In the most recent quarter, beverage company Dr Pepper Snapple Group (NYSE: DPS ) turned in some pretty good overall numbers, with revenue, net income, and free cash flow expanding 1%, 46%, and 254%, respectively. Digging a little deeper, however, yielded four things that could cast doubt on the long-term prospects of the company.
Struggles all around
In stark contrast to other carbonated soda companies, Dr Pepper Snapple Group saw bottler case volume decreases in both carbonated and non-carbonated beverages of 1% and 2%, respectively, in the most recent quarter. A huge number of its brands, such as its flagship Dr Pepper, saw volume decline 4%, stemming partially from decreased fountain demand in restaurants and loss of business from "larger accounts," in addition to the overall shift in the industry.
Volume in the Ten line remained flat, exceeding the expectations of some analysts. Category declines stemming from consumer demand for healthier drinks for kids, as well as competition, served as catalysts for an 8% decline in its Hawaiian Punch line. Even the Motts brand declined 1% . Given the industry headwinds facing carbonated sodas, it's understandable that volumes in those products lines will suffer, but when a company such as Dr Pepper struggles on all fronts, then the issue may lie internally as well as globally.
However, some bright spots in Dr Pepper Snapple Group's portfolio remained, as Canada Dry, Snapple, and its bottled water product Penafiel all saw gains in volume. On a similar note, Penafiel contributed overall volume growth of 2% in Latin America. Moreover, its concentrates business saw sales volume increases due to shipment timing.
The key to superior revenue and cash flow generation over the long term lies in product innovation. Unfortunately, in its most recent earnings call, Dr Pepper Snapple Group remained relatively silent on its innovation initiatives, with words such as "innovation" and "new" appearing seven and 12 times respectively. Two initiatives that stood out include new low-sugar Mott's juice and new variations under its popular Penafiel brand.
RCI drives bottom line
Rapid Continuous Improvement, or RCI, a Dr Pepper Snapple program that emphasizes cost-cutting and efficiency, drives margins, net income, and cash flow higher. For example, the company improved warehouse efficiencies by reducing driver check-in and check-out times and maximizing warehouse space by clearing excess inventory. This contributed to an improved overall margin for Dr Pepper Snapple Group, with net profit margin registering 11% versus 8% the same time last year. However, the question remains: How much can you squeeze a turnip?
In responding to a Wall Street analyst's question regarding the conservatism on guidance, CEO Larry Young said in part, "Everybody would agree the visibility is still next to zero with these headwinds we're facing." One thing is for sure: If the company doesn't start dreaming up new healthier drinks that consumers will buy, then its future remains dark. Dr Pepper Snapple Group did talk about expanding distribution to Singapore and Hong Kong, but it has a long way to go before catching up to its rivals in terms of global presence. Right now your investment dollars belong in a better spot.
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