Dr. Pepper Sales Decline, But Earnings Up 10% In 2013

Feb.13.14 | About: Dr Pepper (DPS)

Dr. Pepper Snapple Group (NYSE:DPS) reported earnings before the opening bell yesterday. This article will outline the highlights offered in the quarterly report. Larry Young, Dr. Pepper Snapple Group's CEO, didn't give investors much room for optimism as he kicked off the conference call by stating that the 4th quarter was a very challenging quarter for a major segment of its business. Below are the noted earnings and revenue results:

  1. Reported EPS were $.78 for the quarter. Reported EPS were $3.05 for the year, up 3%.
  2. Core EPS were $.97 for the quarter. Core EPS were $3.20 for the year, up 10%.
  3. Net sales decreased 1.4% for the quarter and were flat for the full year.
  4. Year-to-date, the company returned $702 million to shareholders.

Capital IQ Consensus Estimate of $.84 cents a share. Revenue fell 1.4% to $1.46 billion, in line with analysts' estimates of $1.47 billion. In addition to the broad results noted above, sales volume declines of 4% and less favorable trade adjustments were partially offset by favorable mix and price. Reported segment operating profit (NYSEARCA:SOP) decreased 7%, or $27 million, as a $56 million non-cash charge due to the firm's intention to withdraw from a multi-employer pension plan and the volume decline were partially offset by a year-over-year LIFO benefit of $25 million and favorable price and mix. Reported income from operations for the quarter was $264 million, including $3 million of unrealized commodity mark-to-market losses. Reported income from operations was $292 million in the prior year period, including $1 million of unrealized commodity mark-to-market losses. Core income from operations was $323 million, up 10.2% compared to the prior year period.

Fortunately, FY14 guidance gave investors some positive considerations. For 2014, Dr Pepper Snapple said it expects earnings of between $3.38 and $3.46 a share. Analysts expected earnings of $3.26 a share for the year. The beverage company expects revenue of between $6 billion and $6.06 billion, compared to analysts' forecasts of $6.12 billion.

Carbonated soft drink (CSD) volumes continue to witness declining volume sales as consumers seek out alternative, healthier beverage options including water, coffee and other assorted drink beverages with lower sugar, sodium and caloric content. The troubling aspect of Dr. Pepper's earnings report, however, is that it is also witnessing declines in other notable business categories. During the quarter Bottler Case Sales (BCS) volumes declined 2% due to both carbonated and non-carbonated beverage volumes declining. Sales volume declines become even more troubling when the company broke down the core brand volume declines

  1. Dr Pepper volume decreased 1%.
  2. Core 4 brands, which include TEN, declined 4% as a high-single digit decrease in 7UP and mid-single digit declines in Sunkist soda and A&W were partially offset by a mid-single digit increase in Canada Dry.
  3. Squirt and RC Cola both declined mid-single digits.
  4. Sun Drop declined double-digits while Peñafiel increased double-digits.
  5. Fountain foodservice volume increased 2% in the quarter.
  6. In Non-carbonated beverages (NCBS), Hawaiian Punch volume declined 8%. This decline was partially offset by a 3% increase in Snapple. Mott's was flat in the quarter.
  7. By geography, U.S. and Canada volume declined 2%, and Mexico and the Caribbean volume increased 4%.

During Q4, Dr. Pepper launched Core 4 and RC TEN platform nationally. The company suggested that this CSD platform, which has only 10 calories per 12 ounce can, will bring consumers back to the CSD category. The firm also launched Snapple regular Half 'n Half Lemonade Iced Tea and Hawaiian Punch's Aloha Morning. Aloha Morning has the same grade Hawaiian Punch tastes with 40% less sugar.

From an execution standpoint, Dr. Pepper continued to gain distribution and availability for their key brands across key packages with Snapple increasing 3 points in grocery and almost 2 points in convenience and gas, and Mott's increasing over 3 points in grocery. The company gained over 43,000 new fountain valves, providing thousands of additional sampling opportunities and brand impressions for the Dr. Pepper trademark.

Larry Young ended the quarterly dissemination for investors by outlining the company's core objectives for 2014. He noted that the company is committed to the TEN platform and they will continue to drive it in 2014. The company will continue to innovate with sweeteners and believes it will soon launch an all-naturally sweetened 60-calorie version of some of the company's brands in 2014. Young outlined the company's goal to sharpen the marketing return on investment capabilities, ensuring the optimization of every dollar spent and actively shift dollars from low-return vehicles into higher-return vehicles. These efforts will serve to maximize profitability.

New products and product initiatives will be key to maintaining current market share and offsetting current declines in certain business segments during 2014. With that in mind Dr. Pepper has laid plans to leverage two of their largest trademarks, Canada Dry and Schweppes to capitalize on the growth in the carbonated water category. The company is expanding Canada Dry's Sparkling Seltzer Waters into new markets as well as launching a new peach mango flavor and a line of Schweppes sparkling waters nationwide.

In addition to leveraging the aforementioned brands, the company has new Mott's juice drink line and 3-fold flavors like Wild Grape Surge. The line is made with real fruit juice, has 40% less sugar and no artificial sweeteners. New consumer preferred flavors of Snack & Go Applesauce Pouches will also be launched in 2014. Snapple Apple is one of the brand's most popular single serve flavors and this year the company will expand this line into a take-home packaging.

Lastly but certainly not least, Dr. Pepper is testing Snapple Straight Up Tea across several markets. Straight Up Tea has a true tea taste and is made from all natural black tea with a touch of real sugar and only 40 calories per serving.

In concluding this 4th quarter 2013 recap of Dr. Pepper Snapple Group's earnings, it is important to note that it seems the plan in place for the company has not changed much from the prior year, which saw net sales basically flat with earnings up 10% on the year. The company is expecting a similar performance in 2014 in an ever-evolving beverage market that has a plethora of alternatives coming to market every single year. Competition is ever-encroaching on the company's core business and much of the earnings growth is coming from a constant share re-purchase program. In light of these business aspects, any negative changes to the economic environment within the company's core business segments could present meaningful deviation from the company's offered guidance. We don't believe that DPS represents a strong investment vehicle given the headwinds noted by the CEO and those disclosed in the marketplace regarding competition.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.