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Yamil Berard
Yamil Berard
Articles (192) 

Coca-Cola Pushes Limits on Innovation

After Fuze Tea hits, CEO pushes for experimentation. 'We need to be willing to kill a few zombies,' he says

April 24, 2018 | About:

In a life-sized greenhouse overlooking the Swiss alps, large crowds of people mingled while sipping on a new flavorful, low-cal tea.

Every now and then, the iconic emblem for Coca-Cola Co. (NYSE:KO) peaked into view. Make no mistake: This was Coke celebrating the European launch of its fast-growing beverage, ready-to-drink Fuze Tea.

Fuze was one of the bright spots on a balance sheet that catapulted the world’s beverage leader to earnings and revenue beats in the first quarter of the year. Coke reported comparable (non-GAAP) earnings of 47 cents per share on revenues of $7.626 billion. Analysts were projecting 46 cents a share on revenues of $7.34 billion.

The company today announced purchases of stock for treasury for the quarter of $927 million. Net share repurchases (non-GAAP) totaled $471 million.

It was promising news for a trademark that’s been battered by declining earnings and revenue growth. In recent years, Coke has faced intense competition from companies like PepsiCo (NASDAQ:PEP) and Dr Pepper Snapple Group (DPS).

Investors, on Tuesday, however, were ambivalent about their choices. All three beverage giants saw declines in their stock values on a day of market losses. The S&P 500 was down 1.44% to 2,631.96, while the Dow Jones Industrial Average stood at 23,950, down 2%. In Tuesday afternoon trading, Dr Pepper was down 0.66% to $119 a share while PepsiCo stood at $101.64, down 0.92%.

Coke was down 2.46% to just under $43 a share. Its stock has been flat in the last 12 months. Its 52-week range is $42.19 to $48.62 a share.

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More than just ‘Coke’

Long gone are the days when boxes of Coke quickly vanished from the shelves of grocery stores. Coke is now trying to build its products to fit consumer demands for less sugary drinks. One example is the European launch of the billion-dollar Fuze Tea brand at Zurich’s Giardino Verde, the tropical-style greenhouse.

Investors, so far, have been encouraged by a push from CEO James Quincey, who came on board last May. Quincey is trying to transition the company into more than just a carbonated drinks maker.

Quincey is encouraging risk-taking and experimentation with new and different products. "When we get something, let's not be shy about it moving around the world quickly,'' he said during a morning earnings call. Of course, he adds, if the idea doesn't work "for whatever reason, it needs to be pulled out (but) we need to be willing to kill a few zombies."

First-quarter performance

Coke reported a net revenue loss of 16% from $9.1 billion a year ago. The company is transitioning to refranchising some of its distribution centers back to independent bottlers, and blamed some of the losses to that effort. Reuters also reported on Tuesday that company executives mentioned in a post-earnings call that rising freight costs in North America, up 20% from a year earlier, would have an impact on revenue in the first half of the year.

The highlights of the earnings data showed volume growth of 3% across the board for product, including teas, water, soda and juices. Diet Coke returned to volume growth in North America after a “full brand restage.” The product was introduced with four new flavors and sleek packaging. Overall, the company is moving to smaller, immediate consumption packaging of sodas, teas and coffees.

Coke also reported 3% growth in brand Coca-Cola and double-digit growth in Coca-Cola Zero Sugar. A recent acquisition of Topo Chico premium sparkling water also boosted revenues.

There was visible growth in Latin America, including Brazil and Argentina. Quincey said bottlers in those countries have revamped packaging and marketing materials aimed at consumers.

The Coca-Cola mystique

Perhaps a part of the mystique of Coca-Cola is the loyalty it enjoys from its most famous investor. Warren Buffett (Trades, Portfolio) owns a 9.6% stake, holding more than 400 million shares. The investment is valued at more than $18.35 billion.

Buffett has long dismissed claims the sugary substance leads to immediate poor health. The guru investor has said he consumes about 700 calories of Coke a day and that he wasn’t planning to shift to “water and broccoli” to try to live longer. He is now 87 years old.

Buffett bought more than $1 billion worth of Coca-Cola stock in 1988, representing a then-stake of about 6.2%. At the time, Coke had the largest position in his portfolio. Buffett's investment grew nearly 16 times over in 27 years when accounting for dividends. The estimated annualized gain was 11%, according to Investopedia.

A need for improvement

While Buffett prefers Coke, the beverage giant has to try to convince the rest of the world of it, too.

In revenue growth per share, the company reported -4.2% over the last five years and -14.60% over the last 12 months. The company reported revenue of $35 billion in December 2017 compared to revenue of $41.8 billion the prior year. It has $5 billion in free cash flow.

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In earnings before interest, taxes, depreciation and amortization, the company reported $2.05 per share in December 2017, compared to $2.44 a year ago. For return on equity, it reported 6.22% from 26.85% in 2017 compared to the prior year. Meanwhile, operating margins have remained at about 20% to 26% over the last 15 years.

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The company has a market cap of $183 billion. GuruFocus ranks it 5 out of 10 in financial strength and profitability and growth.


Rating: 4.5/5 (2 votes)

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