Costs keep rising, recovery is slow: PepsiCo (PEP.US) lowers performance guidance due to pressure on North American business

Zhitong Finance APP has learned that PepsiCo (PEP.US) has lowered its earnings outlook, as the recovery process for this snack and beverage giant in the North American market is taking longer than expected. The financial results show revenue reached $25.27 billion, up 5.6% year-on-year, exceeding expectations by $310 million; adjusted earnings per share were $2.34, surpassing forecasts by $0.04.

PepsiCo's organic sales grew by 3.1% this quarter, higher than the market expectation of 2.9%. The growth in organic sales was mainly driven by a 9% increase in Europe, Middle East, and Africa, while sales in PepsiCo Foods North America remained flat, as the momentum for recovery in its domestic market weakened.

The company faces cost pressures that are particularly pronounced in the North American market, eroding profit margins.

PepsiCo is striving to revive sales of savory snacks, while also tackling the dual challenges of rising costs and consumers tightening spending under economic pressure. In February this year, the company reduced the pricing of some mid-sized supermarket pack products for its core brands. However, the company will raise some prices in the coming months, indicating that previous price cuts have not effectively driven sales growth.

In the third quarter, PepsiCo's organic revenue from food and beverages in the North American market both saw slight declines. Still, strong international sales helped the company’s earnings per share exceed analysts’ expectations this quarter.

Chief Executive Officer Ramon Laguarta stated that PepsiCo will look for areas to cut costs and said the underperforming North America business "has considerable room for improvement."

He said the company will continue to launch more products containing protein and fiber, as well as offerings with simpler ingredients and alternatives to traditional oils, such as avocado oil. Many large food companies are currently struggling to win back consumers, who are shifting spending from packaged foods to less processed options.

Laguarta also stated that PepsiCo needs to "reinvigorate performance" in its carbonated soft drinks segment, with no-sugar and flavored products currently outperforming full-sugar alternatives.

The issue of PepsiCo’s chip prices came under the spotlight earlier this year. Due to high pricing, some products sold for more than $7 per bag, causing the company to lose shelf space in grocery stores. The company subsequently lowered prices, but Chief Financial Officer Steve Schmitt noted that the price cuts eroded profit margins.

Performance Guidance

Looking ahead, PepsiCo expects full-year organic revenue to grow by 3%, with core constant-currency earnings per share growth projected at 2.5% to 3.5%. Total cash returns to shareholders are anticipated to be around $8.9 billion, including $7.9 billion in dividends and $1 billion in share repurchases.

The parent company of Doritos, Lay's, and Gatorade now expects its core constant-currency earnings per share for this fiscal year to grow by 1% to 2%, compared to the previously forecast low end of the 4% to 6% growth range.