Keurig Dr Pepper (KDP) Q1 Earnings Beat, Soft Sales Hurt Stock

Keurig Dr Pepper Inc. KDP reported first-quarter 2019 results, wherein earnings beat estimates while sales missed. Further, the company’s top line declined year over year due to adverse effects of changes made in its Allied Brands portfolio and negative comparisons due to a calendar shift this year. However, earnings improved due to higher operating income and lowered debt. The company also reiterated its guidance for 2019.

Despite the strong earnings performance, the Keurig Dr Pepper stock lost investors’ confidence due to the decline in sales in the first quarter. Shares of this Zacks Rank #4 (Sell) company declined nearly 2.9% on May 9.

Overall, shares of Keurig Dr Pepper have surged 10.3% year to date, outperforming the industry’s rally of 8.8%.

Quarterly Highlights

Adjusted earnings per share of 25 cents improved 32% year over year and surpassed the Zacks Consensus Estimate of 23 cents. This improvement was aided by higher adjusted operating income and considerable decline in interest expenses due to reduced indebtedness and unwinding of several interest rate swap contracts. Further, a lower tax rate benefited the bottom line.

Keurig Dr Pepper, Inc Price, Consensus and EPS Surprise

Keurig Dr Pepper, Inc price-consensus-eps-surprise-chart | Keurig Dr Pepper, Inc Quote

Notably, the company reduced debt by $414 million in the first quarter, driven by strong operating performance and effective working capital management.

Net sales of $2,504 million missed the Zacks Consensus Estimate of $2,545 million and declined 1.1% from adjusted pro forma net sales of $2,533 million (including the merger adjustments) in the year-ago quarter. This decline is attributed to the adverse effects of changes made to its Allied Brands portfolio, as well as negative comparisons due to a calendar shift this year, including the shift of Easter into the second quarter of 2019 and one less shipping day in the first quarter of this year. This growth was partly negated by underlying net sales increase of 2.5%.

Underlying net sales was aided by 1.4% growth in volume/mix and 1.1% net price realization, offset by 2.5% adverse effects from changes in Allied Brands portfolio, 0.6% impact of calendar shift and 0.5% negative currency translations. However, net sales more than doubled (up 164%) from the year-ago quarter’s reported net sales of $948 million mainly due to the benefits of the merger.

During the first quarter, the company benefited from strong retail market performance measured by IRI. Keurig Dr Pepper witnessed dollar consumption growth across the majority of its portfolio and KDP holding, with market share gains across all categories. Market share growth in its CSD premium unflavored still water, RTD coffee and shelf stable apple juice portfolios were backed by strength in Dr Pepper and Canada Dry CSD brands, CORE waters, Peet's and Forto RTD coffees, and Mott's apple juice. Further, retail consumption for the single-serve pods manufactured by KDP rose almost in line with category unit growth of 5%.

Adjusted operating income grew 10.5% year over year to $621 million, driven by strong productivity and merger synergies that leveraged costs of goods sold and SG&A expenses. Nevertheless, this was partly offset by inflation, particularly in packaging and logistics. Moreover, adjusted operating margin expanded 260 basis points (bps) to 24.8%.

Segmental Details

Revenues for the Beverage Concentrates segment rose 4.8% year over year to $304 million from adjusted pro forma net sales of $290 million in the year-ago quarter. Net revenues primarily benefited from a 7.1% increase in price realizations, partly negated by a 2% decline in volume/mix and 0.3% currency headwinds.

Sales for the Packaged Beverage segment were $1.12 billion, down 5.3% from adjusted pro forma net sales of $1.18 billion in the year-ago quarter. This decline mainly resulted from a 5.4% impact of changes in Allied Brands portfolio, 1.2% impact of calendar shift and 0.1% adverse currency effects. This was, however, slightly offset by underlying sales growth of 1.4%, which reflected a 2.3% increase in prices, offset by a 0.9% decline in volume/mix.

Revenues from the Latin America Beverage segment improved 2.7% to $116 million from adjusted pro forma net sales of $113 million in the prior-year quarter. Gains from 4.1% rise in price realization and 1% volume/mix growth were partly offset by 2.4% unfavorable currency effects.

The Coffee Systems segment’s sales increased 1.7% to $968 million from adjusted pro forma net sales of $952 million in the year-ago quarter. This increase was backed by improved volume/mix, offset by lower pricing and unfavorable currency. Volume/mix grew 5%, benefiting from a 7% increase in K-Cup pod volume and 12.4% rise in brewer volume, offset by lower pod sales mix due to rise in volumes of branded partners in the first quarter.

Financials

Keurig Dr Pepper ended the first quarter with cash and cash equivalents of $85 million as of Mar 31, 2019, compared with $83 million as of Dec 31, 2018. Long-term obligations totaled $13,246 million and total stockholders’ equity was $22,674 million. Net cash provided by operating activities totaled nearly $591 million as of Mar 31, 2019.

Outlook

Keurig Dr Pepper reiterated its guidance for 2019. The company continues to anticipate adjusted earnings per share growth of 15-17% in 2019, which is in line with the long-term target for the 2018-2021 period set at the time of the merger. This brings the company’s adjusted earnings per share guidance to $1.20-$1.22 for 2019.

The earnings view for 2019 is supported by net sales growth of about 2%, which is also in line with Keurig Dr Pepper’s long-term sales growth target of 2-3%. Further, it anticipates capturing merger synergies of nearly $200 million in 2019, consistent with the long-term target of capturing $200-million synergies every year between 2019 and 2021.

Other net expenses are projected to be $30 million in 2019. Adjusted net interest expenses are likely to be $570-$590 million, driven by ongoing efforts to lower debt and benefits from the unwinding of interest swap contracts. Adjusted effective tax is expected to be 25-25.5%, with outstanding shares estimated at 1,420 million.

Additionally, the company expects significant cash flow generation and rapid deleveraging, targeting a leverage ratio of less than 3.0 in two to three years from the closing of the merger in July 2018.

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PepsiCo Inc. PEP has a long-term earnings growth rate of 7% and a Zacks Rank #2 at present.

New Age Beverage Corporation NBEV, also a Zacks Rank #2 stock, has witnessed positive revisions in its current-year estimates in the past 60 days.

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