Goldman: Coke Q3 Performance Encouraging

The Coca-Cola Company’s performance in Q3 has left Goldman Sachs Equity Research analysts encouraged by what they saw, with better-than-expected organic sales growth indicating a path to recovery in the months ahead.

Organic sales were down 6% year-over-year, still good enough to beat Goldman’s projections, while continued reductions in advertising and marketing spend — down 30% in Q3 — helped boost operating margins up 230 base percentage points year-over-year. Declines in global volumes have also been decelerating in recent months after reaching mid-single digits in late summer.

In a report published yesterday, Goldman analysts said that a refreshed marketing strategy and an increase in marketing spend from the world’s largest beverage company means “it’s possible” for Coke to revive its immediate consumption business and “potentially, emerge stronger.”

“[Coca-Cola’s] recovery remains top of mind among investors, and we were encouraged that management continues to be biased toward further prioritizing A&M spend shade of the curve (where it makes sense) and believes that the biz is likely better positioned now from a [long-term] standpoint versus where it was in 2019 (especially as [Coke] executes on its recently announced restructuring initiatives),” the report stated.

Much of the discussion around Coke recently has centered around the company’s decision to discontinue roughly half its total beverage portfolio, including underperforming legacy brands like Odwalla, Tab and Zico. Goldman analysts noted that the company’s management is confident in its “conscious decision” to make cuts, which will reduce complexity without significantly impacting top-line profits. Their departure will also see Coke place greater emphasis on the brands “most deserving of our investment and resources,” including Topo Chico Hard Seltzer, Coca-Cola Energy and AHA.

Though broadly optimistic, the report noted that, based on Coke’s management commentary from its earnings report, it’s unlikely that the soda giant fully returns to meeting the objectives of its growth algorithm until 2022. The potential for colder weather in the Northern hemisphere to spur an increase in COVID-19 infections and further dampen volume gains is also a factor.

“Against this backdrop, we continue to see a neutral risk-reward for [Coke] and maintain our neutral rating,” the report stated.