How Will Dr Pepper Snapple Perform In The Second Quarter?

Keurig Dr Pepper (NYSE: KDP) is set to report second quarter results for Dr Pepper Snapple (NYSE:DPS) on August 8, wherein a growth in both revenue and earnings is expected. The 2.4% revenue growth, from $1.8 billion in Q2 2017 to $1.84 bilion in Q2 2018, is expected to be driven by higher pricing and increased volumes, besides improvement in Bai Brands. The earnings are expected to jump over 18% to $1.48 per share as a result of a reduction in the corporate tax rate in the U.S.  Keurig Dr Pepper completed the merger between Keurig Green Mountain and Dr Pepper Snapple Group on July 9, hence, this will be the final quarter for DPS to report its earnings as an unmerged entity.

We are in the process of updating our model to reflect the financials of the merged entity.

Factors That May Have An Impact On The Quarter

1. Popularity of Ginger Ale: Canada Dry had an 8% gain in the first quarter due to steady growth in the ginger ale category and product innovation. The increasing popularity of ginger ale has been driven by millennials, as they look for more authentic, quality beverages having natural flavors. Ginger beverages have been gaining traction in many markets around the world, with demand growing strongly at a 32% year over year growth rate across the U.S., U.K., Spain, and Mexico. Ginger, a sought-after flavor, was also ranked in the top 10 in Google’s 2017 Beverage Report. This segment is expected to continue its strong growth in the second quarter.

2. Potential of Bai Brands: 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. In the quarter, Bai volumes increased 54% driven by distribution gains, product innovation, and promotional activity, while also benefiting in terms of comparison of a full quarter versus two months in Q1 2017.

3. Reduction in Effective Tax Rate: The lowering of the corporate tax rate from 35% to 21% in the U.S., effective January 1, 2018, positively impacted the company. Consequently, its effective tax rate for the first quarter of this year was 24.7%, as compared to 28.6% in Q1 2017. This trend is expected to continue in Q2 as well.

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