Coca-Cola beats on earnings, but cuts revenue forecast

Coke reports mixed quarter
Coke reports mixed quarter
Coca-Cola COO: Macro environment worsened in Q2
Coca-Cola COO: Macro environment worsened in Q2

Coca-Cola posted earnings on Wednesday that beat analysts' estimates, but strong international headwinds forced the company to cut its organic revenue forecast for the year.

Shares of the Dow component fell as much as 3.4 percent on the more downbeat forecast.

The Atlanta beverage giant said second-quarter net income rose to $3.45 billion, or 79 cents a share, compared with earnings of $3.11 billion, or 71 cents a share, in the year-ago period.

Net income in the latest period included a noncash gain tied to the deconsolidation of its German bottling operations, partially offset by charges tied to refranchising its North American territories and restructuring.

Excluding those items, Coke said it earned 60 cents a share, outpacing analysts' estimates of 58 cents a share, according to Thomson Reuters. This makes six-straight quarters that Coke has surpassed Wall Street's expectations.

But revenue fell 5 percent, coming in at $11.54 billion in the latest quarter, shy of Wall Street's expectations, which called for $11.6 billion, on average. Second-quarter sales fell in each of Coke's regional units, except in North America.

In the second quarter of 2015, Coke posted revenue of $12.16 billion.

Second-quarter global unit case volume was flat versus a year ago, according to the company.

"Strong performance in some of our largest and most developed markets, including the United States, Mexico and Japan, was offset by difficult external conditions in many of our emerging and developing markets, including China and Argentina. These factors combined to put pressure on our volume and top-line performance in the quarter, especially where we own bottling businesses," CEO Muhtar Kent said in a statement.

"In these international operations where external headwinds have proven to be more severe than originally forecast, we are taking action by reassessing local market initiatives where needed and continuing our efforts in driving productivity."

In North America, Coke said it gained share in nonalcoholic ready-to-drink beverages for the 25th consecutive quarter.

While sparkling beverages declined 1 percent in the region, growth in Sprite, Fanta and energy drinks helped to offset a decline in Trademark Coca-Cola. Coke's portfolio of still beverages — Dasani, Vitamin Water, Minute Maid and Powerade — grew 3 percent in the quarter.

"In the end, I think we have a really great run going in our North American business. The beverage business is growing dollars, we're growing dollars, we've been expanding our portfolio, sparkling growing dollars, our stills beverages are growing dollars, so we're very confident that we've found the right mix of marketing, innovation and execution to drive our North American business forward," Coke COO James Quincey said. "It's had a good run and we foresee that continuing into the future."

In Asia, sales fell 2 percent on soft volume and slower sales growth in China caused by a weakening consumer environment. Coke said it is playing the long game, however, and outlined a three-pronged strategy to address these issues in the region during its earnings conference call on Wednesday.

The company plans to target rural areas with more affordable products, provide trade incentives to wholesalers and launch premium products in stronger markets.

Organic revenue forecast cut

In light of these developments, Coke cut its expectations for organic revenue, which it now sees up 3 percent in 2016.

Previously, Coke put its 2016 organic revenue growth at 4 percent to 5 percent. Organic revenue excludes foreign currency effects and the impact of acquisitions and divestitures.

However, Coke maintained its expectations for full-year comparable currency neutral income before taxes, structurally adjusted, of a gain of 6 percent to 8 percent.

Coke also expects full-year earnings per share to fall 4 percent to 7 percent excluding items, versus the prior year's EPS of $2. That equates to a range of $1.86 to $1.92 a share. Ahead of Wednesday's report, analysts, on average, were expecting Coke to earn $1.94 a share, according Thomson Reuters.

Ahead of the earnings release, Jefferies analyst Kevin Grundy anticipated that the organic revenue forecast would be trimmed, citing Nielson data and the modest sales growth seen at rival Pepsi during the latest quarter.