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DPS Posts Mixed 3Q, Cuts Sales View

Zacks Equity Research

Dr Pepper Snapple’s (DPS) third quarter 2012 adjusted earnings (excluding mark-to-market losses gains) of 79 cents per share increased 7.0% year over year as flattish sales growth was overshadowed by a lower share count. The company’s quarterly earnings also surpassed the Zacks Consensus Estimate of 77 cents per share.

During the quarter, Dr Pepper's net sales were flat (both including and excluding currency impact) year over year at $1.528 billion. Price mix benefited revenue by 4%, but volumes declined 3%. Net sales slightly missed the Zacks Consensus Estimate of $1.568 billion.

Overall, sales were down from second quarter levels. Dr Pepper maintained its full year 2012 earnings guidance, while it trimmed the sales outlook.

Volume Growth in Detail

Dr Pepper Snapple manufactures and distributes a variety of flavored carbonated soft drinks (CSDs) and non-carbonated beverages (NCBs). Dr Pepper owns some well-established CSD brands such as Dr Pepper soft drink, 7UP, Canada Dry, Schweppes ginger ale, Peñafiel mineral water, Royal Crown Cola and many more. Popular NCB brands include Snapple tea, Hawaiin Punch, Mott’s apple juice and sauce, Aquafiel mineral water, and Clamato tomato juice among others.

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

In the quarter, BCS volume slipped 3%, which included a 2% decline in CSD’s and a 5% decline in NCBs. In CSD, Dr Pepper soft drink volume declined 1% as growth in low calorie drink Dr Pepper Ten and the fountain food service business was offset by weakness in the base business.

Volumes of the core 5 brands (Canada Dry, A&W and Sunkist soda, 7up and Sun Drop) declined 6% due to higher retail prices and lower promotional marketing. Canada Dry volumes grew as against declines in the other four. Fountain food service volume went up by 2% year over year.

Among the NCBs, growth in Snapple was offset by volume decline in Hawaiian Punch and Mott’s.

Geographically, volumes declined 3% in U.S. and Canada and increased 1% in Mexico and the Caribbean.

Sales volume, as discussed before, was also down 3% in the quarter as branded volumes dropped 3% and contract manufacturing volumes also went down.

Segment Details

Beverage Concentrates: The division manufactures and sells beverage concentrates in the U.S. and Canada, which is used primarily to produce CSDs. Dr Pepper's net sales from Beverage Concentrates went up 4% (both including and excluding currency impact)  year over year to $303 million, as lower discounts, price gains and favorable mix were partially offset by a 2% volume decline. Segment operating profit improved 1% (both including and excluding currency impact) to $198 million driven by revenue growth.

Packaged Beverages: The division manufactures and distributes finished packaged beverages (both CSDs and NCBs) and other products, including its own brands, third party brands and private label beverages in the U.S. and Canada. In the Packaged Beverages segment, net sales declined 1% (both including and excluding currency impact) to $1.12 billion, largely due to volume decline of 6%. Segment operating profit increased 4% on a currency neutral basis to $147 million as top line decline was offset by price, mix and productivity gains.

Latin America Beverages: The division manufactures and distributes carbonated mineral water, flavored CSD, bottled water and vegetable juice in Mexico and the Caribbean. Dr Pepper's net sales from Latin America Beverages increased 7% on a currency neutral basis to $105 million driven by favorable product mix, higher pricing and volume growth. Segment operating profit improved 133% in the quarter to $14 million driven by sales growth and productivity gains.


Dr Pepper maintained its full year 2012 earnings guidance. Full-year 2012 adjusted earnings are expected to be in the range of $2.90 to $2.98 per share, benefiting from share repurchases. The company, however, lowered its full-year sales growth guidance due to lukewarm sales in the third quarter. Dr Pepper now expects 2012 sales to grow approximately 2%, down from prior expectations for sales to increase at the lower end of its long-term forecast of 3% to 5%.

Full-year tax rate is expected to be about 37%. For 2012, the company expects capital expenditure to be nearly 3.5% to 3.75% of net sales, lower than prior expectations of 4.0% of net sales.

Our Recommendation

We currently have a Neutral recommendation on Dr Pepper Snapple. The stock carries a Zacks #3 Rank in the near term (Hold rating).

Overall, we are encouraged by Dr Pepper’s strong position in the flavored CSD market. Also, the Rapid Continuous Improvement (RCI) program is also resulting in cost savings and improving the cash flow. However, Dr Pepper’s weak volume growth and lack of exposure outside U.S. keep us on the sidelines.

Moreover, its competitors in the liquid refreshment beverage market are The Coca-Cola Company (KO) and PepsiCo, Inc. (PEP). Together these companies command approximately 62% of the U.S. LRB market in terms of volume and have much stronger investment resources for brand building.

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