PepsiCo tops estimates, helped by strong Frito-Lay snacks growth

  • Pepsi’s North American beverage has been lagging while its Frito-Lay snacks business has been performing well.
  • CEO Indra Nooyi last quarter said Pepsi will increase advertising spending to revive its beverage business.
  • Pepsi in May acquired baked fruit and vegetable company Bare Foods.

PepsiCo reported second-quarter earnings on Tuesday that beat analysts’ expectations as sales of Cheetos and other salty snacks continued to offset its slumping soft drink business.

Pepsi’s North American beverage business has been struggling to contend with increased competition from upstart brands and changing consumer tastes. CEO Indra Nooyi last quarter placed the blame for slowing sales on Coca-Cola’s increased spending on advertising, though she did not address the Atlanta-based beverage giant by name. She said Pepsi would respond by increasing spending on its trademark cola brand and improving brand communications.

The company has picked three of its largest beverage brands, Gatorade, Pepsi and Mountain Dew, to throw its support behind, Pepsi CFO Hugh Johnston told CNBC on Tuesday. Efforts include its Pepsi Generation advertising campaign, the re-release of Baja Blast and the launch of calorie-free Gatorade Zero.

The company said Tuesday it will “responsibly” increase the marketing budget behind trademark Pepsi going into the second half of the year. Those three brands will continue to get “very strong support” noted Johnston.

Nooyi told analysts on a call that its zero sugar Pepsi drink is doing “exceedingly well” and diet Pepsi is performing well again.

Still, the results didn’t impress some analysts.

“We are disappointed,” Bonnie Herzog at Wells Fargo wrote in a research note. Despite some improvement in Pepsi’s North American beverage sales, the division still remains “challenged,” Herzog said.

The beverage unit also saw an operating profit decline of 16 percent, hurt in part by rising trucking and commodity costs.

For the quarter, Pepsi’s net income dropped to $1.82 billion, or $1.28 a share, from $2.12 billion, or $1.46 a share, a year ago. The company’s “core” earnings were $1.61 a share, which was better than expected. Core earnings don’t comply with generally accepted accounting principles. Pepsi’s excluded changes in the value of derivatives used to offset its commodities costs and a one-time tax expense of $777 million resulting from the new tax laws, among other things.

Total revenue rose 2.4 percent to $16.09 billion, outpacing estimates of $16.04 billion. Organic revenue growth, which strips out the impact of currency exchange, rose 2.6 percent.

Pepsi shares were up 3.15 percent in premarket trading.

Here’s how the company did compared with what Wall Street expected:

  • Earnings: $1.61 per share vs. $1.52 per share forecast by Thomson Reuters
  • Revenue: $16.09 billion vs. $16.04 billion forecast by Thomson Reuters

Pepsi’s Frito-Lay snack business, which includes brands like Doritos and Tostitos, grew 4 percent, as it continues to be the leader in the ever-popular snacking category. Pepsi in May announced its acquisition of baked fruit and vegetable company Bare Foods as part of its efforts to keep its business on trend with today’s snackers. The deal may also serve as a building base for the broader business of plant-based snacks.

“We tend to build businesses like them out and make them into platforms,” said Johnston.

Commodity and transportation costs continue to be an issue for Pepsi, as it is for its food and beverage peers. Those costs hurt its North American beverage business and Quaker foods, which rely on third-party trucking services.

Pepsi said it balanced higher commodity costs in its Quaker foods snack division through “planned cost reductions,” and lower advertising and marketing expenses. It offset costs in its beverage business with “planned cost reductions across a number of expense categories.”

Meantime, the international markets continue to be a strong point for Pepsi. Pepsi this quarter reported 7 percent organic revenue growth in Europe Sub-Saharan Africa and 6 percent growth in Asia, Middle East & North Africa.

Its business in Brazil was hurt notably by the trucking strike, Johnston said.

Pepsi backed its previous financial forecasts for the year.

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