Dr. Pepper Earnings Review: Mexico Sales Remain Strong, Snapple Volumes Decline

DPS: Dr Pepper Snapple logo
DPS
Dr Pepper Snapple

Dr Pepper Snapple (NYSE:DPS) reported 1% growth in its Q2 and year-to-date net sales on July 24, in line with the company’s full-year guidance of flat to 1% top line growth. [1] Carbonated soft drink (CSD) bottler case sales rose 2% year-over-year for the Texas based beverage manufacturer, led by strong rise in Canada Dry sales, while 7Up and Sunkist remained flat. Unit sales rose in Mexico despite the soda tax enacted in January, which was expected to hinder volume growth this quarter. With U.S. and Canada bottler case sales remaining flat this quarter, Dr. Pepper derived growth from higher sales in Mexico and the Caribbean, which together constituted 8% of the net revenues in 2013. [2] On the other hand, Dr. Pepper’s non-sparkling lineup suffered a 4% year-over-year decline in volumes this quarter, mainly as Hawaiian Punch sales fell massively. This decline in still beverage sales also reflects the absence of strong Dr. Pepper brands in fast growing segments such as sports drinks and energy drinks. Despite rising volumes in the overall ready-to-drink (RTD) tea market, Dr. Pepper’s flagship tea brand Snapple witnessed decline in volumes, as the company shifted focus away from its popular value packs.

Dr. Pepper’s gross margins also improved 120 basis points from 2013 levels to 59.2% on better sales mix and lower commodity costs this quarter, but the company expects full year margins to remain flat to only slightly positive. [3] We have a price estimate of $54.23 for Dr Pepper Snapple, which is around 11% lower than the current market price. However, we are currently in the process of incorporating the latest quarterly results into our forecasts.

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See Our Complete Analysis For Dr Pepper Snapple

Mexico Volumes Rise Despite the Soda Tax Enacted in January

Net sales for Dr. Pepper’s Latin America division rose 24% on currency neutral basis this quarter, primarily due to rises in net pricing. Mexico, which forms around 90% of the company’s business in Latin America, had enacted a one-peso-per-liter (~8 cents) tax on sugary sodas, effective as of January 1, as the country battles widespread obesity, diabetes, and other health issues. In fact, around 32.8% of Mexico’s population in obese, the highest figure for any country. Around three-fourths of Dr. Pepper’s beverage portfolio in the country is subject to the soda tax. The tax has on an average made soda more expensive by around 8%. As over half of Mexico’s population lives below the national poverty line, price-sensitive customers could have been dissuaded from soft drink consumption. However, Dr. Pepper managed to carry its Mexican growth momentum seen in previous years into the first and second quarters, with volumes in the overall Latin America region rising 6% in Q2.

Growth in Mexico volumes was bolstered by high demand for the carbonated water brand Penafiel, which grew 25% in the quarter. Net pricing rose because of the pass-through of the soda tax, but had no impact on the net margins as the tax increased cost of sales. Dr. Pepper expects the soda tax to have a 60 basis points positive impact on the net pricing this year, but not affect earnings as the higher pricing is only due to the passing of the tax.

Snapple Volumes Also Decline to Bring Down Still Beverages Sales

Dr. Pepper’s non-sparkling volumes fell 4% this quarter, with the company’s popular flagship RTD tea brand Snapple also undergoing 3% contraction in units sales during this period. As consumers look to avoid the sugar and calorie-fueled carbonated drinks, volumes for healthier non-carbonated beverage segments such as sports drinks, bottled water, natural juices and RTD tea have been rising. Growth in still beverages has bolstered overall volume growth for companies, amid decline in carbonates. However, while still beverage volumes for rival companies Coca-Cola and PepsiCo remain strong, Dr. Pepper’s still beverages have declined in both Q1 and Q2. This decline in non-sparkling sales was mainly as the company’s juice brand Hawaiian Punch saw another quarter of disappointing sales, with volumes falling 12%. Hawaiian Punch had also reported 8% decline in volumes in Q1, as consumers continued to shift from high-calorie juices to organic all-natural and healthier beverages, and also due to lower promotional activities centered on the juice brand.

Despite high growth expectations from Snapple, volumes slid as Dr. Pepper decided to concentrate on the brand’s premium image. Deprioritizing the value line, which constitutes roughly 10% of the RTD tea brand’s volumes, negatively affected sales this quarter. However, the Snapple premium business increased 1% this quarter and could continue to grow due to growing demand for RTD tea and Snapple’s strong brand positioning. Apart from acting as an alternative to sodas, tea is a convenient and healthier hydrant containing antioxidants that boost metabolism. Due to the growing demand for iced tea as a healthier refreshment drink, coupled with low current penetration levels, the U.S. RTD tea segment is expected to generate sales of $5.3 billion in 2014, up from $5.1 billion last year, and grow at a CAGR of over 6% till 2018. [4] Snapple was one of the first few established RTD tea brands in the U.S., along with the Arizona and Lipton tea brands. Snapple and Diet Snapple together hold a market share of 8% with sales of over $400 million last year. [5]

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Notes:
  1. Dr. Pepper 8-k []
  2. Dr. Pepper 10-k []
  3. Dr. Pepper earnings transcript []
  4. RTD tea production in the US“, January 2014, prweb.com []
  5. Sales of RTD tea brands in the U.S., statista.com []