Coca-Cola is set to report its Q2 earnings on Tuesday, July 21, before the market opens.

The Coca-Cola Company (KO) faced one of the most difficult periods in its history during the early stages of the coronavirus pandemic. The shutdown of dine-in restaurants along with other public venues has represented a major disruption to its global business. The company is set to report its Q2 earnings, which will likely include the bulk of the impacts with the operating environment significantly impaired between April and June. The stock has lagged the broader market and still down about 22% from its previous all-time high with a focus on the company’s exposure to the lower sales outside of consumer homes. The recent trends of spiking coronavirus cases and several regions rolling back the pace of reopening now represent a headwind in its recovery outlook. While we’re confident Coca-Cola is a company that will be around for generations to come, the near-term outlook is weak, and we expect shares to remain volatile.

Regarding financial performance, analysts are betting on a revenue wipeout: 27% YOY decline to $7.26 billion. Adjusted EPS of $0.41, if achieved, would also point at sharp deterioration over 2019, in this case by nearly 35%.

A tough quarter ahead:

These subdued analyst expectations, to put it mildly, suggest that Coca-Cola is about to report on what could be the worst quarter of its 100-year-old history as a public company. At the same time, the gloomy projections are aligned with CEO James Quincey’s early observations of the second period, shared back in April.

Q2 Earnings Preview:

Coca-Cola reports its Q2 earnings on Tuesday, July 21, before the market opens. Current consensus expectations are for EPS of $0.42, which if confirmed would be 33% lower compared to the period last year. A revenue estimate of $7.42 billion represents a 25.9% decline on a year-over-year basis.

The context here is that Coca-Cola began the year with generally positive growth momentum from a strong 2019. The Q1 results released back in April highlighted a 3% y/y volume growth through February before the significant impact of lockdown orders across the world took effect towards the end of March. With an update through April, Coca-Cola was seeing a 25% decline in volume compared to trends from the year prior.

This global dynamic included a collapse in the “away-from-home” channels like dine-in restaurants and public events, while some more positive trends in at-home consumption mitigated what would have been an even deeper decline. By this measure, the market estimate for a 26% decline in revenue for the entire quarter implies that the trends from April lasted through June.

In terms of the company’s financial position, despite the challenges, Coca-Cola remains well-capitalized with overall strong liquidity. In March, the company issued $5 billion in new debt to cover the near-term financial pressures.

Coca-Cola CFO John Murphy participated in an investor conference in May and provided an update in regards to how the company sees the trends as progressing. The key point here is that there is an expectation for only a gradual recovery that will come in stages.

From the early lockdown and strict restrictions, different regions of the world are reopening at different paces. Until the virus is contained, Coca-Cola is working with the assumption that sales will remain pressured as consumer behaviors have changed. Favorably, the Chinese market is recognized for being ahead of the curve in terms of recovering with its successful containment efforts, and Coca-Cola has seen some positive signs in that market.

The Second Wave of Coronavirus:

The major development in recent weeks has been a spike in coronavirus cases particularly in the U.S. Several states including Arizona, Florida, Georgia, and Texas along with California are seeing a record number of new infections, forcing a rollback of reopening plans and new restrictions. California, which represents the world’s 5th largest economy, is currently in an effective lockdown by banning indoor dining, and most other public venues remain closed.

While consumers are still able to purchase Coca-Cola products at retailers, and the option for food and beverage take-out supports volumes, the lost volume from other channels is a more significant disruption.

Investors should recognize that the “away-from-home” segment, which represents around 50% of the total Coca-Cola business, is much broader than simply restaurants. Consider that major events like concerts, sports, festivals, conferences, and other locations including schools and workplaces are essentially a point of sale and still do not have a timetable to completely reopen. These are global themes, and Coca-Cola is feeling the impact in all regions.

In the past month, reports have confirmed that many schools plan to be online-only for the upcoming semester while some university programs are canceling athletics. Even cruise lines were hit with an extension of a new no-sail restriction through at least September by the CDC. With the outlook deteriorating, the first conclusion we can draw is that the disruptions are set to last longer than previously anticipated. Again, these are all lost opportunities for the consumption of Coca-Cola products.

COCA-COLA SHORT (Sell)

ENTER AT: 46.29

T.P_1: 44.41

T.P_2: 42.93

T.P_3: 40.90

S.L: 47.51