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Soft North American Sales to Hit Coca-Cola (KO) Q4 Earnings

Zacks

Revenues of The Coca-Cola Company’s KO North America segment, comprising about 30% of its topline, are expected to decline in the fourth quarter of 2017, when it reports on Friday, Feb 16.

A Look at Coca-Cola’s North America Performance in Q3

The North America segmental revenues totaled $2.75 billion last quarter, increasing 3% year over year on 2% growth in price/mix. Organically, revenues rose 2% in the period while volumes remained unchanged during the same. Price/mix increased on the company’s disciplined approach to occasion, brand, price and package strategy as well as positive business and category mix.

Notably, sparkling beverage volumes have shown no growth during the quarter that includes mid-single digit growth in Sprite, offset by a mid-single digit decline in Diet Coke. The company registered low single-digit rise in tea and coffee, offset by a low single-digit fall in water, enhanced water and sports drinks.

Precisely, the company’s sparkling beverage unit case volume was flat in the third and second quarters with a 1% decline witnessed in the first quarter of 2017. Notably, the sparkling beverage accounted for 72% of the company’s 2016 worldwide unit case volume. Hence, such vast exposure puts Coca-Cola in a weak spot.

Coca-Cola’s North American sparkling beverage business has been delivering sluggish results due to carbonated soft drinks (CSD) category headwinds. Cross-category competition and growing health and wellness consciousness are hurting demand for CSDs. Consumer tastes are swiftly shifting from CSDs to healthier beverages like energy drinks, tea juices and flavored waters.

The challenges in the CSD category have been affecting all major soft drink makers namely Coca-Cola, PepsiCo PEP, Monster Beverage MNST and Dr Pepper Snapple Group DPS, leading to lower volumes and soft sales.

Q4 Projection

Though Coca-Cola has increased marketing investments and is driving package and product innovation to boost its carbonated beverage business, these efforts are yet to show meaningful results with the trend unlikely to change in the fourth quarter as well.

Overall, Coca-Cola’s North American segmental revenues are expected to witness a 1.7% decline year over year and an 11.6%, sequentially, per the Zacks Consensus Estimate.

Apart from the North American segment, Coca-Cola’s Latin America revenues are likely to witness 9.9% growth. While the consensus estimate for Europe, Middle East and Africa segment’s revenues of $1.7 billion indicates an increase from $1.6 billion a year ago. Bottling Investments revenues are anticipated to decrease to $1.3 billion from $4.1 billion a year ago. Again, Asia Pacific revenues are expected to increase 3.2% on a year-over-year basis.

Overall Earnings & Revenue Expectations

Overall, the beverage behemoth’s fourth-quarter revenues are likely to decline on structural changes. However, the company had earlier stated that its fourth quarter might benefit from an extra day compared with the prior-year period, which equates with roughly one additional point of top-line growth for the soon-to-be-quarter.

Meanwhile, Coca-Cola expects the net impact of acquisitions, divestitures and other structural items to be a 27-point headwind on net revenues and an 11-12 point headwind on profit before tax in the fourth quarter.

The company had earlier stated that the hurricane strikes in North America during the third quarter caused disruption to its supply chain, registering an estimated $50 million rise in costs, majority of which is forecast to affect the fourth quarter.

Nonetheless, we feel pricing gains, cost cuts and productivity savings should continue to support the bottom line of this Zacks Rank #3 (Hold) company to some extent. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate of 38 cents for fourth-quarter earnings reflects 2.7% growth from the prior-year period’s profit of 37 cents per share. Also, the consensus mark for revenues of $7.4 billion represents a 21.7% decrease on a year-over-year basis.

(Read More: Will Cost Saving Plans Support Coca-Cola's Q4 Earnings?)

Coca-Cola Company (The) Revenue (TTM)

Coca-Cola Company (The) Revenue (TTM) | Coca-Cola Company (The) Quote


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