Dr Pepper Snapple Group Inc.'s (DPS) third-quarter earnings beat the Zacks Consensus Estimate backed by favorable pricing and strong volumes. The company refined the fiscal-year earnings outlook following better-than-expected year-to-date results.
Dr Pepper Snapple’s third-quarter 2014 adjusted earnings of 98 cents per share beat the Zacks Consensus Estimate of 88 cents by 11.4%. Moreover, earnings increased 11% year over year attributable to strong margins and solid revenues from Beverage Concentrates and Latin America Beverages.
During the quarter, Dr Pepper's net sales rose 3% year over year to $1.58 billion on the back of improving sales volumes, price increases and favorable product/package mix. Sales volume remained flat year over year as gains in Latin America and Packaged beverages were offset by decline in Beverage Concentrates. Net sales beat the Zacks Consensus Estimate of $1.54 billion by 2.6%.
Adjusted gross profit went up 3.1% to $921.0 million. Adjusted operating income increased 6% year over year to $318 million during the quarter driven by productivity improvements and lower marketing and people-related expenses.
The effective tax rate was 34% in the quarter, lower than 34.4% in the prior-year quarter as New York State reduced the effective tax rate by 0.4%.
Volumes in Detail
Dr Pepper's sales volume is measured in two ways: 1) sales volume and 2) bottler case sales (BCS) volume. Sales volume represents concentrates and finished beverages sold to bottlers, retailers and distributors. BCS includes the sale of packaged beverages by the company and its bottlers to retailers and independent distributors.
Sales volume, as discussed earlier, remained flat in the quarter as 10% volume gain in the Latin American segment and 2% volume gain in Packaged Beverages were offset by 3% decline in Beverage concentrates.
In the quarter, BCS volume went up 1% as both Carbonated Soft Drinks (CSDs) and non-carbonated beverages (NCB) volume gained 1%. Although sales volume in Mexico and Caribbean region gained 10%, that in the U.S. and Canada remained flat.
Overall, volumes of the Core 4 brands (Canada Dry, A&W, Sunkist soda and 7UP), including TEN versions, increased 2% driven by strong performance of Canada Dry. High single-digit volume growth in Canada Dry was partially offset by low single-digit decline in A&W. Sunkist soda and 7UP remained flat in the quarter.
In terms of volumes, Penafiel water increased in double digits due to strong sales of the new products. The Fountain food service gained 2% during the quarter.
Segment Details
Beverage Concentrates: Dr Pepper's net sales from Beverage Concentrates slipped 3% year over year (on a currency neutral basis) due to negative pricing. Segment operating profit remain flat year over year as the decline in net sales and higher operating costs were offset by planned reductions in marketing investments and lower cost of goods.
Packaged Beverages: In the Packaged Beverages segment, net sales rose 2% on a currency neutral basis due to favorable product mix and an increase in contract volume. Segment operating profit rose 8% year over year (excluding currency impact) due to tailwinds from higher productivity, favorable input cost and lower people costs.
Latin AmericaBeverages: Dr Pepper's net sales from Latin America Beverages increased 21% on a currency neutral basis driven largely by mix gains, increased prices and volume growth of 10%. Segment operating profit increased 38% (excluding currency) in the quarter backed by productivity gains.
2014 Outlook
The company raised its adjusted earnings per share outlook to a range of $3.56 to $3.62 from $3.43 to $3.51. This represents an upside from the 2013 levels.
The company, refined the previously provided sales guidance for 2014. Owing to the continued CSD category headwinds, Dr Pepper expects full-year 2014 net sales to be up 1% as against the previously announced range of flat to up approximately 1% year over year.
The company expects lower packaging and commodity costs to reduce the cost of goods sold (COGS) by 2.5% in 2014.
The full-year tax rate is expected to be about 35%, compared to 35.5% in 2013. Capital expenditure is expected to be nearly 3% of net sales. The company plans to repurchase approximately $375 to $400 million worth of shares in 2014.
Dr Pepper carries a Zacks Rank #3 (Hold). Other better-ranked companies in the consumer goods sector include True Drinks Holdings, Inc. (TRUU), Keurig Green Mountain Inc. (GMCR) and Monster Beverages Company (MNST). While True Drinks carries a Zacks Rank #1 (Strong Buy), Keurig Green and Monster Beverages carry a Zacks Rank #2 (Buy).
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