Dr Pepper Snapple Earnings Bubble Higher Despite Lower Volumes

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.

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.