Outside Factors To Pressure Dr Pepper Snapple’s Earnings In The Third Quarter

DPS: Dr Pepper Snapple logo
DPS
Dr Pepper Snapple

Dr Pepper Snapple (NYSE:DPS) is scheduled to report its second quarter earnings on October 25. Analysts have forecast an EPS of $1.17 per share, reflecting a flat earnings growth, and revenues of $1.77 billion, which would represent an improvement of more than 5%. In the previous quarter, while the company managed to beat consensus expectations on revenues by $30 million, it missed on earnings. This time around, the acquisition of Bai Brands, as well as growth in the domestic market, are expected to buoy the sales.

Earnings Guidance Lowered

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While declaring its second quarter results, the company provided an updated full year guidance. The company expects net sales growth of 4.5%, higher than the 4% predicted earlier, 2 percentage points of which are anticipated to come from the acquisition of Bai Brands. Even currency headwinds are expected to negatively impact the earnings by 4 cents per share, instead of 7 cents. Despite these factors, the company has decided not to revise its then-EPS guidance upwards from the $4.56 to $4.66 range. This is because the impact of Bai is expected to be $0.07 dilutive, instead of an estimation of $0.02 earlier, due to the increased marketing efforts for the brand. The total marketing spend on Bai alone was $20 million in the second quarter, with another $16 million spent on other priority brands. Such heavy levels of investment into the brand can be expected in the remainder of the year as well, with the highest expenditure coming in the third quarter.

The company then lowered its earnings guidance in the middle of the third quarter, which sent the stock price of the company down by about 2%. The beverage company expects earnings to come in the range of $4.53 to $4.63. The reduction in guidance was in anticipation of the effects of a default by a supplier of resin to DPS’ operations in Mexico, which was, in fact, unaffected by either Hurricane Harvey or Irma. While the company has procured additional sources of resin, it will have to write-off certain prepaid resin inventory. The total expected impact is said to be between $7 and $9 million, and will mostly occur in the third quarter. Moreover, the company also stated that its operations have been negatively affected by hurricanes in south Texas, the southeastern U.S., and the Caribbean, as well as the recent earthquake in Mexico.

Tremendous Potential Of Bai

The acquisition of Bai Brands has boosted the company’s revenues, and in Q2 2017 the brand accounted for just over 2% of the net sales growth. Through the acquisition of this brand, 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. Moreover, 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 drink 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.

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. The company is also re-launching antioxidant water, which is slated for the latter part of this year, which may drive further upside to the brand.

See Our Complete Analysis For Dr Pepper Snapple

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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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