The New York-based multinational food and beverage corporation PepsiCo Inc. (PEP, Financial) posted higher than expected profits with great contribution from the sales of Frito Lays and beverages in North America. The company’s earnings were recorded at 83 cents per share excluding items, compared to the expectations of 79 cents per share.
PepsiCo’s performance in Q1
Before the announcement by the food and beverage giant, analysts had predicted a decline in the company’s year-over-year earnings per share and a drop in its revenues as well. Its key rival Coca Cola (KO, Financial) had declared a better than expected results this week with profits crossing even the last nine quarters.
The maker of Pepsi, Lay’s potato chips and Gatorade sports drinks came out with an excellent first quarter results with the help of boosted sales of Frito Lays which grew 3.1% to $3.32 billion. On the other hand, the beverage business, which is running slow paced in the US market, saw a little rise at $4.43 billion. The net income was almost the same at $1.22 billion and revenues rose 4.4% organically in the first quarter. Its gross margins also rose to 55.5% from last year’s 54.5%. The company has marginally exceeded the analysts’ expectations and Wall Street’s profit estimates for 13 quarters in a row. Surging ahead of its key competitor Coca-Cola, PepsiCo was able to put its signature beverage over the former’s Diet Coke version for the number 2 position in the US. Despite a general distaste which had been seen among American consumers for carbonated drinks in the recent times, PepsiCo was still able to raise its revenues through this quarter.
The Hidden Truth
There is no denying the fact that the beverage industry has been slow paced in the US as well as globally due to changing tastes and rising competition. Demand has decreased even in the European market probably due to price rise done in line with currency impacts. Although the company performed better, there are concerns doing the rounds with regards to beverage division as well as overall performance getting impacted by the strong dollar. Revenues fell 3.2% to $12.22 billion in the first quarter for the first time in four quarters. A rise of 8.5% was seen in dollar as against the competing currencies this year based on which PepsiCo expects to see a fall in revenues in 2015 by about 10 percentage points and in earnings by around 11 percentage points. All in all, a decline of 7 percentage points is expected in this year.
Future Plans
Amidst all this, the company is keen on picking up in the volatile macroeconomic environment by working on pricing, controlling costs and by effectively managing the impact of the strong dollar. It is also hopeful of achieving the target of $1 billion in cost savings this year. In an effort to balance pricing globally, the company had in recent times raised the costs of its beverages in some countries. As the snacks unit is performing better than the beverages unit, PepsiCo’s revenue sharing amongst the two has been at a balance currently.
Going forward, the company has chalked out strategic plans for the next basketball season of National Basketball association (NBA), which it overtook from Coca-Cola as a big achievement as the latter was holding the league sponsorship rights since last 28 years. PepsiCo will make Mountain Dew the NBA’s leading soft drink brand, and will also promote Aquafina, Brisk, Doritos and Ruffles products during the events and games.
