Price Increases Help Coca-Cola Beat Revenue Expectations For The Fourth Quarter

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The Coca-Cola Company (NYSE:KO) reported fourth quarter earnings in-line with consensus estimates, while revenues came in a smidgen higher than anticipated. The performance in the quarter was similar to the ones reported by the company in the recent past, with revenue growth (excluding the impact of refranchising) being driven by price increases and product mix, with a diversified portfolio trying to make up for the loss in sales from traditional carbonated drinks. Moreover, margins continued their upward trajectory as a result of the divestiture from the bottling business. The comparable operating margin came in 530 points higher than the prior-year quarter. Coca-Cola also reported value share gains in total nonalcoholic ready-to-drink (NARTD) beverages for the quarter and full year, with value share growth outpacing volume share performance, reflecting the company’s desire for growth from more premium products. One of the major factor driving the stock price rise in the aftermath of the earnings was the guidance for FY 2018, wherein the company stated the expected earnings growth was 8% to 10%, but only if the currency environment was “benign.” The revenue growth is expected to be driven by products such as Coca-Cola Zero Sugar, FUZE Tea, AdeS plant-based beverages, and smartwater, while earnings growth will be spurred by increasing sales, a reduced tax rate, and operating margin expansion as a result of its refranchising efforts.

We have a $48 price estimate for Coca-Cola, which is slightly higher than the current market price. The charts have been made using our new, interactive platform. The various driver assumptions can be modified by clicking here, to gauge their impact on the earnings and price per share metric.

Strength Of Coca-Cola Zero Sugar

Coca-Cola Zero Sugar has now been launched in 20 markets, with a reformulated product, evolved marketing, and new packaging. The brand witnessed positive results, reflected in the double-digit revenue growth. The company reported that the relaunch of the product drove almost 10 points of growth in the fourth quarter. This brand along with others, such as its water portfolio, ready-to-drink-tea and coffee, etc. are expected to help Coca-Cola deliver 4% organic revenue growth in FY 2018.

Seeing the success of Coca-Cola Zero Sugar, the company intends to reformulate a number of other brands, as it clambers to keep up to pace with changing consumer preferences. One such brand has been Diet Coke, which has been plagued with declining volumes recently. Increasing concerns about the dangers of artificial sweeteners, such as increased risk of stroke for daily drinkers of diet beverages, have resulted in a substantial fall in the sales of such drinks, including Diet Coke. Moreover, according to Nielsen, while diet soda volumes were down 4% for the 12 weeks to 30 December 2017, those for Diet Coke fell 6% in the same period. To arrest this decline, Coca-Cola decided to revamp Diet Coke. While the original Diet Coke remains, four new flavors of it – Ginger Lime, Feisty Cherry, Zesty Blood Orange, and Twisted Mango – have been introduced, keeping the millennial generation in mind. While it is not for certain if the new flavors will halt the decline, it is definitely a step in the right direction.

Refranchising Efforts Provides A Margin Boost

Coca-Cola has undertaken a number of steps to improve its margins, which should have a positive impact in the coming quarters. Some of these have been listed below:

1. Coca-Cola is refranchising many of its bottling operations in a bid to move away from the capital intensive and low margin business of bottling. In 2017, the company accomplished major milestones in three of its most important markets. The bottling businesses in China was sold; KO’s two largest bottlers in Japan merged creating a single bottler, covering roughly 85% of the system; and most importantly, Coca-Cola completed the refranchising of its U.S. bottling operations.

2. The company has been undertaking certain productivity initiatives, such as restructuring of the global supply chain, incorporating zero-based budgeting, and streamlining the operating model, that have driven operating margin expansion in both Q4, as well as FY 2017. Earlier in the financial year, Coke announced plans to expand its productivity and reinvestment program to eke out an additional $800 million in annualized savings over the next two years.

3. Coca-Cola is focusing on high-margin products to drive profitability. For example, earlier in FY 2017, the company de-emphasized low-margin water in China, which had a negative impact on volumes, but didn’t affect the profitability.

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