Coca-Cola Enterprises Inc. (CCE) announced dismal third-quarter 2014 earnings. The company beat the earnings expectations only on the back of currency benefits and lower share count. It missed revenue expectations and also lowered the full-year sales and profit outlook due to difficult operating conditions.
Share price declined in pre-market trading. In fact, this Zacks Rank #5 (Strong Sell) company has seen its share price decline slightly more than 3% to-date this year.
Third-quarter 2014 adjusted earnings of 92 cents per share beat the Zacks Consensus Estimate of 88 cents by 4.5% and increased 12.2% year over year. Operating income growth, lower share count and currency benefits offset a weak top line to result in the earnings beat. Currency benefited third-quarter earnings by 3 cents per share.
During the quarter, net sales declined 1.5% year over year to $2.14 billion and missed the Zacks Consensus Estimate of $2.22 billion by 3.6%. Excluding currency benefits, revenues declined 3.5% due to weak volumes.
Coca-Cola Enterprises is the Western European bottler of The Coca-Cola Company (KO) and is thus exposed to the economic uncertainties of this region, including the debt burdens of some of these countries and the challenging consumer spending environment.
A challenging retail consumer and competitive environment in Great Britain and poor weather conditions in France in the early part of the quarter led to the poor results.
Operating Income Increases
Despite the poor top-line performance, adjusted operating income grew 5.5% to $338 million driven by lower operating costs and cost of sales. On a currency neutral basis, adjusted operating income grew 2.5%. The company’s cost of sales per case declined 1% in the quarter. Operating expenses declined 3% in the quarter driven by the company’s cost savings and productivity initiatives.
Volume and Pricing Update
Volumes declined 4% in the quarter, much worse than an increase of 3.5% in the preceding quarter. This was due to poor weather conditions in France and the ongoing macroeconomic headwinds and competitive pressure.
Volumes declined 2.5% in Great Britain and 5% in continental Europe.
Both sparkling and still beverages declined 4%. The sparkling beverage decline was led by Coca-Cola trademark brands which went down 3.5%. The company’s energy brands grew 5.5% in the reported quarter.
Net pricing per case remained flat, same as in the previous quarter.
2014 Outlook
Management expects the ongoing economic softness and operating challenges to persist in the near term.
As such, though management maintained the previously provided earnings per share outlook, it lowered the expectations for revenues and operating income.
In 2014, adjusted earnings are still expected to increase approximately 10% in constant currency.
However, adjusted constant currency net sales are now expected to be flat as against previous expectation of its being at the lower end of the previously disclosed range of low-single-digit growth.
Similarly, adjusted constant currency operating income is now expected to increase in a low single-digit range instead of the previous expectation of the lower end of the previously disclosed range of mid single-digit range growth.
We would like to remind investors that this is the second time in the last two months that the company has lowered the sales and operating income outlook.
Moreover, according to recent rates, currency is expected to benefit 2014 earnings per share by approximately 3%, lower than prior expectation of less than 4%.
Also, the sales and profit guidance range are far below the company’s long-term targets. Over the long term, net sales are expected to grow in the 4–6% range and operating income in the range of 6–8%.
Though the earnings per share guidance of approximately 10% growth is above the long-term target of high single-digit range, we believe it will be mostly driven by share buybacks.
Other Stocks to Consider
Better-ranked beverage stocks include Keurig Green Mountain, Inc. (GMCR) and Monster Beverage Corporation (MNST). Both companies have a Zacks Rank #2 (Buy).
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