Coca-Cola Enterprises (CCE - Analyst Report) reaffirmed its sales and earnings guidance for fiscal 2012 at the Barclays Back-To-School Conference in Boston.
The company continues to expect earnings per diluted share to be within a range of $2.18 to $2.24 in fiscal 2012. The Zacks Consensus Estimate of $2.21 per share falls within this range.
The guidance includes the negative impact of currency translation and a decline in full-year earnings per diluted share of 10% and 12%, respectively. Net sales and operating income are expected to grow in the mid-single digit range.
Coca-Cola Enterprises posted second quarter 2012 adjusted earnings (excluding the impact of restructuring charges and mark-to-market commodity hedges) of 73 cents per share, in line with the Zacks Consensus Estimate. Earnings were down 4% year over year due to a decline in revenue and volumes.
Currency hurt earnings significantly, by 8 cents. During the quarter, net sales decreased 8.5% y/y to $2.2 billion. Excluding impact of currency and the French excise tax (FET) hike, organic revenues were down 2.0%. Sales lagged the Zacks Consensus Estimate of $2.29 billion.
The company intends to focus on innovation in new brands, flavor extensions, new packaging or sweeteners, in order to achieve its target. In 2012, the company plans to launch products with new sweetener alternatives, such as Stevia, expand the Fanta line with new flavors such as mango and passion fruit, and re-launch the Nestea brand in France and Belgium.
In addition, the company plans some packaging initiatives for 2012 including a new 375 milliliter pocket-sized bottle and a 250 milliliter can. The company’s solid marketing strategies employed during the London Olympics and the Euro Championship are expected to boost volumes in the upcoming quarters.
However, Coca-Cola faces several headwinds. Increasing costs of raw materials, ingredients, or packaging materials, such as aluminum, sweetener, PET (plastic), fuel and other cost items have been hurting its margins. The company is geographically focused on Western Europe and is thus exposed to the economic uncertainty of some of these countries.
Further, from January 2012, French regulatory authorities introduced an increased excise tax on beverages with added sweetener, which is applicable to almost all drinks that the company sells in France. The company expects this increased tax to hurt its overall cost of sales by 4% in 2012. Though the company expects to pass on these costs to consumers in the form of higher retail prices for its products, a fear of losing customers to its competitors due to steep pricing creates an overhang.
We appreciate the company’s strong brand portfolio. However, the negative impact of the French excise tax increase, currency translations and economic challenges in Europe create a significant overhang. Coca-Cola Enterprises carries a Zacks #3 Rank in the near term (Hold rating). We currently have a Neutral recommendation on the company over the long term (3-6 months).