On Aug 28, 2014, we issued an updated research report on
Dr Pepper Snapple Group Inc.
On Jul 24, the beverage company reported mixed second-quarter
2014 results, beating the Zacks Consensus Estimate for earnings
while revenues were in line with the same.
Adjusted earnings of $1.06 per share increased 26% year over
year driven by strong margins and lower interest expense and taxes.
Both net sales and volume grew 1% in the quarter. While gross
margins expanded 100 basis points (bps), operating margin improved
290 bps driven by pricing gains, lower commodity costs, lower
marketing investments than last year and ongoing productivity
Dr Pepper had an impressive run in the first half delivering
strong profits in both the quarters. The company also raised its
adjusted earnings per share outlook for the year during the
second-quarter conference call on the back of
stronger-than-expected first-half results. The company expects
earnings in the range of $3.43 to $3.51 in 2014 higher than $3.38
to $3.46 expected previously. This represents an upside from the
Notwithstanding, the consistent margin discipline, the company
needs to turn around its sales. Weak volume trends due to ongoing
pressure in the U.S. CSD category keeps us concerned.
The CSD category declined for the ninth straight year in 2013
due to weak consumer spending environment, cross-category
competition and growing health and wellness consciousness -
consumers are particularly vigilant about artificial sweeteners,
high sugar content and related obesity concern. Also, possible new
taxes on sugar-sweetened beverages and growing regulatory pressures
are affecting CSD sales. These headwinds are significantly
affecting Dr Pepper's CSD volumes which comprise around 80-85% of
its business. The category headwinds also hurt CSD sales of other
beverage giants like PepsiCo, Inc. (
) and The Coca-Cola Company (
Dr Pepper is trying to reinvigorate its CSD category through
low-calorie versions of its popular brands like Dr Pepper, 7UP,
Sunkist Orange Soda, A&W Root Beer, Canada Dry Ginger Ale and
RC Cola. The 10-calorie drinks have gained decent success, bringing
new as well as lapsed consumers back to the category.
Also, to drive sales, Dr Pepper is carrying out aggressive
marketing programs and strong activation in stores. Its marketing
plans include increasing distribution and availability of its key
brands and packages; expanding single-serve availability and
re-deploying cold drink equipment assets across its DSD (Direct
Store Delivery) footprint. These efforts have improved equity
scores of its brands with increase in both brand relevance and
Though CSDs showed improving trends in the second quarter helped
by these marketing initiatives, it remains to be seen if the
improvement can be sustained through the rest of the year.
Other Stocks to Consider
Dr Pepper carries a Zacks Rank #2 (Buy). Another beverage stock
that has the same Zacks Rank as Dr Pepper is The WhiteWave Foods
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