) continued the momentum witnessed in the first quarter into the
second. The food/beverage giant beat the Zacks Consensus Estimate
for both earnings and revenues gaining largely from
lower-than-expected currency headwinds and a sequential improvement
in beverage volumes.
Moreover, the Zacks Rank #2 (Buy) company raised its earnings
guidance for the year based on its strong year-to-date performance
and an optimistic outlook for the rest of the year. Pepsi's shares
rose 2.0% in
. In fact, its share price has gone up almost 10% year-to-date.
Pepsi's second-quarter 2014 core earnings per share of $1.32
comfortably beat the Zacks Consensus Estimate of $1.23 by 7.3%.
Earnings increased 1% year over year driven by strong organic
revenue gains and solid margins. Currency hurt fourth-quarter
earnings by 2.0%, significantly lower than management's
expectations of 5%. In constant currency terms, adjusted earnings
Despite difficult consumer spending environment and higher
taxes, lower-than-expected currency headwinds, better execution and
productivity gains boosted profits in the quarter.
Core earnings exclude the impact of restructuring and impairment
charges and mark-to-market gains on commodity hedges. Including
these factors, reported earnings per share were $1.29, up 1.0% year
Pepsico, Inc - Earnings Surprise |
Top-Line and Volume Growth
Total sales in the quarter improved 0.5 year over year to $16.89
billion. Structural changes, mainly beverage re-franchising
transaction in Vietnam, pulled down revenues slightly. Foreign
exchange hurt revenue growth by 3.0%, lower than management's
expectation of 4%. Revenues were in line with the Zacks Consensus
Excluding these factors, revenues increased 3.6% on an organic
basis. Improved beverage volumes, strong Frito-Lay snacks
performance in the Americas, and substantial sales gain in
developing/emerging market offset weakness in Mexico and slowdown
Pepsi witnessed an effective net pricing gain of 3% in the
quarter, same as in the past four quarters. Volumes increased 0.5%
in the quarter, slightly less than 1% in the last quarter.
Organic snacks and beverage volumes grew 1% each in the
Organic volume of the American snacks segment was flat, slowing
down from 1% seen in the last quarter. While volumes remained
strong in the Frito-Lay North America segment, it declined in the
Latin American snacks business due to weak revenues in Mexico.
Higher food and beverage taxes in Mexico once again hurt revenues
in the quarter. Organic snacks volumes grew 1% in Europe and 7% in
developing and emerging markets.
As regards beverages, while Pepsi's American and
developing/emerging market volumes improved, European volumes
declined from the last quarter.
Organic beverage volumes increased 1.0% in Europe and 2% in
In the Americas, beverage volumes improved 0.5%, better than
flat growth in the last quarter - a sequential improvement as
witnessed by peer,
The Coca-Cola Company
) which reported earlier this week. Also, the company gained market
share in the liquid refreshment beverage (LRB) category in the
quarter. However, while non-carbonated beverages volume grew in the
quarter, carbonated soft drinks (CSD) remained a weak spot due to
Growing health and wellness consciousness, vigilance among
consumers about the use of artificial sweeteners, high sugar
content and related obesity concerns are affecting the demand for
CSD and thereby hurting sales of Pepsi as well as other soft drink
makers like The Coca-Cola Company and
Dr Pepper Snapple Group, Inc.
Pepsi has increased marketing investments and is driving package
and product innovation to boost its American beverage business.
Despite higher commodity costs, core gross margins improved 60
basis points (bps) in the quarter helped by effective revenue
management strategies and productivity gains. Core constant
currency operating profit (including gain Vietnam re-franchising)
improved 3.0% to $2.96 billion in the quarter. Core operating
margins grew 10 bps as organic revenues growth and productivity
gains offset headwinds from higher operating costs.
2014 Outlook Increased
Management increased its previously provided earnings outlook
for 2014 while maintaining expectations of sales growth.
In 2014, Pepsi expects core constant currency earnings per share
to be approximately $4.72, representing an increase of 8% from
$4.37 reported in 2013. Previously, the company was expecting an
earnings growth of 7%. The target is in line with management's
long-term goal of high single-digit core constant currency earnings
Excluding headwinds from currency and structural changes,
organic revenues are expected to grow in the mid single-digit
range, also in line with the long-term targets.
Currency is expected to hurt 2014 earnings per share and
revenues by 4% and 3%, respectively.
The rate of commodity inflation is expected to be higher in 2014
than in 2013. Commodity inflation is expected in the low
single-digit range in 2014. Productivity savings are expected to
amount to $1 billion in 2014, which will be used to offset
headwinds from cost inflation and thereafter, reinvest in the
business. The core tax rate is expected to be approximately 25% for
2014, slightly lower than the 2013 level. Moreover, interest
expenses are expected to be higher than 2013 due to increased debt
Also, management maintained its plan to increase cash returns to
shareholders in 2014 by 35% to $8.7 billion through significant
hikes in dividends and share repurchases.
Another beverage maker,
The WhiteWave Foods Company
) also has the same Zacks Rank as Pepsi.
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