PepsiCo on Tuesday delivered better-than-expected third-quarter earnings that showed signs of growing consumer demand for its teas, Gatorade, namesake cola and other beverages in North American.
The 16 percent surge in profits was a victory for Indra Nooyi on her last day as CEO, after years of facing pressure to sell or spin the company’s beverage business as its growth has lagged behind that of its Frito Lay, Tostitos, Lays chips and other packaged snacks. While its snacks continue to command presence and sales in a crowded market, its beverages have grappled with slowing carbonated sales and competition from new upstart rivals. Nooyi, though, has said she believes the company is stronger with both product lines in its portfolio.
To revive the business, PepsiCo has picked three of its largest beverage brands, Gatorade, Pepsi and Mountain Dew, to throw its marketing dollars behind. Those efforts seem to have taken hold, with its North American beverage business posting organic growth of 2.5 percent, stripping out the impact of acquisitions and other variables. Last quarter, it was down 1.5 percent.
“Splitting the entire company is something we took off the table a long time ago and are not revisiting that at all, based off the performance of the last six years we’ve proven the case that the business being together creates value,” PepsiCo chief financial officer Hugh Johnston told CNBC.
Still, the growth in beverage sales came at a cost for PepsiCo. Operating profit for its North American beverage business fell 11 percent, due to increased marketing expenses as well as rising transportation and commodity costs. To cover its higher expenses, PepsiCo started raising beverage prices in September, Johnston told CNBC. The results of those bumps will therefore be reflected in the next quarter.
Johnston added he expects the company’s advertising and marketing spending for the beverage unit will stay consistent and it believes the units growth is “sustainable.”
Meantime, the company has continued to invest in the beverage business, announcing in August plans to buy at-home carbonated drink maker SodaStream for $3.2 billion. SodaStream helped create the market for in-home soda making, but in recent years has promoted the product as a tool to make carbonated water, accommodating for changing tastes. It therefore gives PepsiCo a further foothold into both water and at-home appliances.
The deal was also notable bite for PepsiCo, which has largely stuck to smaller size deals in recent years.
“I would interpret SodaStream as a unique business opportunity that was in front of us and not a change in M&A policy,” Johnston told CNBC.
As to speculation the company might refranchise its bottling business, following suit of rival Coca-Cola, Johnston said he “[didn’t] have any news to report.”
Here’s what the company reported compared with what Wall Street was expecting, based on a survey of analysts by Thomson Reuters:
- Adjusted earnings per share: $1.59, vs. $1.57 expected
- Revenue: $16.49 billion vs. $16.36 billion expected
Its stock was flat in premarket trading at $111.29 a share.
Pepsi reported fiscal third-quarter net income of $2.49 billion, or $1.75 per share, up 16 percent from $2.14 billion, or $1.48 per share a year earlier.
PepsiCo earned $1.59 per share on an adjusted basis, which strips out fluctuations in commodities prices, restructuring costs and some tax issues, beating the $1.57 per share expected by analysts surveyed by Thomson Reuters.
Net sales rose 1.5 percent to $16.49 billion, beating expectations of $16.36 billion.
PepsiCo said it expects revenue growth for the year of 3 percent. It also said that a strong dollar will negatively impact its fiscal year earnings by one percentage point. As result, it anticipates to earn $5.65 a share in fiscal 2018, up 8 percent from 2017.