UPDATE 4-Coke sales disappoint on wet weather, weak economy

Tue Jul 16, 2013 3:06pm EDT

By Martinne Geller

July 16 (Reuters) - Coca-Cola Co reported disappointing second quarter sales on Tuesday as global economic weakness and cool, wet weather crimped demand for soft drinks.

The world's largest soda maker said sales volume rose 1 percent, which was below its expectations. It cited economic slowdowns in Europe and Asia, a consumer credit crunch in Brazil and inflation in Mexico. It also said a historically wet and cold spring in the United States, very early monsoons in India, and flooding in central Europe curbed sales and overall consumer spending.

Coke Chief Executive Muhtar Kent described the disappointing performance as an anomaly and a "confluence of events" that should not continue to occur together. He said performance would improve in the second half of 2013, even though foreign exchange rates are expected to hurt earnings by 4 percent, or double its previous estimate.

The summer weather is now more comparable with the previous year and performance should improve in Latin America, where social unrest in Brazil interrupted sales.

Coke also expects sales in China, where volume was flat, to improve because of several factors including a new management team, new packages and expanded distribution to third-tier cities.

Coke doesn't give quarterly forecasts, but Chief Financial Officer Gary Fayard said 2013 should see growth very close to the company's long-term targets, and what was expected at the start of the year.

Sanford Bernstein analyst Ali Dibadj questioned whether weak economies and weather were temporary issues, or if they represent another secular challenge for an industry already beset by increasing health consciousness and intensifying competition.

"That's not known yet," Dibadj said. He added that Coke has, of late, been driving more of its earnings through non-operating levers like tax and interest expense, while investors are looking for more operating improvements.

BUYING OPPORTUNITY?

Coca-Cola shares, which had gained about 5 percent in recent weeks, were down 1.4 percent at $40.42 in afternoon trade.

"I'd use today as a buying opportunity to add to our position," said Gary Bradshaw, a portfolio manager at Dallas-based Hodges Capital Management. "We still believe in the long-term story and think it will bounce back toward the second half of the year."

Still, if forced to choose, Bradshaw said he would opt for PepsiCo Inc shares moving forward, since that stock has gained nearly 24 percent this year, versus only 13 percent for Coke. Furthermore, PepsiCo should get a bigger boost from lower corn prices, given its Frito-Lay division.

PepsiCo plans to report second-quarter results on July 24.

In the second quarter, ended on June 28, Coke's net income dipped to $2.68 billion, or 59 cents per share, from $2.79 billion, or 61 cents per share, a year earlier.

Excluding items such as restructuring charges and tax matters, earnings were 63 cents per share, in line with the average analyst estimate, according to Thomson Reuters I/B/E/S.

Revenue dropped 3 percent to $12.75 billion, missing expectations of $12.96 billion. Foreign exchange rates hurt revenue by 2 percent.

By region, sales volume fell 1 percent in North America and 4 percent in Europe, but rose 2 percent in Latin America, 9 percent in Eurasia and Africa, and 2 percent in the Pacific region.

JP Morgan analyst John Faucher said volume results were below his expectations in all regions except North America.

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