Will North America Sales Fuel Coca-Cola’s (KO) Q2 Earnings?
The Coca-Cola Company’s KO North America segment that contributed about 35.1% to the company’s overall top line in first-quarter 2018 is likely to boost second-quarter results. The company will report second-quarter 2018 earnings on Jul 25.
Headwinds Faced by North America Division
We note that Coca-Cola’s North America division is witnessing weak operating margin due to accounting change, structural headwinds and other cost pressures, which are likely to persist throughout 2018. Also, the segment’s price/mix results were negatively impacted by the timing of new product launches, incremental outbound freight costs and shift of the Easter holiday in the last reported quarter.
Also, Coca-Cola’s North American strong beverage business has been soft due to headwinds in the carbonated soft drinks (CSD) category. Notably, cross-category competition, consumers’ awareness on health and wellness alongside new taxes on sugar-sweetened beverages and growing regulatory pressures are affecting the CSD sales. Consequently, sales of major soft drink makers namely Coca-Cola, PepsiCo, Inc. PEP, Monster Beverage Corporation MNST are suffering a decline.
North America Division’s Q1 Performance
In first-quarter 2018, the company delivered robust performance in the North America region. However, the segment’s price/mix declined year over year due to low single-digit underlying price. Also, higher freight costs remained a major headwind in the last quarter, primarily in North America.
Revenues at this segment totaled $2.68 billion, up 11% year over year in first-quarter 2018. Also, organic revenues grew 1% in the quarter. Price/mix declined 1% due to low single-digit underlying pricing, which was compensated with the cycling of product launches, higher freight charges and timing of the Easter holiday.
Unit case volume inched up 2% in the quarter. Sparkling soft drinks volume too improved 3%, which includes double-digit growth in Coca-Cola Zero Sugar and solid performance by the Diet Coke brand.
Juice, dairy and plant-based beverages fell 2% in first-quarter 2018. The downside can be attributed to the decline in juice category due to deprioritizing low-margin juice drink brands and packaging re-sizing across juice portfolio, which was negated by the improvement in dairy and plant-based beverages. However, tea and coffee rose 5% in the quarter. Moreover, water, enhanced water and sports drinks were up 1%, including robust growth in the sparkling water portfolio owing to solid growth in smartwater sparkling and Dasani sparkling, and robust performance of Topo Chico.
Strategic Efforts to Drive North America Sales
Despite the headwinds, management remains optimistic about realizing the price and value in the North American market. As a result, in 2018, the company expects to achieve low-single-digit price/mix for the total beverage portfolio in North America.
Moreover, Coca-Cola is striving to revive the Diet Coke brand in the region. With regard to this, the company has been introducing new packaging, marketing campaign and flavors to woo consumers. Notably, it has received solid response in the initial stage and remains encouraged to drive the Diet Coke brand’s growth and overall results. This apart, the company is focused on boosting growth through digital marketing and other capabilities.
At the North America segment, the Zacks Consensus Estimate for second-quarter revenues is pegged at $3,141 million, which reflects growth of 9.4% year over year and 17.2% sequentially. Also, the segment’s operating income stands at $851 million, up 13.2% year over year and 50.9% on a sequential basis.
Overall Earnings & Revenue Expectations
Coca-Cola’s efforts to drive growth through brand innovation, packaging and product launches are commendable. Additionally, the company has been making investments to generate incremental revenues for increasing profits. This apart, its focus on strategic acquisitions to strengthen the company’s business portfolio and maintain solid brand recognition is impressive. All these factors are likely to boost Coca-Cola’s results in the soon-to-be-reported quarter.
However, currency translation risks remain concerns for this Zacks Rank #4 (Sell) company. In second-quarter 2018, currency headwinds are likely to impact operating income by about 2% and net revenues by 0-1%, both on a non-GAAP basis.
The Zacks Consensus Estimate of 60 cents for second-quarter earnings reflects 1.7% growth from the prior-year period. However, the estimate for revenues of $8.54 billion represents about 12% decline on a year-over-year basis. (Read More: Factors Setting the Tone for Coca-Cola’s Q2 Earnings)
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