PepsiCo’s price cuts, brand refreshes power quarterly results beat

This Tuesday, July 17, 2012, photo, shows bottles of Pepsi in Montpelier, Vt. (AP Photo/Toby Talbot, File)

PepsiCo’s price cuts for salty snacks in the U.S. and steady demand for diet sodas helped it beat Wall Street estimates, providing a buffer against growing macroeconomic uncertainty.

The company has cut prices by up to 15 per cent on brands such as Lay’s and Doritos to address consumer complaints over multiple hikes and win back shelf space at retailers, driving the first rise in volumes in the North America foods category in a year.

The division has struggled over the last few years as budget-strained consumers traded down to cheaper brands or switched to healthier alternatives.

CEO Ramon Laguarta has also launched a cost-cutting effort that includes trimming the number of products and shutting some production centers to simplify its North America supply chain amid pressure from activist investor Elliott Management.

Iran war casts shadow

The upbeat results come as investors worry over the fallout of the Iran war on global consumer goods companies amid a surge in energy costs and pricier raw materials such as the PET resin used to package drinks.

“As we look ahead, the macroeconomic environment has become more volatile and uncertain because of ongoing geopolitical conflicts,” Chief Financial Officer Steve Schmitt said in a statement.

The beverage and snacks giant’s shares were last up one per cent in choppy premarket trading on Thursday.

PepsiCo typically hedges about nine to 12 months out for packaging raw material and the company expects this to provide some near-term protection.

Higher cost of living could also push consumers to be more frugal, analysts and investors have said, forcing companies like PepsiCo to be prudent about their expectations for the year.

PepsiCo expects organic revenue to increase between two per cent and four per cent and core constant currency earnings per share to grow four per cent to six per cent, reaffirming its annual targets for a second time this year.

The reiterated guidance is solid given the environment and reflects management’s confidence in funding product innovation while tightly managing costs, said RBC Capital Markets analyst Nik Modi.

Brand refresh

PepsiCo on Thursday also announced a refresh of the Gatorade energy drinks brands to include new formulas with low sugar, as companies appeal to increasingly health-conscious consumers against the backdrop of the Make America Healthy Again movement and rising popularity of GLP-1 weight-loss drugs.

The company rebranded Lay’s to highlight no artificial flavors and launched Gatorade Lower Sugar last year.

North America foods category volume swung to growth, up two per cent in the reported three-month period, compared with a one per cent drop in the fourth quarter. North America beverage volumes were down 2.5 per cent, but improved quarter-on-quarter.

For the 12 weeks ended March 21, the company’s core adjusted operating margin was 15.7 per cent, compared with 13.9 per cent in the prior quarter.

The company said first-quarter revenue rose 8.5 per cent to US$19.44 billion, compared with estimates of $18.94 billion, according to data compiled by LSEG.

Its quarterly adjusted earnings per share of $1.61 also handily beat estimates of $1.55.

(Reporting by Juveria Tabassum in Bengaluru; Editing by Sriraj Kalluvila)