Solid Market Gains to Aid Keurig Dr Pepper (KDP) Amid Cost Woes
Keurig Dr Pepper KDP has been gaining from strong market share growth, continued brand strength and significant pricing. Also, a solid performance in its cold beverages bodes well. This led to impressive second-quarter 2023 results, wherein the top and bottom lines surpassed the Zacks Consensus Estimate.
Adjusted earnings of 42 cents per share grew 7.7% year over year. Net sales of $3,789 million jumped 6.6% from the year-ago quarter on a reported basis and increased 6.1% on a constant-currency (cc) basis. Net price realization grew 8.2%, with a lower volume/mix of 2.1%.
A strong in-market performance in the Liquid Refreshment Beverages category in the second quarter also acted as a key growth driver. The company witnessed retail dollar consumption growing 10.7% and market share expansion above 85% of KDP's cold beverage portfolio.
This mainly reflected strength in CSDs, seltzers, energy, apple juice, coconut waters and fruit drinks. Also, strength in Dr Pepper and Squirt in CSDs, as well as Polar seltzers, Vita Coco, C4 Energy, Evian, Mott's and Hawaiian Punch, aided the results. In coffee, KDP’s manufactured shares were solid at 79%, driven by higher year-over-year consumer mobility.
The company has been witnessing continued momentum in the Refreshment Beverages segment. The segment reported sales of $2,330 million, which beat our estimate of $2,180.3 million. Sales in this segment grew 11.8% in the second quarter, gaining from higher net price realization of 12% and a 0.2% decline in the volume/mix. The results were driven by recent innovations and effective in-market execution, along with the contribution from its sales and distribution partnership for
C4 Energy.
Driven by these factors, Keurig Dr Pepper raised its sales view for 2023. The company expects sales growth of 5-6%, which is higher than the 5% projected earlier and in line with our estimate of 5.5% growth. For adjusted earnings, KDP expects an increase of 6-7%, in line with our estimate of 6%.
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Consequently, shares of this Zacks Rank #3 (Hold) company have gained 5% in the past three months compared with the industry’s growth of 0.6%.
However, the company has been reeling under continued cost pressures in transportation, warehousing and labor. These, along with the adverse impacts of higher marketing investment, acted as deterrents.
Also, it has been witnessing sluggishness in its coffee segment for a while now. In second-quarter 2023, sales in the U.S. Coffee segment declined 5.7% year over year to $970 million. At-home coffee consumption continued to be impacted by mobility changes on a year-over-year basis. Further, pod revenues fell 4.6%, including a shipment drop of 7.7%, mainly owing to the mobility-driven category softness and exit of certain lower-margin private label contracts.
Conclusion
All said, we believe that strength in its refreshment beverages segment, driven by recent innovations and solid market share gains, is likely to help offset cost headwinds. Also, a potential recovery in the coffee segment raises optimism.
Its forward price-to-earnings ratio of 18.90 has underperformed the industry’s ratio of 20.36. The Zacks Consensus Estimate for KDP’s fiscal 2023 sales and earnings per share suggests year-over-year growth of 6% each. Topping it, a long-term earnings growth rate of 6.8% reflects its inherent strength.
Stocks to Consider
We highlighted some better-ranked stocks from the broader Consumer Staples space, namely TreeHouse Foods THS, Associated British Foods ASBFY and Celsius Holdings CELH.
TreeHouse Foods, a manufacturer of packaged foods and beverages, currently sports a Zacks Rank #1 (Strong Buy). THS has a trailing four-quarter earnings surprise of 49.3%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for TreeHouse Foods’ current financial year’s sales suggests a decline of 12.4% from the year-ago reported number.
Associated British Foods is a diversified international food, ingredients and retail group, which currently flaunts a Zacks Rank #1. ASBFY’s expected EPS growth rate for three to five years is 7%.
The Zacks Consensus Estimate for Associated British Foods’ current financial-year sales and earnings suggests growth of 30.4% and 4.2%, respectively, from the year-ago reported figures.
Celsius Holdings currently carries a Zacks Rank #2 (Buy). CELH specializes in commercializing healthier, nutritional functional foods, beverages and dietary supplements.
The Zacks Consensus Estimate for CELH’s current financial-year sales indicates 67.9% growth from the year-ago reported figure, and the same for EPS implies a 154% rise. The company had an earnings surprise of 81.8% in the last reported quarter.
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TreeHouse Foods, Inc. (THS) : Free Stock Analysis Report
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Keurig Dr Pepper, Inc (KDP) : Free Stock Analysis Report
