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Coca-Cola - higher prices help sales beat expectations

Coca-Cola reported Q1 sales of $10.5bn, ahead of market expectations, with organic growth of 18%.

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Coca-Cola reported Q1 sales of $10.5bn, ahead of market expectations, with organic growth of 18%. That was driven by improvements in pricing, a more favourable mix of products sold and an increase in concentrate sales.

Underlying operating profit, which ignores the effect of currency changes, grew 24% to $3.4bn. That reflected higher revenue offsetting increased marketing and acquisition costs.

The group continues to expect full-year organic revenue growth of 7-8%, with cost inflation in the mid-single digits.

The shares were broadly flat in pre-market trading.

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

Our view

Beverage giant Coca-Cola is showing how and why it's such a global powerhouse. Despite the challenges of rising costs and a consumer feeling the pinch of a cost-of-living crisis, performance pushed ahead of expectations. That's testament to the brand power, which means prices can flex to offset increased costs whilst the loyal customer base will keep coming back for more.

It's also testament to the operating model. 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's supported a gross profit margin of 60%, which in turn has backed over half a century of dividend growth. Whether this can be repeated going forward remains to be seen though. Ultimately all dividends are variable and not guaranteed.

Fundamentally, Coca-Cola is a marketing machine, and its attention is devoted to soft drinks. A rise in marketing spend suggests the group isn't sitting back on its laurels though. Coke is updating its strategy and brand portfolio to focus more on sharpening its proposition on a regional and local level, but it looks more like a refinement than a revolutionary change to us. Nonetheless, it's encouraging to see the group moving forward.

The acquisition of Costa Coffee put Coke in the hot beverages market for the first time. And the group's also added BODYARMOR to its stable of brands, helping it increase sales in the growing global health drinks market.

For all their benefits, these acquisitions increased the strain on the company's balance sheet, Coca-Cola is carrying $31.3bn in net debt, which is slightly higher than ideal even for a business expected to generate over $10bn in free cash flow this year.

Over the long run shareholders have enjoyed some rich rewards, and trends look encouraging again now that restaurant and bar sales are back. Coca-Cola owns one of the best brands in the world, and there's a lot to be said for that in an uncertain environment. Though expect to pay a premium, with the group trading a decent way ahead of its long-term valuation.

Coca-Cola key facts

All ratios are sourced from Refinitiv. 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.

First Quarter Results (organic)

Sparkling soft drink and trademark Coca-Cola sales grew 7% and 6% respectfully, with growth across all geographies. Nutrition, juice, dairy and plant-based beverages grew 12%, led by the US, China and India. Hydration, sports, coffee and tea grew 10%, with the strongest growth from Latin America and Europe, Middle East & Africa. BODYARMOR and Powerade supported 22% growth in sports drinks.

Europe, Middle East & Africa saw sales grow 22% to $1.8bn, volumes grew 11% and price/mix was up 6%. Volume growth was most prevalent in Western Europe, Egypt and Pakistan. Operating profit grew 26% to $1bn as higher sales offset increased marketing spend.

Strong growth across most categories helped Latin American report sales of $1.2bn, up 39%. That reflected a 19% rise in price/mix and 9% volume growth. Operating income grew 42% to $760m.

North America posted sales of $3.6bn, up 14% as both volumes and price/mix grew. Volume growth of 5% was driven by recovery in the fountain business as covid restrictions continued to ease and strong soft and sports drink trading. Price/Mix increased 11% as premium offerings, out-of-home channels and the fountain business performed well. That helped operating income rise 19% to $1.1bn.

Sales grew 5% in the Asia Pacific region to $1.4bn as the resurgence of restrictions in China was offset by strong volumes in India and the Philippines. Sale growth was offset by higher marking spend which meant operating income was flat at $664m.

Global Ventures saw sales grow 34% to $729m as the group lapped a comparable period where Costa stores were closed in the UK. Operating profit of $51m was up from $26m.

Driven by India and the Philippines, Bottling Investments saw sales up 12% to $2.0bn. Operating income grew 50% to $193m.

Higher incentives and less favourable working capital movements meant free cash flow fell $1.0bn to $406m. Net debt of $31.3bn was up from $30.1bn the prior year.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. 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 disclosure for more information.

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Written by
Matt-Britzman
Matt Britzman
Equity Analyst

Matt is an Equity Analyst on the share research team, providing up-to-date research and analysis on individual companies and wider sectors.

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Article history
Published: 25th April 2022