Dismal Quarter & Year for Dr Pepper - Analyst Blog

By Zacks | February 13, 2013 AAA

Dr Pepper Snapple's (DPS) fourth quarter 2012 adjusted earnings (excluding mark-to-market losses/gains) of 82 cents per share missed the Zacks Consensus Estimate of 85 cents by 3.5%.  Earnings also declined 2.4% year over year as decent sales growth was offset by weak profits. During the quarter, Dr Pepper's net sales grew 2% year over year at $1.48 billion as gains from pricing and currency were offset by volume declines. Excluding 1% currency tailwind, revenue improved 1% in the quarter. Net sales, however missed the Zacks Consensus Estimate of $1.496 billion.

Overall, sales were down from both the second and third quarter levels. Dr Pepper provided its outlook for fiscal 2013 and raised its quarterly dividend rate by 12% from 34 cents to 38 cents.

Gross profit improved 1.6% in the quarter to $879 million as top-line growth offset headwinds from higher cost of sales. Adjusted operating income declined 1% in the quarter to $293 million as gains from gross margin expansion, ongoing productivity and lower marketing costs were offset by increased labor costs and higher LIFO inventory provision.

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 growth was flat as both CSD's and NCBs recorded flat volumes. In-fact, volumes improved sequentially from a 3% decline in the third quarter.

In CSD, Dr Pepper soft drink volume declined 1% due to strong prior-year comparisons, which included heavy pricing and promotional activity to support the launch of low calorie drink, Dr Pepper Ten.

Volumes of the core 5 brands (Canada Dry, A&W and Sunkist soda, 7up and Sun Drop) increased 3%, driven by volume gains in Canada Dry, A&W and Sunkist soda. Canada Dry posted growth in the high single-digit range, showing maximum increase among the core brands. Fountain food service volume went up by 1% year over year.

Among the NCBs, growth in Clamato tomato juice, Aguafiel water, Mott's apple juice and sauce and Snapple tea was offset by a decline in Hawaiian Punch. Clamato recorded the maximum increase of 34%.

Geographically, volumes were flat in U.S. and Canada and increased 8% in Mexico and the Caribbean. Sales volume, as discussed earlier, was down 1% in the quarter.

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 2% (both including and excluding currency impact)  year over year to $333 million, as price gains and favorable mix were partially offset by a 2% volume decline. Segment operating profit improved 5% (both including and excluding currency impact) to $223 million driven by revenue growth and lower marketing investments than the year-ago quarter.

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 were flat (both including and excluding currency impact) at $1.04 billion, as mix gains were offset by a volume decline of 1%. Segment operating profit increased 3% on a currency neutral basis to $131 million due to productivity gains, which partially offset headwinds from higher labor costs and a LIFO inventory provision.

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 $107 million, driven largely by volume growth of 8%. Segment operating profit improved 56% (both including and excluding currency) in the quarter to $14 million, driven by sales growth and productivity gains.

Annual Results

In fiscal 2012, the company witnessed a 2.0% increase in revenues to $6.0 billion, slightly missing the Zacks Consensus Estimate of $6.01 billion. Sales increase was just in line with management's guidance of approximately 2% growth.

We would like to remind investors that the revenue guidance was previously slashed at the third quarter conference call in Oct 2012. Dr Pepper had pulled down revenue expectations to approximately 2% from the prior guidance of an increase at the lower end of its long-term forecast of 3% to 5% due to weaker-than-expected volume growth.

Adjusted earnings were $2.92 per share, which also missed the Zacks Consensus Estimate of $2.95 by 1%. Adjusted earnings increased 2.5% from the prior year. Full-year 2012 adjusted earnings were at the lower end of the guidance range of $2.90 to $2.98 per share.

2013 Outlook

Full-year 2013 adjusted earnings are expected to be in the range of $3.04 to $3.12 per share. Dr Pepper expects 2013 sales to grow approximately 3%. The company projects cost of goods sold to increase by 2% in full year 2013, due to higher packaging and commodity costs. Full-year tax rate is expected to be about 37%. Capital expenditure is expected to be nearly 3.5% of net sales.

Other Stocks to Consider

Dr Pepper currently carries a Zacks Rank #3 (Hold). Rival, The Coca-Cola Company (KO) reported mixed fourth quarter results yesterday; beating on earnings and lagging on sales.

Among other beverage companies, a few of Coca-Cola's bottling companies are currently doing well and have a bright outlook. These include Coca-Cola FEMSA S.A.B de C.V. (KOF) and Coca-Cola Enterprises Inc. (CCE), both carrying a Zacks Rank #2 (Buy).

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