The feeling of deja vu investors got from Coca-Cola's (NYSE:KO) second-quarter earnings report was warranted: The global beverage giant essentially had a copy-paste period that saw higher profits on lower revenues that beat analyst expectations.
With management maintaining 2015 is a "year of transition," investors shouldn't look for any dramatic changes to occur in the back half of the year, but here are the top five things Coca-Cola wants shareholders to keep in mind.
1. Earnings surged thanks to one-time items
Second-quarter profits jumped 22% to $0.71 per share, but that was largely the result of completing a partnership with Monster Beverage (NASDAQ:MNST), through which Coca-Cola took a 16.7% stake in the energy-drinks maker. That move added $1.4 billion to results. Without the gain, earnings would have been $0.63 per share, still up over 8% from the year ago period, and still beating analyst expectations of $0.60 per share.
However, last year's earnings were depressed as a result of refranchising Coca-Cola's bottling operations, so on an apples-to-apples basis, earnings were down 1.5% year over year.
2. Thank goodness we raised prices when we did!
Because it's been able to take advantage of pricing opportunities when they presented themselves, and coupled with higher concentrate shipments, Coca-Cola was able to report that revenues grew 4% higher in the quarter.
Management laid out a strategy over a year ago to price its products in relation to the value its brand should command. Doing so at the same time consumers were moving to smaller package sizes helped the beverage maker gain the benefit of both pricing and product mix, which helped offset weakness in much of the rest of its business.
International markets, where it generates over half of all its revenues, were hit by the strong U.S. dollar, and that's not likely to change soon.
3. Currency fluctuations remain a headwind
Coca-Cola's worst market was seemingly Latin America, where operating revenue fell 13% year over year to $973 million. Eurasia and Africa were down another 10% to $658 million. However, absent currency fluctuations, the picture looked a lot different.
For example, changes in currency exchange rates swiped 24% from Coca-Cola's results in Latin America; organic revenue growth was up 11%. Eurasia and Africa suffered a 13% decline as a result of currency effects, but organic revenue growth there was otherwise up 4%.
The strong U.S. dollar will continue wreaking havoc on Coke's earnings, and it says it expects foreign currency exchange rates to have an unfavorable impact on its reported results for the year, namely:
- A 6-point headwind on revenues.
- An 11-point headwind on operating income.
- A 7- to 8-point headwind on income before taxes.
4. Still beverages are the future
As has come to be expected, Coca-Cola's still-beverage portfolio continues to outperform sparkling beverages with a 4% volume increase in North America and an overall gain of 5% because of strong improvement in Europe, Eurasia, and Africa.
Importantly, in the North American ready-to-drink business, Coca-Cola reported gaining value and volume share across both still and sparkling beverages, as both juice and juice drinks and bottled water saw hefty volume gains.
5. Diet Coke is still a drag
Also as expected, Diet Coke continues to fade, with volumes down 7% in the quarter. That follows a 6% decline in the first quarter and a 6% drop for all of 2014, suggesting consumers are rejecting the artificially flavored soft drink at an accelerating rate.
Although Diet Coke remains the No. 1 diet soda in the U.S. and management says its goal is to eventually get the brand's revenues to flatten before they move higher again, it seems a bit of wishful thinking at this point. Coca-Cola believes it'll be able to gain some traction from PepsiCo's changing its own diet-drink formula later this year (perhaps recalling its own spectacular failure with New Coke), but the company does admit that "it's a work in progress and [there's] a lot more work to do."
What it means for investors
Coca-Cola's gains this quarter caught many analysts by surprise, but even Coca-Cola recognizes it still has its work cut out for it. The company does have a vast and growing portfolio of billion-dollar brands in its favor, and with consumer preferences moving toward still beverages, where much of that portfolio resides, it has a bright future yet.
Moreover, the Coca-Cola brand itself remains one of the most valuable in the world, and with its namesake soda still as popular as ever, this lull in performance should be seen as temporary.