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Coca-Cola (KO) Q1 Earnings Miss, Refranchising Costs Hurt

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The Coca-Cola Company (KO - Free Report) failed to meet earnings expectations in the first quarter of 2017. Earnings also decreased year over year due to higher costs related to refranchising efforts in Coca-Cola's North America bottling operations. Further, Coca-Cola's total sales fell 11%, marking the eighth consecutive quarterly decline in revenue.

However, we appreciate the company’s efforts in expanding its current productivity and reinvestment program that is expected to generate an incremental $800 million in annualized savings by 2019. This brings the total annualized savings target of its six-year program to $3.8 billion.

Earnings Miss

First-quarter 2016 adjusted earnings of the company were 43 cents per share, shy of the Zacks Consensus Estimate of 44 cents by 2.3%.

Earnings declined 4.4% year over year due to currency headwinds as well as higher costs associated with refranchising efforts.

Sales Beat

Net revenue declined 11% year over year to $9.12 billion due to currency headwinds and the negative impact of structural items. Currency headwinds hurt sales by 1%.

Acquisitions/divestitures and structural items had a 10% impact on revenues, partly offset by 3% positive contribution of price/mix.

Revenues surpassed the Zacks Consensus Estimate of $8.97 billion.

Margins

Adjusted consolidated gross margins expanded20 basis points (bps) year over year to 61.3% as currency headwinds were offset by positive pricing and productivity gains.

Adjusted selling, general and administrative (SG&A) expenses declined 11% on a currency-neutral basis.

The company’s comparable currency neutral operating margin (non-GAAP) expanded 226 bps, while comparable operating margin grew 137 bps.

Comparable income before income tax declined 2% to $2.48 billion. On a currency neutral basis, income before income tax decreased 19%.

The structural changes mainly include the impact of bottler re-franchising efforts and the brand transfer agreement with Monster which closed in 2015.

Volume and Pricing

Coca-Cola’s total unit case volume was even in the quarter (compared with 2% growth in the year-ago quarter and 1% decline in the preceding one), which included less than a half point of growth from the acquired brands. Unit case volume was impacted by macroeconomic headwinds in some Latin American markets. Again, the shift of the Easter holiday into the second quarter compounded the woes. Brazil and Venezuela accounted for over a 1% drag on consolidated unit case volume growth.

From a market segmentation viewpoint, the company’s developed markets delivered 1% unit case volume growth.

Sparkling beverage unit case volume was down 1%; Juice, dairy, and plant-based beverages were even; Water, enhanced water, and sports drinks were up 3%; and Tea and Coffee was up 2%.

Price/mix increased 3% compared with a 3% rise in the previous quarter.

2017 Guidance

Organic revenues are expected to rise 3%. Acquisitions/divestitures (mainly the bottler re-franchising efforts) are expected to hurt revenues by 18–19%, while Fx is likely to have a negative impact of 1–2% on revenues.

Excluding currency headwinds and structural changes, PBT is expected to increase 7–8%.

Foreign exchange is expected to hurt PBT by 3%. Structural changes are likely to have a 5–6% negative impact on PBT.

The company expects adjusted EPS to be down 1% to 3% from the prior year’s comparable EPS of $1.91.

The company expects to buy back shares worth $2.0 billion in 2017. The adjusted effective tax rate is likely to be 24%.

Zacks Rank

Currently, Coca-Cola has a Zacks Rank #2 (Buy).You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Upcoming Peer Releases

PepsiCo, Inc. (PEP - Free Report) is set to report first-quarter 2017 results on Apr 26, before market open.

Dr Pepper Snapple Group, Inc. is set to report quarterly results on Apr 26, before market open.

Monster Beverage Corp. (MNST - Free Report) is expected to report quarterly results on May 5.

Coca-Cola Company (The) Price, Consensus and EPS Surprise

 

Coca-Cola Company (The) Price, Consensus and EPS Surprise | Coca-Cola Company (The) Quote

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