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Could Dr Pepper Snapple’s Margins Improve in 3Q17?

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Oct. 23 2017, Updated 9:11 a.m. ET

Margins under pressure

Dr Pepper Snapple Group’s (DPS) gross margin and operating margin both fell in 2Q17. Its gross margin fell 50 basis points to 60.0%, mainly due to an unfavorable comparison of the mark-to-market activity on commodity derivative contracts. Other factors that adversely impacted its gross margin were higher commodity costs, a rise in other manufacturing costs, currency headwinds, and an unfavorable product, package, and segment mix.

The company’s adjusted gross margins rose 70 basis points to 60.4% in 2Q17 due to the addition of Bai Brands.

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Operating margin in the previous quarter

Dr Pepper Snapple’s operating margin fell significantly to 20.8% in 2Q17, from 24.3% in 2Q16. The fall was mainly impacted by marketing expenses associated with the Bai Brands acquisition. It was also due to marketing expenses related to other priority brands, a rise in certain operating expenses, and increased planned investments in the DSD (direct store delivery) front-line workforce.

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

Expectations

Dr Pepper Snapple’s gross margin is expected to continue to be under pressure due to higher packaging and ingredients costs (excluding the acquired Bai Brands business) and currency headwinds. However, the addition of Bai Brands is expected to have a positive impact on its gross margin.

The company’s operating margin is expected to be adversely impacted by higher costs, expenses associated with investments made in its DSD front-line workforce, and higher health and welfare and risk insurance expenses.

The productivity benefits under the company’s Rapid Continuous Improvement program are expected to benefit its 2017 margins.

Next, let’s look at analysts’ earnings expectations for Dr Pepper Snapple.

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