In the stiff competition among beverage players, Dr Pepper Snapple (DPS, Financial) is probably the one which suffers the most. This is because it depends mostly on the North Americans for its sale of carbonated soft drinks and other beverages. Consumers in North America, on the other hand, are trying to avoid soda consumption mainly because of health reasons. This decrease in demand has been affecting sales in the region for all the players, such as Coca-Cola (KO, Financial), PepsiCo (PEP, Financial) and Dr Pepper Snapple.
Nonetheless, Snapple managed to surprise its investors by reporting blockbuster results. Its second-quarter numbers were ahead of Street’s estimates, leading to a sharp rise in its share price.
The details therein
Revenue inched up slightly to $1.63 billion from $1.61 billion last year. Also, it was ahead of the expectations of $1.62 billion. The top line was driven by an increase in product prices as well as higher volumes. In fact, overall volumes grew 1% during the quarter. The bottler case sales increased by 1% as Carbonated Soft Drinks jumped 2% and Non-Carbonated Beverages fell 4%.
Non-Carbonated Beverages dropped mainly because of stiff competition from Coca-Cola and PepsiCo, which offer a wide variety of sports drinks, natural juices and bottled water. Snapple’s Ready-To-Drink tea sales also declined 3% along with a 12% fall in Hawaiian Punch. Consumers have shifted from sugar-filled high calorie Hawaiian Punch to natural and organic drinks. Moreover, Snapple’s lower promotional activity resulted in less demand. Also, RTD teas have always been placed in the premium tea category. Hence, it is pocket pinching for people, when there are cheaper options such as Lipton.
Earnings also rose 26% to $1.06 per share, higher than the expectations of $0.92 per share. This was mainly because of higher revenue and increased margins. Further, gross margin expanded by 120 basis points, owing to lower marketing expense as well as productivity improvements.
Key drivers
One of the bright spots during the quarter was the Latin American business, which climbed 24% on the back of price increases. Also, sales in Mexico, which make 90% of total revenue, was one of the key drivers. Mexico is one the largest markets for soda sales and demand continued to rise despite a recent enactment of soda taxes, which made sodas 8% more expensive. Volumes for Penafiel, carbonated water brand, rose 25% over last year.
Moreover, Dr Pepper has some distribution deals, which makes it an even more interesting pick. For instance, it distributes Vita Coco, the leader in the coconut water category and has annual sales of around $250 million. Further, the coconut water industry has been growing rapidly since 2004. Another new deal was with Sunny Delight, for the launch of Sparkling Fruit2O, a carbonated flavored water brand. These partnerships should together help the beverage maker a successful bet.
Bottom line
Despite all the headwinds related to lower soda demand in the U.S. and a shift in consumers’ tastes and preferences, Dr Pepper has managed to register a better quarter than its peers. It has also revised its outlook for the year. Although revenue forecast still remained the same, earnings outlook was revised by $0.05 per share. Moreover, the retailer also announced its plans to repurchase its shares. Hence, this company should prove to be a good investment decision.
