Quarterly net sales rose % year-on-year to $1.631bn while net income rose % to $210m, but despite Young’s mention of “strong results in a tough environment”, Wells Fargo Securities said yesterday it was concerned by DPS’s positioning and outlook in a challenged US CSD market.
Analysts warn of significant CSD over-exposure
Warning that DPS held “significant over-exposure” in CSDs, the brokerage warned that the firm is losing share in a declining industry (heaping pressure on the top line), and faces margin pressures due to higher fixed costs.
Given what Wells Fargo sees as a stuttering TEN calorie platform, a lack of “any other near-term catalysts to drive top-line growth”, its analysts say DPS cannot rely on ongoing cost-cutting initiatives in the next few years.
Chatting with analysts about DPS’s performance over Q2, CFO Martin Ellen said that DPS’s packaged beverage sales (excluding concentrates) benefited from strong growth for allied brands such as Vita Coco and Bai 5 (Bai Drinks founder Ben Weiss is pictured left).
Ellen said DPS earns a lower gross margin on these products, which it buys as finished goods, despite a good per case profit, adding that they account for around 3% of sales volumes.
“They’re really important to us and they’re growing. And strategically, it speaks to our ability to either seek out or have others seek us out – entrepreneurs who create these products that will probably end up creating this product somewhat better than larger companies would, not that we can’t,” he said.
DPS had the opportunity to get involved with these brands by offering them access to its distribution network, Ellen said, name-checking coffee-fruit brand Bai 5, Vita Coco and Fruit2O zero-calorie waters.
“One of our strengths and advantages is offering up our DSD system to take advantage of growing categories and growing products that are created by these partners. And it is a very good business for us,” he added.
Larry Young hasn't 'changed his tune' on acquisitions
In light of the allied brands’ success, and interestingly, given Wells Fargo’s view on the lack of growth catalysts for DPS, William Schmitz, Deutsche Bank, asked Young he’d “changed your tune” on acquisitions.
“You talked about some of these great allied brands that you love the growth profile, you love the revenue per case, and obviously, the balance sheet is fairly under-levered right now,” Schmitz said.
“So have you changed your view on doing deals?” he added.
Young replied that DPS remained committed to being shareholder-friendly, and insisted the firm would not overpay for anything.
“Some of these multiples that are out there are ridiculous. And I love these young entrepreneurs, but they all want to have the next Glaceau deal [the brand cost Coke $4.1bn in 2007]. And we’ll be very prudent in what we do with them,” he said.
“We’re very happy being a distributor and can also pick up some equity stakes in them, and we’ll continue to do that going forward,” Young added.
The DPS boss also spoke of ongoing trials offering lower-calorie CSDs to consumers looking for alternatives to artificial sweeteners – sodas with real sugar and stevia, with 60 calories/12oz (340ml) can.
Dr Pepper brand sales fell 1% in the quarter – an improvement on Q1 when it fell 4% – but it continues to lag other DPS soda brands. “Our issue…is diet. Diet has taken us down.” Young said.