Will Cost Cut, Innovations Drive Coca-Cola (KO) Q1 Earnings?

The Coca-Cola Company (NYSE:KO) is slated to report first-quarter 2018 results on Apr 24, before the opening bell. Last quarter, the company delivered a positive earnings surprise of 2.63%.

In fact, this beverage giant delivered a positive earnings surprise in three of the trailing four quarters, with the average beat being 1.48%.

A Look at Coca-Cola’s Revenue Performance

Coca-Cola has been struggling to boost sales amid weak demand in certain emerging and developing markets, and shifting consumer preferences. The company has been witnessing a decline in revenues for the last 11 quarters, primarily due to weak volumes especially in the sparkling beverage category, and structural changes.

Last quarter, Coca-Cola’s revenues declined 20% year over year due to the negative impact of structural items. Acquisitions/divestitures and structural items had a 26% impact on revenues. This time again, the company expects the same degree of adverse impact on net revenues from acquisitions, divestitures and other structural items. Moreover, the first quarter will have one less day than the same period last year. However, the company expects currency to have a positive impact on quarterly net revenues by 2%. Again, revenues will be positively impacted by 1% from Accounting Standards Update 2014-09.

That said, the company’s organic revenues grew across the board in the last reported quarter. Coca-Cola has been firing on all cylinders to rejuvenate its portfolio. It has ramped up its efforts to transform into a total beverage company with a broad, consumer-centric brand portfolio and an asset-light business model. Coca-Cola is pursuing investments in newer revenue platforms to boost long-term sales and profits.

Coca-Cola witnessed solid growth in the preceding quarter in its developed markets, mainly in Europe and North America, buoyed by improving execution in recently refranchised territories, higher pricing, improved product innovations and packaging strategies. Although other emerging markets were more challenging in the first half of 2017, the company saw an improvement in the key markets like India, Argentina and Brazil as it moved into the second half.

Overall, for the first quarter, the Zacks Consensus Estimate for Coca-Cola’s total revenues stands at $7.43 billion, implying 18.6% year-over-year decline.

Segment Discussion

North America, comprising about 30% of the total revenues, is expected to witness solid growth in the first quarter. The Zacks Consensus Estimate for the segment’s revenues of $2.49 billion reflects growth of 96.5% from the preceding quarter and 4.1% sequentially.

Latin America revenues are likely to witness 9.3% decline sequentially but 9.4% growth year over year. On the other hand, the consensus estimate for Europe, Middle East and Africa segment revenues of $1.73 billion indicates a decrease from $1.75 billion in the last quarter but an increase from $1.63 billion a year ago. Bottling Investments revenues are likely to decrease to $1.1 billion from $3.9 billion a year ago and $1.1 billion last quarter. Again, Asia Pacific revenues are expected to increase 0.1% on a year-over-year basis and 17.3% sequentially.

Cost Savings to Drive Growth

The cola giant has been focusing on increasing efficiency and improving its margins amid tough business conditions. To that end, Coca-Cola’s strategy to refranchise its bottling operations facilitated improved margins by reducing its exposure to the capital-intensive bottling business. Refranchising efforts, though likely to hurt sales/profits in the near term, will result in higher operating margins, lower capital spending and improved return on invested capital over the long term.

Coca-Cola’s adjusted EPS got a 5.4% and 2% boost in Q4 and Q3, respectively, from the year-ago level (after falling for nine consecutive quarters) despite weak revenues. The company’s earnings have topped the consensus mark in 13 of the past 14 quarters.

The improvement was attributable to its ongoing productivity initiatives. Its adjusted gross margin expanded 480 basis points or bps in Q4. Comparable operating margin also grew 540 bps. The company’s plan to refranchise its low-margin bottling operations and transform into a capital-light business is helping to improve its margins. The trend is likely to continue in the to-be-reported quarter as well.

Again, the company is on track to deliver annualized savings of about $3.8 billion by 2019 through its productivity programs. These include restructuring of its global supply chain, zero-based budgeting and streamlining its operating model.

Overall, the beverage behemoth’s first-quarter revenues are likely to decline owing to structural changes. Nonetheless, pricing gains, cost cuts and productivity savings should continue to support the bottom line to some extent.

For the first quarter, the Zacks Consensus Estimate for earnings is pegged at 46 cents, reflecting a 7% year-over-year increase.

Here is What Our Quantitative Model Predicts:

Coca-Cola does not have the right combination of the two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher — which are required to be confident of an earnings beat.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks ESP: The Earnings ESP for Coca-Cola is -0.34%.

Zacks Rank: Coca-Cola carries a Zacks Rank #3, which increases the predictive power of ESP. However, we also need to have a positive ESP to be confident of an earnings surprise.

Stocks to Consider

Here are a few companies in the Zacks Consumer Staples sector that can be considered, as our model shows that they have the right combination of elements to post an earnings beat in their upcoming releases.

The Boston Beer Company, Inc. (NYSE:SAM) has an Earnings ESP of +35.65% and a Zacks Rank #3. The company is slated to report quarterly results on Apr 25.

The Hershey Company (NYSE:HSY) has an Earnings ESP of +0.53% and a Zacks Rank #3. The company is scheduled to report quarterly results on Apr 26. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Coty Inc. (NYSE:COTY) has an Earnings ESP of +5.26% and a Zacks Rank #3. The company is slated to report quarterly numbers on May 9.

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