The Coca-Cola (KO) Company based in Atlanta released its second quarter earnings on July 22 and recorded negative growth in revenue which fell 1.4% to $12.6 billion missing analysts’ estimates of $12.8 billion for the quarter. An analyst of Morgan Stanley commented soon after the earnings’ call – “Coke’s Q2 was weaker than expected.”
Let’s dive in to find out the positives and negatives in the earnings call.
Sales volume shows momentum
The company reported worldwide volume growth of 3% for the second quarter and 2% year to date, driven by the strong product portfolio featuring in its kitty.
Worldwide sparkling sales grew 2% for the quarter and this was backed by gain in volume and value share of global core sparkling beverages. Also the marketing campaigns in many of the overseas markets aided in the sales volume increase of Coke by 1%, Sprite up 6% and Fanta up 2%, all of these witnessed in the second quarter.
Worldwide beverage sales volume grew by 5% for the quarter, with a solid rise in volume across multiple beverage categories – tea, packaged water and sports drinks saw increases of 4%, 7% and 6%, respectively. However, this was partially offset by a 1% decline in sales witnessed in the juices segment that stemmed from a price increase of the juices portfolio in North America to meet the higher input costs.
A bit of stress on revenue and income
In 2013, the Bottling Investment Group (BIG) of Coca-Cola underwent certain structural changes which included the major deconsolidation of the Brazilian bottling operations and the restructuring of the company-owned juice operations in Russia. Such steps taken by the company have impacted the net revenues for this quarter which fell by 1%. Also, the Venezuelan government has enacted a new provision that imposes a maximum threshold for profit margins. This has also affected the revenue and operating income generated in Venezuela by the company.
Barring the impact of the structural changes, the net revenue rose 3% this quarter, reflecting a 2% increase in concentrate sales and 2% favorable price mix.
Also the structural changes reduced the operating income by 2% from that reported a year ago. Excluding the effect, operating income actually increased 5% as improving gross margins in the quarter were largely offset by an increase in marketing investments, resulting in even operating expense leverage.
Net income fell 3 percent to $2.6 billion, or 58 cents a share, from $2.68 billion, or 59 cents, a year ago. Excluding some items, earnings were 64 cents a share, compared with the 63 cents average estimated by Bloomberg analysts.
Cash position remains solid
Irrespective of the current headwinds taking a toll on the top and bottom lines of the company, the cash from operations was up 13% year to date standing at $4.5 billion, attributable to cycling incremental pension contributions of last year and efficient working capital management that were partly offset by restructuring and deconsolidations.
Share repurchase for investors
In the second quarter, Coca-Cola returned $1.3 billion cash to its stockholders through share repurchases which soothed investors’ nerves worried about the results. This repurchase reflects the expectation set by the management to achieve net share repurchase of between $2.5 billion to $3.0 billion by the end of the year.
Though there are challenges to meet due to the effect of the structural changes that could drag the top and bottom line of the company to a limited extent, Coca-Cola looks all set to please its shareholders. The investors need not worry much and should wait and watch for more updates in the coming quarters.