Dr Pepper Snapple (NYSE:DPS) reported better than expected earnings for the first quarter of 2013 as revenues grew by 1% led by a favorable volume mix and pricing, but this was partially offset by lower volumes (down 2% y-o-y). Reported earnings per share (EPS) grew 6% primarily driven by higher pricing and ongoing productivity improvements. The company stated that its Core 4 and RC TEN national launch is seeing good progress and also reaffirmed its full year earnings guidance. 
Volume Decline Drags Revenue Growth
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Dr Pepper’s net sales for the quarter were up 1% driven by a favorable volume mix and pricing. Consolidated volume was down 2% due to lower volumes for Hawaiian Punch (down 14%) in the still category and Dr Pepper (down 3%) in the carbonated category. Bottler case sales (BCS) volumes were flat for the Core 4 brands: 7-Up, A&W, Sunkist and Canada Dry.
Hawaiian Punch volumes were down due to a stiff product pricing strategy. On the other hand, Dr Pepper volumes were negatively impacted by continuing cycling effects from the large inventory build-up seen during the national launch of its TEN variant in the latter half of 2011. Also, the increased availability of the brand with growing fountain spots was offset by softening trends in the restaurant industry. However, the Core 4 brands volume was positively impacted by the ongoing TEN product launch this year.  We expect the company to report better volumes during the second and third quarters as the summer season kicks in and increased marketing efforts behind its new TEN line-up drive trial volumes higher.
Pricing, Productivity Improvement Program Drive Profitability
Net pricing helped Dr Pepper increase its gross margins by approximately 80 basis points. On the other hand, higher input costs, primarily related to apples and corn, reduced gross margins by around 50 basis points year-over-year. However, benefits from the ongoing productivity improvement program helped negate the impact of higher input costs. The company also recorded a LIFO inventory benefit of $7 million during the quarter based on their current view of inflation and year-end inventory balances, which drove a 50-basis point improvement in gross margin year-over-year.
SG&A expenses grew by around $10 million, excluding depreciation and amortization on higher field labor costs and marketing investments. However, higher gross income – aided by pricing and productivity improvements coupled with lower depreciation and amortization expense and lower effective tax rate – drove more than 1% gain in net income margin. The lower number of shares outstanding further aided EPS growth of 6%. Going forward, we expect operating margins for the full year to remain stable as lower inflationary pressures would be offset by higher marketing expenses.
Core 4 and RC TEN Launch Underway
There is ample proof that CSD consumption in North America is declining due to a shift in consumer preference towards healthier alternatives. Meanwhile, Dr Pepper is betting on the ongoing launch of its Core 4 and RC TEN products in the U.S. These products boast of low calories per serving while maintaining the original trademark taste. The company reported that the availability of these new products measured by all category volume (ACV) is currently at 65% and has so far been able to secure incremental space from the retailers. In areas where the company is currently distributing these products, they account for approximately 10% of total sales. Dr Pepper claims these sales have been largely incremental to the CSD category and is confident of attracting more consumers back to CSDs with these products.
We currently have a price estimate of $47 for Dr Pepper Snapple, which we will revise soon based on the latest results.Notes:
- Dr Pepper Snapple Group Reports First Quarter 2013 Results, investor.drpeppersnapplegroup.com [↩]
- First Quarter 2013 Earnings Call, investor.drpeppersnapplegroup.com [↩]