Coca-Cola (KO 0.15%) suffered through the pandemic as its takeaway category, which in a normal year accounts for half of total sales, plummeted.
But after four quarters of sales declines, revenue turned positive in the first quarter of 2021 (ended April 2). Lockdowns have mostly ended, and people are cautiously getting out again. The pandemic exposed some gaps in the company's model, and it restructured accordingly. Can Coca-Cola keep up the gains?
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A return to growth
Coca-Cola was showing momentum before the pandemic, with a 16% sales increase in 2019's fourth quarter after years of slower growth. But after a 28% sales drop in the 2020 second quarter and struggles throughout the pandemic, the company ended the year with an improved 11% sales decline for the full fiscal year. Coke maintained a strong balance sheet throughout the declines, continuing to pay a dividend.
2021 first-quarter revenue grew 5%, fueled by a return for the takeaway segment, which also grew 5%. Earnings per share decreased 19%, but both numbers beat expectations. The recovery was so strong in the first quarter that March 2021 sales matched March 2019 sales.
However, with lockdowns still strong in other parts of the world, it's not clear that Coke's recovery will continue its upward trajectory. Despite the earnings beat, the company maintained its 2021 outlook of high-single-digit organic revenue growth.
Facing a new set of challenges
The company made some major changes to manage in the new operating environment. It restructured its units for a more centralized system to clear out inefficiencies, cut costs, and create a more targeted marketing strategy, and it laid off thousands of workers in the process. It also reduced its vast range of brands from 400 to 200, cutting out mostly local-centric brands that had low volume. At the same time, it launched several new brands that are more scalable, to fit its new strategy.
These moves strengthened the company overall and allowed it to leverage its at-home business while restaurants and other away-from-home locations were closed, but concentrate sales remain a large part of the overall business. Competitor PepsiCo (PEP -2.97%), whose beverage segment is not as large as Coca-Cola's, weathered the pandemic better due to its more varied product range, which includes the Quaker breakfast brand and the Frito-Lay snack brand. Both of those were popular under lockdown, hedging total sales declines.
In the first quarter, even without those segments, Coke came close to matching PepsiCo's 6.8% revenue increase. That means Coke is in pretty good shape at this point, even with some lockdowns remaining in place. It also demonstrates that under unexpected and difficult circumstances, the company can pivot to operate in an uncertain environment.
In the near term, Coke's prospects seem to be tied to global vaccine rollouts. But in the long term, the company is well positioned to expand margins and increase sales.
Stocks and dividends
Coca-Cola is valued for its dividend, which yields 3.1% at the current price. The company has raised its dividend for 57 consecutive years, making it a Dividend King. It's committed to the dividend and has continued to pay it, and raise it as well, during the pandemic. The stock itself hasn't been so valuable over the past five years, gaining 16%.
Coke is a great company with strong management and an unbeatable brand name. The pandemic struggle may not be completely over, but investors can expect a solid recovery when it is.
