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Coke Meets 2Q Earnings, Volumes Weak

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The Coca-Cola Company (KO - Free Report) reported weak second-quarter results, barely meeting the Zacks Consensus Estimate for earnings but missing the revenues estimate. Overall, the results were hurt by weak volume growth due to bad weather in several markets and slow economic growth in Europe and China.

The Atlanta-based cola giant’s second-quarter 2013 adjusted earnings of 63 cents per share were in line with the Zacks Consensus Estimate. Earnings grew 4% from the prior-year quarter as weak top-line performance was offset by decent margin growth. Currency hurt earnings growth by 2%.

Revenues and Margins

In the quarter, net revenue declined 3% year over year to $12.75 billion due to lower-than-expected volume growth and headwinds from currency and structural changes. Adjusting for the impact of currency and structural changes, constant currency revenues increased 2% in the quarter. The top-line results missed the Zacks Consensus Estimate of $12.90 billion.

The company recorded adjusted consolidated gross margin of 61.2% in the quarter, up 90 basis points (bps) year over year as the top-line decline was offset by lower cost of sales.

Adjusted selling, general and administrative (SG&A) expenses increased 1% on a currency neutral basis and came in at $4.4 billion as better operating expense leverage was offset by increased marketing costs.

Adjusted operating margin was 26.8% in the quarter, up 70 bps year over year and 310 bps sequentially. Operating margins gained from gross margin expansion and improved operating expense leverage.

Constant currency adjusted operating income increased 4% to $3.42 billion in the quarter. Currency hurt operating income by 3% in the quarter, in line with management expectations.

Volume and Pricing Growth in Detail

The cola giant witnessed 1% volume growth in the reported quarter, much worse than last quarter’s 4% growth. Poor weather conditions in several countries and slow economic growth in Europe, Asia and Latin America hurt volumes in the quarter.

Volumes grew 1% in the Americas as 2% positive growth in Latin America was partially offset by a 1% decline in North America. The Latin American volume growth was however much weaker than past quarters due to poor performance in Brazil. The North American volumes were hurt by unusually cold weather and weakened consumer spending.

International volumes grew 2%. Eurasian and African volumes grew 9% in the quarter led by strong growth in both sparkling and still beverages. Volumes declined 4% in Europe due to poor weather conditions (mainly in Germany and Central Europe) and an overall weak consumer spending environment.

Pacific volumes grew only 2% as strong performance in Vietnam, Indonesia and Thailand were offset once again by slowdown in China. Coca-Cola is expanding its presence in emerging markets of Latin America, India, Russia and China to offset slowing growth in developed nations.

Among the non-alcoholic ready-to-drink (NARTD) beverages, sparkling beverages, like Coca Cola, Fanta and Sprite, were flat in the quarter, worse than last quarter’s 3% growth. Specifically, Coke witnessed 1% volume growth.

Changing consumer preferences, increasing health consciousness, rising obesity concerns, possible new taxes on sugar-sweetened beverages and growing regulatory pressures are affecting sales of carbonated beverages of Coca-Cola as well as other soft drink companies like PepsiCo, Inc. (PEP - Free Report) and Dr Pepper Snapple Group Inc. (DPS - Free Report) .

Accordingly, Coca-Cola is trying to re-invigorate sales of its soft drinks by conducting strong integrated marketing campaigns, offering more choices to customers in package sizes, sweeteners and beverages (including more low- and no-calorie selections) and providing transparency in labeling.

Still beverages such as Minute Maid, Simply and POWERade grew 6% in terms of volume, registering substantially higher volume growth than the popular soft drinks reflecting consumers’ growing health consciousness. Coca-Cola is slowly expanding its portfolio of non-carbonated drinks to reduce its huge dependence on carbonated beverages.

Among the still beverages, ready-to-drink tea grew 10% and packaged water grew 6%. Energy drinks, and juice and juice drinks recorded low single-digit growth in the quarter.

The impact of price/mix was flat in the quarter as pricing gains were offset by headwinds from geographic mix. The Latin America, Europe and Eurasia & Africa segments showed some positive growth while price/mix declined in Pacific and was flat in North America.

Other Stocks to Consider

Coca-Cola currently carries a Zacks Rank #4 (Sell). Another beverage company that is currently doing well is Monster Beverage Corporation (MNST - Free Report) carrying a Zacks Rank #2 (Buy).

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