY, LEASEHOLD IMPROVEMENTS
AND FURNITURE AND EQUIPMENT (Note 5)
1,715,189
1,825,154
GOODWILL (Note 2.i)
232,359
232,359
DEFERRED CHARGES (Note 2.k)
233,733
256,724
53,716
84,121
OTHER ASSETS (Note 2.l)
Total assets
Liabilities and Stockholders’ Equity
CURRENT LIABILITIES:
Short-term debt (Note 7)
Suppliers
Deferred value added tax
Accounts payable and accrued expenses
Income tax and asset tax payable
Total current liabilities
Ps
11,634,015
Ps
13,594,214
Ps
812,407
1,950,866
478,519
290,414
8,982
3,541,188
Ps
791,373
1,919,857
560,402
342,274
38,338
3,652,244
LONG-TERM LIABILITIES:
Long-term debt (Note 7)
Deferred income tax (Note 11)
Estimated liability for labor benefits (Notes 2.n and 8)
Total long-term liabilities
Total liabilities
3,419,747
791,544
76,781
4,288,072
7,829,260
3,320,552
722,043
125,555
4,168,150
7,820,394
STOCKHOLDERS’ EQUITY (Note 9):
Capital stock
Paid in capital
Retained earnings
Deficit on restatement of capital
2,040,644
542,354
2,836,075
(1,624,804)
2,168,709
1,981,057
3,357,003
(1,744,014)
Total majority interest
3,794,269
5,762,755
10,486
11,065
3,804,755
5,773,820
Minority interest
Total stockholders’ equity
COMMITMENT (Note 12)
Total liabilities and stockholders’ equity
The accompanying notes are an integral part of these financial statements.
28
2006 ANNUAL REPORT
Ps
11,634,015
Ps
13,594,214
GRUPO FAMSA, S. A. B. DE C. V. Y SUBSIDIARIAS
CONSOLIDATED STATEMENT
OF INCOME
(NOTE 1)
FOR THE YEAR 2005 WITH COMPARATIVE FIGURES FOR 2006
Thousands of Mexican Pesos of December 31, 2006 Purchasing Power
2005
Net sales
Cost of sales
Gross margin
Operating expenses
Operating income
Comprehensive financing expense, net (Note 10)
Ps
Other income, net (Note 5)
Income before income tax and employees’
profit sharing and the effect of adoption of new
accounting standards
Income tax (Note 11)
Employees’ profit sharing (Note 11)
Income before the effect of adoption of
new accounting standards
Effect of adoption of new accounting
standards (Note 8)
Consolidated net income
Net income (loss) corresponding to minority interest
Net income corresponding to majority interest
Ps
Earnings per share corresponding to majority
interest, in pesos (Notes 2.s and 9)
Ps
11,041,030
(6,318,046)
4,722,984
(3,627,012)
1,095,972
(565,496)
530,476
937
2006
Ps
12,393,248
(7,004,216)
5,389,032
(4,156,199)
1,232,833
(546,610)
686,223
15,507
531,413
(188,652)
(2,067)
(190,719)
701,730
(178,707)
(1,907)
(180,614)
340,694
521,116
(63,041)
277,653
47
277,700
521,116
(188)
520,928
1.04
Ps
Ps
1.72
The accompanying notes are an integral part of these financial statements.
2006 ANNUAL REPORT
29
GRUPO FAMSA, S. A. B. DE C. V. Y SUBSIDIARIAS
(NOTE 1)
FOR THE YEAR 2005 WITH COMPARATIVE FIGURES FOR 2006
Thousands of Mexican Pesos of December 31, 2006 Purchasing Power
CONSOLIDATED STATEMENT OF
CHANGES IN STOCKHOLDERS’ EQUITY
Balances at December 31, 2004
Ps
2,040,644
Retained
earnings
Paid in Capital
Capital Stock
Ps
542,354
Ps
277,700
Comprehensive income
Balances at December 31, 2005
Increase in capital stock
2,040,644
542,354
128,065
1,438,703
2,836,075
Comprehensive income
Balances at December 31, 2006 (Note 9)
The accompanying notes are an integral part of these financial statements.
30
2006 ANNUAL REPORT
2,558,375
520,928
Ps
2,168,709
Ps
1,981,057
Ps
3,357,003
Deficit on
restatement of
capital
(Ps
1,534,083)
Total majority
interest
Ps
3,607,290
(90,721)
186,979
(1,624,804)
3,794,269
Minority
interest
Ps
10,534
Total stockholders’
equity
Ps
(48)
186,931
10,486
3,804,755
1,566,768
(119,210)
(Ps
1,744,014)
1,566,768
401,718
Ps
5,762,755
3,617,824
579
Ps
11,065
402,297
Ps
5,773,820
2006 ANNUAL REPORT
31
GRUPO FAMSA, S. A. B. DE C. V. Y SUBSIDIARIAS
CONSOLIDATED STATEMENT OF
CHANGES IN FINANCIAL POSITION
(NOTE 1)
FOR THE YEAR 2005 WITH COMPARATIVE FIGURES FOR 2006
Thousands of Mexican Pesos of December 31, 2006 Purchasing Power
2005
Operations
Net income
Items not affecting resources:
Depreciation and amortization
Allowance for doubtful accounts
Deferred income tax
Estimated liability for labor benefits
Ps
Ps
238,085
229,852
152,973
8,132
906,742
Changes in working capital other than financing:
Trade accounts receivable
Inventories
Suppliers
Other, net
Resources used in operating activities before
the effect of adoption of new accounting standards
520,928
280,795
276,256
64,292
29,354
1,171,625
(861,308)
(321,571)
84,774
(154,874)
(1,252,979)
(1,380,861)
(410,206)
(31,009)
(155,766)
(1,977,842)
(346,237)
(806,217)
63,041
Effect of adoption of new accounting standards
Resources used in operating activities
(283,196)
(806,217)
Financing
Bank loans and long-term debt, net
Increase in capital stock
572,189
(120,229)
1,566,768
Minority interest, net
Resources provided by financing activities
Investment
Property, leasehold improvements and furniture
and equipment, net
(Decrease) increase in cash and temporary investments
Cash and temporary investments at end of year
The accompanying notes are an integral part of these financial statements.
2006 ANNUAL REPORT
(48)
579
572,141
1,447,118
(332,188)
(373,797)
(43,243)
267,104
297,978
Cash and temporary investments at beginning of year
32
277,700
2006
Ps
254,735
254,735
Ps
521,839
GRUPO FAMSA, S. A. B. DE C. V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
AT DECEMBER 31, 2005 WITH COMPARATIVE FIGURES FOR 2006
Thousands of Mexican Pesos of December 31, 2006 Purchasing Power
(except where otherwise indicated)
NOTE 1 - ACTIVITIES OF THE COMPANIES
The main activities of Grupo Famsa, S. A. B. de C. V. and its subsidiaries (Grupo Famsa or the Company), is the purchase and sale of
various kinds of household appliances, furniture, clothing and other consumer products, as well as the manufacture of various kinds of
furniture. The Company’s sales are made on credit and in cash, to both wholesale and retail customers.
Currently, Grupo Famsa carries out its activities through retail branches and wholesale warehouses. The Company’s principal subsidiaries and their ownership percentage are:
(Unaudited)
Ownership %
at December 31,
2005
2006
99.87
100.00
99.99
99.94
99.04
100.00
95.00
99.21
99.99
99.87
100.00
99.99
99.94
99.04
100.00
95.00
99.21
99.99
99.99
99.99
Retail sales:
Fabricantes Muebleros, S. A. de C. V. (1)
Famsa del Centro, S. A. de C. V.
Famsa del Pacífico, S. A. de C. V.
Famsa Metropolitano, S. A. de C. V.
Impulsora Promobien, S. A. de C. V.
Famsa, Inc., a subsidiary company headquartered in California, U.S.A.
Corporación de Servicios Ejecutivos Famsa, S. A. de C. V.
Corporación de Servicios Ejecutivos, S. A. de C. V.
Promotora Sultana, S. A. de C. V.
Suministro Especial de Personal, S. A. de C. V.
Manufacturing and other:
Auto Gran Crédito Famsa, S. A. de C. V.
Expormuebles, S. A. de C. V.
Mayoramsa, S. A. de C. V.
Promocrédito del Hogar, S. A. de C. V. (1)
Verochi, S. A. de C. V.
95.00
99.90
99.89
99.38
95.00
99.99
99.90
99.89
99.92
Financial sector
Banco Ahorro Famsa, S. A.,
Institución de Banca Múltiple (2)
99.00
(1) On December 29, 2006 it was agreed to merge Promocrédito del Hogar, S. A. de C. V. into Fabricantes Muebleros, S. A de C. V.;
the rights and obligations of the former were transferred to Fabricantes Muebleros, S. A. de C. V. The merger agreement became
effective as of December 31, 2006. (2) Banco Ahorro Famsa, S. A., Institución de Banca Múltiple (BAF), located in Monterrey, N. L. was incorporated in May 2006 and it
began operations in January 2007. Its main activity is the rendering of banking and credit services, in conformity with the Law of
Credit Institutions.
2006 ANNUAL REPORT
33
At an Extraordinary General Meeting held on December 14, 2006, the stockholders resolved to change the Company’s name from Grupo
Famsa, S. A. de C. V. to Grupo Famsa, S. A. B. de C. V.; and likewise, to modify its by-laws for purposes of reflecting the new integration,
organization and operation of its corporate governance and the new rights of the minority stockholders, as required by the Securities
Market Law (SML) published on December 30, 2005.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
On January 1, 2006, Grupo Famsa and its subsidiaries adopted the standards issued by the Mexican Financial Reporting Standards Board
(CINIF), which is responsible for prescribing accounting and reporting standards in Mexico. Therefore, the accompanying consolidated
financial statements were prepared in conformity with such standards, which, as stipulated by the CINIF, comprise the following:
i. Financial Reporting Standards (FRS) and related interpretations issued by the CINIF.
ii. Statements issued by the Accounting Principles Board of the Mexican Institute of Public Accountants which have not been modified,
replaced or abolished by new FRS.
iii. International Financial Reporting Standards (IFRS) applicable on a supplementary basis.
In accordance with the above-mentioned criteria, Grupo Famsa and its subsidiaries applied the following accounting policies:
a. Bases for presentation and disclosure
The issuance of the accompanying consolidated financial statements was approved by the Company’s Chief Executive Officer
(Humberto Garza Valdez) on March 9, 2007, and they have been prepared in accordance with FRS, and the standard requiring comprehensive recognition of the effects of inflation on the financial information. Consequently, all financial statements, including those of prior periods presented for comparative purposes, are stated in constant pesos of December 31, 2006 purchasing power.
The financial statements of all the consolidated companies are conformed to FRS for consolidation purposes, including the financial
statements of the foreign subsidiary, Famsa, Inc., which are originally prepared in conformity with accounting principles generally
accepted in the United States of America (U.S.A.), and the financial statements of BAF, which are prepared in conformity with the
accounting rules and practices established by the National Banking and Securities Commission (NBSC).
The preparation of the financial information in accordance with Mexican financial reporting standards requires management to
make estimates and assumptions that affect the reported amounts at the date of the financial statements. Actual results could
differ from those estimates.
The most important indexes (National Consumer Price Index - NCPI) used to reflect the effects of inflation on the financial statements were: 121.015, 116.301 and 112.550 at December 31, 2006, 2005 and 2004, respectively (second half of June 2002=100).
b. Bases for consolidation
The consolidated financial statements comprise those of Grupo Famsa and all its subsidiaries (see Note 1). Intercompany transactions and balances between Grupo Famsa and its subsidiaries have been eliminated in consolidation.
c. Temporary investments
These investments are stated at market value. The differences in market value between the investment date and the balance
sheet date are recorded in the statement of income under the caption comprehensive financing income (expense).
34
2006 ANNUAL REPORT
d. Revenue recognition
Revenues arise from the activities described in the first paragraph of Note 1 and may be in cash or on credit. Revenues are recognized at issuance of the sales receipt and/or shipment of the merchandise to the customer. Sales on credit are made on a weekly,
bi-weekly and/or monthly installment basis with financing terms under agreements, which occasionally stipulate interest at fixed
rates.
The Company recognizes revenues for financing on sales made on credit at the time the sale is made since the average recovery
term is less than a year.
In connection with the sale of warranty policies made by Famsa, Inc., the Company is required, in accordance with legal requirements in the U.S.A. to maintain 25% of the related sales amount deposited in a trust until the warranty policy expires. At December
31, 2005 and 2006, the Company had restricted cash of Ps21,649 and Ps32,510, respectively, included in the balance sheet under
the caption “Cash and temporary investments.”
e. Allowance for doubtful accounts (Note 3)
The Company records as an allowance for doubtful accounts, the equivalent of 2.9% of its net sales made on credit, which the
Company considers sufficient to cover any related loss.
f. Inventories and cost of sales (Note 4)
Inventories of household appliances, furniture, clothes and other products for sale to third parties are stated at estimated replacement cost, generally at the latest purchase prices. The amounts shown for inventories do not exceed market value.
The cost of sales is shown in constant pesos based on the estimated replacement costs prevailing on the dates when the sales
were effected.
g. Shipment and handling of merchandise
The Company records freight expenses under the caption “Cost of sales” as well as the shipping and handling costs of merchandise when incurred. The amounts received for shipping and handling costs of merchandise paid by the customer are included within
“Net sales.”
h. Advance payments for advertising
The Company contracts its media advertising, mainly television and press, directly and through its subsidiaries. The related agreements stipulate advance payments for these services, which are rendered during the following year. At December 31, 2006, there
were advance payments of Ps120,246 (Ps113,852 in 2005) for advertising; this amount is included in the balance sheet as “Other
accounts receivable.”
i. Goodwill
This caption is stated at cost restated by applying factors derived from the NCPI to the historical cost. It is subject to testing for
impairment on an annual basis, or earlier, in the event circumstances occur that indicate the existence of a possible impairment.
j. Property, leasehold improvements, furniture, equipment and depreciation (Note 5)
Property, leasehold improvements, furniture, equipment and the related accumulated depreciation are stated at cost restated by
applying factors derived from the NCPI.
Depreciation is calculated by the straight-line method based on the estimated useful lives of the assets as determined by the companies. The amortization period for leasehold improvements is determined based on the term of the lease agreement.
2006 ANNUAL REPORT
35
k. Deferred charges
This caption is stated at cost restated by applying factors derived from the NCPI to the historical cost. It comprises principally costs
relative to development and implementation of integral computer systems, installation, preoperating and start-up expenses of the
foreign subsidiary, all of which are subject to amortization. l. Other assets
m. n. o. p. q. r. 36
These assets represent principally deposits in guarantee and an intangible asset related to severance compensations.
Transactions in foreign currency and exchange differences (Note 6)
Monetary assets and liabilities in foreign currencies, mainly U.S. dollars (US$), are stated in Mexican currency at the rates of exchange in effect at the balance-sheet date. Exchange differences arising from changes in exchange rates between the transaction
and settlement dates or the balance-sheet date are charged or credited to comprehensive financing (expense) income.
Estimated liability for labor benefits (Note 8)
Seniority premiums to which employees are entitled upon termination of employment after 15 years of service, as well as the
obligations existing under the retirement plans and severance compensations, are recognized as a cost of the years in which the
services are rendered in accordance with actuarial studies carried out using the projected unit credit method.
At December 31, 2006, the Company adopted the standards relating to pension plans contained in Statement D-3, “Labor liabilities”. The effect of this adoption was immaterial; therefore, it was considered as part of the net cost for the period. Comprehensive financing income (expense) (Note 10)
This item is determined by grouping in the statement of income all interest and other financial income and expense, exchange gains
and losses, and the gain or loss on monetary position.
The gain or loss on monetary position represents the effect of inflation, as measured by the NCPI, on the Company’s monthly net
monetary assets or liabilities during the year.
Impairment of long-lived assets and their disposal
Long-lived assets, tangible and intangible (including goodwill), are subject to testing for impairment in the event circumstances
occur that indicate the existence of a possible impairment. In 2005 and 2006 no loss due to impairment was recognized since there
were no factors indicating impairment of such assets.
Income tax and employees’ profit sharing (Note 11)
Income tax and employees’ profit sharing are recorded by the comprehensive asset and liability method, which requires recognition
of deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement
carrying amounts of all assets and liabilities and their respective tax bases.
Comprehensive income (Note 9)
Comprehensive income is represented by the net income plus the gain or loss from holding nonmonetary assets, and items required by specific accounting standards to be reflected in stockholders’ equity but which do not constitute capital contributions,
reductions or distributions. Amounts included herein are restated on the basis of NCPI factors.
2006 ANNUAL REPORT
s. Earnings per share
Earnings per share are computed by dividing the net income for the year by the weighted average number of common shares
outstanding during the year. There are no effects arising from potentially dilutive shares.
t. Risk concentration
The principal financial instruments maintained by the Company under a credit risk concentration correspond to cash in banks and
temporary investments, as well as trade accounts receivable. Cash and temporary investments are maintained in recognized financial institutions. The relative investments are in fixed interest and money market securities. The risk concentration regarding trade
accounts receivable is significant since the Company managed a credit portfolio of approximately 1,250,000 accounts (unaudited) at
December 31, 2006. However, there is an allowance for doubtful accounts based on a percentage of the net credit sales. Additionally, in order to reduce risks, the Company requires that the credits granted be collateralized by the goods sold and a guarantor.
NOTE 3 - TRADE ACCOUNTS RECEIVABLE
At December 31 this caption comprised the following:
2006
2005
Trade accounts receivable
Less - Allowance for doubtful accounts (1)
Net
Ps
Ps
6,556,536
80,594
6,475,942
Ps
Ps
7,661,507
80,960
7,580,547
(1) In 2005 and 2006, the charge to income was Ps229,852 and Ps276,256, respectively.
At December 31, 2005 and 2006 the Company’s amounts receivable in respect of its retail customers were pledged as security for a
line of credit (see Note 7).
NOTE 4 - INVENTORIES
Inventories were analyzed as follows:
2006
2005
Products (*)
Clothing, footwear and jewelry
Merchandise in transit, advances to suppliers and other
Estimated replacement cost
Ps
Ps
1,680,339
271,890
11,773
1,964,002
Ps
Ps
1,856,976
390,391
7,631
2,254,998
(*) Comprises principally electronic products, household appliances and furniture.
2006 ANNUAL REPORT
37
NOTE 5 - PROPERTY, LEASEHOLD IMPROVEMENTS AND FURNITURE AND EQUIPMENT
At December 31 this caption comprised the following:
2006
2005
Land
Ps
246,098
Ps
165,806
1,331,938
490,028
161,710
272,498
5,693
2,427,673
(958,582)
1,469,091
1,715,189
Buildings and construction
Leasehold improvements
Furniture and equipment
Transportation equipment
Data-processing equipment
Construction in progress
Accumulated depreciation
Net restated cost
Ps
Ps
Depreciation
rate
231,599
145,922
1,544,866
554,140
172,075
311,181
22,980
2,751,164
(1,157,609)
1,593,555
1,825,154
3%
7%
10%
20%
24%
Depreciation charged to income represented annual average rates of 9.8% in 2005 and 10.2% in 2006.
In accordance with the lease agreements, the leasehold improvements will become the property of the lessor at the termination of the
agreements.
In 2006 the Company sold the land and buildings occupied by its branches located in Los Angeles, California and Dallas, Texas to then
lease them. At the date of the sale transaction the related book values were Ps13,427 and Ps66,849, respectively. The gain on the sale
of these properties was Ps23,581, and it is included in the statement of income under the caption “Other income, net.”
38
2006 ANNUAL REPORT
NOTE 6 - FOREIGN CURRENCY POSITION
At December 31, 2005 and 2006, the exchange rates were 10.63 and 10.81 nominal pesos to the U.S. dollar, respectively. At March 9,
2007, date of issuance of the audited financial statements, the exchange rate was 11.14 nominal pesos to the dollar.
Amounts shown in this note are expressed in thousands of U.S. dollars (US$), since this is the currency in which most of the Company’s
foreign currency transactions are carried out.
At December 31 the Company had the following foreign currency assets and liabilities:
2005
Monetary assets
Monetary liabilities
Monetary position in foreign currency
Nonmonetary assets (inventories)
2006
US$
US$
64,388
65,290
(902)
US$
100,034
81,165
18,869
US$
29,414
US$
36,133
US$
The above-mentioned inventories are those manufactured outside of Mexico and are stated at their net restated cost.
For the year ended December 31, 2006 the Company had direct imports of inventories totaling US$28,227 (US$32,962 in 2005).
2006 ANNUAL REPORT
39
NOTE 7 - SHORT-TERM LOANS AND LONG-TERM DEBT
At December 31, 2006, Grupo Famsa, S. A. B. de C. V. and Famsa, Inc. had contracted with GE Capital Bank and GE Capital Corporation a
revolving credit line for two years of up to an equivalent of US$330 million. At December 31, 2006, Ps2,899,981 had been drawn down in
Mexican pesos (Ps3,038,002 in 2005) and US$38.9 million (US$34.5 million in 2005) under such credit line at a fixed interest rate and with
a maximum maturity of two years. Borrowings under this credit line are secured by trade accounts receivable of the following subsidiaries: Fabricantes Muebleros, S. A. de C. V, Famsa del Centro, S. A. de C. V., Famsa del Pacífico, S. A. de C. V., Famsa Metropolitano, S. A.
de C. V. and Impulsora Promobien, S. A. de C. V. In addition, the Famsa, Inc.’s borrowing is secured by its own trade accounts receivable
and guaranteed by Grupo Famsa, S. A. B. de C. V.
The above-mentioned agreements contain certain covenants, principally requiring the maintenance of certain financial ratios, reductions
in capital and submission of financial information. At the date of issuance of the financial statements, Grupo Famsa, S. A. B. de C. V. and
Famsa, Inc. had complied with all the financial obligations stipulated in the loan agreements.
At December 31 the total consolidated debt was as follows:
2006
Interest rate
(*)
500,000
8.57%
1,150,983
1,887,019
3,038,002
1,038,420
1,861,562
2,899,982
9.33%
110,651
77,456
188,107
291,373
6.80%
381,745
4,232,154
(812,407)
3,419,747
420,570
4,111,925
(791,373)
3,320,552
2005
Grupo Famsa
Mexican pesos:
Debt certificates (1)
Ps
Amounts drawn down from revolving credit lines (2):
GE Capital Bank, S. A.
GE Capital Corporation
U.S. dollars:
Euro-commercial paper
Unsecured
Famsa, Inc. (U.S. dollars):
Amounts drawn down from credit line with
GE Capital Corporation (2)
Total debt
Short-term debt
Long-term debt, all of which matures in 2008
(*) Nominal rates at December 31, 2006.
(1) Maturing in 2007.
(2) Maturing in 2008.
40
2006 ANNUAL REPORT
Ps
624,300
Ps
291,373
Ps
8.71%
NOTE 8 - ESTIMATED LIABILITY FOR LABOR BENEFITS
The liabilities and costs relating to seniority premiums and pension plans to which employees are entitled after 15 years of service,
are recognized on the basis of actuarial studies performed by independent actuaries. The Company has also established plans to
cover compensations in the event of dismissal, based on actuarial studies made by independent actuaries.
Following is a summary of the principal financial data relative to these obligations determined based on actuarial studies:
2005
Seniority
premiums
Accumulated benefit
obligation
Projected benefit obligation
Unamortized prior service
cost (transition liability)
Unamortized actuarial gains
and losses
Unfunded accrued labor
cost
Seniority
premiums
Total
Severance
compensations
Pension
plans
Total
Ps
29,329
Ps
47,931
Ps
77,260
Ps
30,003
Ps
81,577
Ps
3,086
Ps
114,666
Ps
30,159
Ps
52,750
Ps
82,909
Ps
30,926
Ps
86,224
Ps
3,409
Ps
120,559
(1,017)
(46,079)
(3,036)
Additional liability
Amount paid for the year
Estimated liability for labor
benefits
2006
Severance
compensations
856
(47,096)
(662)
(7,044)
(1,871)
(9,577)
(2,180)
6,799
(34,340)
(690)
(28,231)
26,106
7,527
33,633
37,063
44,840
848
82,751
3,223
40,404
43,627
539
40,027
2,238
42,804
(479)
(479)
Ps
28,850
Ps
47,931
Ps
76,781
Ps
37,602
Ps
84,867
Ps
3,086
Ps
125,555
Ps
6,396
Ps
1,883
Ps
8,279
Ps
7,847
Ps
2,121
Ps
197
Ps
10,165
Net cost for the period:
Labor cost
Financial cost
Unamortized actuarial gains losses
Effect of initial adoption of
pension plans
Ps
893
2,480
3,373
962
2,721
104
3,787
843
8,690
9,533
680
11,951
198
12,829
2,573
2,573
8,132
$
13,053
Ps
21,185
Ps
9,489
Ps
16,793
Ps
3,072
Ps
29,354
Prior service cost (transition liability), plan amendment costs and actuarial gains and losses are recorded through charges to income
by the straight-line method over the average remaining service life of the employees expected to receive the benefits (approximately
eleven years). In 2005 and 2006, annual weighted real discount rates of 4.5% and 4.0%, respectively, were used for the actuarial
calculations.
2006 ANNUAL REPORT
41
NOTE 9 - STOCKHOLDERS’ EQUITY
At Extraordinary General and Ordinary Meetings held on April 28, 2006, the stockholders resolved to: (a) increase the fixed portion of
the capital stock by Ps407,409 (nominal value), through the conversion of the shares representing the variable portion; as a result, the
nominal, subscribed and paid in capital stock of Ps532,409 is represented by 53,240,874 Class “I” Series “A”, common, nominative
shares, without par value; (b) split the shares through the issuance and exchange of shares at a 1 to 5 ratio; as a result, the capital stock
is represented by 266,204,370 Class “I” Series “A”, common, nominative shares, without par value; (c) increase the Company’s capital
stock through a primary public stock offering in the domestic stock market involving a total amount of 61,884,654 shares carried out on
May 24, 2006; from the total offering, an amount of Ps123,769 (nominal amount) was recorded as an increase in the fixed minimum
capital stock, and Ps1,390,449 as paid in capital, net of commissions and other expenses related to the placement; and (d) change the
Company’s by-laws to register the shares in the Securities Section and in the Special Section of the National Registry of Securities of the
NBSC and adjust them to the standards stipulated by the SML.
Subsequent to the above-mentioned changes the amounts of stockholders’ equity were as follows:
Nominal
amount
Capital stock
Paid in capital
Retained earnings
Deficit on restatement of capital
Total majority interest
Minority interest
Total stockholders’ equity
Ps
Ps
656,178
1,767,067
1,298,221
3,721,466
10,486
3,731,952
Restatement
increment
Ps
Ps
1,512,531
213,990
2,058,782
(1,744,014)
2,041,289
579
2,041,868
Restated
amount
Ps
Ps
2,168,709
1,981,057
3,357,003
(1,744,014)
5,762,755
11,065
5,773,820
The capital stock is variable with a fixed minimum of Ps656,178 (nominal amount) and an unlimited maximum. At December 31, 2006,
the subscribed and paid in nominal capital stock was represented by 328,089,024 Class “I” Series “A”, common, nominative shares. At December 31, 2006 the retained earnings include Ps166,822 and Ps333,644, applicable to the legal reserve and to the reinvestment
reserve, respectively.
42
2006 ANNUAL REPORT
Dividends paid are not subject to income tax if they arise from the after-tax earnings account (CUFIN). Dividends paid in excess of this
account are subject to a tax equivalent to 28% applicable to the amount resulting by multiplying the dividends by a factor of 1.3889, if
paid during 2007. The tax is payable by the Company and may be credited against the normal income tax payable by the Company in
the year in which the dividends are paid or in the two following years. Dividends paid from previously taxed profits are not subject to tax
withholding.
In the event of a capital reduction, any excess of stockholders’ equity over capital contributions, the latter restated in accordance with the
provisions of the Income Tax Law, is accorded the same tax treatment as dividends.
The deficit on restatement of capital comprises principally the accumulated loss from holding nonmonetary assets and represents the
difference between restating these assets by the specific cost method and restating them based on inflation measured in terms of the
NCPI.
Earnings per share (in pesos):
Continuing operations
Effect of adoption of new accounting standards
Ps
Ps
2005 (1)
6.40
(1.19)
5.21
Ps
Ps
2005 (2)
1.28
(0.24)
1.04
Ps
2006
1.72
Ps
1.72
(1) Amount calculated over the weighted average rate of the 53,240,874outstanding shares at December 31 2005.
(2) Amount reestablished as a result of the split of 266,204,370 shares, in accordance with the resolutions taken by the stockholders on
April 28, 2006.
NOTE 10 - COMPREHENSIVE FINANCING INCOME (EXPENSE), NET
This caption comprised the following:
2005
Financial expense
Financial income
Exchange loss, net
Loss on monetary position
Ps
Ps
(554,322)
22,571
(17,035)
(16,710)
(565,496)
2006
Ps
Ps
(491,021)
31,915
(11,099)
(76,405)
(546,610)
2006 ANNUAL REPORT
43
NOTE 11 - INCOME TAX, ASSET TAX AND EMPLOYEES’ PROFIT SHARING
Grupo Famsa and its subsidiaries determine their taxable income (loss) and employees’ profit sharing on an individual Company standalone basis.
The net charge to consolidated income for taxes was as follows:
2005
Income tax:
Current
Deferred
Ps
Adjustment to income tax provision Employees’ profit sharing
Ps
(35,679)
(152,973)
(188,652)
(2,067)
(190,719)
2006
Ps
Ps
(114,415)
(64,292)
(178,707)
(1,907)
(180,614)
The reconciliation between the statutory and effective income tax rates is shown below:
Income tax at statutory rate
Add (deduct) effect of income tax on:
Inflationary component, net
Permanent nondeductible differences
Inflationary tax effect
Other permanent differences
Effective income tax rate
44
2006 ANNUAL REPORT
2005
2006
30%
29%
2%
4%
4%
(4%)
36%
5%
3%
2%
(14%)
25%
As a result of the various amendments to the Mexican Income Tax Law published on December 1, 2004, the income tax rate is of 28%
for the year 2007.
At December 31 the principal temporary differences requiring recognition of deferred income tax were as follows:
2005
Trade accounts receivable
Advance payments
Inventories
Property, furniture and equipment, net
Allowance for doubtful accounts
Estimated liability for labor benefits
Tax effect of credit sales
Tax loss carryforwards
Ps
Income tax rate
Deferred income tax liability
Ps
(1,321,504)
3,939,210
162,305
1,244,388
138,288
(51,398)
(125,555)
(1,959,202)
(291,307)
3,233,096
3,056,729
29%
28%
937,598
855,884
(146,054)
Recoverable asset tax
Deferred income tax liability, net
3,140,276
149,631
1,228,861
164,202
(51,817)
(76,553)
2006
Ps
791,544
(133,841)
Ps
722,043
The Company had unused tax loss carryforwards in Mexico, which may be restated for inflation through the date they are applied against
future taxable profits, expiring in the following years:
2009
2010
2011
2012
2013
2014
2015
2016
Ps
Ps
4,314
21,165
119,438
115,009
11,512
10,048
3,985
5,836
291,307
The foregoing amounts are shown at their inflation-indexed amount through December 31, 2006.
2006 ANNUAL REPORT
45
The subsidiary company located in the U.S. A. has tax loss carryforwards totaling US$33,836, expiring in 2026; however, the Company
has created a reserve relating to such tax loss carryforwards since the U.S.A. operations have not historically generated taxable income
to amortize in 2006.
Asset tax is payable at the rate of 1.8% on the net amount of certain assets and liabilities, but only when the amount of asset tax exceeds
the income tax due. Asset tax paid may be carried forward and credited against income tax payable in the following ten years to the
extent income tax exceeds asset tax in those years.
At December 31, 2006 the asset tax credits recoverable in future periods, expire in the following years:
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Ps
Ps
870
7,701
7,504
6,933
11,801
13,725
14,057
21,913
12,340
36,997
133,841
Employees’ profit sharing was determined at the rate of 10% on taxable income adjusted as prescribed by the Income Tax Law. Tax loss
carryforwards and asset tax credits are not available for purposes of reducing employees’ profit sharing.
NOTE 12 - COMMITMENT
The majority of the subsidiary companies have entered into long-term lease agreements (some with related parties) covering properties
occupied by their stores.
Rentals payable are as follows:
Other
2007
Ps
492,722
Related parties
Ps
62,487
1,970,888
2008 through 2011
Ps
2,463,610
Total
Ps
249,948
Ps
312,435
555,209
2,220,836
Ps
2,776,045
In 2005 and 2006 total rental expense was as follows:
2005
Other
Related parties
Total
46
2006 ANNUAL REPORT
Ps
Ps
402,861
49,331
452,192
2006
Ps
Ps
469,259
59,511
528,770
NOTE 13 - INFORMATION BY BUSINESS SEGMENT
The Company manages and evaluates its continuing operations through three business units: Mexico (national retail stores), U.S.A.
(foreign retail stores) and Other businesses in Mexico (wholesaler, manufacturing of furniture, personal car financing, footwear catalog
business and financial sector). Their activities are carried out through various subsidiary companies.
Company’s management uses operating income before depreciation as the measure of segment performance as well as to evaluate
development, make decisions relating to the operations and to allocate resources. The information by business segment is as follows:
2005
Mexico
Net sales (1)
Ps
USA
9,769,529
Ps
Other
1,223,689
Ps
Subtotal
991,557
Ps
11,984,775
Intersegment
Ps
Consolidated
(943,745)
Ps
11,041,030
Cost of sales
(5,827,633)
(634,121)
(858,953)
(7,320,707)
Gross margin
3,941,896
589,568
132,604
4,664,068
58,916
4,722,984
Operating expenses
(2,789,266)
(547,326)
(93,991)
(3,430,583)
41,656
(3,388,927)
1,152,630
42,242
38,613
1,233,485
100,572
1,334,057
-
(238,085)
Operating income before
depreciation and
amortization
Depreciation and
amortization
(178,293)
(58,203)
Operating income (loss)
Ps
974,337
Ps
Additional segmental
disclosure:
Total assets
Ps
10,373,142
Ps
Total liabilities
Ps
7,450,898
Ps
Capital expenditure
Ps
174,851
Ps
(15,961)
(1,589)
1,002,661
(238,085)
(6,318,046)
Ps
37,024
Ps
995,400
Ps
100,572
Ps
1,095,972
1,301,541
Ps
406,756
Ps
12,081,439
Ps
(447,424)
Ps
11,634,015
662,587
Ps
163,199
Ps
8,276,684
Ps
(447,424)
Ps
7,829,260
34,765
Ps
13,851
Ps
223,467
Ps
Ps
223,467
-
2006
Mexico
Net sales (1)
Ps
10,514,560
USA
Ps
1,761,117
Other
Ps
1,061,373
Subtotal
Ps
13,337,050
Intersegment
Ps
(943,802)
Consolidated
Ps
(6,202,205)
(902,989)
(899,851)
(8,005,045)
Gross margin
4,312,355
858,128
161,522
5,332,005
57,027
5,389,032
Operating expenses
(3,058,581)
(758,348)
(118,435)
(3,935,364)
59,960
(3,875,404)
1,253,774
99,780
43,087
1,396,641
116,987
1,513,628
-
(280,795)
Operating income
before depreciation and
amortization
Depreciation and
amortization
(201,144)
(77,220)
Ps
1,052,630
Ps
Total assets
Ps
12,159,294
Total liabilities
Ps
7,349,618
Capital expenditures
Ps
314,136
Operating income
(2,431)
22,560
Ps
Ps
1,657,451
Ps
1,050,950
Ps
90,810
1,000,829
12,393,248
Cost of sales
(280,795)
(7,004,216)
40,656
Ps
1,115,846
Ps
116,987
Ps
1,232,833
Ps
477,797
Ps
14,294,542
Ps
(700,328)
Ps
13,594,214
Ps
120,154
Ps
8,520,722
Ps
(700,328)
Ps
7,820,394
Ps
13,629
Ps
418,575
Ps
Ps
418,575
Additional segmental
disclosure:
-
(1) Net sales are realized in the respective countries disclosed above.
2006 ANNUAL REPORT
47
NOTE 14 - NEW FINANCIAL REPORTING STANDARDS
On January 1, 2007 four new reporting standards issued by the CINIF became effective. They basically stipulate the following:
a. A new structure for the statement of income; the presentation of special or extraordinary items is eliminated, income and
expense will be classified as ordinary or not ordinary. In addition, employees’ profit sharing must be included as an ordinary
expense instead of a tax on income.
b. Rules for the recognition of asset and liability restructuring, and for waivers granted by the creditors in the event of noncompliance with payment by the debtor.
c. New disclosure requirements regarding transactions with related parties.
d. Rules for capitalization of comprehensive financing income (expense).
At March 9, 2007, date of issuance of the consolidated financial statements, the management of Grupo Famsa and its subsidiaries were
carrying out a study to determine the impact that these new financial reporting standards will have on the Company’s consolidated
financial information.
48
2006 ANNUAL REPORT
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