Dr Pepper Q3 Earnings & Sales Beat Estimates, Ups View

Dr Pepper Snapple Group Inc. DPS reported decent third-quarter 2015 results, beating the Zacks Consensus Estimate for both earnings and sales.

The Plano, TX beverage company raised its previously issued guidance for sales and earnings despite higher currency headwind expectations.

Earnings Beat

Third-quarter 2015 adjusted earnings of $1.08 per share beat the Zacks Consensus Estimate of $1.04 by 3.8%. Moreover, earnings increased 10% year over year as strong margins offset a relatively softer sales performance.

Revenues and Margins

Dr Pepper's net sales rose 3% year over year to $1.63 billion as favorable segment and package/product mix and positive volume growth offset a 2% negative impact from currency translation.

Net sales were ahead of Zacks Consensus Estimate by 2.5%.

Adjusted gross profit went up almost 7.05% to $986 million. Gross margins expanded 90 basis points (bps) to 59.0% as RCI productivity gains and lower commodity costs offset the unfavorable mix and currency headwinds.

Higher growth of non-carbonated beverages NCB and allied brands (higher dollar revenue products) favorably benefitted product mix and in turn, total sales.

Adjusted operating income increased 11.9% (on a currency neutral basis) to $356 million year over year. Adjusted operating margins increased 120 bps to 21.3% driven by higher sales, improved gross margins and productivity improvements.

The effective tax rate was 34.9%, higher than 34.3% a year ago.

Volumes in Detail

Dr Pepper's sales volume is measured in two ways: 1) sales volume and 2) bottler case sales BCS volume. Sales volume represents concentrates and finished beverages sold to bottlers, retailers and distributors. BCS includes the sale of finished packaged beverages by the company and its bottlers to retailers and independent distributors.

Sales volume, as discussed earlier, increased 3% backed by 3% volume gain in Beverage Concentrates, 1% volume gain in Packaged Beverages and 8% in the Latin American segment.

In the quarter, BCS volume went up 2%, backed by 2% gain in carbonated soft drinks (CSDs) and 4% gain in non-carbonated beverages (NCBs). BCS volume improved sequentially during the quarter.

Overall, volumes of the Core 4 brands (Canada Dry, A&W, Sunkist soda and 7UP), including TEN versions, remained flat as a high-single-digit increase in Canada Dry was offset by mid-single-digit declines in 7UP and Sunkist soda and a low-single-digit decline in A&W. Fountain foodservice volume increased 2% in the period.

Segment Details

Beverage Concentrates: Dr Pepper's net sales from Beverage Concentrates increased 2% year over year to $308 million. The growth was driven by favorable product mix, higher shipments and concentrate price increases, implemented earlier in the year, offset by higher discounts primarily related to the fountain foodservice business.

Packaged Beverages: In the Packaged Beverages segment, net sales rose 6% to $1.19 billion driven by favorable product mix, price increases and a 2% increase in sales volumes.

Latin AmericaBeverages: Dr Pepper's net sales from Latin America Beverages increased 10% to $129 million driven by an 8% increase in sales volumes and favorable mix.

Raises 2015 Outlook

The company now expects full-year 2015 earnings within the range of $3.92 to $3.98, higher than the previous guidance of $3.85 to $3.93. The earnings guidance also reflects positive growth from $3.65 in 2014.

The company raised its guidance despite expectation of 5% negative impact from currency translation, worse than 4% expected earlier.

Dr Pepper expects net sales to be up just over 2%, slightly better than the prior expectation of 1%, from the year-ago level. Negative currency impact is expected to hurt sales by about 2%, same as expected earlier.

The company expects lower packaging and commodity costs to reduce the COGS by about 2.0% (previously 1.5%) in 2015.

The full-year tax rate is expected to be about 35.5%, higher than 34.6% in 2014. Capital expenditure is still expected to be nearly 3% of net sales. The company plans to repurchase roughly $500 million to $550 million worth of shares in 2015.

Dr Pepper currently carries a Zacks Rank #2 (Buy). Other consumer staples companies worth considering include Diamond Foods inc. DMND, Flower Foods Inc. FLO and Omega Protein Inc. OME, all carrying a Zacks Rank #2 (Buy).

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