Coca-Cola's Earnings Meet, Sales Miss - Analyst Blog
The Coca-Cola Co. ( KO ) reported third-quarter 2013 adjusted earnings of 53 cents per share, in line with the Zacks Consensus Estimate. Earnings grew 4% year over year owing to volume and pricing improvement. Decent operating margin growth also contributed to earnings. Currency, however, hurt earnings growth by 5%.
Revenues and Margins
In the quarter, net revenue declined 3% year over year to $12.03 billion, missing the Zacks Consensus Estimate of $12.05 billion. The year-over-year decline was due to currency headwinds (2%) and structural changes (4%), which more than offset the benefit of concentrate sales (1%).
Excluding transaction gains and other items, revenues declined 2% to $12.12 billion. However, adjusting for the impact of currency and structural changes, constant currency revenues increased 4% in the quarter. Improved volume growth and positive pricing in many markets led to the increase in sales.
The company recorded adjusted consolidated gross margin of 60.0% in the quarter, down 30 basis points (bps) year over year due to weak top-line performance, which offset the lower cost of sales.
Adjusted selling, general and administrative (SG&A) expenses declined 4% on a currency-neutral basis and came in at $4.4 billion owing to better operating expense leverage.
Adjusted operating margin was 23.5% in the quarter, up 90 bps year over year, gaining from improved operating expense leverage. Adjusted operating income on a constant currency basis increased 2% to $2.85 billion in the quarter. Currency hurt operating income by 5% in the quarter, worse than management's expectations of 4%.
Volume and Pricing Growth in Detail
The cola giant witnessed 2% volume growth in the reported quarter, lower than last year's 4% growth. Social unrest in southeast Europe and Brazil hurt volumes. However, it improved sequentially as weather conditions improved in some of the markets in the quarter. Management also expects better volume growth in the second half of 2013.
Volumes grew only 1% in the Americas as 2% positive growth in North America was partially offset by flat volumes in Latin America. In Latin America, the key markets of Brazil and Mexico underperformed. International volumes grew 3% as decent volume growth in Pacific, Eurasia and Africa was offset by weakness in Europe. Improved weather conditions in China and India led to volume gains in the quarter. In addition, Coca-Cola gained volume and value market share in both sparkling and still beverage categories.
Among the non-alcoholic ready-to-drink (NARTD) beverages, sparkling beverages, like Coca Cola, Fanta and Sprite sales improved 1% in the quarter, down from 3% growth in the last year quarter. Specifically, Coke volumes grew 2%.
Changing consumer preferences, increasing health consciousness, rising obesity concerns, possible new taxes on sugar-sweetened beverages and growing regulatory pressures are affecting sales of carbonated beverages of Coca-Cola as well as other soft drink companies like PepsiCo, Inc. ( PEP ) and Dr Pepper Snapple Group Inc. ( DPS ).
Accordingly, Coca-Cola is trying to re-invigorate sales of its soft drinks by conducting strong integrated marketing campaigns, offering more choices to customers in package sizes, sweeteners and beverages (including more low- and no-calorie selections) and providing transparency in labeling.
Still beverages such as Minute Maid, Simply and POWERade grew 3% in terms of volume, registering substantially higher volume growth than the popular soft drinks and reflecting consumers' growing health consciousness. However, growth was lower than the previous quarter's growth of 6% and last year's growth of 10%. Among the still beverages, ready-to-drink tea grew 5% and packaged water grew 5%. Energy drinks and juice/juice drinks recorded 4% growth in the quarter.
Price/mix increased 2% in the quarter as compared to flat price/mix in the prior quarter. The improvement was led by positive growth in Latin America and Europe segments, which offset the pricing declines in Eurasia and Africa and Pacific. Price/mix was flat in North America.
The company did not provide specific revenue or earnings guidance. The recent structural changes (bottler merger in Brazil and the sale of 51% stake in the Philippines bottler) are expected to hurt 2013 net sales by 3% and operating income by 1%.
Foreign exchange is expected to hurt fourth-quarter operating income by 5% to 6%, while it will unfavorably impact full year operating income by 4%. Further, the company anticipates that the Philippine bottling transaction, together with the bottling transaction in Brazil, will have a 1% structural impact on full-year 2013 operating income, with this decline being offset by a related improvement in equity income.
Operating expense leverage is expected to be in low single-digits in 2013. Share repurchase guidance stands at $3.0 billion-$3.5 billion.
Coca-Cola currently holds a Zacks Rank #4 (Sell). One beverage company, which is better placed is Coca-Cola Enterprises Inc ( CCE ) with a Zacks Rank #2 (Buy).
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