) reported strong first-quarter earnings results beating both the
Zacks Consensus Estimate as well as the year-ago number. The
company also delivered positive top-line growth and strong
margins while retaining its 2013 outlook.
2012 was a turning point for PepsiCo. In this year the company
increased investments in brand building, market execution and
innovation, improved productivity and efficiency, and drove
significant cash flow generation, thereby setting a solid
foundation for further growth and securing competitive
PepsiCo's first quarter 2013 earnings per share of 77 cents
beat the Zacks Consensus Estimate of 71 cents per share by 8.5%.
Earnings also improved almost 12% from year-ago levels driven
largely by productivity gains from restructuring activities,
strong margins as well as positive top-line growth. Earnings grew
13% on a constant currency basis.
Top-Line and Margin Details
Total sales in the quarter improved 1% year over year to
$12.58 billion. Structural changes, mainly beverage
re-franchising transaction in China pulled down revenues by 3%,
in line with management's expectations. Foreign exchange hurt
revenue growth by 0.5%, less than management's expectation of 1%.
Excluding these factors, revenues increased 4.4% on an organic
basis driven by an effective net pricing gain of 3% and volume
growth of 1%. Both snacks and beverages showed positive organic
volume growth with snacks growing 4% and beverages up 1%.
Revenues, however, missed the Zacks Consensus Estimate of $12.68
The American foods business once again did well in the
quarter, gaining from successful innovations and increased brand
building investments. Emerging and developing market revenues
also did well growing 12% on an organic basis (excluding the
impact of structural changes). However, the American beverage
business continued to be sluggish.
Core gross margins expanded 130 basis points (bps) in the
quarter. Core constant currency operating profit improved 9% in
the quarter to $1.80 billion despite an 11% increase in
advertising and marketing costs driven mainly by productivity
savings from its restructuring program. Core operating margins
increased 80 bps in the quarter.
PepsiCo Americas Foods (PAF):
The segment, which makes popular foods like Lay's potato chips,
Cheetos cheese flavored snacks and Quaker-brand cereals and
snacks recorded revenue growth of 5% (organically up 6%) to $5.12
billion. Price/mix gains, volume growth and higher marketing
spend boosted revenues of the segment. All the three sub-segments
delivered positive organic growth in the quarter.
The segment's core operating profit increased 7% in constant
currency to $1.23 billion due to top-line growth and productivity
Frito-Lay North America (FLNA)
: Revenues improved 4% year over year to $3.12 billion on both
reported and organic basis. Revenues were driven by volume growth
and improved market share trend due to stepped-up advertising
support. Core operating profit was up 5% to $830 million driven
by organic top-line growth and productivity benefits.
We believe the Frito-Lay business will continue to post steady
top-line growth in 2013 driven by balanced growth in volume and
price (as inflation is expected to subside).
: Revenues increased 11% year over year (14% organically) to
$1.37 billion driven largely by price/mix gains. Organic volumes
Core operating profit improved 25% to $220 million in constant
currency terms driven by sales growth and productivity gains
which offset headwinds from higher commodity costs and marketing
Quaker Foods North America (QFNA)
: Revenues increased 2% (both reported and organic) to $634
million in the quarter driven largely by organic volume gains.
Core constant currency operating profit declined 6% to $179
million due to high advertising and marketing costs.
PepsiCo Americas Beverages (PAB):
Net revenue of this segment, which makes popular beverages like
Pepsi, Mountain Dew, Diet Pepsi and 7UP, declined 1% year over
year to $4.42 billion. Organically revenues were flat as
price/mix gains offset headwinds from volume. Though volumes
improved slightly in Latin-America, they declined in North
America. Non-carbonated beverages volume declined 1% while
carbonated soft drinks volume declined in mid single-digits in
The company's North American beverage business has been
continuously delivering sluggish results, especially the colas.
PepsiCo has been witnessing a slack in cola sales as consumers
increasingly prefer drinks with low calorie content and are also
looking for a variety of choices. In order to re-vitalize cola
sales which are suffering due to their high calorie content, the
company is developing evolutionary natural sweeteners and
flavorings aimed at reducing calories with no compromise on
Core operating profit improved 4% to $552 million in constant
currency driven by pricing and productivity gains.
Net revenue in the segment improved 5% year over year (up 4%
organically) to $1.94 billion driven by balanced growth of
price/mix gains and volume. Both snacks and beverages showed
organic volume growth. Core operating profit rose 14% year over
year to $93 million in constant currency due to top-line growth
and productivity benefits.
Asia, Middle East & Africa (AMEA):
Net revenue declined 14% to $1.10 billion mainly due to
re-franchising of the beverage business in China (which hurt
revenues by 27%) and currency headwinds (2%). Organically,
revenues grew 15% driven by organic volume growth for both snacks
and beverages. Organically, snacks volumes grew 15% while
beverages grew 10%.
Core operating profit improved 19% year over year to $185
million in constant currency due to organic top-line growth.
2013 Outlook Retained
PepsiCo continues to expect core constant currency earnings to
increase in 2013 by 7% from 2012 core earnings of $4.10 per
share. The target is in line with management's long-term goal of
high single-digit core constant currency earnings growth.
Currency headwinds are expected to reduce earnings growth by
approximately 1%, less than in 2012.
Excluding headwinds from currency and structural changes,
organic revenues are expected to grow in the mid single-digit
range, also in line with long-term targets. The structural
changes are expected to pull down organic revenues by 1%.
Organic revenue growth is once again expected to be driven by
strong growth in developing and emerging markets as well as
increased investment behind innovation advertising/marketing. The
company expects its advertising/marketing expense to increase at
a rate equal to or higher than revenue growth. The company
intends to step up innovation and marketing spend behind
good-for-you products in 2013.
Commodity inflation is expected to be in the low single-digit
range in 2013. The core tax rate is expected to be
approximately 27% for 2013.
PepsiCo plans to reinvest any excess earnings to support brand
building, innovation and improve productivity, especially in the
U.S. Productivity savings are expected to amount to $900 million
in 2013 which will be used to offset headwinds from cost
inflation and will be thereafter reinvested in the business.
PepsiCo currently carries a Zacks Rank #3 (Hold). Rival,
The Coca-Cola Company
) reported mixed first-quarter results this week; beating on
earnings and lagging on sales. Another beverage company,
Dr Pepper Snapple
) is expected to announce its first-quarter results next
You may consider investing in one of Coca-Cola's bottling
Coca-Cola Amatil Limited
) which carries a Zacks Rank #2 (Buy).
COCA-COLA AMATI (CCLAY): Get Free Report
DR PEPPER SNAPL (DPS): Free Stock Analysis
COCA COLA CO (KO): Free Stock Analysis Report
PEPSICO INC (PEP): Free Stock Analysis Report
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