The Coca-Cola Co.'s (NYSE:KO) fourth-quarter 2014 earnings report, issued Tuesday before the markets opened, threw a glimmer of light onto this portfolio holding of long-patient Coke investors.
The company reported earnings per share of $0.17, or $0.44 after adjusting for one-time items. While net income declined 55% to $770 million due to charges against the company's Venezuela's operations, implementation of a new productivity program, and the costs of de-consolidating some of its bottling operations, Coke managed to stabilize its revenue versus the prior-year quarter, recording a 2% decline, from $11.04 billion to $10.87 billion. After adjusting for currency effects, the top line actually expanded 4%.
In a mild surprise, revenue in the company's North American segment increased for the first time in four quarters, growing 2% to $5.37 billion. The performance is quite significant for Coca-Cola, as the North American business is more than four times the size of the next-largest segment (excluding bottling operations).
Coca-Cola has waged an intense effort to stem the decline of its trademark sweetened carbonated beverages, which drive North American revenue, and thus the company's overall fortunes. Is the 2% growth in this division a sign that the world's largest beverage company is back on track?
The productivity and marketing solution
It's early to call a complete turnaround. The company's data by segment shows that the increase in North American revenue was driven almost entirely by pricing and mix, versus volume growth. This is likely propelled by higher disposable income due to lower prices at the gas pump in the final quarter of 2014. Coca-Cola was effectively able to adjust pricing to its advantage as American consumers guarded their pocket change less fiercely.
Conversely, we can see hints that the company's productivity strategy is beginning to pay off in these numbers. Coca-Cola announced last year that it would find an additional $1 billion in productivity by 2016 by optimizing its global supply chain, streamlining data systems, and reducing costs.
Cash flows resulting from the productivity gains will be reinvested into innovation, general marketing, and increased media spends. With today's report, Coke CFO Kathy Waller mentioned that some of the revenue results in North America were attributable to "smaller cans," which carry a premium price point. Coke is actively promoting the 7.5 ounce mini cans, and they're also favored by those consumers who are in the market for an smaller dose of a guilty pleasure.
By freeing up marketing spends, the company can opportunistically allocate resources when it sees an innovation like the mini can begin to take off. But over longer periods, Coca-Cola can't expect to market its way to expansion on carbonated beverages given the sea change in consumer tastes. Revenue may be stabilizing, but the hard work of growing the company's sales beyond a 1%-2% annual rate is still ahead.
Where promise is beginning to manifest
One place the company can look for a solution is its non-carbonated portfolio. Coke reported that it added three beverages to its stable of billion-dollar brands as of Q4 2014. Gold Peak tea, FUZE tea, and I Lohas mineral water increase Coke's total number of billion-dollar brands from 17 to 20. Investors should note that each of these beverages exists in the "still" category, which includes bottled coffees, waters, teas, fruit juices, and energy drinks.
The still category represents Coke's future. For the year ended Dec. 31, still beverage volume grew at a rate of 4% -- that's four times the growth rate of the struggling carbonated, or "sparkling" category. While company executives won't say this out loud, accelerating the growth rate of still beverages is perhaps more important over the long term for Coca-Cola than shoring up its flagship sodas.
Operations also show potential
Investors can also catch a glimpse of the company's future operating performance in today's report. Recorded income statement charges for Coke's productivity plan in Q4 of $342 million well exceeded the total charged to this program during the rest of the year ($259 million).
The early effects of the productivity initiative are apparent in the company's cash flows. Coca-Cola generated $10.6 billion in operating cash flow in 2014, from net income of $7.1 billion. This compares quite favorably to the $10.5 billion in operating cash Coke generated from higher net income -- $8.6 billion -- in 2013. Throughout 2015, we should see continued cash flow optimization as the company squeezes more cash out of each revenue dollar.
To sum up today's earnings filing, while there was relative vigor in the North American segment, investors may want to judiciously temper optimism with patience in 2015. Coca-Cola has stabilized for the current quarter, but following this up with positive revenue and earnings trends won't be easy, and will require continued execution by management, especially in the still beverages category.