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What Boosted Dr Pepper Snapple’s Margins in 1Q16?

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Higher margins

As mentioned in part one of this series, Dr Pepper Snapple’s (DPS) higher margins in 1Q16 facilitated growth in the company’s adjusted EPS (earnings per share). Dr Pepper Snapple’s gross margin increased to 59.5% in 1Q16 from 58.5% in 1Q15.

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Factors that influenced gross margins

The 100-basis-point expansion in Dr Pepper Snapple’s gross margin in 1Q16 was a result of the favorable effect of unrealized mark-to-market commodity changes and lower commodity costs, primarily related to PET (polyethylene terephthalate) and aluminum. The 1Q16 gross margins also grew due to productivity benefits and higher pricing.

However, unfavorable products, packages, and segment mixes adversely impacted Dr Pepper Snapple’s gross margin by 70 basis points and currency headwinds had an impact of 30 basis points. The PowerShares DWA Consumer Staples Momentum ETF (PSL) has a 3.3% exposure to Dr Pepper Snapple.

Enhanced operating margin

Dr Pepper Snapple’s operating margin expanded to 21% in 1Q16 from 18.6% in 1Q15. The rise in its 1Q16 operating margin resulted from lower SG&A (selling, general, and administrative) expenses driven by lower marketing investments and favorable foreign currency effects. The SG&A expenses in 1Q16 also declined due to lower logistics costs from lower fuel rates.

Dr Pepper Snapple’s 1Q16 operating margin was higher than the margins of larger soda peers Coca-Cola (KO) and PepsiCo (PEP). Coca-Cola’s operating margin declined to 20.8% in 1Q16 from 21.4% in 1Q15, due to currency headwinds and the impact of refranchising. PepsiCo’s 1Q16 operating margin declined to 13.6% from 14.7% in 1Q15. Monster Beverage (MNST) delivered operating margins in excess of 30% in the last two years, helped by higher prices of energy drinks.

Dr Pepper Snapple continues to focus on improving its margins through its RCI (rapid continuous improvement) program. We’ll discuss the company’s stock price movement in the next part of this series.

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