The Coca-Cola Company (KO) reported mixed first-quarter results beating the Zacks Consensus Estimate for earnings but marginally missing the revenue estimates. Overall, the results were hurt by two fewer selling days in the quarter and currency headwinds.
Coca-Cola’s first-quarter 2013 adjusted earnings of 46 cents per share marginally beat the Zacks Consensus Estimate of 45 cents by a penny. Moreover, earnings grew almost 5% from the prior-year quarter as revenue decline was offset by significantly improved margins. Lower taxes and share count (due to significant share buybacks) also boosted earnings in the quarter.
Revenues and Margins
In the quarter, net revenue declined 1% year over year to $11.04 billion, as benefits from volume growth and concentrate (syrups, powders etc. used in finished beverages) sales were largely offset by a flat price/mix and headwinds from currency and structural changes. Two fewer selling days in the quarter also hurt revenues. Constant currency revenues increased 2% in the quarter as currency hurt revenues by 2%. The top-line results marginally missed the Zacks Consensus Estimate of $11.06 billion.
The company recorded adjusted consolidated gross margin of 61.5% in the first quarter of 2013, up 80 basis points (bps) year over year as the top-line decline was offset by higher cost of sales.
Adjusted selling, general and administrative (SG&A) expenses were flat on a currency neutral basis at $4.18 billion driven by better operating expense leverage despite two fewer selling days in the quarter and increased brand investments.
Adjusted operating margin was 23.7% in the quarter, up 70 bps year over year and 200 bps sequentially. Operating margins gained from gross margin expansion and improved operating expense leverage. The constant currency operating income increased 5% to $2.61 billion in the quarter. Currency hurt operating income by 3% in the quarter.
Volume and Pricing Growth in Detail
The cola giant witnessed volume growth of 4% in the reported quarter better than last quarter’s 3% growth. International volumes grew 5% against a 3% increase in the Americas. The company saw volume growth in Eurasia and Africa and Latin America while Europe, Japan and China showed some improvement from fourth-quarter levels.
Among the non-alcoholic ready-to-drink (:NARTD) beverages, sparkling beverages, like Coca Cola, Fanta and Sprite, grew 3% in terms of volume, better than last quarter’s 1% growth. Specifically, Coke volumes grew 3%.
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, KO is trying to re-invigorate sales of its soft drinks by introducing new stevia (a non-nutritive sweetener) based products, innovative packaging and stronger merchandising solutions to cater to the ever-changing needs of its consumers. We believe these efforts may have led to the sequential improvement in sparkling beverage volumes.
Still beverages such as Minute Maid, Simply and POWERade grew 6% in terms of volume, registering higher volume growth than the popular soft drinks as consumers have grown health conscious. However, still beverage volumes were lower than last quarter’s 9% growth. Coca-Cola is slowly expanding its portfolio of non-carbonated drinks to reduce its huge dependence on carbonated beverages. Among the still beverages, while ready-to-drink tea grew in double-digits, energy drinks and juice and juice drinks recorded high single-digit growth in the quarter.
The impact of price/mix was flat in the quarter as pricing gains were offset by headwinds from geographic mix. The Latin America and Eurasia & Africa segments showed some positive growth.
Geographically, the Eurasia & Africa division recorded revenues of $669 million, up 9% over the prior-year quarter driven by growth in volume, price/mix and concentrate sales which offset headwinds from currency. Constant currency revenues increased 13% in the quarter.
The segment witnessed volume growth of 15% year over year led by 17% organic growth in Middle East and North Africa region. Sparkling beverages volume was up 12% versus 26% volume growth for still beverages. Adjusted operating income was up 13% on a currency neutral basis in the quarter to $284 million driven by volume, pricing and product mix gains which offset the impact from higher brand building investments.
The Latin America segment recorded revenues of $1.23 billion, up 4% from the prior-year quarter levels driven by benefits from concentrate sales, positive volume and price/mix, which offset the headwinds from currency and structural changes. Constant currency revenues increased 9% in the quarter.
Volumes increased 4% in the segment, with Brazil, South Latin, Latin Center and Mexico all showing positive volume growth. Volume growth, however, lagged 5% growth witnessed in the prior-year quarter. Sparkling beverages volume was up 2% versus 11% volume growth for still beverages. Adjusted operating income was up 9% on a currency neutral basis to $763 million in the quarter, benefiting from volume growth and favorable pricing which offset headwinds from higher brand building investments and two fewer selling days in the quarter.
The North America segment recorded revenues of $4.89 billion, down 1% due to structural changes and two fewer selling days in the quarter. North American volumes grew 1% in the quarter.
Sparkling beverage volume declined 1% against 6% volume gain for still beverages as Americans are increasingly avoiding sugary sodas. Adjusted operating income declined 3% on a currency neutral basis to $491 million in the quarter due to two fewer selling days in the quarter.
The Pacific segment recorded revenues of $1.39 billion, down 4% over the prior-year quarter due to geographic/product mix and currency headwinds. Constant currency revenues were flat in the quarter.
The Pacific Group’s volume grew 3% in the quarter, representing a sequential improvement from fourth quarter levels. Volumes grew in high single-digits in India. China and Japan showed some improvement from fourth-quarter declines, both growing 1% in the quarter. China volumes improved due to the timing of the Chinese New Year which partially offset headwinds from poor weather conditions and economic slowdown in the country. Volumes grew in Japan due to improved sparkling beverage sales which gained from strong marketing campaigns.
Adjusted operating income was up 4% on a currency neutral basis to $610 million in the quarter.
The Europe segment recorded revenues of $1.18 billion, down 2% over the prior-year quarter due to unfavorable weather in March and overall economic headwinds. Constant currency revenues declined 3% in the quarter as both volume and price/mix were flat and concentrate sales declined 2%. Volumes were flat in the quarter, better than last quarter’s 5% decline as Great Britain returned to positive growth and Germany grew 3%.
Adjusted operating income declined 1% on a currency neutral basis to $683 million due to two fewer selling days in the quarter.
U.S. Bottler Deal
In another press release, Coca-Cola announced that it was granting new expanded U.S. territories to five of its bottling companies to distribute its beverages, under its new beverage partnership model.
Other Stocks to Consider
Coca-Cola currently carries a Zacks Rank #4 (Sell). Another beverage company that is currently doing well is Molson Coors Brewing Company (TAP) carrying a Zacks Rank #2 (Buy).Read the Full Research Report on KO
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