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Coca-Cola Trends Positively after Dismal Q2 Results

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COVID-19 significantly hurt Coca-Cola’s (NYSE:KO) second-quarter results, which it reported yesterday. In the quarter, the beverage giant’s revenue fell 28.5% YoY (year-over-year) to $7.15 billion, missing Wall Street’s expectation of $7.18 billion. The revenue decline reflected restaurant closures and the loss of sales from other away-from-home consumption events. Coca-Cola generally derives about 50% of its revenue from away-from-home channels. Excluding the impact of currency fluctuations and acquisitions and divestitures, the company’s organic revenue fell 26%.

However, investors were pleased with the company’s update about improving trends in away-from-home channels with the easing of lockdowns. Coca-Cola stock rose 2.3% yesterday. The stock had fallen 17% year-to-date as of July 20.

COVID-19 drags down Coca-Cola’s Q2 earnings

In the second quarter, Coca-Cola’s adjusted EPS fell 33.3% YoY to $0.42, but beat analysts’ forecast of $0.40. Lower revenue and currency headwinds impacted its bottom line.

The company’s adjusted gross margin narrowed by 300 basis points YoY to 57.7% in the second quarter. Meanwhile, its adjusted operating margin contracted by about 30 basis points, to 30.0%. The company’s cost management efforts helped mitigate some weakness in its top line.

Coca-Cola’s volumes fell in all of its major beverage categories as lockdowns impacted on-the-go beverage sales. The company’s overall unit case volumes fell 16% in the quarter, and its sparkling soft drink volumes fell 12% YoY. Likewise, volumes in the juice, dairy, and plant-based beverages category and water, enhanced water, and sports drinks category fell 20% and 24%, respectively. The closure of Costa Coffee retail locations in Western Europe dragged down tea and coffee volumes by 31%.

Rival PepsiCo (NASDAQ:PEP) fared better than Coca-Cola due to strength in its snackfood business. PepsiCo’s second-quarter revenue declined 3.1% to $15.95 billion, and its organic revenue fell 0.3% YoY. The company’s second-quarter adjusted EPS were 14.3% lower at $1.32 due to lower revenue and higher costs amid the pandemic.

Managing through the pandemic

Coca-Cola believes the second quarter will likely be its most challenging of the year. Trends are improving, with its July unit case volumes falling by mid-single digits versus a 25% and 10% fall in April and June, respectively. Higher consumption in at-home channels and improving trends in away-from-home consumption are improving its numbers.

The company withdrew its full-year guidance in March as pandemic-related uncertainty made it difficult to estimate the outbreak’s impact on business. Coca-Cola’s strategy now is to focus on fewer but bigger and stronger beverage brands. The company also continues to innovate beverages based on evolving consumer tastes.

Amid the “new normal,” the company announced its plans to launch touchless Coca-Cola Freestyle machines in the US by the end of this year. The machine allows consumers to choose and pour drinks without creating an account or downloading an app.

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