Coke Leaves a Bad Taste on the Street


By David Kiley Where's the fizz? That's what Coca-Cola (KO) investors are trying to find out after the soft-drink maker warned Wall Street on Sept. 15 of weak second-half earnings. Soft sales in North America, higher costs in Germany, and wet weather in Europe were blamed. Comparisons for Coke were particularly disappointing because Pepsi's soft-drink sales are up worldwide amid the same conditions.

Coke's announcement that its third-quarter per-share results will drop at least 24% came from CEO E. Neville Isdell, who took over from Doug Daft last June -- with a mandate to get the outfit back on track. But Coke shares are off 20% so far this year and fell more than 4% to hit a new 52-week low, just above $41, after Isdell's warning. "Today, we're not growing the way we should be," Isdell admitted. Meanwhile, Pepsi (PEP) shares are up about 22%, to around $49.50, so far in 2004.

RARE AD HIT. Unlike Pepsi, Atlanta-based Coke has no snack division to offset softening soft-drink sales, so it's extra dependent on selling soft drinks. That requires a careful balance of pricing, distribution gains, and most of all, marketing. But Big Red has been in the marketing and advertising doldrums. In 2003, it seemed to score fairly well with its "Real," campaign, but this is arguably the first hit set of ads for Coke in more than a decade.

They showed celebrities as real folks doing everyday things. In one ad, Courteney Cox loads up husband David Arquette's glass with extra ice, leaving it with less Coke for him and more for her. But ads have been less interesting this year. And Coke is choosing a curious and creatively weak strategy to enliven sales of Diet Sprite by renaming the brand, Diet Sprite Zero.

Plus, new products at Coke, like the mid-calorie/mid-carb C2, are foundering. A plan that cuts consumer prices is expected soon to drive volume -- but not necessarily profits.

REDUCE OR BUY?. Analysts continue to be divided on Coke's prospects. UBS lowered its rating on Sept. 9 by two notches to reduce, from buy, saying disappointing results may prompt the new CEO to launch an aggressive and expensive restructuring. UBS slashed its stock-price target for Coke to $34, from $60. Without a turnaround plan, says UBS, Coke will deliver below-market long-term per-share earnings growth of 5% a year.

Legg Mason on the same day, however, told clients the stock is oversold, that the global sales environment is improving, and that CEO Isdell will implement a plan that would revive sustainable growth. Legg Mason upgraded Coke buy, from hold, and added it to its "Select List." Legg Mason's Mark Swartzburg says Wall Street's consensus of operating profit growth -- 3% to 4% a year -- is too low. He sees a range of 6% to 8%.

Coke now says its reported net earnings for the July-September period will be in the range of 35 cents to 38 cents. At 38 cents, that would be a 24% EPS decline from the 50 cents Coke reported in the same period in 2003. Excluding charges, Coke said it now forecasts third-quarter EPS in the range of 46 cents to 48 cents. Analysts surveyed by Thomson First Call were looking for it to post third-quarter EPS of 54 cents, excluding one-time items. For the second half, Coke now expects to report EPS in the range of 88 cents to 92 cents. Third-quarter and year-to-date earnings come out on Oct. 21.

The numbers so far tell it all: Isdell needs to show creative leadership fast to bottlers, Wall Street, and Coke's stable of ad agencies. The longer it stays flat, the harder it'll be to get the bubbles back. Kiley is Marketing editor for BusinessWeek in New York


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