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Dr. Pepper's 1Q Earnings Beat, Revs Lag

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Dr Pepper Snapple Group Inc.’s (DPS - Free Report) first quarter 2013 adjusted earnings (excluding mark-to-market losses/gains) of 53 cents per share surpassed the Zacks Consensus Estimate of 47 cents by 12.8%.  Earnings also increased 15.2% year over year on the back of decent sales growth and increase in adjusted operating income.

During the quarter, Dr Pepper's net sales grew 1% year over year to $1.38 billion as gains from price/mix were offset by lower volumes. Sales volumes declined 2%. Currency translations had a neutral impact on revenues in the quarter. Net sales, however missed the Zacks Consensus Estimate of $1.40 billion by 1.4%. Overall, sales were down from the prior three quarters.

Gross profit improved 3.0% in the quarter to $796 million. Adjusted operating income increased 9.7% in the quarter to $204 million on the back of gains from improving productivity.

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. Bottler case sales include sales of packaged beverages by the company and its bottlers to retailers and independent distributors.

Sales volume, as discussed earlier, was down 2% in the quarter due to declines in the Beverage Concentrates and Packaged Beverages segments.

In the quarter, BCS volume declined 2% as both carbonated soft drinks (CSD) and non-carbonated soft drinks (NCB) volumes dipped 2% and 4% respectively. In CSD, Dr Pepper soft drink volume declined 3% due to weak performance of the base business and Dr Pepper TEN.

Overall volumes of the Core 4 brands (Canada Dry, A&W, Sunkist soda, and 7UP) remained flat, as the volume gains in Canada Dry and A&W were offset by declines in Sunkist soda and 7UP.

Canada Dry volumes grew high-single digit while A&W increased in low single-digits. 7UP declined in low-single digits in the quarter while Sunkist soda was down in mid single-digits.  Volumes declined for Crush, Sun Drop, RC Cola and Fountain foodservice during the quarter. Volumes for the remaining CSD brands were flat for the quarter.

Among the NCBs, growth in Mott’s products (11%) was offset by a decline in Hawaiian Punch (14%) and Snapple tea (2%). Volumes of Hawaiian Punch and Snapple tea were dragged by increases in prices and lower brand building activities.

Geographically, volumes declined 2% in U.S. and Canada and increased 1% in the Caribbean.

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 4% (both including and excluding currency impact)  year over year to $263 million as price gains and favorable mix were partially offset by a 1% volume decline. Segment operating profit improved 10% (both including and excluding currency impact) to $154 million driven by revenue growth and lower marketing expenditures.

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 $1.02 billion as mix gains and prices hikes were offset by a volume decline of 4%. Segment operating profit increased 2% on a currency neutral basis to $114 million due to productivity gains and a decline in LIFO inventory provision of $7 million, which partially offset headwinds from higher commodity costs, particularly apples.

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 6% on a currency neutral basis to $99 million, driven largely by mix gains, prices hikes and volume growth of 1%. Segment operating profit improved 11% (excluding currency) in the quarter to $10 million, driven by sales growth and productivity gains.

2013 Outlook

The company maintained its prior guidance for fiscal 2013. 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 2% in full year 2013 due to higher packaging and commodity costs (mainly apple costs).

Full-year tax rate is expected to be about 37%. Capital expenditure is expected to be nearly 3.5% of net sales.

Dr Pepper carries a Zacks Rank #4 (Sell).

Some other companies from the consumer staple sector that are performing well include Flower Foods Inc (FLO - Free Report) , The Coca-Cola Company (KO - Free Report) and Pepsico, Inc. (PEP - Free Report) . While Flower Foods carries a Zacks Rank #1 (Strong Buy), Coca Cola and Pepsico carry a Zacks Rank #2 (Buy).


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