The impact of the strong U.S. dollar against world currencies is a real thing Coca-Cola needs to contend with now and in the future.
Because more than half of Coca-Cola's (KO 2.14%) revenues come from outside the U.S., the strong dollar is wreaking havoc with the beverage giant's financial performance. While it's a hardship impacting any number of multinational corporations, currency effects, coupled with Coke's weak soda business here at home, present the beverage giant with a unique challenge.
Management has previously said 2015 is a "year of transition," so investors likely weren't expecting any dramatic changes, but with more of the same on board for the immediate future, here are the top five things Coca-Cola wants shareholders to keep in mind.
1. Our cost-cutting program really is generating results.
The $3 billion initiative Coke launched last year to wring productivity improvements out of its operations is starting to yield results. On a consolidated basis, margins experienced growth, which would have been even greater had the structural changes it's been engineering across its business not been present.
Coca-Cola CEO Muhtar Kent said the aggressiveness is paying off, noting, "We are continuing to reinvest behind our brands, though, but our margin expansion is masked right now by currency and structural, so if you pull those two things out, you'd see very good margin expansion."
2. But currencies will remain a gale force headwind.
Coke has been battling the effects of weak foreign currencies all year long, but even it was surprised at the extent of the dollar's impact, causing it to revise downward Coke's revenues and operating profits. It now expects foreign exchange rates to cause it to take a seven-point hit on revenues, instead of six, and the effects on income before taxes will now be at the high end of its previous seven- to eight-point range.
Although it's been able to hedge against most of the volatility, emerging markets are more difficult, and the company can't plan more than a quarter in advance. As Coke will also be lapping a euro debt bond offering, CFO Kathy Waller says, "we do have to cycle that next year on top of just a change in the rates and probably a more difficult currency environment going forward," one which could extend as far out as 2017.
3. The Big Beer merger is a surprise unknown.
The $105 billion merger between beer makers Anheuser-Busch InBev (BUD 1.43%) and SABMiller (NASDAQOTH: SBMRY) could create friction for Coca-Cola because Anheuser-Busch is a key Pepsico (PEP 1.08%) bottler, and Miller serves as one for Coke. It's long been rumored Anheuser-Busch wants to make a play for Coke, and its purchase of Miller would now give it an opportunity to eventually make a bid.
CEO Kent, though, wouldn't speculate on what, if any, implications the merger would have on its own business, saying, "we will not comment on any specific matters related to our customers, bottlers or any M&A matters, so I'll just leave it at that."
Coca-Cola still has a thirst for growth in still beverages where its packaged water business saw some of the greatest volume growth this quarter.
4. Water is still where it's at in still beverages.
While Coke enjoyed a 1% increase in global sparkling beverage case volumes this quarter, it was still beverages where it really shined, with volumes rising 5% year over year. Coke has made a pitch for teas, juices, and sports drinks as the future of its business, but packaged water was the drink that enjoyed some of the best gains, with volumes rising 8% from the year-ago period.
Although its value-added dairy product Fairlife jumped by double-digit percentages, it was starting from a small base; it only launched the protein-enriched milk drink last year. It also lost out to Pepsi last month in adding yogurt to the dairy business as its rival won the right to invest in Greek yogurt maker Chobani.
But as Kent noted, the health of the beverage market in the U.S. is still driving gains for Coke, and "this is the 22nd consecutive quarter of us gaining value share in the marketplace in North America."
5. Thank goodness for Monster Beverages.
Had Coca-Cola not expanded its distribution agreement with Monster Beverages (MSTR -2.82%) after taking a $2.1 billion stake in the energy drink maker in June, the one percentage point increase in unit case volumes it saw in North America would have otherwise been flat. It's still a new deal for both companies, as Monster took over distribution of certain Coke brands, and how it plays in coming quarters will be a closely watched development, but the early results point to a positive impact.
What it means for investors
The stronger than expected impact currencies had on Coca-Cola's results -- and what it's likely to do for the foreseeable future -- caught investors at unawares. In the weeks after earnings, Coke's stock has trended down, but this is likely to be a short-term drop that will change direction as the value of its brand portfolio outweighs market volatility.
