Grupo Bafar Navigates Headwinds in Q1 2025 Amid Macroeconomic Challenges

Introduction
Grupo Bafar (NYSE: BWMX), a leading multilevel marketing and direct sales company in Mexico, reported its first-quarter 2025 results, revealing mixed performance amid a challenging macroeconomic landscape. While the company grapples with currency volatility, declining consumer demand, and operational headwinds, its strategic pivots and resilient business model offer a glimmer of hope for recovery. Let’s dissect the numbers and assess the investment implications.

Key Financials: A Tale of Declines and Strategic Trade-Offs

Net Revenue: Grupo Bafar’s revenue dipped 2.9% year-over-year to Ps. 3.5 trillion, driven by a steep 9.8% decline in Betterware Mexico’s sales. The peso’s 20.3% depreciation against the U.S. dollar exacerbated costs, squeezing margins across all segments.

Gross Margin: The gross margin contracted by 353 basis points to 66.2%, with Betterware Mexico’s margin plummeting 473 basis points to 55.3%. Higher raw material costs and promotional strategies to offset demand weakness were key culprits.

EBITDA: The metric fell 29.1% to Ps. 535 billion, with margin compression (150 basis points) and higher administrative expenses contributing to a 567-basis-point margin decline to 15.3%.

Net Income: The most striking figure was a 48.7% drop in net income to Ps. 151 billion, reflecting reduced EBITDA and one-time expenses. However, currency hedging and lower interest rates provided some cushioning.

Free Cash Flow: The company’s free cash flow turned negative (-Ps. 55.8 billion), a stark contrast to the Ps. 360 billion surplus in Q1 2024. This was due to extraordinary outflows, including inventory buildup at Jafra Mexico and tax payments.

Business Unit Performance: Diverging Fortunes

Betterware Mexico: The core division struggled with a 10.4% decline in its associate base and weak consumer spending. Management aims to reduce inventory by 52% by year-end and stabilize demand through pricing adjustments.

Jafra Mexico: Despite a 1.1% revenue rise, margin pressures mounted as strategic pricing investments in skincare and color categories weighed on profitability. The brand’s focus on distributor experience and product mix optimization will be critical.

Jafra US: Revenue fell 4.7% in USD but rose 14.6% in pesos due to currency effects. A turnaround in March (27% YoY growth) hints at potential recovery, especially after launching a new compensation plan and upgrading its Shopify platform.

Strategic Initiatives: Balancing Risk and Growth

1. International Expansion:
2. Guatemala: Showing early growth signs.
3. Ecuador: Launching in May 2025.

4. Betterware US: Paused due to U.S. policy uncertainties, a prudent move given geopolitical risks.

5. Cost Optimization:

6. Diversifying suppliers to mitigate reliance on China, with Southeast Asia and Mexico emerging as alternatives.

7. Inventory reduction targets aim to cut stockpiles from Ps. 529 billion to Ps. 252 billion by year-end.

8. Financial Position:

9. Debt/EBITDA ratio rose to 2.08x but remains within targets.
10. A proposed Ps. 200 billion dividend (pending approval) signals confidence in cash flow normalization despite Q1’s negative FCF.

Outlook and Risks

2025 Guidance:
- Revenue: Ps. 14,900–15,300 billion (+6–9% growth).
- EBITDA: Ps. 2,900–3,000 billion (+6–9% growth).

Key Risks:
- Mexico’s weak consumer sentiment and peso volatility.
- U.S. policy changes impacting cross-border operations.
- Execution of inventory reduction and new market launches.

Conclusion: A Company in Transition

Grupo Bafar’s Q1 results underscore the challenges of operating in a volatile environment, yet the company’s agility and long-term vision provide reasons for cautious optimism. While near-term metrics like negative FCF and margin compression are concerning, strategic moves—such as cost diversification, selective market expansion, and inventory management—align with a path to recovery.

Crucially, the proposed dividend and management’s confidence in cash flow normalization suggest underlying financial strength. With EBITDA margins expected to rebound and international markets like Ecuador offering growth potential, investors may find value in the stock’s current undervaluation. However, sustained peso weakness and geopolitical risks could prolong headwinds.

For now, Grupo Bafar remains a story of resilience, balancing short-term pain with long-term strategic bets. Investors should monitor Q2 cash flow trends and the success of Jafra’s U.S. turnaround to gauge whether the company can deliver on its ambitious 2025 targets.

Final Take: Grupo Bafar’s stock presents a high-risk, high-reward opportunity for investors willing to bet on its ability to navigate macro challenges and execute its growth roadmap. The path forward hinges on cost discipline, currency stability, and successful market entries—watch this space closely.