Dr Pepper Snapple (NYSE:DPS) announced its Q3 earnings on Thursday as strong pricing helped boost the net income but revenues remained flat due to a weak volume. Total revenue stood at $1.53 billion whereas the net income swelled 16% to $179 million or 84 cents a share. However, the net income benefited from a $18 million mark-to-market commodity gain.
Total volume was down 3% in the quarter. The weak volumes forced the company to cut its full year forecast to a 2% increase in the net sales, down from the previous forecast of 3%. The company continued to maintain its full year guidance of an EPS in the range of $2.90 to $2.98 however.
Soft drink volumes declined 2% in the third quarter. Dr Pepper TEN‘s gains were not enough to offset the declines of the regular Dr Pepper as the brand’s overall volume was down 1% in the quarter. Soft drinks contribute to more than three-fourth to Dr Pepper Snapple’s stock price as per our estimates. Overall, the soft drink market is declining at the rate of 1-2% annually in the U.S.
In the non-carbonated beverage (NCB) segment, Snapple posted a 4% volume gain. Besides Snapple, the company has a weak portfolio in the NCB segment and continues to lose ground in the broader non-alcoholic beverage market. Mott’s and Hawaiian Punch were again culpable for most of the volume declines within the non-carbonated beverages as the high costs of raw materials were passed on the consumers. NCB volume declined 5% in the third quarter.
As more and more buyers snub traditional colas for healthier alternatives such as juices, RTD coffees, water mixers etc, beverage companies have resorted to stronger pricing in order to compensate for the weak volumes. Strong pricing helped the gross margins expand to 59.0% from 56.0% in the previous year quarter. Pricing was up 4% in the quarter.
Company-reported operating margins increased 3.0% to 20.1%. Excluding the impact of mark-to-market gains, the margins would have increased 2.0%. However, there will be some downward pressure on the margins in the fourth quarter due to higher marketing expense the company expects to incur. Year-to-date, margins are up 80 basis points.
We currently have a price estimate of $45.60 for Dr Pepper Snapple, which is about 5% above the market price.