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The Major Takeaways From PepsiCo’s Second Quarter Earnings

August 15, 2014 | About:

The global beverage and food manufacturer, PepsiCo (NYSE:PEP), reported its second-quarter earnings on July 23 and analysts were excited about its consistent performance which has been continuing for the last two and a half years. The management also raised the bar in terms of its outlook for the remaining fiscal year.

Against this backdrop, let’s dive into the earnings report to find out its key highlights.

Source: PepsiCo Website

Solid Quarter Revenue

PepsiCo’s second-quarter sales edged 0.5% up to $16.89 billion matching the Street estimates from $16.81 billion last year. Net income for the quarter fell 2% at $1.98 billion or $1.29 per share from $2.01 billion or $1.28 per share, a year ago. Excluding one-term items such as restructuring and impairment charges, the earnings stood at $1.32 per share which beat analysts’ estimates of $1.23 per share for the quarter.

Organic revenue rose 5% for global snacks and 2% for global beverages in the quarter, leading to an overall organic revenue increase of 3.6%. Early this year, PepsiCo raised its expectations on the revenue chart being mainly driven through improved sales in the emerging markets. On similar lines, the organic revenue growth in the emerging markets increased 8% in the quarter from that recorded a year ago. However, unfavorable currency translations and the Vietnam refranchising dragged down the organic revenue growth from these countries by 1% in the quarter.

Sparkling volumes decline

While PepsiCo’s still beverage portfolio grew 1% in the quarter in North America, its sparkling unit witnessed a fall by 2% from a year-ago period. This decline was in line with the trend of contracting soda volumes in the American market as consumers are becoming health conscious and are avoiding high-sugar and calorie-fueled carbonated soft drinks (CSDs).

The only bright spot for PepsiCo’s sparkling portfolio is the single digit growth in sales volume of its Mountain Dew soft drink in measured retail channels during the quarter.

To compare with core rival Coca-Cola (NYSE:KO) for the first quarter of the year, both saw a decline of 1% in sales of CSDs in North America. But in this quarter, while PepsiCo posted a 2% decline, its sole rival’s sales have remained flattish. The gap with Coca-Cola, the U.S. soft drinks market leader, is again widening.

Should this worry PepsiCo’s management? Let’s look into the further sections for answers.

Snacks show firm growth amid health concerns

PepsiCo’s Frito-Lay section in North America saw a 2% growth this quarter. This division contributes nearly 35% to the overall revenue of PepsiCo and remains the most profitable division, having generated nearly 21% of the net sales last year.

Pepisco’s Frito-Lay division is an established name in the American market, and PepsiCo rules the savory snacks market in the country with a 36.6% market share. And Frito-Lay commands the lead in the market with 60% and 72.4% market share in the potato chips and tortilla chips sectors.

Truly, the growth in this division can continue to surpass that seen in the beverages division, and this is well portrayed through its 5% rise in operating profit in the quarter. The operational profitability growth has been fueled by lower snack prices that positively affected the segment’s sales growth and thus led to net pricing gains in this line of business.

Management’s outlook remains positive

PepsiCo wants to invest in its growing businesses for which it would require regular cash flow. Since the first quarter of the fiscal year, the management seems inclined to adopt to cost-cutting measures to keep net income at stable levels even if the carbonated drinks business revenue gets affected by change in consumer preferences. The management is looking ahead to productivity savings of approximately $1 billion for the year, and it appears that this plan is on track.

The management expects 8% growth in earnings, up 1% from its previous forecast, and the cost-cutting measures could assist in achieving the earnings estimate. To continue rewarding its investors with dividends and share repurchase, the management is keen to generate cash flow of $10 billion from operating activities and more than $7 billion free cash flow through the year.

In the past two quarters, the company has achieved nearly $2.7 billion cash from operating activities and $1.9 billion free cash.

The management stays upbeat on returning around $8.7 billion to the stockholders through dividends and share repurchase this year.

Rounding up

The second-quarter results stand testimony to the strength in the company’s product portfolio, which is well-diversified and also signifies the sound positioning of the diverse business lines. During the second quarter earnings call, PepsiCo’s CEO, Indra Nooyi said, “Despite operating in what continues to be a challenging and volatile macro environment, we are delivering consistent, strong results.” PepsiCo hopes to sustain its revenue and profits at a decent level in the upcoming quarters, which might be worth watching, and investors’ rewards are also slated to continue. Let’s keep an eye on PepsiCo’s futuristic moves.

About the author:

We are a group of analysts exploring and analyzing different domains of business and writing reviews based on information available in public domain web portals. We do not hold any stock or investment position in any of the companies that we write for.

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