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Did Dr Pepper Snapple’s Productivity Initiatives Deliver in 2Q15?

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Margins in 2Q15

Dr Pepper Snapple’s (DPS) operating margin in the second quarter of 2015 improved by 100 basis points to 22.3% from the comparable quarter of the previous year. The company’s gross margin improved slightly to 59.3% in 2Q15 from 59.2% in the second quarter of the previous year.

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Reasons for margin growth

The growth in the company’s 2Q15 gross margin was driven by productivity initiatives and lower commodity costs. These favorable factors were partially offset by an unfavorable product, package, and segment mix as well as currency headwinds.

The significant improvement in the company’s 2Q15 operating margin was driven by higher sales coupled with lower selling, general, and administrative expenses. We discussed the factors that brought down Dr Pepper Snapple’s expenses in Part 1 of this series.

Productivity initiatives

Dr Pepper Snapple’s productivity initiatives are helping to create a lean cost structure. The company’s Rapid Continuous Improvement (or RCI) program uses lean and six sigma methods to lower costs and improve productivity. Under this program, the company classifies its improvement activities into what it calls “lean tracks.” The company implemented five new tracks in 2015 that aim at waste elimination in areas such as non-working marketing spending, ingredients, and the customer deductions collection process.

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These lean tracks have also helped enhance the company’s single-serve distribution. In the 2Q15 conference call, Larry D. Young, Dr Pepper Snapple’s president and CEO (chief executive officer), stated that the company has added more than 17,000 new fountain valves across local and national accounts.

Competitors’ margins

Coca-Cola’s (KO) gross as well operating margin fell in 2Q15 due to lower revenue, currency fluctuations, and structural changes. PepsiCo’s (PEP) gross margin improved 103 basis points to 55.0% and its operating margin increased by 107 basis points to 18.2% in 2Q15. The company’s improved margins were a result of planned cost reductions, higher pricing, and revenue management strategies.

Coca-Cola and PepsiCo together account for over 1.6% of the portfolio holdings of the iShares Core S&P 500 ETF (IVV) and ~2.8% of the iShares Russell 1000 Growth ETF (IWF).

The next article in this series discusses Dr Pepper Snapple’s stock price movement in 2015.

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