Price Increases Help PepsiCo. Beat Consensus Estimates
A strategy of increasing the prices of its snacks and beverages helped PepsiCo (NYSE:PEP) beat consensus estimates on earnings per share and revenue. The core earnings came in at $1.50 per share on revenues of $15.71 billion, outperforming analysts’ expectations by 10 cents and $100 million, respectively. While the volumes were flat, the net pricing trended upwards by 1%. The profits in the quarter were also helped by the sale of its minority stake in Britvic, the gains of which the company intends on reinvesting in its business through the balance of the year. By focusing on selling premium products, and by transforming its portfolio to reflect the increasing demand for healthier food and beverage options, the company can continue to deliver strong results in the future. For the full year, PepsiCo raised its earnings guidance to $5.13 per share, from $5.09 earlier, citing a lower foreign currency translation impact.
Focus On “Healthier” Products
Giving a huge push to its “health” initiatives, recently PepsiCo announced its new targets to reduce calories and sugar in its beverages, and salt and fat in its snacks by 2025. As it adapts to changing consumer preferences, PepsiCo believes that healthier products will be key for long term growth and the company is looking at several ways to make its portfolio of products healthier. From organic Gatorade, to offering probiotic health drinks, and lowering sugar in its beverages and salt in its snacks, these initiatives are aimed at driving sales amid a growing base of health conscious consumers. According to the company, its “everyday nutrition” products will witness the fastest rate of sales growth by 2025.
A key driver of PepsiCo’s revenues in Q2 2017 was its portfolio of healthy snacks and beverages. As PepsiCo works towards transforming itself to adapt to the changing customer preferences of healthier lifestyles and aims to limit its environmental footprint, the company has adopted a motto of “Performance with Purpose.” In order to meet the evolving needs of customers globally, the company is shifting its portfolio to a wider range termed as “Everyday Nutrition Products.” These products contain nutrients such as grains, fruits, vegetables, or protein. This portfolio falls under a broader category of “Guilt Free Products” which also includes beverages which have less than 70 calories from sugar and small serving snacks with low sodium. The company now derives approximately 45% of its revenues from these “Guilt Free Products” indicating that it has transformed its portfolio towards healthier products according to the new customer preferences. The “everyday nutrition products” constitute 28 points of the 45.
LIFEWTR, a product in its water portfolio, performed particularly well. In just five months since its launch in the first quarter, the product has already generated sales of $70 million, and is on track to reach $200 million in sales on an annualized basis.
Margin Contraction
PepsiCo posted a third straight quarter of declining gross margins, owing to commodity inflation after a number of periods of commodity deflation. This trend, of rising commodity prices, is expected to continue, which could pressure the margins further. To combat this, the company intends to increase the prices of its products. Hence, the margins may start to improve as the year goes on.
The reported gross margin contracted by 55 basis points, while the core gross margin fell by 5 basis points. Meanwhile, the reported operating margin declined by 20 basis points, and its core operating margin expanded by 50 basis points, both of which were positively impacted by 60 basis points as a result of the Britvic sale. Looking forward, the company expects an expansion of its operating margin in the remainder of the year, fueled by its productivity programs.
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