Coca-Cola Consolidated (COKE 15.63%) is the largest Coca-Cola bottler in the United States, but as an investment, it tends to get overshadowed by Coca-Cola -- its biggest customer. In the last 12 months, a string of positive quarters has certainly increased the company's visibility; shares have leaped 83% year to date. Indeed, the bottler's stock gained more than 10% in the Wednesday trading session following release of second-quarter 2019 earnings Tuesday evening. Below, we'll delve into the quarter's details and look into the factors that are driving enthusiasm for the sprawling bottling enterprise.
Note that all comparable numbers that follow refer to those of the prior-year quarter.
Coca-Cola Consolidated: The raw numbers
| Metric | Q2 2019 | Q2 2018 | Change |
|---|---|---|---|
| Revenue | $1.27 billion | $1.22 billion | 4.1% |
| Net income | $15.4 million | ($3.9 million) | N/A |
| Diluted earnings per share | $1.64 | ($0.42) | N/A |
Data source: Coca-Cola Consolidated. N/A = Not applicable; difference too great to be meaningful.
What happened with Coca-Cola Consolidated this quarter?
- Physical case volume increased by 0.4%. The rest of the company's approximately 4% revenue improvement derived from pricing changes and favorable product mix.
- Sparkling beverage sales rose 5.4% to $671.6 million due to higher price points throughout Coca-Cola Consolidated's operating regions (a distribution network that encompasses 14 U.S. states and the District of Columbia).
- Still-beverage sales improved by 7.2% to $421.5 million on strength in sports and energy drink sales. Management cited the launch of Monster Beverage's new Reign beverage, as well as completion of the company's first full year distributing BodyArmor products, as factors behind the fast sales growth.
- Gross margin rose by 100 basis points to 34.2%, due mostly to price increases tracing back to the second half of 2018 that the company instituted to counter rising commodity costs. Supply chain optimization also supported the higher gross margin, as transportation costs declined against the prior year.
- Coca-Cola Consolidated achieved reductions in operating expenses as well. Selling, delivery, and administrative expenses declined by 4.3% to $368.6 million, even as revenue rose. Management attributed the lower cost burden to its ongoing "system transformation initiative." Specifically, the bottler incurred $2.2 million in costs in its multiyear effort to improve its information technology (IT) system, versus $9.8 million in the prior-year quarter. The company also benefited from operating structure changes completed in 2018 in the areas of expense control and payroll efficiency.
- The combination of higher gross margin and lower overhead resulted in a jump in operating margin by 370 basis points to 5.3%.
- Better margins are translating into better cash flow. Coca-Cola Consolidated generated $88.6 million in operating cash in the first half of 2019, an improvement of 55% against the same period in 2018.
Image source: Getty Images.
What management had to say
In Coca-Cola Consolidated's earnings press release, CEO Frank Harrison touched on the organization's cost discipline in operations and alluded to new product opportunities from Coca-Cola (which accounts for roughly 88% of the company's revenue) and other major beverage companies, which are helping to scale its business:
We are very pleased with our second quarter performance as well as the solid results we generated in the first half of this year. We are making excellent progress in leveraging the scale of our business, improving our margins and driving consistent marketplace execution across our expanded territories.
Chief Operating Officer David Katz also emphasized the importance of execution in helping Coca-Cola, Monster, BodyArmor, and other major customers like Keurig Dr Pepper launch innovative products in an increasingly competitive beverage marketplace:
Our strong revenue performance reflects our commitment to margin improvement, the strength of our brands and the passion of our teammates. Importantly, our Sparkling portfolio is performing very well in the marketplace, enabling us to grow our value share in this category. We continue to work closely with our brand partners to drive excitement and higher levels of growth for our Still products as we respond to increasing consumer demand for drinks with unique flavors and functional benefits.
Looking forward
Coca-Cola Consolidated doesn't issue forward quantitative guidance. However, shareholders can expect that the company will continue to realize the benefit of cost-cutting and investments in efficiency in the remaining two quarters of 2019. While it may be difficult to envision shares rallying much beyond their stellar appreciation in the first half of 2019, the company's stock still holds significant long-term potential. Higher margins coupled with a loyal base of top-tier beverage companies have unexpectedly turned Coca-Cola Consolidated into an exciting consumer goods investment idea in 2019.
