Down 28% from its February peak, Coca-Cola (NYSE:KO) stock is performing significantly worse than the rest of the stock market, which has rallied off its March lows and cut its total decline to about 15%.
And yet historically, Coca-Cola has been one of the economy's best-performing stocks, one of the strongest businesses, with one of the most recognizable brand names in America and around the world. Is there really any doubt that, given a year or so to figure this pandemic out, Coca-Cola stock will bounce back?
Actually, yes, there is some doubt about that.
Past performance, future results
You've all heard the standard Wall Street line about how "past performance is no guarantee of future results," right? And yet while not a guarantee, precisely, past performance can guide us to what future results might look like. To see what the next year might hold for Coca-Cola, take a look back with me at what management told us about its Q1 2020 results just a few weeks ago.
"The first quarter began with good momentum coming off strong results in 2019," began CEO James Quincey. However, "as shelter at home and social distancing practices increased rapidly and globally, there has been temporary but profound pressure on our customers and our business."
Specifically, "the biggest impact has been a sharp decline in the important away-from-home portion of our business, which includes our eating and drinking channels as well as our on-the-go orientated channels like convenience retail." Combined, these outlets "broadly represent[s] about half of our business," says the CEO. And while "drive-thru operations and carryout have helped offset some of the pressure...most restaurants are operating on limited hours and are seeing overall trips decline sharply."
Now, because coronavirus hit toward the end of Q1, it caused Coke's sales to decline only about 1% last quarter. But that doesn't really reflect the full extent of the problem this poses for Coke's business. In April, for example, Coke said it was looking at a 25% decline in total volume of product shipped. And because April was the first month of Q2 and foreshadowed trends that will extend through this quarter and the year, Coke now fears it will see "a significant impact on second quarter results," and perhaps on "full year 2020" as well.
A fearful future for Coke
Will this trend turn out to be a mere blip in Coke's business or something more permanent that could affect where Coca-Cola stock will be in one year? I worry it could be the latter.
Consider: An April survey of more than 1,400 owners of mostly small and independent restaurants found that more than 38% of respondents had closed their restaurants at least temporarily because of a combination of government-mandated shutdowns and slow customer traffic. Even with some restaurants still operating on a takeout or delivery model, across the industry, most restaurants reported at least a 50% reduction in sales.
And here's the worst part: Roughly 80% of restaurateurs surveyed fear that the pandemic will not end soon enough to prevent their having to close up shop permanently.
Now, maybe the gradual reopening of the U.S. economy that began this month will salvage the situation and revive Coke's sales to restaurants. But what if it doesn't? What if U.S. restaurants, which averaged a 3% to 5% profit margin before the pandemic, when they were at least theoretically allowed to operate at 100% of capacity, are unable to break even under pandemic conditions in which governments mandate they operate at no more than 50% capacity?
In that case, the decline in out-of-home sales that hit Coca-Cola in March and accelerated in April could become as permanent as a permanently closed restaurant. If the 38% restaurant closure rate we saw in April more than doubles to 80% -- as the survey suggests is possible -- then that would imply that Coke's 25% decline in away-from-home sales in April could likewise double to 50% or more. And if away-from-home sales make up 50% of Coke's total revenues, then that would imply as much as a 25% reduction in total sales for Coke over the coming year -- a reduction to about $28 billion.
Historical data from S&P Global Market Intelligence tells us that Coke hasn't seen sales that slow since way back in 2007, a year in which its share price traded mostly in the $20s -- rather than $45 or so it costs today.
So is the $20 range where we can expect to see Coca-Cola stock in a year? Hopefully not, but if things keep going the way they're heading, I very much fear that it might be.