Lower Soda Sales Cast A Shadow Over DPS Results And Outlook

Dr Pepper Snapple’s (NYSE:DPS) top-line stagnation continued into the fourth quarter of 2012 as the declining sales of carbonated beverages in the North American region took a toll on the company’s sales volumes. Meanwhile, the bottom line did not see any marked improvement either with margins more or less the same as last year’s. Overall, the company’s net income grew by a marginal 2% both for Q4 as well as the full twelve months.

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Lower Demand For Soda Weighs On Volumes

In our pre-earnings write-up discussing Dr Pepper’s fourth quarter outlook, we mentioned how, of the big three cola companies, Dr Pepper Snapple stands to lose the most from declining consumer demand for soda in North America. The reasons are clear – soda sales in North America make up for more than 70% of the company’s revenues. Moreover, unlike PepsiCo and Coca-Cola, DPS’ portfolio in the non-carbonated segment isn’t wide enough to accommodate the consumer shift towards healthier beverages. This fact is reflected in the company’s 2012 performance – total volume sales declined by 1% in the final quarter and about 2% over the previous year. The company has largely been offsetting volume decline through pricing increases, and this continued in the fourth quarter as well. Net sales as a result grew by a marginal 2%, both in Q4 and for the full year.

Strong Growth In Latin America

One of the brighter spots for investors in DPS’ Q4 results was the company’s performance in Latin America. The increased focus on countries such as Mexico and the Caribbean Islands certainly seems to be paying off, with volume increase of 8% and net sales increase of 11% in the region during the last quarter.

DPS’s bottom line performance, meanwhile, remained steady. Gross margins for the full year increased from 57.9% to 58.3% despite a general increase in commodity prices, while operating margins increased from 17.3% to 18.2%. As a result, net income for 2012 increased by around 2%.

Outlook Growing Weaker But Innovation May Turn Things Around

Going forward, we expect the sales slowdown in carbonated drinks in North America to get worse. This casts a heavy gloom over DPS’ future earnings. The company will have to innovate with its products to get out of this situation – investors should keep a close eye on any portfolio expansion in the non-carbonated soda segment. Meanwhile, the company’s Latin American operations provide another growth prospect, although DPS draws very little revenues from the region. In order to compete more effectively with companies such as Coca-Cola in countries like Mexico, DPS will also have to step up its ad spend. This can however weigh down its bottom line in the long run.

We currently have a price estimate of $46 for Dr Pepper Snapple, which we will revise soon based on the latest results.

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