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Can Dr Pepper Snapple Sustain the Solid 1H Results in 2H?

Zacks Equity Research

On Aug 28, 2014, we issued an updated research report on Dr Pepper Snapple Group Inc. (DPS).

On Jul 24, the beverage company reported mixed second-quarter 2014 results, beating the Zacks Consensus Estimate for earnings while revenues were in line with the same.

Adjusted earnings of $1.06 per share increased 26% year over year driven by strong margins and lower interest expense and taxes. Both net sales and volume grew 1% in the quarter. While gross margins expanded 100 basis points (bps), operating margin improved 290 bps driven by pricing gains, lower commodity costs, lower marketing investments than last year and ongoing productivity gains.

Dr Pepper had an impressive run in the first half delivering strong profits in both the quarters. The company also raised its adjusted earnings per share outlook for the year during the second-quarter conference call on the back of stronger-than-expected first-half results. The company expects earnings in the range of $3.43 to $3.51 in 2014 higher than $3.38 to $3.46 expected previously. This represents an upside from the 2013 levels.

Notwithstanding, the consistent margin discipline, the company needs to turn around its sales. Weak volume trends due to ongoing pressure in the U.S. CSD category keeps us concerned.

The CSD category declined for the ninth straight year in 2013 due to weak consumer spending environment, cross-category competition and growing health and wellness consciousness — consumers are particularly vigilant about artificial sweeteners, high sugar content and related obesity concern. Also, possible new taxes on sugar-sweetened beverages and growing regulatory pressures are affecting CSD sales. These headwinds are significantly affecting Dr Pepper’s CSD volumes which comprise around 80–85% of its business. The category headwinds also hurt CSD sales of other beverage giants like PepsiCo, Inc. (PEP) and The Coca-Cola Company (KO).

Dr Pepper is trying to reinvigorate its CSD category through low-calorie versions of its popular brands like Dr Pepper, 7UP, Sunkist Orange Soda, A&W Root Beer, Canada Dry Ginger Ale and RC Cola. The 10-calorie drinks have gained decent success, bringing new as well as lapsed consumers back to the category.

Also, to drive sales, Dr Pepper is carrying out aggressive marketing programs and strong activation in stores. Its marketing plans include increasing distribution and availability of its key brands and packages; expanding single-serve availability and re-deploying cold drink equipment assets across its DSD (Direct Store Delivery) footprint. These efforts have improved equity scores of its brands with increase in both brand relevance and brand strength.

Though CSDs showed improving trends in the second quarter helped by these marketing initiatives, it remains to be seen if the improvement can be sustained through the rest of the year.

Other Stocks to Consider

Dr Pepper carries a Zacks Rank #2 (Buy). Another beverage stock that has the same Zacks Rank as Dr Pepper is The WhiteWave Foods Co. (WWAV).

Read the Full Research Report on DPS
Read the Full Research Report on WWAV
Read the Full Research Report on KO
Read the Full Research Report on PEP

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