Business context and reporting period
Betterware de México, S.A.B. de C.V. (Nasdaq: BWMX) sells home-organization and related products in Mexico through catalogs and a two-tier network of independent distributors and associates. This Form 20-F is an annual report for the 53 weeks ended January 3, 2021—not a standalone fourth-quarter report. Financial statements are prepared under IFRS in Mexican pesos; amounts below are Ps. millions unless stated otherwise. The 2020 period includes BLSM as a subsidiary from March 10, 2020, while 2019 was presented on a combined basis, limiting comparability.
Key financial results
| Metric | 2020 | 2019 |
|---|---|---|
| Net revenue | 7,260.4 | 3,084.7 |
| Gross profit / margin | 3,969.4 / 54.7% | 1,803.8 / 58.5% |
| Operating income / margin | 2,120.4 / 29.2% | 812.2 / 26.3% |
| Net income / margin | 338.4 / 4.7% | 472.1 / 15.3% |
| EBITDA, as defined by the company | 2,164.0 | 850.6 |
| Operating cash flow | 1,822.3 | 605.4 |
| Cash and cash equivalents at period end | 649.8 | 213.7 |
| Borrowings | 629.9 | 677.7 |
| Total liabilities | 3,491.9 | 1,515.2 |
Revenue rose 135.4%, attributed principally to growth in the sales network and units sold, plus higher average selling prices. The company reported 133.7 million units sold and a network of 1.29 million distributors and associates in 2020, compared with 42.3 million units and 437,872 network members in 2019. Operating income more than doubled, while the gross margin fell 3.8 percentage points. Basic earnings per share were Ps. 9.93, down from Ps. 15.63.
Net income declined despite higher operating income, largely reflecting Ps. 851.5 million of non-cash warrant fair-value loss and Ps. 288.0 million of derivative valuation losses within financing costs. Total financing cost was Ps. 1,239.2 million versus Ps. 107.4 million in 2019. The reported EBITDA is a non-IFRS measure and should not be treated as a substitute for IFRS results.
Cash flow, debt and liquidity
Operating cash flow was Ps. 1,822.3 million; investing outflow was Ps. 631.4 million, including Ps. 617.7 million of capital expenditure, mainly for a new Guadalajara distribution center; and financing outflow was Ps. 754.7 million. Cash increased Ps. 436.1 million during the period. The company paid Ps. 830.0 million in dividends, compared with Ps. 343.0 million in 2019.
Borrowings totaled Ps. 629.9 million, of which Ps. 105.9 million was current and Ps. 524.0 million non-current. Cash exceeded borrowings by approximately Ps. 19.9 million, before lease liabilities. Current assets were Ps. 2,906.6 million against current liabilities of Ps. 2,867.4 million; supplier payables accounted for Ps. 2,078.6 million of current liabilities. Management cited customer payment terms of 14–28 days and supplier terms of about 120 days, and reported compliance with debt covenants. Undrawn bank credit lines were Ps. 297.8 million at period end.
Material changes, outlook and risks
- Cost of sales increased faster than revenue, reaching 45.3% of revenue versus 41.5%. Management attributed the margin pressure primarily to higher air-freight costs amid demand growth and, to a lesser extent, peso depreciation against the U.S. dollar. Approximately 90% of products were sourced from China.
- Administrative expenses rose 108.3% but declined to 9.2% of revenue from 10.4%, reflecting operating leverage. Selling expenses rose 54.8% but declined to 11.8% of revenue from 17.9%; distributor rewards and catalog costs increased substantially.
- COVID-19 did not interrupt operations because certain product lines qualified as essential in Mexico. Management said currency movements and promotions affected gross margin and could continue to do so in 2021; it described forward contracts and development of higher-margin products as mitigations. No quantified earnings or revenue guidance was provided.
- Management’s stated growth plans include e-commerce and web marketing, increased service capacity, new product lines, Latin American expansion and potential strategic acquisitions. The new distribution center was expected to be completed in the first quarter of 2021. Subsequent events disclosed a Ps. 75 million marketing campaign, a Ps. 350 million dividend approval and an agreement to acquire 60% of GurúComm for Ps. 45 million; the company did not expect the acquisition to be material to 2021 results.
- Material weaknesses in internal control over financial reporting remained outstanding at January 3, 2021, and management concluded controls were not effective. Remediation was underway; management stated the weaknesses had not caused financial-statement restatements. The auditor did not attest to internal controls because the company qualified as an emerging growth company.
- Risks include dependence on independent distributors and Chinese manufacturers, consumer demand, foreign-exchange and freight exposure, direct-selling regulation, cybersecurity, and concentration of ownership. Campalier held approximately 51.57% of outstanding shares. A tax dispute relating to 2010 remained in litigation; management did not expect a liability and estimated maximum exposure at Ps. 20.1 million. Other routine legal proceedings were not described as material.
Important facts for investors to verify
- Assess how much of the 2020 revenue and operating growth is sustainable, given the 53-week period, network expansion and the change from combined to consolidated reporting.
- Reconcile the sharp net-income and EPS decline with operating growth, including the warrant and derivative valuation losses, their tax effects and their non-cash nature.
- Track gross-margin recovery, air-freight costs, peso-dollar exposure, hedge coverage and the economics of sourcing from China.
- Review working-capital quality and liquidity, especially receivables, inventory, supplier financing, dividend outflows and the availability of unused credit lines.
- Monitor remediation and independent testing of internal-control weaknesses, along with execution and returns on the distribution-center investment and other growth initiatives.