Dr Pepper Snapple Group Inc. (DPS) reported second-quarter 2011 earnings of 77 cents per share compared with 74 cents in the year-ago period. However, quarterly earnings were in line with the Zacks Consensus Estimate.
During the quarter, Dr Pepper's net sales grew approximately 4% year over year to $1,582.0 million. However, it fell short of the Zacks Consensus Estimate of $1,590.0 million. The year-on-year growth was mainly attributable to price increases, favorable foreign currency translations and revenues from The Coca-Cola Company (KO) licenses and favorable impact of repatriated brands.
The company also signed an agreement with The Coca-Cola Company on October 4, 2010, which grants Coca-Cola the distribution rights for Dr Pepper in the U.S. and Canada Dry in the North East U.S. for a one-time payment of $715 million.
The 20-year deal (with a provision for 20-year renewals) is part of Coca-Cola's acquisition of the North American bottling operations of Coca-Cola Enterprises (CCE). The proceeds from the deal are recorded as deferred revenue over a period of 25 years. The company accredited $7 million of revenue in the first quarter of fiscal 2011.
Segment Details
Dr Pepper's net sales from Beverage Concentrates remains almost flat with the prior-year quarter at $321.0 million, primarily due to benefit from Coca-Cola licensing agreement, partially offset by a negative impact from repatriated brands. Segment operating profit grew 3% to $216.0 million due to lower marketing investment.
In the Packaged Beverages segment, net sales increased by 4% to $1,135.0 million, attributable to low single-digit price increases. Brands repatriated under the Coca-Cola licensing agreement also positively impacted sales growth.
Segment operating profit however declined 14.7% to $139.0 million, as net sales growth and benefits from supply chain productivity were offset by increases in packaging, ingredient and transportation costs.
Dr Pepper's net sales from Latin America Beverages increased 15.6% to $126.0 million, mainly stemming from higher sales volume growth and favorable product mix. Segment operating profit, however, plunged 5.6% to $17.0 million manifesting higher packaging, ingredient and transportation costs and IT infrastructure upgrades that offset the positive impact from net sales growth.
Balance Sheet and Cash Flow
Dr Pepper ended the quarter with cash and cash equivalents of $550.0 million and a long-term debt of $2,184.0 million compared with a cash balance of $315.0 million and long-term debt of $1,687.0 million at the end of fiscal 2010.
Year-to-date, the company generated $256.0 million of cash from operations. The company bought back $325.0 million worth of shares, paid $111.0 million in the form of dividends and made a capital expenditure of $104.0 million.
For, 2011 the company expects capital expenditure to be approximately 4.5% of net sales.
Outlook and Zacks Consensus
Moving forward, Dr Pepper reiterated its full-year 2011 adjusted earnings in the range of $2.70 to $2.78 per share on a 3% to 5% growth in net sales. The current Zacks Consensus Estimate for fiscal 2011 is $2.75 per share, which lies almost at the middle of the guidance range.
Dr Pepper currently has a Zacks #3 Rank, implying a short-term Hold rating on the stock. Moreover, we maintain a long-term Neutral recommendation on the stock.
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