PepsiCo earnings beat expectations, boosted by strong snack performance
- PepsiCo reported second-quarter revenue and profit that beat Wall Street expectations thanks to strong performance from its Frito-Lays snack division, which saw operating profit and revenue grow 5% and 4%, respectively, according to a company release. Still, the beverage giant's profit slipped 14% to $1.82 billion, dragged down by higher costs for raw materials and transportation. Net revenue jumped 2.4% to $16.09 billion, and the company reaffirmed its financial outlook for fiscal 2018.
- North American sales slipped for the fourth period in a row. Net revenue for the North American beverage unit dropped 0.9% to $5.19 billion. The overall beverage division saw net revenue climb 2.4% to $16.09 billion.
- "This is going to take several quarters to get back on track," PepsiCo finance chief Hugh Johnston said of its U.S. beverage brands in an interview with The Wall Street Journal. Johnston said the company's focus on healthier drinks like LifeWtr bottled water have bruised performance of core brands such as Gatorade and Pepsi, and that PepsiCo has ramped up advertising spending on these brands.
PepsiCo may have overcorrected in its aggressive push to bring trendier, health-focused beverage brands into its portfolio. As consumers have spurned sugary sodas for sparkling waters and functional tea and juice blends, the company has poured marketing and R&D spend into low- to zero-calorie drinks like LifeWtr, Izze Fusion and bubly sparkling water.
And while these are savvy investments — the sparkling water category grew 70% between 2011 and 2016, and is expected to hit $3.1 billion in sales by 2020 — PepsiCo's long-suffering soda brands could use similar attention.
Last quarter, PepsiCo CEO Indra Nooyi pointed to heavy advertising spending by competitors such as Coca-Cola as an obstacle for the company's stable of beverage brands. She said the company would ramp up investment on its Pepsi soda brand in response, a position the company reiterated on Tuesday, stating that it would "responsibly" increase spending in the second half of 2018.
The beverage titan's goal is to strike a balance between fighting for a foothold in growing beverage markets like sparkling water and modernizing its classic soda brands. In April, Nooyi said the company was considering repositioning its bottling operations as a separate unit, either by making it a stand-alone public entity or putting it under the control of multiple franchises. Coca-Cola refranchised its U.S. bottling system last year, which allowed it to cut significant costs, so it's possible that PepsiCo could see similar benefit.
While challenges in the beverage space have weighed on PepsiCo's performance for the past few quarters, the company is also seeing gains from its snacking business.
The snacking category hit $33 billion in the U.S. last year, and products centered around health claims — an area PepsiCo has invested heavily in — have seen the strongest growth, according to Nielsen. In February, the company rolled out fruit, nut and veggie bars under its Naked brand, which aligns with growing consumer demand for non-GMO, preservative-free clean label snacks.
The company also acquired baked fruit and vegetable chip maker Bare Foods in May to meet demand for healthy, plant-based snacking. It's likely that PepsiCo will continue to develop products and acquire snack brands that fit these requirements, as consumer interest in better-for-you options shows no sign of slowing down.
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