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Mixed 3Q for Coca-Cola Enterprises

Zacks Equity Research

Coca-Cola Enterprises’ (CCE) third quarter 2012 adjusted earnings (excluding the impact of restructuring charges and mark-to-market commodity hedges) of 71 cents per share beat the Zacks Consensus Estimate of 69 cents by 2.9%.

However, earnings declined by a penny (or 1.4%) from the prior-year quarter, pulled down by currency headwinds and net sales decline.

Quarterly Details

During the quarter, net sales declined 3.5% to $2.1 billion, including the impact of the French excise tax (FET) increase and 8.5% currency headwind. Excluding the impact of both FET and currency headwind, organic revenues grew 2.5%. Reported revenue was in line with the Zacks Consensus Estimate.

The company reported 0.5% volume growth in the quarter, driven by favorable weather. Volume growth was also driven by double-digit growth in Coca-Cola Zero and energy drinks, and increase in sparkling flavored beverages.

The company’s net pricing per case grew 4.5% and cost of goods per case increased 5.5% in the quarter, including FET. However, excluding the FET impact, net pricing per case increased 2.5% and cost of goods per case increased 2.0%.

Adjusted gross profit in the quarter decreased 5.3% year over year to $767 million due to lower revenues. Adjusted operating income decreased 9.6% to $306 million due to currency headwinds and lower gross margins.

Other Financial Update

During the reported quarter, Coca-Cola Enterprises repurchased $225 million shares under its new share repurchase program worth $1.0 billion, which was announced in January 2012.

Fiscal 2012 Guidance

Despite a tough quarter, the company’s underlying guidance remained largely unchanged. In fact, it was increased slightly.

The company expects fiscal 2012 adjusted earnings per diluted share to be within $2.20 to $2.24 compared to the previous guidance of $2.18 to $2.24; including currency headwinds of 8% (prior expectation was a 10% headwind).

Constant currency net sales are expected to grow in a low to mid-single-digit range, lower than prior expectations of a mid-single digit growth due to macroeconomic challenges and the French Excise tax.

The solid marketing programs launched during the London Olympics together with easing comparisons, cost saving efforts, and share buybacks are expected to help the company meet its targets.
For 2012, the company continues to expect free cash flow to be in the range of $475 million to $500 million. Capital expenditure is expected to be in the range of $375 million–$400 million. The effective tax rate is expected to range between 26%–28%.

We currently have a Neutral recommendation on Coca-Cola Enterprises, a peer of Pepsico Inc, (PEP). The stock carries a Zacks #2 Rank (a short-term Buy rating).

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