The Coca-Cola Company KO could not sustain the strong first-half performance, as third-quarter sales missed the Zacks forecast despite improved volumes and pricing due to currency headwinds.
Also, the beverage giant expects higher negative currency impact on full-year sales and profits than its previous guidance. Shares declined around 1.5% in pre-market trading.
Earnings Beat
Third-quarter 2015 adjusted earnings of the maker of Coke and Fanta were 51 cents per share which beat the Zacks Consensus Estimate of 50 cents by 2%.
Earnings declined 4% year over year due to a strong dollar eroding the value of its overseas sales. Excluding the 12% negative Fx impact, earnings increased 8% as improved organic revenues made up for the relatively weaker margins.
Earnings have been adjusted mainly to incorporate charges related to the North American re-franchising initiative and costs associated with productivity program. Including these, reported earnings were 33 cents per share, down 31% year over year.
Organic Revenues Continue to Improve
Net revenue declined 5% year over year to $11.43 billion due to currency headwinds.
Currency headwinds hurt sales by 8%, higher than management’s expectations of 7%. With more than half of its revenues coming from outside the U.S., Coca-Cola’s sales/profits were affected by the weakening of many emerging market currencies against the U.S. dollar.
Adjusting for the impact of currency, organic revenues went up 3% driven by improved volume and pricing. Revenues, however, marginally beat the Zacks Consensus Estimate of $11.61 billion.
Margins Weak
Adjusted consolidated gross margins declined 50 basis points (bps) year over year and 80 bps sequentially to 60.7% as positive pricing and productivity gains were offset by currency headwinds.
Adjusted selling, general and administrative (SG&A) expenses increased 1% on a currency-neutral basis to $4.21 billion due to higher marketing expenditure.
Adjusted operating income, on a constant currency basis, increased 8% to $2.71 billion. Adjusted operating margin was 23.7%, flat year over year as lower gross margins and higher marketing investments offset strong cost management and productivity gains. Operating margins declined 230 bps sequentially.
Profit-before-tax (PBT) declined 5% to $2.89 billion. Currency hurt PBT by 12%, worse than the expectation of 10%. Structural changes had a negative impact of 1% on PBT. Excluding currency headwinds and structural changes, PBT improved 8% as strong profits in North America made up for the declines in Asia-Pacific and Europe.
Volume and Pricing
Coca-Cola witnessed 3% volume growth in the third quarter, better than 2% in the previous quarter as both still and sparkling beverages volumes improved.
Sparkling beverage volumes grew 2%, higher than 1% in the second quarter. The Coca-Cola brand grew 1%, same as the previous quarter. Coke Zero climbed 8%, while Fanta and Sprite grew in a low single-digit range. Diet Coke, however, declined 8% as the diet drinks are coming under pressure due to increasing consumer concern regarding the use of artificial sweeteners.
Still beverages grew 6% in terms of volume, better than 5% in the last quarter supported by growth in teas, packaged water and sports drinks.
In North America, volumes grew 1%, lower than 2% in the earlier quarter, as improved volumes of still beverages were offset by decline in sparkling sodas. On the contrary, peer, PepsiCo, Inc. PEP witnessed improved volumes in its North Americas Beverage segment in the third quarter, per results announced earlier this month.
Among other developed nations, volumes improved in Europe, while it declined in Japan. European volumes rose 4%, better than 1% in the previous quarter. Japan volumes declined 2%, worse than 1% growth in the second quarter.
Among the developing countries, 5% volume growth in China and 4% in India were offset by declines in Russia and Brazil.
Price/mix increased 3%, better than 1% in the previous quarter driven by the company’s new pricing and packaging initiatives in key markets like North America and a favorable geographic mix.
While Latin America and North America continued to show growth due to the company’s new pricing strategies, price/mix improved in Asia Pacific. However, price/mix declined in Eurasia and Africa but remained flat in Europe.
2015 Outlook
In 2015, the adjusted constant currency earnings per share are expected to increase 5%. Previously, management expected the number to go up in a mid single-digit range.
Foreign exchange is expected to hurt 2015 revenues by 7% (previously 6%), operating income by 11% (maintained), and PBT by 8% (earlier 7–8%).
Structural changes are expected have a 1% negative impact on revenues and PBT.
The company still expects to buy back shares worth $2.0 billion to $2.5 billion in 2015. Productivity savings are expected to be $500 million in 2015. Adjusted effective tax rate is likely to be 22.5%.
2015 – A Transition Year
2015 has been a “transition year” for Coca-Cola because of the changes implemented to create a new operating model. The company has undertaken aggressive cost-cutting and several initiatives to drive faster growth this year. The resultant savings are being used to fund marketing programs and innovation to re-accelerate top-line growth, margin expansion and returns on capital.
The company is also re-franchising the majority of its company-owned North American bottling territories to create a more efficient system. It has been divesting and merging many bottling operations since 2014 to revamp its bottling system and thereby improve margins and drive growth. Three of its European bottlers — Coca-Cola Enterprises, Inc. CCE, Coca-Cola Iberian Partners and Coca-Cola Erfrischungsgetränke AG — will merge to form a new Western European bottler named Coca-Cola European Partners.
Moreover, Coca-Cola has made equity investments in smaller companies, like Keurig Green Mountain and Monster Beverage Corporation MNST, to enhance growth in key categories.
Currently, Coca-Cola has a Zacks Rank #3 (Hold).
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