The beverage giant, Coca-Cola (KO, Financial), posted its third quarter earnings on Tuesday, and soon after, its share price fell as the results were dramatically below the Street consensus. The management has come up with a cost-cutting plan of action to restore the declining sales, especially in the U.S. where buyers are not purchasing soft drinks for health reasons. Let’s have a sneak peek into the quarter earnings and have a brief look at the upcoming strategies to keep its market share safe against rivals like PepsiCo (PEP, Financial), which posted a much better quarter.
A peek into the dull numbers
The world’s largest beverage maker reported flat revenue of $11.97 billion, which failed to meet analysts’ estimates of $12.12 billion. Global soft drinks volume was even this quarter growing at only 1% year to date, adversely affected by macroeconomic headwinds and adverse weather in some regions. However, the company gained volume, mainly due to the success rate of the “Share a Coke” marketing campaign around the world.
What was notable was the fall in volume of soft drink sales seen in North America which remains to the chief operating market for the beverage honcho. Also, unit case volume was down by 5% in Europe, but this was partially offset by 5% growth in Eurasia and African markets. This clearly reflects the fact that the company is failing to pick up the sales momentum in developed markets where its sales are nearing the saturation level.
Overall, the beverage volume grew 2% in the quarter, with tea contributing 4% and water and energy drinks each growing 7% by volume.
Net income also declined to $2.1 billion, from $2.4 billion reported a year ago. This translates to $0.48 per share as earnings, from $0.54 per share reported a year earlier. Excluding charges for re-franchising some North American bottling plants, earnings per share stood at $0.53 a share, which was in line with the Street consensus.
But the stock market reacted by pulling share price down by 4%, as the company expects to miss its long-term earnings growth target projected for the fiscal year, partly due to currency fluctuations.
During the earnings conference, Coca-Cola CEO Muhtar Kent said, “Earlier this year, we announced five strategic priorities to restore momentum and reinvigorate long-term sustainable growth. While we have begun to see early signs of progress, we recognize that we need to increase the scope and pace of change as we continue to face a challenging macroeconomic environment. We are therefore taking actions to strengthen our long-term financial performance…”
Tapping new growth initiatives
The company is facing a hard time to put the fizz back into the bottle. As earnings and revenue have been terribly hurt in the third quarter, the Atlanta-based company has unveiled what is dubbed as “actions to drive growth” – a cost-cutting plan of action to shave off $3 billion in annual costs by 2019, partially by expanding productivity initiatives. Besides this plan, Coke also intends to re-franchise the majority of the North American bottling territories by the end of 2017.
The company will also renew its focus on marketing and will add revenue as a metric to its incentive plan. In the long term, the company anticipates earnings to grow in high single-digits and net revenue to grow by mid single-digits. But, in the near future, meaning this year and the upcoming 2015 fiscal, the company does not expect results to portray any rosy picture and estimates earnings to be well below stated targets.
Concluding note
Though Coke’s share price plunged as management were pessimistic on the upcoming quarter results, and did not predict much improvement in the next fiscal year, Coca-Cola is trying to re-position itself in the U.S. to add long-term value to its shareholders. Truly, Coke’s future is unclear at this juncture, but maybe brighter days are there in store for the beverage maker.
