Investors were bracing for another tough earnings report from Coca-Cola (KO 0.68%) to kick off its fiscal 2021. The beverage giant's sales tilt heavily toward on-the-go purchases, and that focus has kept volume lower throughout the pandemic.
But the company just announced some encouraging metrics that point to an imminent end to its demand slump. Let's dive right in.
Sales are flat
Coke's growth rates improved from the prior quarter but are still being pressured by social distancing restrictions. Sales volumes were flat in the first quarter, compared to the 3% drop that marked the end of 2020. Management said the business lost ground to rivals like PepsiCo (PEP 1.65%) due to Coke's dominant position in away-from-home niches like restaurants and sporting events. That category shrank again as people stayed away from crowded environments.
Image source: Getty Images.
Yet the latest trends are pointing up, with sales volumes in March reaching 2019 levels after spending the past year in negative territory. "We are encouraged by improvements in our business," CEO James Quincey said in a press release, "especially in markets where vaccine availability is increasing and economies are opening up."
Slashing costs
Coke's finances, meanwhile, are as strong as ever. Operating earnings jumped 7% thanks to the combination of cost cuts, rising prices, and a dramatic volume rebound in the China geography. The U.S. market should enjoy a similar rebound this quarter as compared to a year earlier when the first phase of the pandemic forced a pause in most economic activity.
Cash flow was impressive, and Coke managed to raise profitability again. That's in contrast with PepsiCo, which endured falling operating margin last year and is predicting another year of sluggish results in 2021. Coke is hoping a flood of new product introductions, including its Topo Chico hard seltzer brand, will amplify the earnings rebound as global volume trends return to positive territory in the coming months.
KO operating margin (TTM) data by YCharts. TTM = trailing 12 months.
Looking ahead
It's too early in the rebound process to say that the pandemic isn't threatening Coke's business anymore. But management is more confident in its broader outlook, which calls for organic sales growth in the high single digits this year compared to the 9% decline in 2020. Earnings should grow at a faster pace, executives confirmed. "We remain confident in our full-year guidance," Quincey said.
That roughly 8% boost this year compares well to the 5% increase that PepsiCo is expecting in 2021, but the bigger question is whether Coke can quickly start setting new sales records after the virus threat recedes. Pepsi's wider portfolio allowed it to win market share in both its beverage and food divisions last year. The good news is that while Coke lost ground in its core niche, it is gearing up for a sharp rebound in major markets like the U.S. and Europe.
And with profitability rising, investors have every reason to expect surging earnings -- and cash returns -- in 2021.
