Coca-Cola: What to Expect and What to Hope for in Its Second-Quarter Earnings

Investors should be ready for anything when Coca-Cola (NYSE: KO  ) releases its second-quarter results on Tuesday. The company turned in better-than-expected results in the first quarter, but the iconic soft-drink company has still struggled to produce growth in line with its 2020 Vision. Investors will want to know if the pricing environment has improved, how new product introductions are performing, and what we can expect for the rest of the year. Can Coca-Cola buck the trend and finally get back on the path to higher growth? Let's take a look at what transpired in the second quarter and what investors can expect in Tuesday's report.

Source: Coca-Cola Corporate Site

Lots of buzz
A lot has happened since Coca-Cola reported its first-quarter earnings. Rumors have swirled that Coca-Cola would like to acquire one or two beverage companies, while another rumor said that Coca-Cola itself would be acquired. The company launched a new drink, Coke Life, that it hopes will bring lapsed customers back to the soda category. There has also been news that Coca-Cola heavily discounted its soft drinks over the Memorial Day weekend, which could lower its profitability if it sustained the promotions. These are each important developments that investors should stay informed about as the year progresses. Here's what investors need to watch out for in the second-quarter results.

Soft drink volume and pricing
Coca-Cola's soft drink business has been in a downward spiral and may be getting worse. The company's global soft drink volume declined 1% in the first quarter, the first worldwide decline for Coca-Cola in 15 years. The company's biggest problems were in Europe and the US, where soft drink volume declined 5% and 1%, respectively. The results could have been worse had the Sochi Olympics not been held in the quarter, which offered Coca-Cola a strong advertising platform. As a result, investors should not expect a better showing in the second quarter -- and may find that volume declined even more.

Investors should focus more on pricing than volume when they evaluate the company's strategy. Soft drink volume is largely driven by demand, which is difficult for one company to create. It measures industry health, but not necessarily the effectiveness of the company's strategy. Pricing, on the other hand, shows investors how management plans to counter market weaknesses. Investors should expect pricing and mix to increase even if volume decreases. If pricing decreases and the company's overall gross margin dips below 60%, it will be a huge red flag that the pricing environment is headed downhill.

New products
Coca-Cola is launching Coke Life -- a mid-calorie stevia-and-sugar-sweetened soda -- in the US and UK this summer. Coke Life may be the key to bringing back ex-diet soda drinkers who left because of concerns over artificial sweeteners, or it may be just another innovation that fails to spark excitement in the flagging category. Coca-Cola CEO Muhtar Kent will almost definitely give his expectations for the new drink, which investors can use to gauge whether or not Coke Life could be a game-changer for the company.

What investors really want to hear
More than anything, investors want to hear what management is doing differently to get the company out of its current malaise. Another quarter of declining volume, stagnant pricing, and incremental innovation is not going to turn Coca-Cola's fortunes around. On the first-quarter conference call, Kent acknowledged that "attaining our 2020 Vision will require more than just counting on industry growth," but failed to specify what steps the company is taking to correct the problem. Coca-Cola's 2020 Vision calls for 3% to 4% overall annual volume growth, well above the 2% growth the company achieved in 2013.

Whether Coca-Cola is going to break into new product categories, acquire another business, or sell off some of its brands to focus on others, investors should hope for a meaningful change in the company's strategy -- otherwise, Coca-Cola may fall short of investors' expectations.

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Ted Cooper

Ted Cooper is a value investor based in Texas. He does not ride a horse to work.

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8/28/2015 4:00 PM
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Coca-Cola CAPS Rating: ****