Coca-Cola sales boost is a relief to investors

Coca-Cola showed signs that its cost-cutting and marketing efforts are starting to take hold in the first three months of the year, reporting its first sales rise in nine quarters despite a sharp decline in Diet Coke.

Net income fell 4 per cent to $1.56bn, or 36 cents a share. However, earnings adjusted for additional costs including early debt repayment and restructuring were 48 cents per share, beating the consensus forecast of 42 cents and sending Coke shares up 1.6 per cent to $41.43 by lunchtime.

Coke has been under pressure as consumers in the US and other advanced markets have lost their appetite for fizzy drinks amid growing concerns about their health effects. The Diet Coke brand, volumes of which dropped 6 per cent in the quarter, has also been hit in North America amid a shift away from artificial sweeteners.

In an attempt to meet changing consumer tastes chief executive Muhtar Kent has been shifting towards using smaller packaging while broadening the company's already extensive range of drinks, such as Coke Life, which it will introduce into more markets this year. It is also making acquisitions, such as the stake it is buying in energy drink maker Monster Beverage.

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It said it was on track to cut costs by $500m this year, using the savings to spend more on advertising.

"If weren't for savings, we wouldn't be able to [spend on] increased marketing, generating other things that are part of our . . . strategy of focusing on revenues, productivity and rewiring the organisation," Mr Kent said.

The company saw volume growth of 1 per cent for both still and sparkling beverages, and volumes of both Coca-Cola and Coke Zero increased. It sold 5 per cent more concentrate to bottlers and succeeded in increasing prices.

"Today we got a slight sense of Coke starting to turn a corner," said Ian Shackleton, an analyst at Nomura. "We have stability in the business at the very least and the negative impact from forex appears to have dropped off a bit."

The strong dollar - up more than 20 per cent this year compared with a basket of major currencies - took 6 percentage points off pre-tax profit in the quarter.

For the full year, Coke expects the currency to take 6 percentage points off its net revenue, and 7 percentage points from its pre-tax profit, which Nomura had estimated would see a 9 percentage point dollar impact.

Mr Kent was cautious about the outlook, however, due to the volatile macro economic outlook and the continued strong dollar. The company added that the effect of improved pricing could diminish in the second half as the year-on-year comparisons petered out.

However, he maintained Coke's guidance for full-year earnings growth in the mid-single digits and added that Coke continues to aim for 5-6 per cent sustainable sales growth, without giving a time frame.

"Sustainable revenue growth in a volatile macro economic environment - that's the picture of success," he said.

The economic recovery in the US, which accounts for nearly half of the company's sales but much less of its profit, is "raising hopes" that wage growth and lower fuel prices could translate into higher consumer spending, Mr Kent said.

However, the company faces headwinds in China, Brazil, Russia and other emerging markets where economic growth is slowing, while Japan remains sluggish.

Coke expects a better environment in Europe when the European Central Bank's landmark monetary easing programme starts to filter through into the broader economy, but the company noted that Greek political headwinds remained a concern.

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