Coca-Cola Starts Its "Transition Year" With Progress

By Markets Fool.com

Continue Reading Below

Shareholders are seeking signs of life from the global beverage giant. Image courtesy GillyBerlin under Creative Commons license.

Are we there yet?

The Coca-Cola Company reported first-quarter 2015 earnings today that showed glimmers of progress, as the company continues to decrease its reliance on its flagship carbonated soda brands. Revenue increased 1% from the comparable prior-year quarter, to $10.7 billion. Coca-Cola earned $0.35 per share versus $0.36 in Q1 2014, on net income of $1.6 billion.

But for currency effects, Coke would have presented more vigorous results. Organic revenue grew 8% during the quarter, yet most of this gain was wiped out by a 10% negative currency differential. Coca-Cola sells its droves of brands in over 200 countries. Thus, the strong U.S. dollar affects Coke's revenue and earnings when it translates its global sales back into dollar terms.

Can we conclude that after peeling back currency effects, the significant gain in organic revenue means that the Atlanta-based beverage behemoth is finally steaming ahead?

Continue Reading Below

Incremental progress is still progress
It would be a stretch to say that Coca-Cola has suddenly found its momentum. The company's financials benefited from six additional selling days during the quarter versus the prior year. So the numbers presented today have the boost of approximately 6.7% more selling time than the comparable period.

For this reason, while the quarter continues a trend of revenue stabilization, the company is quick to point out that real progress will be incremental. As CEO Muhtar Kent stated in this morning's earnings release: "Though we are still in the early stages, we see some initial positive indicators that we have the right strategies in place to accelerate growth. However, we continue to view 2015 as a transition year as the benefits from the announced initiatives will take time to fully materialize amid an uncertain and volatile macroeconomic environment."

One of those positive indicators is volume growth. Coke computes volume percentage changes on average daily sales, giving investors a gauge of underlying sales strength irrespective of the amount of selling days in a quarter. Unit case volume, a measure of bottled products the company sells, held steady at 1% growth, and concentrate volume, a measure of syrups and other concentrates sold for eventual beverage consumption, expanded by a very decent 5% rate.

Pricing proved another positive area, rising three percentage points in Q1. Coke has lately embarked on a strategy of using cash flows from cost savings to increase its marketing spend, and today's numbers indicate some initial success with this strategy, as the increased advertising is probably supporting the company's ability to charge more for its products.

As an example of pricing power, CFO Kathy Waller mentioned today the "Coke Mini" can. This smaller, 7.5-ounce can sells at a premium price point and has proved popular with consumers who are seeking to enjoy a Coke-branded soda with less guilt over calories and well-being. Waller indicated that the "Mini" would see continued expansion this year.

Diet Coke is the new problem child
Coca-Cola's management team must be wondering when they can catch their breath. The company admirably managed to shift volume for brand Coke, the world's No. 1-selling soft drink, forward by 1% during the quarter. Coke volume also increased by 1% for the entire year in 2014, signalling, if not rampant expansion, at least some equilibrium for this all-important core of Coca-Cola's revenue stream.

Yet the battlefield has shifted in an eye-blink. In March, PepsiCo's flagship Pepsi soft drink overtook Diet Coke as the world's No. 2-selling sweetened carbonated beverage behind Coca-Cola. This quarter, Diet Coke volume decreased by 6%, offsetting gains in Coca-Cola brands Sprite, Coke Zero, and Fanta.

Diet Coke's weakness may be a thornier problem to resolve than steadying the Coke trademark. Consumers are increasingly skeptical of perceived carcinogenic ingredients in diet soft drinks. Theacesulfame-K and aspartame used to sweeten Diet Coke present a perception problem for Coca-Cola, one that may not be remedied by sheer marketing prowess and advertising dollars.

The 6% volume decline in Diet Coke poses a potential risk investors should observe in an otherwise positive report. Diet Coke is the company's second best-selling soft drink, and further declines in its volume could dent the top-line progress Coca-Cola is shooting for this year. We can guess that somewhere at this very moment, Coca-Cola scientists are busy at work on aspartame alternatives, most likely the stevia compounds used in the new naturally flavored "Coca-Cola Life." But as with other initiatives at Coke this year, the progress is likely to be incremental.

The article Coca-Cola Starts Its "Transition Year" With Progress originally appeared on Fool.com.

Asit Sharma has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola and PepsiCo. The Motley Fool owns shares of PepsiCo and has the following options: long January 2016 $37 calls on Coca-Cola and short January 2016 $37 puts on Coca-Cola. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.