Investors were hoping for good news in Coca-Cola's (KO 0.09%) third-quarter earnings report. The soda giant three months ago revealed encouraging hints of a growth rebound, and optimism was running high that the company could follow that up with a positive announcement covering the seasonally strong third quarter.
The consumer staples titan largely met those high growth expectations last week, even though the earnings outlook still looks sluggish.
Let's dive right in.
Faster sales growth
Organic sales outpaced management's guidance just as they did last quarter, with revenue climbing 5% after adjusting for acquisitions, divestments, and currency exchange rate moves. That increase maintained plenty of distance between Coca-Cola and PepsiCo (PEP 0.73%), which earlier in the month announced a 3% uptick in its beverage business.
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Coke saw solid growth contributions from a few of its biggest strategic initiatives. Its push to satisfy impulsive consumption by blanketing areas with coolers helped volumes surge in that niche in places like Brazil, for example. Popularity within the new Coca-Cola Zero Sugar brand allowed volume to tick higher in the core U.S. market, too, even as pricing increased. CEO James Quincey and his team said the beverage giant continued to gain global market share.
Coke is achieving a good balance between higher prices and rising volumes, with prices up 4% over the last nine months as volumes climbed 2%. Pepsi, for comparison, showed a 1% volume decline last quarter as part of its overall 3% organic growth in the beverage segment.
Steady profitability
Reported operating income fell 4% but kept pace with revenue after adjusting for currency exchange moves. On the positive side of the ledger, Coke benefited from higher prices and a shift toward high-margin products like single-serve drinks and smaller beverages. These gains were mostly offset by rising expenses, including marketing spending.
Overall, adjusted non-GAAP earnings fell 2% as operating margin held steady at 31% of sales. PepsiCo's core operating margin declined slightly last quarter. Management said the broader results show that the consumer staples giant's turnaround plan is working. "We are positioning the company to create a better shared future for all stakeholders," Quincey said in a press release, "by delivering on our vision and growing sustainably."
Changing the outlook
Executives backed up those bullish comments with positive changes to the short-term outlook. Coke now expects to grow organic sales by "at least" 5% compared to last quarter's 5% target and the 4% increase the company originally projected for the year. The operating income forecast got a similarly modest bump, up to between 12% and 13%.
Coke is still projecting roughly flat adjusted earnings per share, which matches up with the 1% downtick that PepsiCo is forecasting for 2019. Both companies see this year as an investment year when it comes to reported profits. Coke has predicted that the spending it is making in areas like its supply chain, product innovation, and marketing will lay the groundwork for faster growth in 2020 and beyond. Last week's report adds credence to that bullish outlook.
