Coca-Cola (NYSE:KO) reported better-than-expected Q1 2023 earnings and revenue, driven by growing demand for its beverages and higher prices.
The soft drink giant reported adjusted earnings per share (EPS) of 68 cents in the first quarter, beating the consensus estimates of 64 cents per share, according to Refinitiv. Net income attributable to shareholders stood at $3.11 billion, or 72c per share, compared to $2.78 billion, or 64c per share, the company reported in the same quarter last year.
Adjusted revenue came in at $10.96 billion, while analysts were looking for $10.8 billion. Net sales grew 5% year-over-year to $10.98 billion, while organic revenue - which excludes the impact of acquisitions and divestitures - rose 12% in the quarter.
Higher Coke Prices Fueling the Beat
The robust revenue growth was mainly fueled by higher prices of Coke’s drinks. Like most companies, Coca-Cola has also been raising prices to weather the record-high inflation. Most of the hikes were imposed in 2022, though the company said it kept raising prices across operating segments in the first quarter of this year.
However, the average price increase of 11% in the quarter did not have a strong impact on demand as Coke’s unit case volume rose just 3%. This is because volume remained flat in the North American region, while in Europe, the Middle East, and Africa it declined by 3%. On the other hand, demand was notably better in Latin America and the Asia-Pacific region.
"The strength in case volume growth gives us confidence that sales momentum can continue as Coca-Cola's sales strategies are resonating with consumers," said Brittany Quatrochi, an analyst at Edward Jones.
The company’s sparkling soft drink business saw 3% volume growth in the three-month period. Its flagship Coca-Cola drink and Coca-Cola Zero recorded volume growth of 3% and 8%, respectively.
The proactive price increases have been a foundation of Coke’s strategy to battle inflation, though it was not the only factor that helped the company weather the recent economic headwinds.
It was the company’s ability to “stay with the consumer” that had a crucial impact in that battle, Quincey told investors during a call.
“At its core, revenue growth management is about consumer-centric segmentation,” he said.
“Ensuring we have the right product, in the right package, in the right channel, at the right price points to drive transactions and meet consumers where they are.”
He added that a part of the company’s consumption has been fueled by premiumization, while the other part was driven by affordability. This was made possible by the company’s efforts to keep close to its consumers in order to identify the best opportunities to tap into, said Quincey.
Uncertainty Remains
Still, Coca-Cola CEO James Quincey warned about “uncertainty on how the consumer environment may ultimately play out in 2023."
He also said that the recent turmoil in the banking sector added to uncertainty related to spending behaviors in Europe, while in China, consumption continues to recover to pre-pandemic levels after the recent easing of zero-Covid restrictions.
The company’s operating margin in Q1 fell to 30.7%, down from 32.5% in the year-ago period, due to pressures from mounting operating costs, higher marketing spending, more investments, and a strong dollar.
During the earnings call, Coke executives said freight costs, and some expenses related to commodities were lower, though prices for juices and sweeteners continued to surge.
"With pricing expected to moderate over the course of the year, this should come in tandem with moderating levels of commodity inflation, which should help to protect profitability," said Wedbush analyst Gerald Pascarelli.
Looking ahead, Coca-Cola reiterated its earlier outlook for 2023, expecting organic revenue growth in the range of 7% to 8% for the year, while comparable EPS is estimated to increase by 4% to 5%.
Further, the Atlanta, Georgia-based company expects commodity inflation to weigh on its cost of goods sold by mid-single digits this year. The company’s CFO John Murphy said oil spot prices and freight costs were trending down, but other commodities’ costs are expected to remain elevated for a while longer.
CEO Quincey said earlier this week that the company’s “consumer-centric segmentation” has played a central role in managing the rapidly-changing macroeconomic environment in the past year and a half.
Moreover, Coke is also closely collaborating with global agency partner WPP (LON:WPP) to leverage digital capabilities aimed to help “engage consumers through passion points.”
Retail Trends Remain Strong
Coke and its arch-rival PepsiCo (NASDAQ:PEP) faced very little pushback from consumers to price hikes given the two companies’ dominance in the global soft drinks market. PepsiCo raised its full-year outlook on Tuesday after Q1 results topped analyst expectations.
Similarly, the world’s biggest food and beverage company Nestle (OTC:NSRGY) (SIX:NESN) reported Q1 sales that topped anlyst estimates by a small margin, helped by recent price hikes by the company to offset poor sales volumes.
The maker of Nescafe Coffee and KitKat bars said sales increased by 5.6% in the quarter to 23.5 billion Swiss francs ($26.48 billion), while analysts were estimating 23.27 billion francs.
The Swiss company raised its prices by 9.8% during the quarter, however, sales volumes - which the company sees as the source of real internal growth - declined by 0.5%. The exceptions were Nestle’s confectionery and pet food categories, which both saw positive volume growth.
Summary
Coca-Cola delivered another solid set of quarterly results as it continues to enjoy strong demand for its popular soft drinks. The results are likely to reiterate the view that Coca-Cola stock is a high-quality, defensive name, in a sector that generally performs well in times of market uncertainty.
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Shane Neagle is the EIC of The Tokenist. Check out The Tokenist’s free newsletter, Five Minute Finance, for weekly analysis of the biggest trends in finance and technology.