Coca-Cola (KO) is an iconic drink maker with hugely powerful brands that people tend to buy in good economies and bad. However, that doesn't mean the company is immune to economic gyrations.
Right now Coca-Cola is putting up very strong results, but management seems to be hinting that things could change next year. Here's what you need to know.
A solid quarter
Coca-Cola's third-quarter earnings report was, overall, pretty good reading. For example, adjusted earnings per share rose a healthy 7% year over year. Case volume was up 4%. And organic revenues were higher by a whopping 16%.
Given the high rates of inflation the world is dealing with today, particularly in developed markets, the drink giant seems to be managing particularly well.
Image source: Getty Images.
A lot of the strength has come from the company's ability to push through higher prices. Its strong brands, many of which are iconic household names even in emerging markets, give it the ability to do that. The company's direct customers, retailers, are willing to accept increased prices because their customers expect to find Coca-Cola on the shelves.
Simply put, Coca-Cola is a valued partner, as its huge advertising budget helps to drive customers into stores.
But there was one negative to monitor in the quarter. The company's comparable operating margin fell 0.5 percentage points to 29.5%. According to management, "...strong topline growth was more than offset by the impact of the Bodyarmor acquisition, higher operating costs, an increase in marketing investments versus the prior year, and currency headwinds." There are a lot of moving parts in that list, including an acquisition, but higher operating costs is the one to key in on.
A warning about the future
The reason for that shows up further down the company's earnings release, when management notes in its early comments on how it's thinking about 2023:
The company expects global inflation to continue to impact its expenses across the board, and also expects commodity prices to remain volatile. The company has benefited from its hedges in 2022 and expects elevated inflation on a per case basis in 2023.
Reading into this statement just a little bit, the consumer staples giant is saying that inflation is not going away. Furthermore, and perhaps more importantly, it states expressly that 2022 has been benefiting from hedges used to protect against things like rising ingredient costs. That means its costs are artificially low this year.
Next year, as the hedges from which it's currently benefiting roll off, it expects its costs to rise. So margins have been strong for now, but that could change in 2023.
This isn't the end of the world, of course, since food makers have long had to deal with volatile commodity prices for ingredients and packaging.
Indeed, Coca-Cola, which has increased its dividend an impressive 60 years in a row (making it an elite Dividend King), has clearly managed through inflationary periods before.
This time around, the company has done a good job of protecting its margins in the face of swift and dramatic commodity price increases. If this were a short bout of inflation, it might have even managed to sidestep the hit altogether. But inflation is lingering, and the company will eventually have to accept higher costs as a part of doing business. At least that's what it seems like Coca-Cola is telling investors to expect.
A fourth-quarter shocker?
Coca-Cola is likely to roll out full-year 2023 guidance when it reports its fourth-quarter results. At that point, its preliminary thoughts on 2023 will be laid out far more clearly in dollars and cents.
It seems like management's trying to get ahead of that guidance, so investors aren't taken off guard when it projects margin compression due to inflationary pressures that have, so far, seemed pretty tame. Investors should heed the warnings so they aren't taken by surprise.
