For Americans, it's 'Have a Coke and a frown'

While its profits and sales rose last quarter, the world's largest beverage maker still faces sagging drinks sales at home.

By Parija B. Kavilanz, senior writer

NEW YORK ( -- While Coca-Cola is enjoying a strong resurgence in demand for its brands overseas, the world's largest beverage maker is still struggling with soft drinks sales back at home.

Atlanta-based Coca-Cola on Tuesday posted a second-quarter profit, excluding charges, that beat Wall Street's forecasts, driven by a 9 percent growth in total drinks case volume shipments in international markets, such as China, India and Brazil.


At the same time, total drinks sales in its key North America market continued to suffer.

Both Coke and its rival Pepsi (Charts, Fortune 500) continue to lose marketshare for their cola drinks in the U.S. as consumers increasingly favor diet sodas, bottled water, tea, coffee and energy drinks.

Despite posting higher profits and sales, Coke (Charts, Fortune 500) shares traded lower Tuesday on the New York Stock Exchange.

That may be because its North American beverage sales, which include the U.S. and Canadian markets, as measured by unit case volume growth, declined 2 percent amid a 3 percent drop in soda volume.

That's a problem for Coke since carbonated drinks still account for 56 percent of its total volume.

Coke blamed the North America shortfall on a "difficult environment resulting from increased retail pricing."

Indeed, Coke had warned last quarter that American consumers would suffer from "sticker shock" in the months ahead as the company increases soda prices to offset higher commodity costs for things like corn syrup, a sweetener, and aluminum, for cans.

But in the non-carbonated drinks categories, sales fared much better. Volume growth for Coke's energy drinks rose double-digits, including a 9 percent jump in Powerade. And Coke "Zero," a calorie-free soda launched in 2006, also enjoyed a double-digit unit case volume increase.

"In our last call [with analysts], we reiterated our commitment to win again in our home market. In the second-half of the year, we will continue to execute on our plan to do what is expected to make improvements in North America," Coca-Cola CEO Neville Isdell said during a conference call with analysts to discuss the company's results.

Isdell alluded to Coke's recent $4 billion acquisition of Glaceau, maker of Vitaminenergy and Smartwater, as being part of his overall plan to restore growth in the U.S.

Other executives also talked up Glaceau's significance to Coke's non-soda portfolio.

"Glaceau compliments every part of our business," Muhtar Kent, Coke's chief operating officer, said during the call. "It's six weeks since we closed the [Glaceau] deal and it's already performing ahead of expectations. We expect Glaceau to be a catalyst for growth across our entire North America business."

"I think this was a great quarter for Coke. They weren't firing on all cylinders, but they have rekindled their business," said Matthew Reilly, analyst with Morningstar.

"Internationally Coke has seen pockets of strength and weakness. But last quarter there were no blowups," he said. "I also don't get the sense that management will scale back expectations for growth overseas."

"North America was what I had expected and what Coke had warned would happen because of the rising commodity costs," Reilly said.

Coke's 22 international markets account for more than 70 percent of its total sales.

Although Coke did not provide guidance for the remainder of its fiscal year, Kent admitted that the company was anticipating some new challenges in the months ahead.

"We've had good growth in the third quarter. In the third quarter we will be cycling last year's [FIFA] World Cup event and the launch of Coke Zero, which was very successful," said Kent. "This is going to be a hurdle in the third quarter, but that doesn't mean that we are expecting a decline in volume."

Analysts, on average, expect the company to post a third-quarter profit of 68 cents a share on sales of $7.2 billion, according to First Call.

For the full year, Coke is expected to earn $2.59 a share and sales of $27.4 billion, according to First Call.

"I don't anticipate any major risks to our business," said Isdell. "What we have to do is be faster to market with our products, get the innovation pipeline moving quicker and ramp up our internal machinery."

However, Morgan Stanley analyst Bill Pecoriello, did spot a few risks down the road.

"Any weakness in emerging markets (given their importance to Coke's growth), greater volume weakness from significant price increases in the U.S. and further softness in the global carbonated soft drinks industry due to health and wellness trends are risks to our outlook for Coca-Cola," Pecoriello wrote in a research note Tuesday. Top of page