DPS Misses Consensus Revenue Expectations In The Fourth Quarter

by Trefis Team
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Dr Pepper Snapple‘s (NYSE:DPS) fourth quarter revenue of $1.64 billion missed consensus estimates of $1.7 billion, though it was higher than the prior year’s figure of $1.58 billion. The annual sales came in 4% higher than the previous year at $6.69 billion. Recent corporate tax changes contributed $297 million to the 2017 results. As opposed to its usual practice of reporting its results through a press release, followed by an earnings call, the results this time around were reported through its 10-K filing, with the webcast conference call being canceled. A proxy filing process related to its previously announced merger transaction with Maple Parent Holdings Corp., which owns Keurig Green Mountain Inc., was cited as the reason for this.

We have a $122 price estimate for Dr Pepper Snapple, which is higher than the current market price. The charts have been made using our new, interactive platform. You can click here to modify the different driver assumptions, and gauge their impact on the earnings and price per share metrics.

Deal With Keurig

JAB Holdings, Keurig’s owner, has acquired a number of coffee brands, such as Jacobs, Peets, Caribou, and, Keurig. It has also scooped up Krispy Kreme Doughnuts, Panera Bread, Au Bon Pain, among other food and beverage companies. However, being able to deliver these products to places where the consumers shop requires a massive distribution network, and this is where Dr Pepper Snapple will come in. Furthermore, this deal, the biggest in the soft drinks space according to Dealogic, would also result in a hot and cold drinks combination, with immense scale for both. DPS, meanwhile, will benefit from Keurig’s e-commerce capabilities. JAB also has experience in the past of acquiring small brands, and ensuring these fast growth rates continue, an aspect DPS has been working on for Bai. More details regarding the deal can be expected once the proxy filing process is complete.

Bai Brands’ Topsy Turvy Year

DPS completed the Bai brands merger on January 31, 2017, and for the full year, the primary impacts of merger decreased diluted earnings per share in total by $0.26, against an initial estimation of just $0.02. The brand also added to the net sales by 1%, as opposed to 2 percentage points expected at first. The fact that the purchase of Bai Brands is the first major deal by Dr Pepper Snapple as a standalone company showed in DPS’ uncertainty regarding the brand’s expected financial performance, as the company modified the impact of the purchase on the earnings multiple times since announcing the acquisition. DPS does not have the experience of buying a smaller brand such as Bai, whose sales are growing at a fast rate. The company has also invested enormously in Bai’s advertising, promotion, and distribution strategy, which has been pressuring the margins.

One factor that could be causing the slow growth of the brand is that earlier the company relied on volume expansion by selling cases to companies such as Costco and Wal-Mart’s Sam’s Club. However, DPS is now focusing on acquiring retail grocery shelf space, where sales are usually more individualized, and not in bulk. The main reason cited for this was the highly promotional environment in such club stores. In the third quarter of 2016, the club channel mix was 31%, which has dropped to 26% year-to-date this financial year. This strategy should prove to be more fruitful for the company over the long run as it encourages trials and samplings, in the short run, its unforeseen impact resulted in an overoptimistic results forecast.

However, Bai Brands has tremendous potential to grow and drive DPS’ revenues going forward. 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.

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