Coffee Talk – KDP Continues to Combat Inflation in Earnings Outlook

By:

Senior Market Analyst at Interactive Brokers

U.S.-based, soft beverage giant Keurig Dr Pepper Inc. (NASDAQ: KDP) is poised Thursday to announce its latest quarterly earnings, as the firm shores-up its supply chain strategy amid ongoing inflationary pressures.

KDP – the maker of iconic brands such as Dr Pepper, 7up, Canada Dry, Snapple, and Green Mountain Coffee Roasters – is set to unveil its third-quarter financial results before the market opens on Thursday, October 27, along with a more-detailed conference call at 8:00am (ET).

The company’s latest earnings figures fall at the heels of inflationary pressures and supply chain concerns, with which the soft drink, juice, and coffee producer has been recently grappling – prompting the firm to increase prices, and place renewed focus on its capital deployment strategies.

At KDP’s second-quarter earnings call, then-CFO Ozan Dokmecioglu said that the “primary driver of the phasing of our second half results is the timing relationship between pricing and inflation,” which he expects to be “even higher” in Q3 after rising 15% in Q1 and advancing to 17% in Q2. Dokmecioglu attributed his outlook to the firm’s Green Coffee positions.

While Dokmecioglu said KDP is “seeing improvement in office-coffee,” which he anticipates will gradually improve further over time, he added that despite the firm’s increase in single-serve pricing, “the gaps between core months have remained consistent as all-forms of coffee have increased in price.”

Indeed, coffee prices had surged in Q3 but seem to be cooling off.

Indeed, coffee prices had surged in Q3 but seem to be cooling off.

According to a recent Hightower Report, while market participants have generally been concerned about consumers cutting back on their restaurant and retail coffee purchases, as inflation continues to weigh on the market, at-home consumption “has seen a notable increase since the start of the COVID pandemic.” The report continued that even if inflation levels remain stubbornly elevated, 2022/23 global coffee consumption is expected to reach “a record high.”

Hightower added that the coffee market has recently become “severely oversold.” Production is likely to remain down, while demand appears to be holding firm.

Hightower added that the coffee market has recently become “severely oversold.” Production is likely to remain down, while demand appears to be holding firm.

The projections could help KDP realize its second half guidance, which is expected to be more heavily weighted toward fourth-quarter earnings prospects, while Q3 is expected to look much like Q2.

In Q2, KDP’s retail dollar consumption of single-serve pods in the firm’s coffee segment rose 3.8% over the same prior year period, led by higher pricing in both partner and KDP-owned and licensed brands. Meanwhile, its cold beverage portfolio gained 9.9%, with market share growing or holding across 92%.

Overall, net sales for Q2 increased 13.2% to US$3.55 billion, up from US$3.14 billion in the same year-ago quarter, largely driven by net price realization of 10.4% and higher volume/mix of 3.1%, which reflected the impacts of modest volume elasticity.

KDP raised its guidance for 2022 net sales growth to the low-double-digit range and reaffirmed its guidance for adjusted EPS growth in the mid-single-digit range.  The company continues to expect earnings growth in the second half of the year to reach the high-single-digit range, driven largely by the fourth quarter.   

The company’s stock was last up around 1.0% on the day Wednesday to US$38.96, with a year-to-date increase of 7.92%, according to the IBKR Trader Workstation. For comparison, shares of Coca-Cola have grown 2.6%, and PepsiCo 5.7%, this far in 2022.

The company’s stock was last up around 1.0% on the day Wednesday to US$38.96, with a year-to-date increase of 7.92%, according to the IBKR Trader Workstation.

On a related front, KDP also said it has been shoring up its supply chain strategy, underscored by a string of leadership shifts.

The firm recently promoted three of its senior supply chain managers, including installing a new Chief Supply Chain Officer, with an aim to streamline its business units, while boosting productivity across the enterprise.

KDP has also named Vista Outdoor’s finance chief Sudhanshu Priyadarshi to fill the CFO gap left vacant after the ascension of Dokmecioglu to CEO.

Priyadarshi boasts two-decades of executive experience in global finance, strategy, and operations in the food & beverage, retail, pharmaceutical and logistics industries, with the lion’s share of his career at multi-national consumer packaged goods and retail companies, namely PepsiCo (NASDAQ: PEP) and Walmart (NYSE: WMT).

His tenure at KDP commences November 14.

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