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Why Dr Pepper Snapple’s Margins Contracted in 2Q17

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Margins in 2Q17

Dr Pepper Snapple Group (DPS) reported a contraction in its gross as well as operating margins in 2Q17, despite generating higher sales in the quarter. The company’s gross margin contracted 50 basis points on a year-over-year basis to 60.0%. The unfavorable impact of unrealized mark-to-market commodity changes reduced the company’s 2Q17 gross margins by 120 basis points.

The company’s 2Q17 gross margin was also adversely impacted by higher commodity costs and a rise in certain manufacturing costs. It was also negatively impacted by currency headwinds and an unfavorable mix, primarily arising from continued allied brand growth. These negative factors offset the impact of the company’s productivity improvements and lower discounts.

Excluding the unfavorable impact associated with commodity changes, the company’s adjusted gross margin rose 70 basis points to 60.4% in 2Q17. The growth was mainly due to owning Bai Brands, which the company acquired in January 2017.

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Operating margin fell in 2Q17

Dr Pepper Snapple’s operating margin fell to 20.8% in 2Q17 from 24.4% in 2Q16. The fall was mainly due to marketing expenses related to the Bai Brands acquisition. Marketing expenses related to other priority brands, a rise in certain operating expenses, and additional planned investments in the DSD (direct store delivery) front-line workforce also put pressure on the company’s 2Q17 operating margin.

Excluding one-time items, the company’s adjusted operating margin fell 130 basis points to 21.5% in 2Q17.

Comparison with peers

Coca-Cola’s (KO) reported operating margin in 2Q17 fell 335 basis points on a year-over-year basis to 21.4%. Coca-Cola’s 2Q17 operating margin was adversely impacted by lower revenue and higher charges related to the company’s refranchising efforts.

PepsiCo’s (PEP) operating margin contracted 20 basis points to 19.0% in 2Q17. The fall was due to a rise in certain operating costs, increased commodity costs, and currency headwinds.

For more earnings updates, be sure to visit Market Realist’s Nonalcoholic Beverages page.

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