Fitch Affirms Controladora Comercial Mexicana at 'BBB-'.

NEW YORK -- Fitch has affirmed the foreign and local currency IDR rating of Controladora Comercial Mexicana, S.A. de C.V. (CCM) at 'BBB-' as well as the 'BBB-' rating of CCM's US$200 million senior notes due 2015. In addition, Fitch affirmed CCM's national scale ratings of 'F1+(mex)' and 'AA(mex)'. The Outlook is Stable.

CCM's ratings are based on the company's competitive position in the Mexican food retail market, its multiple-format strategy, ownership of the majority of its selling space and solid financial profile. CCM is one of the largest Mexican food retailers based on revenues.

Over the past few years, the company has implemented several strategic initiatives designed to improve its long-term competitive position in the evolving Mexican retail industry. Incumbent food retailers, including CCM, have faced increased competition from Wal-Mart de Mexico (Walmex), which dominates the market. In addition, hypermarkets are replacing supermarkets as the format preferred by consumers. In response to these market trends, in 2002 the company modified its product pricing strategy from deep discounts on targeted products to 'everyday low prices'. CCM has also focused on growing its larger store formats by opening new stores and converting some of its existing supermarkets to Mega stores. Additionally, at the beginning of 2006, the company launched a new supermarket format targeting high purchasing power customers (City Market). These initiatives have allowed the company to improve its profit margins in a highly competitive industry.

CCM owns the majority of its current store locations and has acquired land sites targeted for future new store developments, which provides a competitive advantage in highly concentrated areas such as Mexico City. Over the past several years, the company has increased total selling space by an annual average of approximately 5%. Capital expenditures, which reached US$279 million in 2005 and US$201 million in 2004 have been and should continue to be financed with internally generated cash, thereby maintaining stable debt levels. During 2006, CCM is planning to spend around US$300 million in the opening of 22 new stores.

During 2005, revenues increased by 3.8%, driven by the opening of new stores. For the first three months of 2006, revenues increased by 7.4%. Same-store sales remained relatively flat during 2005 but showed a slight increase of 1.6% during the first three months of 2006. These figures compare favorably with 2.4% and 1.7% declines respectively during each period for same-store sales of the supermarket sector, according to the Mexican source ANTAD. EBIT and EBITDA margins have improved over the past several quarters due to the various strategic initiatives taken by the company, tight expense controls and higher operating efficiencies. These initiatives include a combination of marketing and pricing tactics, supplier negotiations, shrinkage reduction programs, management of store categories and improving efficiency in the management of the company's distribution center.

Credit protection measures remain stable and are consistent with the rating category. At March 31, 2006, the ratio of total adjusted debt (including off-balance-sheet debt) to LTM (last twelve months) EBITDAR was 1.7 times (x), and LTM EBITDAR/interest expense plus rents was 4.3x. CCM also has a non-financial liability totaling US$40 million (due in annual payments of US$20 million in 2007 and 2008) related to its acquisition of five Auchan stores in 2003. Including this debt, the ratio of total adjusted debt to LTM EBITDAR was 1.8x. In recent years, credit ratios have improved slightly due to increases in EBITDAR. Credit protection measures are expected to remain stable over the next few years.

At March 31, 2006, the company had US$265 million of on-balance-sheet debt with an adequate maturity profile. In June 2005, the company issued US$200 million of Senior Notes due 2015 and used proceeds to refinance debt. The current debt structure includes the US$200 million Senior Notes, peso-denominated debentures due 2010 equivalent to US$8 million, US$55 million of Short-Term Certificados Bursatiles and US$2 million of other debt. As customary in the industry, the company has off-balance-sheet liabilities related to store operating leases, which at March 31, 2006 totaled US$256 million.

CCM is one of the largest Mexican food retailers, with revenues of US$3.8 billion in 2005. At March 31, 2006, the company operated a total of 194 stores, the majority of which are located in Central Mexico (including Mexico City). CCM operates six store formats: Comercial Mexicana, a service-oriented supermarket; Mega, a hypermarket; Bodega, a value-priced supermarket; Sumesa, a value-priced neighborhood supermarket; Costco, under a joint venture with Costco Wholesale Corp. and City Market, a high purchasing power segment supermarket. In addition, CCM operates a chain of 63 family-style restaurants.

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