The Coca-Cola Company (KO) reported another dull quarter, missing the Zacks Consensus Estimate for revenues and only managing to meet earnings expectations in the fourth quarter of 2013 as U.S. beverage sales slowed down.
Adjusted earnings of this Zacks Rank #4 (Sell) company were 46 cents per share, in line with the Zacks Consensus Estimate.
Currency hurt earnings growth by 5% as a strong dollar lowered the value of the company’s ex-U.S. sales. Earnings grew 7% year over year on a constant currency basis as strong gross margins and lower taxes made up for soft revenues and margins.
Revenues and Margins
In the quarter, net revenue declined 4% year over year to $11.04 billion due to headwinds from currency and structural changes. Revenues also missed the Zacks Consensus Estimate of $11.3 billion.
Currency and structural changes hurt revenues by 2% and 5%, respectively. Adjusting for the impact of currency and structural changes (primarily bottler merger in Brazil and the sale of 51% stake in the Philippines bottler), constant currency revenues increased 4% in the quarter. Both volumes and price/mix gains were lower than the third-quarter levels.
Adjusted consolidated gross margins improved 60 basis points (bps) in the quarter to 60.8%. Adjusted operating margin was 21.6% in the quarter, down 10 bps year over year, as strong gross margins were offset by increased marketing expenses. Adjusted operating income on a constant currency basis increased 6% to $2.38 billion in the quarter.
Currency hurt operating income by 6% in the quarter, at the higher end of management’s expected range of 5% to 6% due to the weakening of many emerging market currencies.
Volume and Pricing Growth in Detail
The cola giant witnessed 1% volume growth in the reported quarter, lower than 2% in the previous quarter. Volumes improved in Europe, India, China and Japan, but slowed down in North America and Latin America.
Volumes declined 1% in North America due to softer volume trends of sparkling beverages. Changing consumer preferences, increasing health consciousness, rising obesity concerns and growing regulatory pressures are affecting sales of sparkling beverages like Coca Cola, Fanta and Sprite in America. Last week, PepsiCo, Inc. (PEP) and Dr Pepper Snapple Group, Inc. (DPS), also announced a dip in their American carbonated soft drink volumes.
Coca-Cola is looking to revive the business through increased marketing investments and package and product innovation. Another step in the direction is Coca-Cola’s latest deal with Green Mountain Coffee Roasters, Inc. (GMCR).
Under the deal, Green Mountain will exclusively make Coca-Cola-branded pods for use on its upcoming Keurig Cold at-home beverage system that will make cold beverages. The partnership deal will allow Coca-Cola to tap the fast-growing cold beverage market and give it the much-needed diversification from its traditional soft drinks.
In Latin America, volumes were flat as the key markets of Brazil and Mexico continued to be weak due to difficult economic conditions.
After slowing down in the first half, volumes rebounded in key markets of China and India in the second half due to improved weather conditions and better execution. Improved sparkling beverage volumes and consolidation of Innocent (juice and smoothies) Brands acquired from Fresh Trading Ltd. in May 2013 helped the European business.
Among the non-alcoholic ready-to-drink beverages, while still beverages showed some improvement from the third quarter, sparkling beverages volumes slowed down.
Sparkling beverage volumes were flat in the quarter, which compared unfavorably with 1% growth in the third quarter. Still beverages such as Minute Maid, Simply and POWERade grew 6% in terms of volume much better than previous quarter’s growth of 3%.
Price/mix increased 1% in the quarter lower than 2% in the third quarter as positive growth in Latin America, Eurasia and Africa and Europe segments was offset by declines in the Pacific region. Price/mix grew just 1% in North America.
Annual Results
In fiscal 2013, revenues declined 2% to $46.85 billion also missing the Zacks Consensus Estimate of $47.18 billion. On a constant currency basis, revenues grew 3%.
Core earnings per share of $2.08 also missed the Zacks Consensus Estimate of $2.09 by a penny. Core earnings grew 3% year over year on a constant currency basis.
New Restructuring Plan
The company announced plans to expand its productivity and reinvestment program to generate $1 billion in productivity savings by 2016. The $1 billion in savings will be in addition to the $550 to $650 million expected to be saved annually over a four-year period from 2012 through 2015 under the current plan. The incremental savings will be used toward brand building through increased media investments, thereby boosting long-term profitability.
2014 Outlook
The company did not provide specific revenue or earnings guidance. The structural changes (bottler merger in Brazil and the sale of 51% stake in the Philippines bottler) completed in 2013 are expected to hurt 2014 net sales and operating income by 1%.
Foreign exchange is expected to hurt first-quarter operating income by 10% and full-year operating income by 7%.
The company expects share repurchase to range between $2.5 and $3.0 billion.
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