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Can Coca-Cola’s Margins Continue to Improve in 3Q16?

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Gross margin in previous quarter

Coca-Cola’s (KO) gross margin improved to 61.3% in 2Q16 from 60.9% in 2Q15. This improvement in the 2Q16 gross margin was a result of increased pricing, lower commodity costs, positive geographic mix, and the company’s productivity efforts.

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Operating margin expansion

Coca-Cola’s operating margin rose to 24.8% in 2Q16 from 20.9% in 2Q15 due to gross margin expansion, productivity initiatives, the timing of certain expenses, and the impact of acquisitions and divestitures. The increase in Coca-Cola’s operating margin in 2Q16 was also due to a favorable comparison with 2Q15. The 2Q15 operating margin was adversely impacted by a $380 million impairment charge related to the closing of a strategic deal with Monster Beverage (MNST), which included the discontinuation of the energy products in the Glacéau portfolio.

Margin expectations

For 3Q16, analysts expect the company’s gross margin to expand to 61.1% from 60% in 3Q15. Analysts expect the company’s operating margin to improve to 23.8% in 3Q16 from 20.8% in 3Q15.

Coca-Cola’s rival PepsiCo (PEP) reported its fiscal 3Q16 results on September 29. The company’s operating margin rose to 17.6% in 3Q16 from 8.7% in 3Q15 due to its revenue management strategies and productivity initiatives. PepsiCo’s 3Q15 operating margin had been adversely impacted by impairment charges of $1.4 billion related to its Venezuelan operations. Coca-Cola and PepsiCo together constitute 14.5% of the iShares U.S. Consumer Goods ETF (IYK).

Coca-Cola continues to focus on enhancing its margins through several productivity measures. The company’s productivity initiatives include restructuring its global supply chain, implementing zero-based budgeting principles across the company, and streamlining its operating structure.

For fiscal 2016, Coca-Cola intends to generate $600 million in productivity savings.  The company intends to reinvest its savings in marketing efforts and innovation. We’ll discuss the company’s soda volumes in the next part of this series.

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