Keurig Dr Pepper (KDP) reported second quarter net sales of $2.81 billion today, a 0.4% decline which fell short of analyst expectations as the conglomerate continues to adapt post-merger.
According to financial results released by the company this morning, underlying net sales grew 2.6% in the second quarter of 2019, driven by a 2.1 increase in volume/mix and a higher net price realization of 9.5%. However, net sales for packaged beverages grew just 1%, impacted by the exit of Fiji Water and BodyArmor from their respective KDP distribution partnerships last year.
Adjusted operating income grew 10% to $702 million in the second quarter, up from an adjusted pro forma operating income of $640 million.
Wells Fargo Securities analyst Bonnie Herzog called the results “muted,” noting that KDP fell short of net sales growth projections of 3.6%. However, earnings per share (EPS) grew 15% to $0.30, beating expectations.
“All-in, we continue to think KDP is on the right track with its merger integration, and although today’s mixed results do little to get us incrementally more excited, we expect shares to outperform today given the EPS beat,” Herzog said in her analysis.
Following a 9 a.m. earnings call, KDP stock value increased 5.14% on Thursday to $29.03 per share.
Speaking to investors today, KDP chairman and CEO Bob Gamgort highlighted several of the company’s accomplishments since the merger between Keurig Green Mountain and Dr Pepper Snapple Group, including growing retail dollar consumption, the acquisitions of CORE Hydration and Big Red, and the launch of seven new Keurig brewers. He also pointed to strong performances for core CSD brands Dr Pepper and Canada Dry, which experienced increased sales thanks to innovations such as Dr Pepper Dark Berry — a promotional flavored released as a tie-in with the film Spider-Man: Far From Home — and new Diet Canada Dry Ginger Ale and Lemonade and Canada Dry Ginger Ale and Orangeade flavors.
“Retail market performance was solid in the quarter,” Gamgort said. “We grew or held market share in the key categories of CSDs, single-serve coffee, premium unflavored still water, shelf-stable fruit drinks and ready-to-drink coffee among others. This performance reflected the growth of key brands such as Dr Pepper and Canada Dry CSDs, CORE Hydration, Peet’s and FORTO ready-to-drink coffees.”
Gamgort added that growing sales of Peet’s and FORTO will help KDP offset the departures of Fiji and BodyArmor, suggesting that headwinds sustained by those brands’ exits will “abate in the last quarter of 2019.”
However, Gamgort noted that sales of Bai were “soft,” adding that KDP recently regained distribution that was lost in the second quarter of 2018 and has increased marketing support for the brand. Bai — which was acquired by Dr Pepper Snapple Group in 2016 for $1.7 billion — grew roughly 6% in the second quarter with more than $400 million in sales. Gamgort noted that the core business “is reasonably healthy,” while sublines such as Bai Bubbles are struggling.
“We analyze these things very extensively and this was all driven by some distribution changes, not velocity changes in the business,” Gamgort said during the Q&A portion of the call. “And so we’re still bullish on the brand going forward. And as I said a number of times before, when you get to a certain scale, like crossing $400 million, approaching 500 million in sales, you’re not going to see 20%, 30% growth rates. It’s just the natural evolution of all of these brands where when it was acquired, it was on the steep part of the growth curve [and] continues to do very well.”
Gamgort also responded to questions about the recently launched performance energy drink line Adrenaline Shoc (also known as A Shoc). Developed in a partnership with CORE founder Lance Collins, the drink launched earlier this summer.
“It’s very early days,” Gamgort said, noting that the drink is only in four regions currently including Los Angeles and Texas. “We’re bullish on the opportunity there, and I think more importantly, it gives you an indication of where we want to go with partnerships.”