NEW YORK (CNN/Money) -
Soft drinks maker Coca-Cola warned Wednesday that its second-half earnings will miss Wall Street expectations, as its new CEO acknowledged the company has priced its products too high recently, cutting into sales volumes.
Shares of Coke (KO: down $2.02 to $40.85, Research, Estimates), a component of the Dow Jones industrial average, lost about 4 percent in early trading following the pre-market warning.
The No. 1 soft drink maker said it expects to earn between 46 cents to 48 cents a share in the third quarter on its way to earning 88 cents to 92 cents a share in the second half of the year.
Analysts surveyed by earnings tracker First Call forecast EPS of 54 cents a share in the third quarter and 99 cents in the last two quarters of the year.
The company earned 55 cents a share in the third quarter of 2003, excluding special items, and $1.01 on that basis in the second half of 2003.
In its statement, the company blamed the reduced forecast on unfavorable volume trends in the North America bottle and can business, and admitted it had not reacted quickly enough to a downturn in the market.
"An effective volume and value growth strategy is critical to the success of our system," said a statement from Neville Isdell, Coke's new CEO. "While this strategy is working in some regions, in other key regions we still have much work to do. The benefit of our actions may not be immediate."
During a call with investors, Isdell acknowledged that much of the volume problems came from the company getting too aggressive on prices, which he said put prices of many of its products about 6 percent higher than consumers are historically used to seeing. While he didn't explicitly promise lower prices, he said the company would be re-evaluating its pricing strategy, which he said was more art than science.
"We have a long way to go in mastering that art," Isdell told analysts and investors. "As we identified the fact we were under pricing, the pendulum swung too far over to only improve price. The pendulum should be stopped in the middle so we have a proper balance between volume and price."
The company said it was also hurt by unseasonably cool and rainy weather in its highly profitable Northern European markets, leading to high-single digit volume declines in the third quarter compared to a year earlier, when the region was gripped by a heat wave.
Wednesday's warning was foreshadowed last week when Coca-Cola Enterprises (CCE: Research, Estimates), the world's largest bottler of Coke products, lowered its earnings forecast for the year, citing lower-than expected volume in North America and Europe. Shares of Coke have lost 6.1 percent since the Coca-Cola Enterprises warning even before Wednesday's decline.
Isdell acknowledged rumors in the market that Coke was considering buying Coca-Cola Enterprises but said there was nothing to the speculation. He said the company would consider acquisitions of some other companies, particularly makers of non-carbonated beverages. But he said so far the prices that such companies are seeking are too great to make a deal feasible.
"We're in an immensely strong position due to cash position we have. We can buy almost anything we want. But nothing you see out there right now is at the right price," he said.
Robert Van Brugge, analyst with Bernstein & Co., said that while the underlying issues dogging the company were well known, the extent of the problems and the earnings impact were something of a surprise.
"The North American problems are partly things outside their control, such as bad weather," he said. "But their pricing strategy has backfired. It's been much too aggressive. And they have not introduced enough interesting new products to spur greater consumption."
The company said it was also hurt by health concerns and the new focus on obesity among consumers. Isdell said the company would make more effort to respond to that market, but that it would also be more aggressive in disputing some claims about obesity and its products.
Van Brugge, who has a neutral rating on Coke's stock, said that the company's lower carb product C2 has been a failure that has not lived up to expectations. He said some other new products, such as Diet Coke with Lime, have seen sales come at a cost of existing products.
Isdell defended C2's performance, saying the individual 20-ounce bottles have sold very well, hitting internal company sales forecasts. He said it has also been a success in Japan. But he acknowledged that sales of multi-cans packs of the product have been a disappointment.
Coke announced in December 2002 that it would no longer offer earnings guidance. But Isdell said in his statement it made the exception with this warning.
-- the analyst quoted in this report owns no shares of Coca-Cola and his firm does not do investment banking for the company.
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