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Keurig (KDP) Looks Poised on Growth Initiatives Amid High Costs

Keurig Dr Pepper KDP has been gaining from strong market share growth, continued brand strength and significant pricing. Also, a solid performance in its cold beverages bodes well. This led to the impressive fourth-quarter 2023 results, wherein the bottom line surpassed the Zacks Consensus Estimate. Meanwhile, both earnings and revenues improved year over year.

Keurig has been keen on delivering organic sales growth over the years. While most growth across categories and organic sales in recent quarters has been pricing-driven, the company remains confident about delivering sustained organic growth in the quarters ahead. KDP has been witnessing less elastic volume growth for the past few quarters. Also, demand trends, although strong, have been reflecting the impacts of pressures on consumers.

In fourth-quarter 2023, adjusted earnings per share grew 10% year over year and net sales rose 1.7% from the year-ago quarter on a reported basis. On a constant-currency basis, net sales increased 1.1%. Continued strength in the company's brand portfolio and in-market execution, along with elasticity across most categories, aided revenues. Net price realization grew 4.8%, with a lower volume/mix of 3.7%.

Factors Aiding Growth

Keurig Dr Pepper has been witnessing continued momentum in the Refreshment Beverages segment for a long time now. In fourth-quarter 2023, sales in the U.S. Refreshment Beverages segment totaled $2.2 billion, up 6.8% year over year, reflecting higher net price realization of 7.5% and a modest drop in the volume/mix of 0.7%. Results were driven by resilient category trends, market share gains, and the contribution from KDP's sales and the distribution partnership with Nutrabolt for C4 Energy. Continuation of this trend will aid the company’s top line in the near term.

Keurig’s focus on core brands revolves around marketing and brand renovation. Its emphasis on enriching the portfolio relates to filling portfolio white spaces through innovation and external partnerships. Gains from recent innovations and effective in-market execution, along with the contribution from its sales and the distribution partnership for C4 Energy, were well reflected in the fourth-quarter results.

The company’s approach to enhancing the effectiveness of its omnichannel, selling and distribution systems is well on track. It witnessed a strong in-market performance in the Liquid Refreshment Beverages category in the fourth quarter of 2023. The company saw retail dollar consumption growing 3.9% and market share expansion above 85% of KDP's cold beverage portfolio. This mainly reflected strength in Dr Pepper, Polar, Evian, Vita Coco, C4 Energy and Hawaiian Punch.

For 2024, management projects constant-currency net sales growth in the mid-single-digit range and adjusted earnings per share to rise in the high-single digits. This guidance is in sync with the company’s long-term targets. The view also reflects continued momentum in the U.S. Refreshment Beverages and international segments. Management also expects healthy operating profits, with operating margin expansion for 2024 on productivity savings. Strategic partnerships will add about 200 basis points to top-line growth in 2024. For the first quarter, the company forecasts net sales and EPS growth in the low-single digits.

Further, this optimism about the stock is reflected in its forward estimates. The Zacks Consensus Estimate for Keurig’s 2024 sales and earnings suggests growth of 3.7% and 6.7%, respectively, from the year-ago reported numbers.

Hurdles to Overcome

Keurig has been reeling under continued cost pressures in transportation, warehousing and labor. These, along with the adverse impacts of higher marketing investment, acted as deterrents. This led the company’s SG&A expenses to increase 2.5% year over year in the fourth quarter of 2023.

Also, it has been witnessing sluggishness in its coffee segment for a while now. In fourth-quarter 2023, sales in the U.S. Coffee segment declined 9.9% year over year, reflecting a net price realization of 0.8% and a lower volume/mix of 10.7%. Pod revenues fell 6.9%, including a shipment drop of 2.7%. Brewer shipments totaled 9.7 million in the 12 months ended Dec 31, 2023, representing a 10.3% year-over-year decline. In the preceding quarter, the segment’s sales fell 3.2%. The 2024 view reflects a relatively muted contribution from the U.S. coffee unit.

Shares of this Zacks Rank #3 (Hold) company have declined 13.4% in the past year against the industry’s growth of 5.5%.

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Zacks Investment Research
Zacks Investment Research


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Conclusion

We believe that strength in its refreshment beverages segment, driven by recent innovations and solid market share gains, is likely to help offset cost headwinds. Also, a potential recovery in the coffee segment raises optimism.

Stocks to Consider

We have highlighted three better-ranked stocks from the Consumer Staple sector, namely Vita Coco Company COCO, Coca-Cola FEMSA KOF and Celsius CELH.

Vita Coco, which develops, markets and distributes coconut water products in the United States, Canada, Europe, the Middle East and the Asia Pacific, currently sports a Zacks Rank #1 (Strong Buy). COCO shares have rallied 23.5% in the past year. You can see the complete list of today's Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Vita Coco’s current financial year’s sales and earnings per share suggests growth of 1.8% and 24.3%, respectively, from the year-ago reported figures. COCO has a trailing four-quarter earnings surprise of 31.3%, on average.

Coca-Cola FEMSA produces, markets and distributes soft drinks throughout the metropolitan area of Mexico City. The company has a trailing four-quarter negative earnings surprise of 2.1%, on average. It currently carries a Zacks Rank #2 (Buy).

The Zacks Consensus Estimate for Coca-Cola FEMSA’s current financial-year sales and earnings suggests growth of 10.1% and 25%, respectively, from the prior-year reported levels. KOF shares have risen 19.3% in the past year.

Celsius, which specializes in commercializing healthier, nutritional functional foods, beverages and dietary supplements, currently carries a Zacks Rank #2. CELH shares have rallied 170% in the past year.

The Zacks Consensus Estimate for CELH’s current financial-year sales and earnings suggests growth of 41.6% each from the year-earlier actuals. CELLH has a trailing four-quarter earnings surprise of 67.4%, on average.

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Vita Coco Company, Inc. (COCO) : Free Stock Analysis Report

Coca Cola Femsa S.A.B. de C.V. (KOF) : Free Stock Analysis Report

Celsius Holdings Inc. (CELH) : Free Stock Analysis Report

Keurig Dr Pepper, Inc (KDP) : Free Stock Analysis Report

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