For the first time in over two years, Coca-Cola (NYSE:KO) reported an increase in quarterly global net revenues to $10.7 billion, a 1% year-over-year increase, as volumes rose along with prices.
Under pressure from changing consumer tastes, the beverage maker was able to prevent unit case volumes from declining in each of its markets, which allowed Coke to overcome currency headwinds and beat analyst expectations on sales and profits.
Management continues to stress that 2015 is a "year of transition" as it progresses on its $3 billion cost-cutting plan, and here are the top five things it looks like Coca-Cola wants shareholders to keep in mind.
1. Still a marketing powerhouse.
Coca-Cola has long been noted for its advertising prowess that can move millions to purchase its products, and it's not just about teaching the world to sing. In China, for example, its investments in advertising and marketing around the Chinese New Year helped drive brand volume growth there by 9% in the quarter, even in the face of slowing economic conditions.
Considering Coca-Cola believes there's actually a one- to two-year lag before its media investments gain traction, the fact that they're generating early returns already bodes well for the periods ahead.
Coke CEO Muhtar Kent:
While we are seeing initial positive results, we're even more encouraged by the knowledge that is still early in the process and we a have tremendous runway for continued improvement in our top-line growth.
2. Still have a portfolio of powerhouse brands.
Even though there's no end in sight for shrinking demand for Diet Coke, where volumes tumbled another 6%, the rest of Coca-Cola's portfolio actually turned in surprisingly strong growth.
Globally, sparkling case volumes rose 1% in the first quarter, with solid performance across most key brands, including 5% growth in Coke Zero, 4% growth for Sprite, 3% growth at Fanta, and even 1% growth in Coca-Cola itself. All of this pushed the beverage maker to greater value share gains globally.
More from Kent:
Our performance was largely driven by the strength of our global brand portfolio and the strong distribution capabilities of our bottling partners, as evidence by our continued global value share gains.
3. But soda in North America is a long-term dead end.
Because Coca-Cola's North America division still accounts for 47% of total quarterly revenue, and that is still predicated on soda sales, the weakness in the beverage class will remain a drag on Coca-Cola's overall performance.
Net operating revenues in the region rose 6% to $5.1 billion in the first quarter, but case volumes were flat as sparkling beverages declined 1% year over year. Still, higher concentrate sales, higher prices, extra selling days in the quarter, and a holiday calendar shift all contributed to growth.
For the moment, then, Coca-Cola has abandoned the effort of fighting the tide and will instead trying to capture growth based on changes to how its products are priced and packaged. CEO Kent explained the strategy:
In North America, we're focused on generating revenue through a greater reliance on price realization. Increased media investments coupled with our segmented price pack strategies drove revenue growth in our sparking portfolio through a strong 3% price mix and a 1% increase in transactions.
4. Global footprint means currency exchange rates will continue to rattle the company.
Even though half of Coca-Cola's revenues are generated in North America, the region only accounts for 22% of quarterly operating income. Europe, the Asia-Pacific region, and Latin America are all more profitable markets for the beverage maker, which means it will continue to see its financial performance held back as a rebounding U.S. economy, with improving employment statistics and rising wages, creates a strong dollar.
In its fourth-quarter earnings call, Coca-Cola warned that weakening exchange rates could dent pre-tax earnings by as much as seven or eight points. That it only swiped six points from earnings in the first quarter is hardly comforting, as the situation will remain volatile.
CFO Kathy Waller touched on this:
The variance between the currency headwind and operating income and net income before tax is primarily due to the foreign exchange gains associated with our euro debt.
5. It also means slowing global growth could still be a problem.
Coca-Cola largely saw increased volumes around the world, but in comparison to the more robust U.S. economy, its foreign markets are weak. It remains concerned about deflation, cautious consumer spending, and the big unknown, Greece. If Greece exits the European Union, that could lead to significant global turmoil.
There are signs of "green shoots" in Europe, though many individual countries remain constrained, and Russia presents a challenge likely to play out over the rest of the year. The first quarter's strength looks like a one-off event.
As CEO Kent said:
The cautious recovery in the U.S. is offset by our relatively sluggish expansion in Europe and Japan as well as weaknesses in emerging markets, notably Brazil and Russia, as well as China slowing down.
What it all means for investors
Coca-Cola's gains may indeed ultimately be fleeting. The beverage maker benefited from six extra selling days in the quarter and the shift of the Easter holiday into March. With soda brands like Diet Coke still in a free-fall, the second quarter and the rest of the year may not be as effervescent as was the first.
Coke remains one of the most valuable brands in the world, but as it adjusts to changing consumer tastes, that value is eroding. Financially it's sound and over the past 12 months produced more than $8.6 billion, but activist investors have said the beverage giant needs to make some bold, "transformative" moves to break out of its lethargy. Investors may want to wait until management shows a willingness to do so before jumping in.