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The Coca-Cola Company’s (KO - Analyst Report) fourth quarter adjusted earnings of 45 cents per share marginally beat the Zacks Consensus Estimate of 44 cents by a penny. Moreover, earnings grew 15% from the prior-year quarter as tepid revenue growth was offset by solid operating margins, which gained from two extra selling days and lower-than-expected currency headwinds.
Revenues and Margins
In the quarter, net revenue increased 4% year over year to $11.04 billion, as benefits from volume growth and concentrate (syrups, powders, etc. used in finished beverages) sales were largely offset by an almost flat price/mix. Constant currency revenues increased 5% in the quarter as currency hurt revenues by 1%. The top-line results marginally missed the Zacks Consensus Estimate of $11.54 billion.
The company recorded adjusted consolidated gross margin of 60.2% in the fourth quarter of 2012, down 10 basis points both year over year and sequentially. The gross margin result was in line with management’s expectation of being sequentially lower than both second and third quarter margins of 60.3% due to the currency and mix shift headwinds.
Adjusted selling, general and administrative (SG&A) expenses increased 1% on a currency neutral basis to $4.42 billion. Excluding the impact of currency, SG&A expenses were flat due to better operating expense leverage in the quarter.
Adjusted operating margin was 21.7% in the quarter, up 140 basis points from the prior-year quarter. The constant currency operating income increased 14% to $2.48 billion in the quarter, in line with management’s expectation of double-digit improvement.
Operating profits accelerated as the operating expense leverage was better in the quarter due to two additional selling days. Lower-than-expected headwinds from currency also benefited operating profits. Foreign exchange unfavorably impacted operating income in the fourth quarter by 4%, lower than management’s expectations of a negative impact in the mid-single-digit range.
Volume and Pricing Growth in Detail
The cola giant witnessed volume growth of 3% in the reported quarter. International volumes grew 4% against a 1% increase in North America. The company saw volume growth in North America, Eurasia and Africa, and Latin America while European volumes declined due to persistent economic uncertainty. Moreover, China and Japan volumes declined in the quarter, which hurt overall volumes of the Pacific segment, for the second quarter in a row.
Among the non-alcoholic ready-to-drink (NARTD) beverages, sparkling beverages, like Coca Cola, Fanta and Sprite, grew 1% in terms of volume, lower than last quarter’s 3% growth. Changing consumer preferences, increasing health consciousness and growing regulatory pressures are affecting the company’s sparkling beverage sales.
Still beverages such as Minute Maid, Simply and POWERade grew 9% in terms of volume, registering much better volume growth than the popular soft drinks as consumers have grown health conscious. Coca-Cola is slowly expanding its portfolio of non-carbonated drinks to reduce its huge dependence on carbonated beverages. Among the still beverages, packaged water, ready-to-drink tea and energy drinks recorded double-digit growth in the quarter.
The impact of price/mix was almost flat in the quarter as only the Latin American segment showed some positive growth.
Geographically, the Eurasia & Africa division recorded revenues of $697 million, up 5% over the prior-year quarter as benefits from volume growth and concentrate sales were offset by price/mix and currency headwinds. Constant currency revenues increased 9% in the quarter.
The segment witnessed volume growth of 10% year over year led by 13% organic growth in Middle East and North Africa, 13% in Turkey and 12% in Russia. Sparkling beverages volume was up 7% versus 23% volume growth for still beverages. Adjusted operating income was up 23% on a currency neutral basis in the quarter to $273 million driven by pricing gains and better operating expense leverage.
The Latin America segment recorded revenues of $1.27 billion, up 8% from the prior-year quarter levels driven by benefits from concentrate sales, positive volume and price/mix, which offset headwinds from currency and structural changes. Constant currency revenues increased 12% in the quarter.
Volumes increased 5% in the segment, with Brazil, South Latin, Latin Center and Mexico all showing positive volume growth. Volume growth was better than the 4% growth witnessed in the prior-year quarter.
Sparkling beverages volume was up 3% versus 16% volume growth for still beverages. Adjusted operating income was up 16% on a currency neutral basis to $715 million in the quarter, benefiting from volume growth and favorable pricing in addition to better operating expense leverage.
The North America segment recorded revenues of $5.29 billion, up 6% as gains from volume growth and structural changes was offset by an almost flat price/mix. North American overall volumes grew 1% in the quarter.
Sparkling beverage volume declined 2% against 8% volume gain for still beverages as American are increasingly avoiding sugary sodas. Adjusted operating income was up 11% on a currency neutral basis to $713 million in the quarter driven by positive volume growth and better operating expense leverage.
The Pacific segment recorded revenues of $1.35 billion, down 1% over the prior-year quarter due to lukewarm volume growth and a flat price/mix. Constant currency revenues were flat in the quarter.
The Pacific Group’s volume grew only 2% in the quarter, below both prior-year and sequential levels. Volume growth in Thailand, South Korea and Philippines was offset by sluggish growth in Japan and China as the latter continues to see some economic slowdown. Adjusted operating income was up 10% on a currency neutral basis to $427 million in the quarter due to favorable geographic mix, productivity gains and better operating expense leverage.
The Europe segmentrecorded revenues of $1.14 billion, down 6% over the prior-year quarter as volumes, price/mix and currency declined in the quarter. Constant currency revenues declined 4% in the quarter. Volumes declined 5% in the quarter.
Sparkling beverage volume declined 5% while still beverages went down 3% in the quarter. Adjusted operating income improved 12% on a currency neutral basis to $670 million due to better operating expense leverage and tight cost management.
In fiscal 2012, the company witnessed a 3.0% increase in revenues to $48.02 billion, slightly missing the Zacks Consensus Estimate of $48.13 billion.
Adjusted earnings were $2.01 per share, which beat the Zacks Consensus Estimate of $2.00 by a penny. Adjusted earnings increased 5.0% from the prior year.
Other Stocks to Consider
Coca-Cola currently carries a Zacks Rank #4 (Sell). Rival PepsiCo, Inc. (PEP - Analyst Report) will report on Feb 14. Some of Coca-Cola’s bottling companies are currently doing well and have a bright outlook. These include Coca-Cola FEMSA S.A.B de C.V. (KOF - Snapshot Report) and Coca-Cola Enterprises Inc. (CCE - Analyst Report), both carrying a Zacks Rank #2 (Buy)
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