The Coca-Cola Company (KO -Analyst Report) could not sustain the momentum witnessed in the first half of the year in the third quarter as soda volumes slowed down mainly in the developed nations of North America and Europe.

The Zacks Rank #4 (Sell) company beat the Zacks Consensus Estimate only by a penny but missed the same for revenues. Moreover, management warned that earnings growth rate could miss the long-term targets in both 2014 and 2015. Share price declined almost 5% in pre-market trading.

The maker of Fanta and Coke also announced new aggressive cost cutting initiatives to drive growth but is apprehensive that the macroeconomic environment will remain challenging through 2015.

Earnings Discussion

Third-quarter 2014 adjusted earnings of the company were 53 cents per share, which beat the Zacks Consensus Estimate of 52 cents by a penny.

Earnings were flat year over year as improved margins were offset by a softer top-line performance and significant currency headwinds of 6%. Earnings increased 6% on a constant currency basis. Both price/mix and volumes slowed down from the second quarter.

The Coca-Cola Company - Earnings Surprise | FindTheBest

Revenues and Margins

In the quarter, net revenue was flat year over year at $11.98 billion due to headwinds from currency and structural changes. Revenues also missed the Zacks Consensus Estimate of $12.144 billion.

Both currency and structural changes hurt revenues by 1% each. Adjusting for the impact of currency and structural changes, constant currency revenues increased 1% in the quarter. The structural changes that hurt results primarily included the re-franchising of territories in North America to certain unconsolidated bottling partners, and lower revenues and operating income in the company’s Venezuelan business.

Adjusted consolidated gross margins improved 20 basis points (bps) year over year in the quarter to 61.2% as favorable geographic mix and slightly lower commodity costs made up for softer volumes and pricing. However, gross margins declined 30 bps sequentially.

Adjusted selling, general and administrative (SG&A) expenses increased 3% on a currency-neutral basis and came in at $4.49 billion due to higher marketing expenses. Media investments increased in double digits during the quarter.

Despite headwinds from higher media investments, adjusted operating income on a constant currency basis increased 5% to $2.84 billion in the quarter helped by better operating expense leverage. Adjusted operating margin was 23.7% in the quarter, up 20 bps year over year. However, operating margin declined sequentially.

Currency and structural changes hurt operating income by 3% and 2%, respectively, in the quarter.

Volume and Pricing Slow Down

The cola giant witnessed 1% volume growth in the reported quarter, slowing down from the 3% increase recorded in the previous quarter due to volume declines in key markets like Europe, China, Japan and North America.

While volumes declined 1% in North America, the same grew 1% in the international markets. Rival PepsiCo, Inc. (PEP - Analyst Report), which reported earlier this month, recorded flat volumes for its Americas beverages business.

In North America, both still and sparkling beverages declined 1% in the quarter. Other developed nations like Europe and Japan also posted weak volumes. European volumes declined 5% due to poor weather conditions and overall challenging economic environment and aggressive competitive pressures. Japan volumes declined 4% due to poor weather conditions.

Among the developing countries, double-digit volume growth in India was offset by softness in China, Brazil and Russia. While an unseasonably cooler summer hurt volumes in China, Brazil’s volumes declined 1% in the quarter due to aggressive competitive activity and overall macroeconomic slowdown. Russia volumes declined due to weakness in Ukraine and Belarus.

Among the non-alcoholic ready-to-drink beverages, both sparkling and still beverages slowed down from the last quarter.

Sparkling beverage volumes were flat, much weaker than 2% reported in the second quarter. Poor weather conditions in some regions and challenging macroeconomic environment and increased competitive pressures hurt volumes in the quarter.

Sparkling beverages have been seeing declining sales trends for the past few quarters due to carbonated soft drinks (CSD) category headwinds. Growing health and wellness consciousness, vigilance among consumers about the use of artificial sweeteners, high sugar content and related obesity concerns are affecting CSD demand and thereby hurting sales of Coca-Cola as well as other soft drink makers like Pepsi and Dr Pepper Snapple Group, Inc. (DPS - Analyst Report).

The Coca-Cola brand was flat in the quarter, a sequential deceleration from the second quarter. Both Sprite and Fanta increased 1%.

Still beverages grew 2% in terms of volume, slower than previous quarter’s growth of 5% as positive growth in teas, packaged water and energy drinks was partially offset by a decline in sports and juice and juice drinks. Higher pricing to combat increased commodity costs hurt juice volumes in the quarter.

Price/mix increased 1% in the third quarter lower than the second quarter due to weakness in Asia Pacific. All the other geographic segments — Latin America, Eurasia and Africa, Europe and North America — showed positive growth. The Asia Pacific region recorded price/mix decline of 2% in the quarter.

Growth Initiatives

In a separate press release, Coca-Cola announced expansion of its productivity initiatives and plans to streamline its operations to drive better revenues and profit growth.

The company announced a broader productivity plan targeting $3 billion in annualized savings by 2019. In February this year, the company unveiled an expanded productivity program to generate $1 billion additional productivity savings by 2016.

The company also stated that it would re-franchise the majority of its company-owned North American bottling territories by the end of 2017 and a substantial portion of the remaining territories no later than 2020.

While the company maintained its long-term high single-digit EPS growth target, it replaced the operating income component of the long-term guidance with profit before tax. The company now expects its long-term profit before tax rate to range between 6% and 8% against similar long-term expectations for operating income.

Moreover, the company adjusted its net revenue target to mid single-digit growth.

2014 Outlook

The company did not provide any revenue or earnings guidance. However, management stated that it expects 2014 as well as 2015 earnings per share growth rate to be below the long-term range of a high single-digit increase. Currency headwinds, difficult operating environment in the U.S. and slower growth in some international markets may be blamed for management’s bearish stance.

The structural changes are expected to hurt fourth-quarter net sales and operating income by 1–2% and 2%, respectively.

Foreign exchange is expected to hurt fourth-quarter operating income by 7% and full-year operating income by 6%, at the higher end of the previously provided range of 5–6%.

The company expects to buyback shares worth $2.5 billion in the year, at the lower end of prior expectation of 2.5 to $3.0 billion.

A better-ranked beverage maker is Monster Beverage Corp. (MNST - Analyst Report) which carries a Zacks Rank #2 (Buy).

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