Refreshing Sales Beat at Coca-Cola - Analyst Blog

The Coca-Cola Company KO started 2014 on a positive note, beating the Zacks Consensus Estimate for revenues in the first quarter while meeting earnings expectations as volumes gained slightly.

This is the first time that Coca-Cola has beaten the Zacks Consensus Estimate for sales in the past six quarters. Shares were up 2% in pre-market trading.

First-quarter 2014 adjusted earnings of this Zacks Rank #4 (Sell) company were 44 cents per share, in line with the Zacks Consensus Estimate.

Earnings declined 4% on a year-over-year basis due to currency headwinds as a strong dollar lowered the value of the company's ex-U.S. sales. Earnings grew 5% year over year on a constant currency basis as positive price/mix gains, strong developing market volumes and cost control made up for higher marketing costs.

Revenues and Margins

In the quarter, net revenue declined 4% year over year to $10.58 billion due to headwinds from currency and structural changes. However, revenues beat the Zacks Consensus Estimate of $10.56 billion helped by better pricing and volume growth than previous quarter.

Currency and structural changes hurt revenues by 4% and 2%, 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 2% in the quarter. Both volumes and price/mix gains were better than the fourth-quarter 2013 levels.

Adjusted consolidated gross margins declined 60 basis points (bps) in the quarter to 60.9%.

Adjusted selling, general and administrative (SG&A) expenses were flat on a currency-neutral basis and came in at $3.99 billion as solid cost control helped offset the increased marketing expenses.

Despite headwinds from one less selling day, shift of Easter timing and accelerated marketing investments, adjusted operating income on a constant currency basis increased 7% to $2.46 billion in the quarter. Better operating expense leverage and solid cost control pulled up profits in the quarter. Adjusted operating margin was 23.2% in the quarter, down 50 bps year over year.

As expected, currency hurt operating income by 10% in the quarter due to the weakening of many emerging market currencies.

Volume and Pricing Growth in Detail

The cola giant witnessed 2% volume growth in the reported quarter, better than 1% in the previous quarter. While volumes were flat in North America, they grew 2% in international markets.

However, Coca-Cola's North American volume performance was better than a 1% decline seen last quarter due to accelerated media investments around Super Bowl and Sochi 2014 Winter Olympics programming. In North America, while still beverage volume improved 3%, sparkling beverages declined 1%.

Coca-Cola is struggling with sluggish volume trends of its sparkling beverages in North America due to carbonated soft drinks CSD category headwinds. Last month, Beverage Digest, a leading beverage industry newsletter said that CSD volumes declined 3%, the ninth straight year of decline for CSDs.

The CSD category is suffering to growing health consciousness since consumers have become particularly vigilant about the use of artificial sweeteners, high sugar content and related obesity concerns. Also, possible new taxes on sugar-sweetened beverages and growing regulatory pressures are affecting the CSD sales. These challenges have also been felt by other major soft drink makers — PepsiCo, Inc PEP and Dr Pepper Snapple Group, Inc DPS — leading to lower volumes and weak sales.

Overall, developed market volumes declined 1% as positive growth in Japan and Australia was offset by 4% decline in Europe. European volumes were hurt by a shift in Easter timing from first quarter last year to second quarter this year and weak sparkling beverage volume in Great Britain.

In developing/emerging markets, volumes grew 3% as both China and Brazil showed sequential improvement. While strong marketing campaigns around the Chinese New Year improved volumes by 12% in China, activation of the FIFA World Cup, Carnival holiday and better weather conditions led to renewed momentum in the Brazil business. Volumes grew 6% in India and Russia.

Among the non-alcoholic ready-to-drink beverages, while still beverages showed improvement from the previous quarter, sparkling beverages volumes slowed down.

Sparkling beverage volumes declined 1% in the quarter, which compared unfavorably with flat growth in the fourth quarter. A shift in Eater holiday timing and double digit decline in Great Britain offset decent sparkling beverage sales in China.

Still beverages such as Minute Maid, Simply and POWERade grew 8% in terms of volume better than previous quarter's growth of 6%.

Price/mix increased 2% in the quarter better than 1% in the fourth quarter of 2013 as positive growth in Latin America, Eurasia and Africa and Europe segments was offset by declines in the Asia Pacific region. Price/mix was flat in North America.

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 second-quarter as well as full-year operating income by 7%.

The company expects share repurchase to range between $2.5 billion and $3.0 billion while effective tax rate will be 23.0%.

Other Stocks to Consider

A better ranked beverage maker is Monster Beverage Corp. MNST which carries a Zacks Rank #2 (Buy).