Dr Pepper Snapple (NYSE:DPS) is set to announce its first quarter results on April 24. We expect the company to report modest revenue growth, primarily led by pricing and volume-mix as total volumes are expected to remain under pressure. Since the company relies on carbonated soft drinks (CSDs) for more than 70% of its revenues, a continued consumer shift away from the category is expected to drag on volumes. However, its new TEN line up has received a positive response from consumers and is expected to provide some support. We expect the company to report thinner margins due to the increased cost of goods sold and distribution and marketing expenses, which would be partially offset by relatively lower inflationary pressures and productivity initiatives.
- Dr Pepper Raises EPS Guidance On Solid Q2 Results
- Dr Pepper Q2 Earnings Preview: Another Strong Quarter Across CSD And Non-CSD Portfolios?
- Dr Pepper Snapple Is Heavily Dependent On CSDs, But That’s Not A Problem
- Dr Pepper Is Defying An Otherwise Tough US Carbonated Market
- Dr Pepper Beats Consensus Estimates; Grows Volume In Carbonated Beverages Too
- Dr Pepper Snapple Earnings Preview: Home Market Growth To Boost Results
TEN Line Up To Slow Down Volume Decline
Consumers in North America are becoming increasingly health conscious, and we have witnessed its impact on declining CSD volumes. Market-wide CSD volumes have declined by around 2.2% over the last two years in the U.S.  The prime health concern associated with soda drinks is obesity. There have been “Diet” versions of these drinks in the market for quite some time now. These contain artificial sweeteners, which have no calories and taste different from their sugary counterparts. However, Dr Pepper Snapple’s “TEN” line up boasts of just 10 calories per 12 ounce serving with minimal aftertaste effects of the artificial sweetener. The drinks under this trademark are made with a mix of sugar and no-calorie sweeteners.
With strong marketing and in-store activity, Dr Pepper Snapple has been able to get a very positive response to this new launch. The company reported that in the test markets, 40% of the dollars spent on buying TEN were incremental to the CSD category. It also reported that 55% of Dr Pepper TEN volume was incremental to the CSD category. These are great results in light of the shift away from CSD beverages seen in the U.S. For 2013, the company plans to complete the national roll out of its TEN line up with heavy investments in the brand’s marketing topping $30 million in estimates.  The fact that added store keeping units (SKUs) have not led to displacing the company’s existing products and it has been able to get incremental shelf space in stores is encouraging. We feel, this is another factor that would limit the cannibalization impact of these new products on their existing CSD line up. 
Moreover, the rate of CSD volume decline would also be limited by the company’s continued distribution and availability gains. Dr Pepper’s CSD all category volume (ACV) was up 0.5% and 0.2% in grocery and convenient stores respectively, in 2012. The company also increased its fountain availabilities in food service establishments to just over 45,000 in 2012. 
Higher COGS, Marketing Expense To Result In Drier Margins
We expect the company’s cost of goods sold to be marginally higher due to increased cost of packaging and ingredients. Higher marketing expense related to the nation-wide launch of the TEN line up during the year is further expected to thin margins. However, ongoing productivity measures that yielded $116 million in annualized savings during 2012, are expected to partially offset these margin pressures.