Keurig Dr Pepper Earnings: Solid Beverage Performance but Weak Coffee Brewer and Pod Demand Persist

Narrow-moat Keurig Dr Pepper KDP held refreshment beverage volume steady following price hikes, but its coffee business disappointed, posting a third consecutive quarterly sales decline this year and reinforcing our concern about the segment’s long-term prospects. Total sales grew 5% (up 6% in beverage but down 3% in coffee) while adjusted EPS rose 4%, both in line with our estimates. As we taper our expectations for coffee sales growth (5% currently) over the 10-year horizon, we plan to trim our $35 fair value estimate by a low-single-digit percentage and view shares as fairly valued.

Refreshment beverage volumes were resilient (down 1%) even with a 7% price increase in the quarter (12% in the past year), which supports our favorable view of the segment. We attribute the low price elasticity in beverage to brand investments, constant innovation (zero-sugar recipes and new fruit flavors), and new categories such as energy drinks (C4) and sparkling water (Polar). Excluding impairments in the year-ago quarter, operating profits (up 6%) grew in line with revenue, as higher promotional spending to preserve market share (prudent in our view) offset productivity gains, and we see little change to this margin dynamic in the coming quarters.

For coffee, soft at-home consumption and retailer hesitance to take on brewer and pod inventories amid consumer belt-tightening remain headwinds that we don’t expect to abate anytime soon. Coffee sales declined 3%, on weak volumes in pods (down 8%) and brewers (down 5%), only partially mitigated by 3% pricing. These volume trends add to our concerns that the firm’s grip on pod volume and its close ties with coffee brand owners (which underpin our narrow moat rating) are weakening. Although coffee margins expanded 300 basis points to 29% thanks to efficiency gains and easing cost pressure, they remained below the 32% achieved in the third quarter of 2021. We expect sluggish volume to remain a drag on the bottom line.