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Coca-Cola Asks Investors to Stay Tuned

By Demitri Kalogeropoulos – Oct 28, 2020 at 9:54AM

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The growth picture for this beverage-producing giant might stay cloudy into early 2021.

Coca-Cola's (KO 0.29%) business does best when people are moving around in society. The beverage titan accounts for a significant portion of global daily-drink purchases, but that dominant market share is tilted toward away-from-home consumption at places like restaurants, convenience stores, and sports arenas.

Coke just revealed fiscal third-quarter results that confirmed how that position has become a financial drag during the pandemic as consumers switched to competing brands at supermarket chains or reduced consumption while staying closer to home. In a conference call with Wall Street analysts, CEO James Quincey and his team highlighted the company's slowly improving growth trends, while cautioning that a full rebound might still take time.

Let's look at some takeaways from the call.

No quick return to growth

We continued to rebound from the pressures we experienced at the peak of the lockdown as the world generally moves into the recovery phase. That said, the trajectory of our business trends continue to be closely linked to the size of our away-from-home business in any given country and the level of the lockdowns in the market. -- Quincey

Coke managed much stronger sales volumes than in the prior quarter, but there was no quick return to sales growth like the one that PepsiCo (PEP 0.81%) announced in early October.

A smiling woman in a blue and white striped shirt enjoying a soda.

Image source: Getty Images.

Investors can see a clear difference in both companies' relative strengths during the pandemic, as Pepsi's beverage volume rose 1%, while Coke's was down 4%. The beverage leader traces more market strength to away-from-home selling channels that are still pressured as people continue social distancing.

Staying focused on efficiency

While much has changed this year with the onset of the pandemic, our focus is on converting top line growth to maximize returns has not. -- CFO John Murphy

Coke became a more efficient business this quarter, even after ramping up a few expense categories, like marketing and advertising. Cost cuts combined with improving sales volumes to allow operating margin to rise, even in the context of a drop in organic revenue. That resulted in just a 2% decline in adjusted earnings, which CFO John Murphy said was better than the team's expectations.

Management is also busy with a restructuring plan that's removing underperforming brands, streamlining the operating chain, and rethinking its marketing product innovation strategies. Executives said this latter initiative is already showing results, with contributions from new products, like the AHA seltzer line, now accounting for more growth. "The amount of revenue per innovation has doubled" year over year, Quincey said.

A still-cloudy growth picture

The challenges that we faced during this pandemic are by no means, in the rearview mirror. -- Quincey

Coca-Cola sees no compelling reason to change the cautious outlook that management noted back in late July. Big risks to growth include varying levels of economic lockdown in different markets, many of which are dealing with significant virus outbreaks. As long as consumer behavior is being impacted by COVID-19, the consumer staples giant will see pressure on its sales volumes and gross profit margin.

The good news is that Coke could be preparing for a sharp operating rebound in fiscal 2021, thanks to the restructuring initiatives and a comparison with the historic sales declines that started in Q1 of 2020.

It's too early to make any concrete projections about those results, but executives implied that they'll have a much clearer picture after the close of Q4. "Our actions give us increased confidence to recover faster than the broader economic recovery," Murphy said. "We will provide more insight as part of our fourth-quarter call" in late January.

Demitri Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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