Dr Pepper Snapple Group Inc.’s (DPS - Free Report) third-quarter 2013 adjusted earnings of 88 cents per share beat the Zacks Consensus Estimate of 83 cents by 6%. Moreover, earnings increased 11% year over year due to pricing gains, productivity improvements and a LIFO inventory benefit. Adjusted earnings exclude the impact of mark-to-market gains and other special items. However, sales continued to be soft due to weak volumes.
During the quarter, Dr Pepper's net sales increased 1% year over year to $1.54 billion as gains from price increases and favorable mix were offset by lower volumes and higher discounts. Sales volumes declined 1% while price/mix increased 3%. Currency translations had a neutral impact on revenues in the quarter. Net sales slightly missed the Zacks Consensus Estimate of $1.55 billion.
Volumes were hurt by the difficult operating conditions faced by carbonated soft drinks (CSD) in North America and slow consumer spending environment.
Changing consumer preferences, increasing health consciousness and rising obesity concerns, possible new taxes on sugar-sweetened beverages and growing regulatory pressures have tremendously pressurized the CSD category in North America. These category headwinds are significantly affecting Dr Pepper’s CSD volumes both regular and diet products) which comprise around 80% of its business.
Adjusted gross profit improved 0.7% in the quarter to $893 million as gains from pricing/productivity and a LIFO inventory benefit were partly offset by higher commodity costs (mainly sweeteners). Adjusted segment operating profit improved 5% year over year due to productivity improvements and LIFO inventory benefit of $14 million.
Volume Growth 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 sales of concentrates and finished beverages sold to bottlers, retailers and distributors. BCS includes the sales of packaged beverages by the company and its bottlers to retailers and independent distributors.
Sales volume, as discussed earlier, was down 1% in the quarter as gains in the Latin American segment were offset by declines in the Beverage Concentrates and Packaged Beverages segments.
In the quarter, BCS volume was flat as CSDs were flat and non-carbonated beverages (NCB) volumes dipped 1%. Dr Pepper soft drink volume declined 1% due to CSD category headwinds.
Overall volumes of the Core 4 brands (Canada Dry, A&W, Sunkist soda and 7UP) were flat as volume gains in Canada Dry were offset by declines in Sunkist soda, A&W and 7UP.
Volumes declined for Crush and Sun Drop while Fountain foodservice was flat during the quarter. Peñafiel water increased in double digits driven by package/product innovation.
Among the NCBs, growth in Mott’s products (1%) and Snapple (4%) was partially offset by a decline in Hawaiian Punch (6%).
Geographically, volumes declined 1% in the U.S. and Canada but increased 6% in Mexico and the Caribbean.
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 $309 million as tailwinds from price increases and favorable mix were partially offset by a 2% volume decline. Segment operating profit improved 2% (both including and excluding currency impact) to $201 million as revenue growth was offset by higher marketing expenses.
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 on a currency neutral basis at $1.11 billion as mix gains and price hikes were offset by a volume decline of 2%. Segment operating profit improved 8% (both including and excluding currency impact) to $159 million due to productivity improvements and a LIFO inventory benefit.
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 12% on a currency neutral basis to $120 million, driven largely by mix gains and volume growth of 6%. Segment operating profit improved 13% (excluding currency) in the quarter at $17 million as sales growth and productivity gains were offset by increasing commodity, manufacturing and other operating costs.
2013 Sales Outlook Lowered
The company maintained its prior earnings guidance for fiscal 2013. Full-year 2013 adjusted earnings per share are expected in the range of $3.04 to $3.12. The adjusted earnings guidance includes LIFO inventory benefit of approximately $30 million (roughly 10 cents per share).
However, Dr Pepper reduced its 2013 sales guidance due to continued CSD category headwinds. The company now expects sales to remain flat, down from prior expectations of 2% increase. We note that the sales guidance cut is on top of a prior top-line slash made in the second quarter. The sales expectations are also below the company’s long-term targets.
The company projects cost of goods sold to increase 1.5% in full-year 2013 due to higher packaging and commodity costs. As previously expected, brand investments on the TEN platform are expected to exceed $30 million in 2013.Full-year tax rate is expected to be about 35.5%, down from the prior expectation of 37%. Capital expenditure is expected to be nearly 3% of net sales.
Other Stocks to Consider
Dr Pepper carries a Zacks Rank #4 (Sell). Better-placed stocks in the beverage sector include Coca-Cola Amatil Ltd (CCLAY - Free Report) , Coca-Cola Enterprises Inc. (CCE - Free Report) and Coca-Cola HBC AG . While Coca-Cola Amatil Limited carries a Zacks Rank #1 (Strong Buy), Coca-Cola Enterprises Inc. and Coca-Cola HBC AG carry a Zacks Rank #2 (Buy).