Food & Beverage

Coca-Cola's profit plunges 20 percent on bottling refranchising costs

Key Points
  • Coca-Cola earnings miss analysts' expectations by 1 penny a share.
  • Net revenues fall 11 percent for the quarter.
  • The company says it's still on track to meet full-year revenue targets, as current COO James Quincey prepares to take over as CEO on Monday.
Incoming Coke CEO: New smaller, focused company sets us up for growth
Incoming Coke CEO: New smaller, focused company sets us up for growth

Coca-Cola reported first-quarter earnings on Tuesday that fell slightly short of Wall Street expectations, however, it was optimistic about the rest of the year, raising the low-end of its 2017 outlook and eyeing additional cost cuts.

The company reported a 20 percent drop in quarterly profit, which was driven lower because of higher costs related to its refranchising efforts in Coca-Cola's North America bottling operations.

In what Coke calls an "accelerated refranchising effort," the company has said it plans to sell the remainder of its Coca-Cola-owned "cold-fill" production facilities by the end of the year. These facilities produce sparkling beverages, such as Sprite, along with still brands like Dasani. Coke will maintain ownership of its "hot-fill" facilities, which produce brands such as Powerade and Minute Maid.

Aside from the expenses incurred from these efforts, Coke was further dragged down in the first quarter by weakness at its Latin American operations.

Here's what the company reported vs. what the Street was expecting:

  • Earnings per share: 43 cents adjusted vs. estimate of 44 cents expected, according to Thomson Reuters analysts' consensus.
  • Revenue: $9.118 billion vs. the $8.874 billion projection.

Shares of Coca-Cola initially dipped in premarket trading and then began to seesaw, trading down less than half a percent, following the company's earnings call.

Coca-Cola's total sales fell 11.3 percent for the quarter, marking its eighth-consecutive quarterly decline in revenue.

"As anticipated, revenues in the quarter were adversely impacted by two fewer days and the shift of the Easter holiday," CEO Muhtar Kent said in a statement. Though, he added, "[Coca-Cola] remain[s] on track to deliver our underlying revenue and profit targets for the full year."

Coke had warned earlier this year that its 2017 profit would drop as the company works to refranchise its bottling operations. Coke has said it expects to complete the refranchising efforts by the end of this year.

Coke now expects 2017 earnings per share on an adjusted basis to fall between 1 percent and 3 percent from the $1.91 a share it earned in 2016. Previously, the company was targeting a drop of 1 percent to 4 percent this year.

Kent is stepping aside as CEO on Monday, making way for James Quincey, who is currently chief operating officer. Kent will remain Coke's chairman.

In the latest period, Coca-Cola said its worldwide unit case volume was flat.

Case volume dropped 3 percent in Latin America, driven by double-digit declines in both Coca-Cola's Brazil and Latin Center business units amid "persistent macroeconomic challenges in those markets," the company said.

Unit case volume in Coca-Cola's Europe, Middle East & Africa segment grew by 2 percent for the quarter.

Meanwhile, the company said it's expanding its productivity and reinvestment program, while looking for an incremental $800 million in annualized savings by 2019. This added savings will boost its target for its six-year savings program to $3.8 billion.

Cost reductions are being made in its supply chain, in marketing expenses and by changing its operating model, Coke said. The bulk of these savings will be realized in 2018 and 2019.

Incoming CEO Quincey said on Tuesday's earnings conference call that part of Coke's cost-cutting plan will involve the elimination of 1,200 jobs, as the company focuses on creating a "lean corporate center."

Coca-Cola prepares for management shuffle

"We are rapidly evolving our growth model to make changes that will result in an even more consumer-centric portfolio that meets people's changing tastes and preferences," Quincey said in a statement.

The incoming CEO has said he wants to focus on raising sales of smaller-sized packages and no-calorie sparkling beverages to meet the needs of consumers looking for healthier options. Last quarter, smaller-package production grew about 10 percent in volume, while no-calorie colas saw accelerated growth in the second half of 2016.

"These portfolio changes will help our consumers moderate the amount of added sugar they consume," Quincey said Tuesday.

"Our revamped portfolio, a stronger global bottling system, and a leaner enterprise structure will allow us to capture an increasing share," in the beverage industry, Quincey added, with the goal of turning Coca-Cola into a "total beverage business."

Last week, Credit Suisse raised its rating for Coca-Cola shares to outperform from neutral, saying the beverage company's new "asset-light" business model will drive profit growth over the next two years.

"After the refranchising, the core Coke business will deliver EPS growth not seen for at least the last five years," analyst Laurent Grandet wrote in a note to clients.

Quincey told CNBC's "Squawk Alley" in an exclusive interview on Tuesday afternoon that the remainder of 2017 will look "messy" for the company, but things will get "cleaner" and there will be more "robust growth" into 2018 and 2019, he said.

As of Monday's close, shares of Coca-Cola have declined a little more than 3 percent in the past year, but are up nearly 4.5 percent this year.

KO 12-month performance 

Source: FactSet