New CEO Isdell Already in Crisis Mode at Coca-Cola

Updated from 11:07 a.m. EDT

Three months on the job and Coca-Cola(KO Quote) CEO Neville Isdell is already in crisis mode.

The Atlanta-based soft-drink giant took the unusual step Wednesday of guiding down earnings estimates for the second half of 2004 Wednesday, blaming weak demand in key markets including the U.S. and Germany.

The profit warning, which was issued as an "exception" to Coke's policy of not commenting on earnings, marks an inauspicious beginning for Isdell, who took over from Douglas Daft in June. Isdell's ascension created division among the company's upper management, some of which reportedly backed the candidacy of Steven Heyer, the 51-year-old former Turner marketing executive who has since left the company.

"I came back to lead a growth business," said Isdell, who left Coke in 1998 after being passed over for the CEO position in favor of Douglas Ivester. "I believe this is still a growth company and my intention is to put it back on track."

Matthew Reilly, an analyst with Morningstar, wasn't surprised to hear that problems are lingering at the company. But he was surprised to hear Isdell say during a conference call that the problems are more long-term than short-term, with no "quick-fixes" in sight.

Nonetheless, Reilly maintained a positive outlook on the stock, saying that the problems stem from mistakes made by previous management teams. He said that a personnel problem exists due to all the "slashing and burning" that was done under Daft. Now, Isdell is having trouble finding new people to fill key positions.

"It's kind of a paradox that they wanted be a growth company, but just a couple of years ago, they were drastically reducing their workforce," Reilly said.

Coca-Cola expects to earn 46 cents to 48 cents a share in the third quarter ending this month, excluding a charge of roughly 10 cents a share to write down assets impaired by a German bottle deposit law, among other things. Analysts were expecting earnings of 54 cents a share in the quarter, according to Thomson First Call.

In the fourth quarter, Coca-Cola will earn roughly 42 cents to 44 cents a share. Analysts were expecting earnings of 45 cents a share in the fourth quarter.

Reilly noted that Coke rival PepsiCo(PEP Quote) managed to exploit growth opportunities in non-carbonated beverages and other product innovations. Coke, on the other hand, went on assuming everyone would think its traditional product is "just a great beverage and everyone should drink as much of it as they can."

Reilly said that despite Isdell's troubles, he understands the company's problems and knows how to go about fixing them. "Isdell, as opposed to Daft, seems to get it," he said. "Coke does have the best distribution system in the world. They have so many great positions in so many markets that if they can get their non-carbonated act together in those markets, they growth opportunities could be huge."

"It's a little early to come to too many conclusions about this news," said Jay Ferguson, portfolio manager with Ferguson, Andrews Investment Advisors. "Everybody's just trying to sort through this and see where the resets are. Is it in the revenue line? Is it in the bottling? Is it in the cost of goods sold? We don't know yet, but they had to do something."

Ferguson didn't think it made sense to blame the recent shake-ups in management. "They already had a management problem," he said. "If this new one's a problem, then it's just a continuation of bad management. It still shows you how strong the franchise is, because you can run it not so well and still put some big numbers up."

Ferguson is long both Coke and Pepsi. "They're both great stocks," he said. "It's just a question of how much you pay for them. They're both going to make a lot of money."

Coke was recently down $1.90, or 4.4%, to $40.97. Its worldwide unit case volume will rise 1% to 2% in 2004, with volume growth for the third quarter flat to 1%, with "continuing challenging conditions in the fourth quarter."

"An effective volume and value growth strategy is critical to the success of our system," Isdell said in a statement. "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."

The company blamed "unfavorable volume trends in the North America bottle and can business," to which it has been slow to react. It also cited "changing marketplace dynamics together with unfavorable weather conditions" in Germany that will cause unit case volumes to fall by a percentage in the mid-teens. Germany was one of several countries mentioned early on by Isdell as places the company was facing near-term challenges.

In addition, Coca-Cola cited bad weather in Northern Europe that will lead to volume declines in the higher single-digits this quarter. In France, retail sell down ahead of a regulated price decrease has led to double-digit declines in unit case volume and declines in gallon sales to bottlers.

A week ago, Coke's biggest bottler, publicly traded Coca-Cola Enterprises (CCE Quote) cut its 2004 earnings forecast from $1.21 a share to $1.25 a share from $1.47 a share to $1.52 a share, citing weak volume in North America and Europe.