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Coca-Cola - lockdowns hit away-from-home sales

Emilie Stevens, Equity Analyst | 21 July 2020 | A A A
Coca-Cola - lockdowns hit away-from-home sales

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Coca Cola Company (The) Com Stk USD0.25

Sell: 54.42 | Buy: 54.43 | Change -0.91 (-1.64%)
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Organic net revenue fell 26% to $7.2bn in Coca-Cola's second quarter as a result of a 16% fall in volume and a 4% headwind from pricing and channel changes. The group lost market share during the quarter as lockdowns hit sales in the away-from-home channel, which in includes pubs and restaurants, and where Coca-Cola's position is relatively strong.

Comparable operating income fell 25% to $2.2bn, excluding the impact of exchange rates. Comparable operating margins fell 0.3 percentage points to 30%.

Given current uncertainty Coca-Cola cannot reasonably estimate its full year financial and operating results.

The shares were up 2.4% in pre-market trading.

View the latest Coca-Cola share price and how to deal

Our view

Coca-Cola is sold in over 200 countries and territories, and is among the world's best known brands. Weird and wonderful variations on its 21 billion dollar brands meant sales enjoyed a long track record of growth prior to the COVID-19 pandemic.

So far, coronavirus has primarily impacted the group's sales in pubs and restaurants etc. Overall volumes fell during the last quarter but have been improving since April, and management thinks the worst is behind them. The fall is less than we probably would have expected given the nature of shutdowns in Europe, showing Coca-Cola's global diversification is moderating the disruption.

Fundamentally, Coca-Cola is a marketing machine, and its attention is devoted to soft drinks. In the long run, we think the strength of the Coke brand will be enough to carry the group to a recovery, although the next few quarters could be painful thanks to a high level of operating leverage.

Rather than investing in big manufacturing plants, Coca-Cola partners with, and holds stakes in, local bottling companies in what's known as the Coca-Cola System.

That reduces the amount of capital tied up in the business and gives the group flexibility it might otherwise lack.

Instead Coke concentrates its efforts on selling the syrups themselves, and marketing its brands directly to consumers. Strong brands mean price rises are less likely to lose customers, helping offset downturns that would otherwise affect demand. That has supported a gross profit margin of 60+% in normal times.

The acquisition of Costa Coffee puts Coke in the hot beverages market for the first time. With $500bn in annual sales globally, it's a potentially lucrative sector and Coke's got ready-to-drink cold coffees in the pipeline too. Unfortunately, lockdowns in Europe have hampered profits this year.

The Costa deal has also increased the strain on the company's balance sheet. Coca-Cola is carrying $34.7bn in net debt, compared to cash profits of $11.9bn last year. High levels of debt increase risk, even for a high quality company like Coca-Cola.

Over the long run shareholders have enjoyed some rich rewards, and trends were encouraging before coronavirus began disrupting the global economy. The dividend has risen every year for 56 years and the shares currently offer a prospective yield of 3.6%, though in such uncertain times investors should take nothing for granted.

Coca-Cola may be carrying more debt than usual and the world may seem a riskier place than it used to, but we still think people will be drinking a lot of Coke in 10 years' time.

Coca-Cola key facts

  • Current 12m forward P/E ratio: 23.4
  • 10 year average 12m forward P/E ratio: 20.0
  • Prospective yield: 3.6%

We've introduced this section in response to recent survey feedback.

Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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Q2 Results (organic, currency neutral & comparable)

Volumes improved during the quarter from a 25% fall in April to a 10% fall in June. To date volume is down by single digits in July. The improvements have been driven by higher sales in the at-home channel and the easing of lockdowns benefiting the away-from-home channel.

Europe, Middle East & Africa revenue fell 35% to $1.2bn, reflecting price and channel changes, and a 17% drop in volumes. Operating profit fell 27% to $715m, as lower revenue was partially offset by the timing of payments and cost controls.

In Latin America volume declined 9%, led by Argentina, Mexico and Brazil. Pricing and channel changes added 5% thanks to initiatives in Mexico. Revenue fell 13% to $755m thanks to the timing of shipments and stock building in the first quarter. Operating profit grew 6% to $514m.

North American price and channel changes were flat as juice and dairy offset falls elsewhere. Revenue fell 18% to $2.7bn on the back of a 16% fall in volume. Operating profits fell 21% to $584m reflecting lower revenue.

Asia Pacific revenues were $1.2bn, a 22% fall on last year. Volumes fell 18%, led by India but offset somewhat by China. Price and channel changes contributed a 1% decline. Operating profit fell 9% to $652m as cost control measures offset falls in revenue.

Global Ventures reported revenues of $295m, a fall of 52%. The division made an operating loss of $101m as nearly all Costa retail stores were temporarily closed in Western Europe.

Bottling Investments, which sell drinks to distributors, wholesalers and bottling partners, saw revenue fall 30% to $1.3bn. Operating profit fell 98% to $20m thanks to coronavirus related revenue pressure in India and South Africa.

Net debt reached $34.7bn, down from $34.8bn at the end of 2019. Coca-Cola generated $2.3bn of free cash during the first half, down 40% on last year.

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.