Bai Brands To Give A Boost To Dr Pepper Snapple’s Earnings

by Trefis Team
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Dr Pepper Snapple
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Dr. Pepper Snapple is scheduled to report its second quarter earnings on July 27. Analysts have forecast earnings of $1.28 per share, growth of 3 cents over the corresponding prior year quarter, and revenues of $1.77 billion, which would represent roughly 4% growth. In the previous quarter, while the company managed to beat consensus expectations on earnings by 4 cents a share, it missed on revenues. This time around, the acquisition of Bai Brands, as well as growth in the domestic market, is expected to buoy the results.

See Our Complete Analysis For Dr Pepper Snapple

Acquisition Of Bai Brands

The acquisition of Bai Brands has boosted the company’s revenues, and in Q1 2017 the brand represented just under 4% of the total net sales, contributing to a 0.2% increase in sales. Through this acquisition, the company aims to be the leader in the healthy beverages segment. As millennials move away from carbonated soft drinks, demand for healthier options is increasing, and Bai is likely to be the front runner for DPS in terms of healthy beverage options. According to our estimates, DPS’s business is still concentrated on carbonated drinks in North America and this segment accounts for nearly 70% of its valuation. The remaining 30% comes from non-carbonated beverages. From an ACV (all-commodities volume) standpoint, while there are still distribution opportunities for its enhanced water product, greater opportunities lie in other platforms, such as Bubbles, Super Tea, and Black. ACV is considered an insightful measure for soft drinks companies, and can be generally thought of as “% of stores selling,” but with stores weighted based on their size, and hence, reflects the item’s exposure to consumer spending.

With Bai Brands the company is looking to increase focus on the non-carbonated beverage segment which is likely to be the key growth driver in the long term. Bai is known for its disruption in the beverage industry, and its entrepreneurial structure has allowed the company to innovate in the healthy beverage segment. Over the past two years the brand introduced fruit-based carbonated beverages and a better-for-you soda called Bai Black. These efforts are aimed towards introducing beverages which are healthier and appeal to customer tastes.  With its founder recently leaving the business, it will be crucial for Dr Pepper Snapple to ensure that the innovations in the brand continue.

Foreign Currency Impact

In the first quarter, net sales growth was negatively impacted by one percentage point of foreign currency impact, which pressured the gross margins by 10 basis points. For the full year, foreign currency headwinds are expected to reduce the overall revenue growth by 1%, mainly as a result of negative translations of the Mexican peso. The company stands in a good stead, in terms of foreign currency, as it garners a large chunk of its revenues from the domestic market. In FY 2016, United States generated approximately 90% of the company’s sales.

At the end of last year, Dr Pepper expected 2017 Core EPS in the $4.44 to $4.54 range, but increased the range to $4.56 to $4.66 thereafter, especially due to its high exposure to the domestic market and less exposure to the foreign markets, where negative currency translations could hurt results. Foreign currency translation and transaction were expected to reduce Core EPS by $0.11, primarily driven by the Mexican peso, but are now expected to reduce Core EPS by only $0.07.

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Dr Pepper Snapple

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