Market Overview

Dr Pepper Snapple Q2 Earnings Beat Estimates, Ups FY Guide


Dr Pepper Snapple Group Inc.'s (NYSE: DPS) second-quarter earnings beat the Zacks Consensus Estimate backed by favorable pricing and strong volumes. The company raised its fiscal year earnings outlook following better-than-expected year-to-date results. Shares of the company rose 3.5% in pre-market trading following the company's earnings release.

Dr Pepper Snapple's second-quarter 2014 adjusted earnings of $1.06 per share beat the Zacks Consensus Estimate of 92 cents by 15.2%. Moreover, earnings increased 26% year over year attributable to strong margins and solid revenues from Beverage Concentrates and Latin America Beverages.

During the quarter, Dr Pepper's net sales rose 1% year over year to $1.63 billion on the back of improving sales volumes, price increases and favorable product/package mix. Sales volume rose 1% year over year. Currency neutral net sales rose 2% in the quarter. Net sales were in line with the Zacks Consensus Estimate.

Adjusted gross profit went up 2.9% to $967.0 million. Adjusted operating income increased 18.0% year over year to $348 million during the quarter driven by productivity improvements and lower marketing and people-related expenses. Adjusted operating margins grew 293 basis points (bps) to 21.3% in the quarter.

The effective tax rate was 35.1% in the quarter, lower than 36.4% in the prior-year quarter as New York State reduced the effective tax rate by 1.3%.

Volumes in Detail

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

Sales volume, as discussed earlier, was up 1% in the quarter driven by 6% volume gain in the Latin American segment and 1% volume gain in Packaged Beverages.

In the quarter, BCS volume went up 1% as Carbonated Soft Drinks (CSDs) gained 2% and non-carbonated beverages (AMEX:NCB) volume dipped 4%. Dr Pepper's soft drink volume declined 1% due to CSD category headwinds.

Overall, volumes of the Core 4 brands (Canada Dry, A&W, Sunkist soda and 7UP), including TEN versions, increased 2% driven by strong performance of Canada Dry. High single-digit volume growth in Canada Dry was partially offset by low single-digit decline in A&W. Sunkist soda and 7UP remained flat in the quarter.

In terms of volumes, Penafiel water increased in double digits due to strong sales from new products. However, the Fountain food service gained 2% during the quarter.

Segment Details

Beverage Concentrates: Dr Pepper's net sales from Beverage Concentrates slipped 2.0% year over year (on a currency neutral basis) due to negative pricing. Segment operating profit rose 5% (on a currency neutral basis) owing to net sales increase and lower marketing expenses.

Packaged Beverages: In the Packaged Beverages segment, net sales rose 1% on a currency neutral basis due to favorable product mix and an increase in contract volume. Segment operating profit rose 22% year over year (excluding currency impact) due to tailwinds from higher productivity, favorable input cost and lower people costs

Latin America Beverages: Dr Pepper's net sales from Latin America Beverages increased 24% on a currency neutral basis driven largely by mix gains, increased prices and volume growth of 6%. Segment operating profit increased 41% (excluding currency) in the quarter backed by productivity gains.

2014 Outlook

The company raised its adjusted earnings per share outlook and now expects earnings in the range of $3.43 to $3.51 instead of $3.38 to $3.46. This represents an upside from the 2013 levels.

The company, however, maintained the previously-provided sales guidance for 2014. Owing to the continued CSD category headwinds, Dr Pepper expects full-year 2014 net sales to be flat to up approximately 1% year over year.

The company expects lower packaging and commodity costs to reduce the cost of goods sold (COGS) by 2% in 2014.

The full-year tax rate is expected to be about 35.5%, same as in 2013. Capital expenditure is expected to be nearly 3% of net sales. The company plans to repurchase approximately $375 to $400 million worth of shares in 2014.

Dr Pepper's carries a Zacks Rank #3 (Hold). Other better-ranked companies in the consumer goods sector include Coca-Cola Amatil Ltd. (CCLAY), PepsiCo Inc. (NYSE: PEP) and The WhiteWave Foods Company (NYSE: WWAV). All the stocks have a Zacks Rank #2 (Buy).

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Posted-In: Earnings News


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