The Coca-Cola Company
) posted mixed results in the second quarter of 2014, beating the
Zacks Consensus Estimate for earnings but slightly missing the same
However, an improvement in volume of sparkling beverages like
Coca-Cola, Fanta and Sprite caught investors' attention. These
sodas have been seeing declining sales trends since the past few
quarters due to carbonated soft drinks (CSD) category headwinds.
Growing health and wellness consciousness, vigilance among
consumers about the use of artificial sweeteners, high sugar
content and related obesity concerns are affecting the demand for
CSD and thereby hurting sales of Coca-Cola as well as other soft
drink makers like
Dr Pepper Snapple Group, Inc.
Second-quarter 2014 adjusted earnings of this Zacks Rank #3
(Hold) company were 64 cents per share, which beat the Zacks
Consensus Estimate of 63 cents by a penny.
Earnings increased 1% year over year (6% on a constant currency
basis) driven by improved sparkling beverage volumes, price/mix
gains, strong international volumes and better gross margins.
The Coca-Cola Company - Earnings Surprise |
Revenues and Margins
In the quarter, net revenue declined 1% year over year to $12.57
billion due to headwinds from currency and structural changes.
Revenues also missed the Zacks Consensus Estimate of $12.85
Currency and structural changes hurt revenues by 2% and 3%,
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 completed in 2013), constant
currency revenues increased 3% in the quarter as volumes were
better than the past two quarters.
Adjusted consolidated gross margins improved 30 basis points
(bps) year over year and 60 bps sequentially in the quarter to
61.5% as strong volume performance made up for higher commodity
Adjusted selling, general and administrative (SG&A) expenses
increased 4% on a currency-neutral basis and came in at $4.39
billion due to higher marketing expenses.
Despite headwinds from accelerated marketing investments,
adjusted operating income on a constant currency basis increased 5%
to $3.33 billion in the quarter. Better gross margins were offset
by higher marketing expenses to result in flat operating expense
leverage in the quarter. Adjusted operating margin was 26.5% in the
quarter, down 30 bps year over year.
Currency hurt operating income by 4% in the quarter less than
management's expectation of 7% due to the decrease in
bolivar-denominated revenues and operating income. Structural
changes hurt operating income by 3%.
Volume and Pricing Growth in Detail
The cola giant witnessed 3% volume growth in the reported
quarter, better than 2% and 1% in the previous two quarters. While
volumes were flat in North America, the same grew 3% in the
In North America, while still beverage volume improved 1%,
sparkling beverages remained flat in the quarter. However,
sparkling beverage volumes were better than a decline of 1% seen in
the first quarter gaining from the sponsorship of the FIFA World
Cup and increased marketing support through strong integrated
marketing campaigns like Share a Coke. Although Fanta and Sprite
saw gains in North America, sales of Diet Coke remained soft.
Among other developed nations, Japan and Europe performed well.
European volumes improved from last quarter due to strong
activation around the FIFA World cup, favorable shift in Easter
timing and better volumes in Germany than in the first quarter.
Japan volumes grew 1% despite an increase in consumption tax in the
Among the developing countries, 9% growth in China was offset by
softness in Brazil, Mexico and Russia. While higher taxes on sugar
sweetened beverages hurt volumes in Mexico, Brazil's volumes were
flat this quarter due to aggressive competitive activity and
overall macroeconomic slowdown. Russia volumes declined at a mid
Among the non-alcoholic ready-to-drink beverages, sparkling
beverages showed a remarkable improvement in the quarter. However,
still beverages slowed down from last quarter due to slowdown in
Sparkling beverage volumes grew 2% in the quarter, much better
than a decline of 1% in the first quarter due to increased media
investments around the FIFA World Cup and the "Share a Coke"
campaign. The Coca-Cola brand grew 1% in the quarter. Sprite and
Fanta increased 6% and 2%, respectively.
Still beverages such as Minute Maid, Simply and POWERade grew 5%
in terms of volume, slower than previous quarter's growth of 8% as
positive growth in teas, packaged water and sports drinks was
partially offset by a 1% decline in juice and juice drinks. Higher
pricing to combat increased commodity costs hurt juice volumes in
Price/mix increased 2% in the second quarter same as in the
first as all the geographic segments - Latin America, Eurasia and
Africa, Europe and North America - showed positive growth. However,
the Asia Pacific region was flat in the quarter; nevertheless
better than the decline witnessed last quarter.
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 second-half 2014 net sales and operating income by
1-2% and 3%, respectively.
Foreign exchange is expected to hurt second-half operating
income by 3% and full-year operating income by 6%, an improvement
from its previous expectation of 7%.
The company expects share repurchase to range between $2.5
billion and $3.0 billion.
The effective tax rate is expected to be slightly lower than
2013 at 23.5% in 2014.
Overall, though 2013 revenues and profits fell short of
management's expectations, it aims to accelerate growth in its
"year of execution" - 2014. The company expects to resume growth in
2014 through aggressive investments across marketing, innovation,
product development, infrastructure, distribution and overall
In 2014, the company plans to accelerate growth of sparkling
beverages (led by Coca-Cola), expand its still beverage portfolio
and increase its brand building investments.
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