Quaker Oats Co.’s troubled Snapple beverage line will undergo a $30 million restructuring in a bid to lift the once top-selling drinks business out of a financial funk.
Quaker, whose products include Gatorade and Cap’N Crunch cereal, also said Thursday it will work to improve lagging European beverage and Pacific food sales, using about $10 million of a $40 million second-quarter pretax restructuring charge to that effect.
Snapple has been an albatross around Chicago-based Quaker’s neck since it bought the tea and juice company in November 1994 for $1.7 billion - a price most analysts considered too high.
“They not only paid too much for Snapple, but their timing was extremely poor,” said analyst William Leach at Donaldson, Lufkin & Jenrette. “They bought it literally the day it was going into decline, and it has been going downhill ever since.”
The Chicago-based company said it expected to report a loss of 35 cents to 45 cents a share for the three months ending Dec. 31, primarily because of a $55 million operating loss for the weakening Snapple line. Wall Street analysts had predicted the company would report income of 5 cents to 8 cents a share for the period, compared with 25 cents per share a year ago.
Investors reacted mildly to the news Thursday, with Quaker shares falling 75 cents on the New York Stock Exchange to close at $34.87-1/2 a share.
The company said in a statement that Snapple sales will fall 10 percent below year-ago levels, resulting in a loss for that unit of about $75 million for the calendar year.
Quaker said the restructuring charge of 15 cents to 20 cents a share will help reconfigure Snapple’s supply chain. Snapple’s distribution system differs from Quaker’s top-selling Gatorade line in that Snapple delivers directly to stores instead of to warehouses.
Quaker Chairman William D. Smithburg said the company’s Gatorade division is showing double-digit volume gains and its U.S. foods division also is performing well. But the company, which began aggressive reconfiguring of the Snapple line earlier this year, still needs to improve Snapple’s supply chain, he said.
“We have identified five areas as critical for enabling profitable growth for Snapple, including greater management focus, enhanced distribution and marketing execution capabilities, aggressive new marketing-advertising” and developing new systems to track manufacturing and selling, Smithburg said.
Leach said Quaker likely will improve Snapple’s sales, but not enough to put Quaker on the same earnings track it once enjoyed. He said the sale of some very profitable companies sharply lowered Quaker’s earnings potential.