Coke Is Back in Black

After two consecutive quarters in which Coca-Cola (NYSE: KO), our Rule Makin' beverage company, turned in net losses, the company we call Big Red returned to its profitable ways. Before we get into the details of Coke's performance, however, let's talk about its move to open the conference call to investors.

Fools have long had one big problem with Coca-Cola -- selective disclosure. Historically, it has favored a few analysts -- mostly the Wall Street crowd -- effectively ignoring its huge base of little guy and gal investors so vital to the company's continued success. Last year around this time, Matt used an article in this space to plead with the company to open up its calls to the general public. I encourage you to read Matt's article, which should resonate deeply with all Foolish investors.

Well, I'm happy to say Coke listened to the pleas of investors and did the right thing. To listen, click on the conference call link at the end of this article.

The move comes four months after Coke announced that Doug Daft had succeeded Douglas Ivestor as the company's chairman and chief executive officer. Not surprisingly, the primary theme of this first-ever open conference call was a renewed focus on Coke's relationship with consumers, bottlers, retailers, and yes, even investors.

I'll go through the highlights of the conference call in a moment, but let's first review the company's performance for the quarter. Coke's sales came in at $5.6 billion, up 5% from the same quarter last year. Worldwide case volumes increased 7%, with core products such as Coke and Sprite accounting for about 5% of the growth. About 1.5% came from the Q3 1999 acquisition of the Schweppes brands.

It's still not up to our 10% sales growth target, but the increase should be heartening to Coke investors because it signals a recovery from tough times of late. Gross margins came in at 70.2%, virtually the same level as last year. The quarter included $191 million in charges related to Coke's restructuring initiatives, and that reduced the operating income margin to 22.9% from 26.1% a year ago.

Coke turned in positive net income after two consecutive quarters operating in the red. The $926 million in net profits represented a 1.6% decline from last year, and the net margin of 16.5% compares unfavorably with the 17.7% net margin posted last year as well. Still, the quarter was very significant in that it reversed the trend of deterioration we've seen over the past four quarters. Earnings at our favorite beverage company came in at $0.37 per diluted share, down from $0.38 per diluted share a year ago. The important thing here is that Coke is solidly back in the black and looking healthy and well-positioned for the second half of 2000.

Chief Financial Officer Gary Fayard said that savings from the company's ongoing restructuring should be about $150 million for the year. He said one penny of the quarter's EPS came from cost savings attributable to this activity. Also, as part of the restructuring, the company completed its reduction of concentrate inventory. This negatively affected earnings by $0.02 per share. Of course, Rule Maker investors like the sound of any plan that will result in better inventory control, which leads directly to a lower Foolish Flow Ratio and higher operating cash flow.

To get more details on Coke's performance and, just as importantly, a sense of its morale and momentum, it's useful to listen to the conference call. Among other positives, it serves as a good reminder that stocks are pieces of companies, not squiggles on a chart.

New CEO Doug Daft started off emphasizing the enduring qualities of Coke: a great company with a great brand. Coke's products are sold in more than 200 countries representing 126 different languages, and account for a billion servings of beverages consumed every day. Daft said the 21st century offers new challenges and will require it to evolve the business model toward the goal of becoming the world's premier consumer relationship organization.

This vision requires focusing on consumers and connecting with them, but it also requires building relationships with other parties: the bottlers, distributors, and retailers. That's why Coke is giving local managers the autonomy to make decisions, with the hope it will create a global brand with a local face in every corner of the world. Officials stressed the "get local" theme in almost every paragraph of the earnings release.

Whether it's Coke's new German marketing campaign (created by a local agency), the launch of a local water brand in India, or a strong investment to establish the Georgia Coffee brand in the minds of Japanese consumers, Coke is discovering the power of adapting the product to unique local preferences and values. In my opinion, that missionary zeal is the ingredient that's been missing since the death of former CEO and shareholder-value champion Roberto Goizueta.

It's early yet, but Daft is making a strong attempt to carry his zeal for the brand worldwide. As Rule Maker investors, that gives us a warm, fuzzy feeling. The need to find companies with consumer-oriented, repeat-purchase business models is rooted deep in our investment philosophy, but companies must fight to remain foremost in the minds of consumers. That requires effective advertising and marketing.

I'd like to end this report with a request of my own. Since Coke doesn't issue a balance sheet with its earnings statements, we have no way of evaluating the improvement implied by this expected reduction in inventory. While opening the conference call was a great move, for which the company and Doug Daft should be praised, I urge management to go one step further: Give investors balance sheet data in the quarterly releases.

Just one more step.

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