PepsiCo Inc. reported first-quarter earnings that were flat by some measures and lower by others as it tries to bring its namesake soft drinks and snack foods back to life. Operating profit was flat at $1.7 billion and core operating profit fell to almost $1.7 billion from $1.8 billion. Core results exclude the rise in market value of commodity contracts that PepsiCo buys to hedge against increases in the cost of energy and raw materials. They also exclude restructuring charges and merger and integration costs associated with the acquisition of Wimm-Bill-Dann, Russia”™s leading food and beverage company.
Earnings per share of 71 cents were even with last year”™s quarter, and core earnings per share were down 7 percent from last year, at 69 cents. Revenue was up 4 percent, led by double-digit growth in Europe, Asia, Africa and the Middle East as well as growth in PepsiCo Americas Foods. Revenue was down at Quaker Foods. PepsiCo reiterated that it expects a 5 percent decline in earnings per share this year from the $4.40 the company earned in 2011.
It did increase media spending in the U.S. by 25 percent in the first quarter, which analyst Caroline Levy of Calyon Securities said is critical to turning PepsiCo around.
“They”™ve been off their game for several years,” she said. “They finally got investor expectations to where they needed to be, so this wasn”™t a big surprise overall, it was expected, but things are difficult. Commodity costs were a huge headwind, up $300 million in the quarter. And they”™ve been losing market share in carbonated soft drinks; there”™s been a lack of investment in those brands.”
She pointed to the fact that PepsiCo, under CEO Indra Nooyi, had been trying to shift its portfolio to healthier food and drink. “They”™ve been neglecting their biggest brand, though. From an altruistic standpoint it”™s great, but a lot of people drink soda, so if you”™re PepsiCo, it may as well be yours not Coke. They”™ve lost a lot of ground.”
Levy also said Tropicana has been a trouble spot for the company. “Orange juice prices went up dramatically and the consumer walked away from the pure juice category. We”™re really in year three of problems with Tropicana, but now it”™s external factors, commodity costs. They really got hit. And they lost lot of market share to Minute Maid and the Simply brand, that”™s Coke.” She noted that Tropicana first ran into problems years ago when its packaging was changed.
“They have to do a lot of soul-searching, go back to their roots,” she said. “Nurture their big brands like Pepsi, Mountain Dew, Tropicana, Gatorade, a lot of their snack brands.”
Levy said that since PepsiCo was losing a lot of money in China, it decided to franchise the business to a Tingyi, China”™s largest beverage manufacturer. That deal was completed March 31.
“This means Pepsi has capitulated by saying ”˜We can”™t do this alone, we”™re giving the country to a franchisee,”™” she said. Levy also said the jury is still out on Pepsi Next, which has less sugar and calories than regular Pepsi. “New products take a year or two to see if they”™re for real, but people I talk to in the industry are extremely skeptical,” she said.
Ali Dibadj, an analyst with Sanford C. Bernstein, said competition is another concern for PepsiCo. “There are a bunch of other players on snack side,” he said, “everything from other salty snacks to a bag of carrots. So far it seems like everyone is behaving and not undercutting on price. But it”™s up to Pepsi to make the best of that environment with more marketing.”
Damian Witkowski of Gabelli & Co. in Rye found encouragement in what is called the immediate consumption channel ”“ where people run into a convenience store and buy a 20-ounce bottle of Pepsi for $1.50. “You”™re paying much more per ounce and sales in that channel had an increase in the high single digits. That”™s a very profitable channel for them. The guy at the gas station keeps some of that profit but it”™s still more profitable for the company.”
The question is, he said, will it last? “For a beverage company, summer is the important months,” he said. “If gas prices keep going up and people cut back that could be a risk, but even with gas being high now it”™s not affecting demand.”
