Seeking Alpha
Research analyst, long/short equity, tech
Profile| Send Message| ()  

Dr Pepper Snapple (DPS) reported a decline in second quarter earnings on lower volumes as well as higher commodity and marketing costs. Reported earnings per share (EPS) fell 8% y-o-y, primarily due to unrealized commodity mark-to-market losses and other items affecting comparability with prior year period. EPS adjusted for these items was down 1% at $0.84 for the quarter. The company also announced that its Core 4 and RC TEN national launch is well under way and is expected to be completed by the end of this summer. [1]

Lower Sales Revenue

CSD consumption in North America has been declining over the past several years on growing health concerns. A research paper recently published in the American Journal of Public Health concluded: “Soft drink consumption is significantly linked to overweight, obesity, and diabetes prevalence worldwide.” Market-wide CSD volumes in the U.S. have declined by ~2.2% over the last two years alone. [2]

Dr Pepper Snapple derives more than 90% of its revenues from North America and ~80% of its sales volume is made up of CSDs. The company therefore faces significant headwinds from declining CSD consumption in North America, unlike more geographically diverse players such as Coca-Cola (KO) and PepsiCo (PEP).

Dr Pepper Snapple’s net sales revenue was down 1% for the second quarter as lower volume more than offset the positive impact from better pricing and healthier price-mix. Bottler case sales (BCS) volume, which excludes contract-manufacturing volume, was down 3% y-o-y with carbonated soft drinks (CSDs) declining 3% and non-carbonated beverages declining 2%. The company’s flagship brand, Dr Pepper’s sales volume declined 4% followed by the company’s Core 4 brands (7-Up, A&W, Sunkist and Canada Dry), which were down 1%. In the still category, Hawaiian Punch volume declined by 7% while Snapple and Mott’s sales volume increased 4% and 2% respectively.

Lower Operating Margins

Dr Pepper Snapple reported slightly better gross margins as higher pricing and productivity improvements more than offset higher commodity costs. However, higher marketing costs as the company spent heavily behind the nationwide launch of its new TEN line-up led to lower operating margins. It should be noted that the company’s planned marketing expense behind the launch of its Core 4 and RC TEN brands was skewed into the first half, and more than two-thirds of it has already been expensed. We therefore expect thicker operating margins for the second half of the year as lighter inflationary pressures and continued productivity improvements will further boost margins.

TEN Line-up Holds Promise

As CSD consumption in North America continues to decline due to a shift in consumer preference towards healthier alternatives, Dr Pepper Snapple is betting on the nationwide launch of its Core 4 and RC TEN products in the U.S. to reverse some of that. These products boast of just 10 calories per 12 ounce serving with minimal aftertaste of the artificial sweetener. The company reported that the availability of these new products measured by all category volume (ACV) has increased to 76% from 65% in the first quarter, and has so far been able to secure incremental shelf space from the retailers. Moreover, the company claims that more than half the dollars spent by consumers on these newly launched products have been incremental to the CSD category. These products therefore hold a lot of promise for Dr Pepper Snapple and it will be interesting to note their contribution to the company’s total sales volume over the next few quarters.

We currently have a price estimate of $47 for Dr Pepper Snapple, which we will revise soon based on the second quarter results.

Notes:

  1. Dr Pepper Snapple Group Reports Second Quarter 2013 Results, investor.drpeppersnapplegroup.com
  2. U.S. Beverage Results for 2012, March Beverage-Digest 25, 2013

Disclosure: No positions

Source: Dr Pepper Snapple Earnings Fall On Lower Volumes, Thinner Margins